The Dodge & Cox Global Stock Fund had a total return of –13.1% for the third quarter of 2015, compared to –8.4% for the MSCI World Index. For the nine months ended September 30, 2015, the Fund had a total return of –11.2%, compared to –6.0% for the MSCI World.
Market Commentary
During the third quarter, international equity markets were weak, with the MSCI EAFE Index down 9% in local currency terms and down 10% in U.S. dollars. Within the EAFE, every major sector and region declined in U.S. dollars. The MSCI Emerging Markets Index was down even more: 12% in local currency and 18% in U.S. dollars. Slower growth in the Chinese economy weighed on markets, reducing global prices for commodities. Several countries with heavy commodity exposures experienced sharp currency declines amid economic weakness.
The S&P 500 declined as well, breaking a streak of ten consecutive quarters of gains. All sectors of the S&P 500 posted losses, except Utilities. U.S. economic data was positive overall: housing, unemployment, and disposable income continued to improve, supporting consumer spending. Fixed asset investment by businesses remained healthy. However, U.S. corporates were impacted by international headwinds, as well as the stronger U.S. dollar and weaker demand for U.S. exports.
In September the Federal Reserve (Fed) elected to maintain its target range for the federal funds rate, postponing a highly anticipated initial rate increase. The Fed cited low inflation (due in part to lower oil and import prices), the uncertain impact of recent developments in the global economic landscape, and U.S. dollar strength as factors. Fed Chair Janet Yellen reiterated positive progress and long-term prospects for the U.S. economy overall, indicating a forthcoming increase in interest rates from historic lows.
With the recent pullback in the markets, equity valuations look attractive overall: the MSCI World traded at 14.7 times forward estimated earnings at quarter end, below its long-term average. While markets can be volatile in the short term, we remain optimistic about the long -term prospects for our portfolio, which we believe is positioned to benefit from a normalization in growth rates over our three- to five-year investment horizon.
Third Quarter Performance Review
The Fund underperformed the MSCI World by 4.6 percentage points for the quarter.
Key Detractors from Relative Results
The Fund’s holdings in the Financials sector (down 17% compared to down 9% for the MSCI World sector) hindered performance. BR Malls (BSP:BRML3, Financial) (down 44%) and Standard Chartered (NAI:SCBK, Financial) (down 39%) were notable detractors.
Within the Consumer Discretionary sector, the Fund’s higher average weighting and holdings in the Media industry (down 14% compared to down 10% for the MSCI World industry) hurt results. Grupo Televisa (TV, Financial) (down 33%), Time Warner (TWC, Financial) (down 21%), and Naspers (down 20%) lagged.
Relative returns in the Energy sector (down 27% compared to down 18% for the MSCI World sector) also had a negative impact. Petrobras (PZE, Financial) (down 55%) and Schlumberger (down 19%) detracted from results.
Additional detractors included Teck Resources (down 52%), Baidu (down 31%), and MTN Group (down 30%).
Key Contributors to Relative Results
Within the Health Care sector, relative returns in the Pharmaceuticals industry (down 6% compared to down 8% for the MSCI World industry) helped performance.
The Fund’s lower average weighting in the Materials sector (3% versus 5% for the MSCI World sector), which was the worst performing sector of the market (down 20%), also had a positive impact.
Additional contributors included Google (up 17%) and Time Warner Cable (up 1%).
Year-to-Date Performance Review
The Fund underperformed the MSCI World by 5.1 percentage points year to date.
Key Detractors from Relative Results
Relative returns in the Financials sector (down 16% compared to down 7% for the MSCI World sector), especially in the emerging markets, hurt performance. BR Malls (down 56%), Standard Chartered (down 32%), and ICICI Bank (down 25%) were notable detractors.
The Fund’s holdings in the Information Technology sector (down 12% compared to down 4% for the MSCI World sector) had a negative impact. Baidu (down 40%), Hewlett-Packard (down 35%), and Samsung Electronics (down 20%) hurt results.
Weak returns in the Consumer Staples sector (down 17% compared to flat for the MSCI World sector), combined with a lower average weighting (3% versus 10%), also hurt results.
Additional detractors included Teck Resources (down 62% since date of purchase), Petrobras (down 51%), National Oilwell Varco (down 41%), MTN Group (down 29%), and Time Warner (down 18%).
Key Contributors to Relative Results
The Fund’s holdings in the Health Care sector (up 3% compared to flat for the MSCI World sector) contributed to results. Cigna (up 31%) and UnitedHealth Group (up 16%) were strong performers.
The Fund’s lower average weighting in the Materials sector (3% versus 5% for the MSCI World sector), which was the second worst performing sector of the market (down 19%), also aided performance.
Additional contributors included Nintendo (up 61% to date of sale), Time Warner Cable (up 20%), and Google (up 16%).
1The Fund’s total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include dividends but, unlike Fund returns, do not reflect fees or expenses. The MSCI World Index is a broad-based, unmanaged equity market index aggregated from 23 developed market country indices, including the United States and Canada. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. All returns are stated in U.S. dollars, unless otherwise noted.
