<PAGE>
DODGE & COX
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Balanced Fund
Established 1931
Quarterly Report
September 30, 1995
1995
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DODGE & COX
Balanced Fund
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Dodge & Cox
Investment Managers
35th Floor
One Sansome Street
San Francisco
California 94104
(415) 981-1710
For Fund literature and
information, please call:
(800) 621-3979
- --------------------------------------------------------------------------------
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DODGE & COX
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1995
-------------------------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CONSUMER: 12.0%
STOCKS: 343,000 Dayton-Hudson Corp............................................................ $ 26,025,125
55.8% 277,000 Dillard Department Stores, Inc. Class A....................................... 8,829,375
168,000 Fleming Cos., Inc............................................................. 4,032,000
439,000 Fruit of the Loom, Inc........................................................ 9,054,375
526,000 General Motors Corp........................................................... 24,656,250
250,000 Genuine Parts Co.............................................................. 10,031,250
910,000 Kmart Corp.................................................................... 13,195,000
640,000 Masco Corp.................................................................... 17,600,000
388,000 Melville Corp................................................................. 13,386,000
381,000 Nordstrom, Inc................................................................ 15,930,753
238,000 Procter & Gamble Co........................................................... 18,326,000
180,078 Times Mirror Co. Series A..................................................... 5,177,243
71,000 VF Corp....................................................................... 3,621,000
239,000 Whirlpool Corp................................................................ 13,802,250
--------------
183,666,621
FINANCE: 12.0%
525,000 American Express Co........................................................... 23,296,875
115,500 American International Group, Inc............................................. 9,817,500
245,000 BankAmerica Corp.............................................................. 14,669,375
195,000 Barnett Banks, Inc............................................................ 11,041,875
160,000 Chubb Corp.................................................................... 15,360,000
297,000 Citicorp...................................................................... 21,012,750
65,000 General Re Corp............................................................... 9,815,000
404,000 Golden West Financial Corp.................................................... 20,402,000
62,600 Lehman Brothers Holdings, Inc................................................. 1,447,625
185,000 Morgan (J.P.) & Co............................................................ 14,314,375
418,000 Norwest Corp.................................................................. 13,689,500
210,500 Republic New York Corp........................................................ 12,314,250
275,000 The St. Paul Cos., Inc........................................................ 16,053,125
--------------
183,234,250
ENERGY: 5.8%
348,000 Amerada Hess Corp............................................................. 16,921,500
155,000 Amoco Corp.................................................................... 9,939,375
186,000 Chevron Corp.................................................................. 9,044,250
20,000 Exxon Corp.................................................................... 1,445,000
254,000 Halliburton Co................................................................ 10,604,500
20,000 Mobil Corp.................................................................... 1,992,500
380,000 Phillips Petroleum Co......................................................... 12,350,000
95,000 Royal Dutch Petroleum Co...................................................... 11,661,250
104,000 Schlumberger Ltd.............................................................. 6,786,000
161,600 Sonat, Inc.................................................................... 5,171,200
65,000 Western Atlas, Inc............................................................ 3,079,375
--------------
88,994,950
BASIC INDUSTRY: 5.5%
321,000 Aluminum Co. of America....................................................... 16,972,875
50,000 Boise Cascade Corp............................................................ 2,018,750
35,500 Crown Vantage, Inc............................................................ 778,799
205,000 Dow Chemical Co............................................................... 15,272,500
343,000 International Paper Co........................................................ 14,406,000
355,000 James River Corp. of Virginia................................................. 11,360,000
255,700 Nalco Chemical Co............................................................. 8,725,763
309,000 Weyerhaeuser Co............................................................... 14,098,125
--------------
83,632,812
</TABLE>
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1995
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SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON ELECTRONICS AND COMPUTERS: 4.6%
STOCKS 499,600 Digital Equipment Corp........................................................ $ 22,794,250
(Continued) 148,000 Hewlett-Packard Co............................................................ 12,339,500
212,000 International Business Machines Corp.......................................... 20,007,500
92,800 Motorola, Inc................................................................. 7,087,600
719,200 Tandem Computers, Inc......................................................... 8,810,200
--------------
71,039,050
CAPITAL EQUIPMENT: 3.3%
242,000 Caterpillar, Inc.............................................................. 13,763,750
188,000 Deere & Co.................................................................... 15,298,500
236,000 General Electric Co........................................................... 15,045,000
32,000 Honeywell, Inc................................................................ 1,372,000
135,000 Parker-Hannifin Corp.......................................................... 5,130,000
--------------
50,609,250
BUSINESS PRODUCTS AND SERVICES: 3.2%
380,000 Donnelley (R.R.) & Sons Co.................................................... 14,820,000
272,000 Federal Express Corp.......................................................... 22,576,000
89,700 Xerox Corp.................................................................... 12,053,438
--------------
49,449,438
PUBLIC UTILITIES: 2.7%
385,000 Central & South West Corp..................................................... 9,817,500
172,500 Consolidated Natural Gas Co................................................... 6,964,688
32,000 Duke Power Co................................................................. 1,388,000
64,000 FPL Group, Inc................................................................ 2,616,000
74,500 Pacific Enterprises........................................................... 1,871,813
205,000 Pacific Gas & Electric Co..................................................... 6,124,375
281,000 Texas Utilities Co............................................................ 9,799,875
80,000 Unicom Corp................................................................... 2,420,000
--------------
41,002,251
DIVERSIFIED TECHNOLOGY: 2.5%
405,000 Corning, Inc.................................................................. 11,593,125
105,000 Grace (W.R.) & Co............................................................. 7,008,750
146,000 Minnesota Mining & Manufacturing Co........................................... 8,249,000
246,500 Raychem Corp.................................................................. 11,092,500
--------------
37,943,375
TRANSPORTATION: 2.2%
885,000 Canadian Pacific Ltd.......................................................... 14,160,000
293,000 Union Pacific Corp............................................................ 19,411,250
--------------
33,571,250
PHARMACEUTICAL AND HEALTH: 2.0%
150,000 Pfizer, Inc................................................................... 8,006,250
205,000 SmithKline Beecham plc ADR.................................................... 10,378,125
283,000 Upjohn Co..................................................................... 12,628,875
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31,013,250
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TOTAL COMMON STOCKS (cost $668,435,993).................................. 854,156,497
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PREFERRED CONSUMER: 0.1%
STOCKS: 76,922 Times Mirror Co. Conversion Preferred Series B................................ 1,855,743
0.1% --------------
TOTAL PREFERRED STOCKS (cost $1,659,843)................................. 1,855,743
--------------
</TABLE>
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1995
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PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS: U.S. TREASURY: 10.7%
39.2% $25,350,000 U.S. Treasury Notes, 5 1/2%, 1996............................................. $ 25,322,369
48,000,000 U.S. Treasury Notes, 7 7/8%, 1996............................................. 48,802,560
30,000,000 U.S. Treasury Notes, 6%, 1997................................................. 30,075,000
28,500,000 U.S. Treasury Notes, 5 1/4%, 1998............................................. 28,010,085
25,000,000 U.S. Treasury Notes, 7 7/8%, 1998............................................. 26,054,750
3,400,000 U.S. Treasury Bonds, 14%, 2011................................................ 5,442,652
--------------
163,707,416
FEDERAL AGENCY: 0.4%
5,000,000 Arkansas Dev. Fin. Auth. GNMA Guaranteed Bonds 9 3/4%, 2014................... 6,250,000
FEDERAL AGENCY MORTGAGE PASS-THROUGH AND REMIC*: 14.3%
2,232,934 Federal Home Loan Mtge. Corp. Group 25-6637, 8%, 2002......................... 2,280,562
2,029,390 Federal Home Loan Mtge. Corp. Group D26241, 6 1/2%, 2006...................... 2,026,853
475,925 Federal Home Loan Mtge. Corp. Group 18-0233, 7%, 2006......................... 477,115
1,262,148 Federal Home Loan Mtge. Corp. Group 25-0921, 7 1/2%, 2006..................... 1,282,658
405,359 Federal Home Loan Mtge. Corp. Group 18-5719, 7 1/4%, 2008..................... 408,399
904,973 Federal Home Loan Mtge. Corp. Group 27-2784, 7 1/4%, 2008..................... 912,892
470,076 Federal Home Loan Mtge. Corp. Group 25-3827, 7 1/2%, 2008..................... 478,302
1,682,539 Federal Home Loan Mtge. Corp. Group 18-0468, 8%, 2008......................... 1,726,891
1,564,959 Federal Home Loan Mtge. Corp. Group D10211, 7 1/2%, 2009...................... 1,598,230
1,836,184 Federal Home Loan Mtge. Corp. Group 30-9878, 8 3/4%, 2010..................... 1,923,403
588,516 Federal Home Loan Mtge. Corp. Group 27-3014, 8 1/4%, 2011..................... 605,130
708,819 Federal Home Loan Mtge. Corp. Group 27-2785, 7 3/4%, 2012..................... 722,109
2,048,210 Federal Home Loan Mtge. Corp. Group 55-5098, 8 1/4%, 2017..................... 2,119,897
15,451,339 Federal Home Loan Mtge. Corp. Group D64097, 8 1/2%, 2023...................... 16,088,707
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1216-GA, 7%, 2006............... 10,028,100
5,934,000 Federal Home Loan Mtge. Corp. Multi PC Series 1203-H, 6%, 2007................ 5,652,135
17,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1564-H, 6 1/2%, 2008............ 16,729,020
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1628-PJ, 6 1/2%, 2022........... 9,587,500
1,172,706 Federal Natl. Mtge. Assn. MBS Pool 55690, 8 1/2%, 2002........................ 1,215,944
1,530,776 Federal Natl. Mtge. Assn. MBS Pool 22354, 6 1/2%, 2004........................ 1,521,454
5,935,811 Federal Natl. Mtge. Assn. MBS Pool 70992, 7 1/2%, 2006........................ 6,084,206
8,761,272 Federal Natl. Mtge. Assn. MBS Pool 70255, 7 1/2%, 2007........................ 8,955,159
2,422,980 Federal Natl. Mtge. Assn. MBS Pool 169231, 7 1/2%, 2010....................... 2,471,924
6,209,581 Federal Natl. Mtge. Assn. MBS Pool 224484, 7 1/2%, 2011....................... 6,372,583
8,291,948 Federal Natl. Mtge. Assn. MBS Pool 124668, 7 1/2%, 2019....................... 8,478,434
5,165,809 Federal Natl. Mtge. Assn. PC 1993-234-PA, 5%, 2004............................ 5,031,808
15,475,000 Federal Natl. Mtge. Assn. PC 1994-33-H, 6%, 2009.............................. 14,686,704
10,183,306 Federal Natl. Mtge. Assn. PC G1993-39-A, 5.70%, 2016.......................... 9,775,974
13,730,000 Federal Natl. Mtge. Assn. PC G1994-13-J, 7%, 2022............................. 13,669,863
18,000,000 Federal Natl. Mtge. Assn. PC 1993-185-PE, 6 1/2%, 2023........................ 17,212,500
13,796,554 Federal Natl. Mtge. Assn. SMBS L-1, 5%, 2006.................................. 12,986,006
1,760,645 Federal Natl. Mtge. Assn. SMBS I-1, 6 1/2%, 2009.............................. 1,738,637
13,352,000 Veterans Affairs Vendee Mtge. Trust 1994-2-3C, 6 1/2%, 2009................... 13,201,790
8,356,468 Veterans Affairs Vendee Mtge. Trust 1995-1A-1 PT, 7.20599%, 2025.............. 8,314,686
11,980,562 Veterans Affairs Vendee Mtge. Trust 1995-2C-3A PT, 8.7925%, 2025.............. 12,489,736
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218,855,311
</TABLE>
*Real Estate Mortgage Investment Conduit
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<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1995
-------------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS COLLATERALIZED MORTGAGE OBLIGATION: 0.0%
(Continued) $ 84,113 FSF Finance Corp. 1985-1-D, 9 1/4%, 2016...................................... $ 85,585
INDUSTRIAL: 4.7%
4,675,000 Dayton-Hudson Corp. Debentures 9%, 2021....................................... 5,380,411
1,200,000 Dayton-Hudson Corp. Debentures 9.70%, 2021.................................... 1,470,000
9,255,000 Dayton-Hudson Corp. MTN 9.35%, 2020, Putable 1997............................. 10,990,313
5,500,000 Ford Holdings, Inc. Debentures 9 3/8%, 2020................................... 6,696,250
9,500,000 Ford Motor Co. Debentures 9.95%, 2032......................................... 12,412,320
5,750,000 May Department Stores Notes 7 5/8%, 2013...................................... 5,953,148
4,375,000 Ralston Purina Debentures 7 3/4%, 2015........................................ 4,457,031
10,000,000 Time Warner Entertainment Senior Debentures 8 3/8%, 2033...................... 10,119,900
3,450,000 Union Camp Corp. Debentures 9 1/4%, 2011...................................... 4,140,000
10,000,000 Weyerhaeuser Co. Debentures 7.95%, 2025....................................... 10,914,700
--------------
72,534,073
FINANCE: 4.7%
2,500,000 Bank of Boston Subordinated Notes 6 5/8%, 2004................................ 2,440,775
2,000,000 Barclays North American Capital Corp. Notes 9 3/4%, 2021, Callable 2001....... 2,299,860
1,800,000 CIGNA Corp. Debentures 7.65%, 2023............................................ 1,707,750
4,400,000 CIGNA Corp. Notes 8.30%, 2023................................................. 4,477,000
3,100,000 First Nationwide Bank Subordinated Debentures 10%, 2006....................... 3,534,000
10,750,000 General Electric Capital Debentures 8 1/2%, 2008.............................. 12,322,188
15,090,000 GMAC Put Bonds 8 7/8%, 2010, Putable 2000/2005................................ 17,579,850
3,100,000 Golden West Financial Subordinated Notes 6.70%, 2002.......................... 3,082,516
3,000,000 Golden West Financial Subordinated Notes 7 1/4%, 2002......................... 3,071,250
8,075,000 Golden West Financial Subordinated Notes 6%, 2003............................. 7,637,335
6,215,000 ITT Hartford Group Notes 8.30%, 2001.......................................... 6,665,588
2,000,000 Norwest Corp. MTN 6 1/2%, 2005................................................ 1,964,000
5,500,000 Norwest Corp. Subordinated Debentures 6.65%, 2023............................. 5,046,250
--------------
71,828,362
INTERNATIONAL AGENCY: 1.7%
7,200,000 European Investment Bank Bonds 10 1/8%, 2000.................................. 8,326,368
18,000,000 Inter-American Development Bank Debentures
7 1/8%, 2023, Callable 2003................................................. 17,570,880
--------------
25,897,248
TRANSPORTATION: 1.4%
3,900,000 AMR Corp. Debentures 9.88%, 2020.............................................. 4,518,618
7,925,000 AMR Corp. Debentures 9 3/4%, 2021............................................. 9,091,402
8,500,000 Consolidated Rail Corp. 95-A Pass Through Trust 6.76%, 2015................... 8,412,365
--------------
22,022,385
CANADIAN: 1.2%
8,000,000 Canadian Pacific Ltd. Debentures 9.45%, 2021.................................. 9,750,000
7,900,000 Hydro-Quebec Debentures 8.40%, 2022........................................... 8,557,517
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18,307,517
PUBLIC UTILITIES: 0.1%
750,000 Idaho Power Co. 1st Mortgage Bonds 9 1/2%, 2021, Callable 2001................ 853,125
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TOTAL BONDS (cost $583,935,296).......................................... 600,341,022
--------------
</TABLE>
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<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1995
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PAR VALUE MARKET VALUE
<C> <C> <S> <C>
SHORT-TERM $ 2,403,190 Eli Lilly & Co., Variable Demand Note 5.30%, 1995............................. $ 2,403,190
INVESTMENTS: 8,144,160 General Mills, Inc., Variable Demand Note 5.46%, 1995......................... 8,144,160
5.1% 19,860,296 Pitney Bowes Credit Corp., Variable Demand Note 5.47%, 1995................... 19,860,296
13,000,000 Prudential Funding Corp., Commercial Paper 6 1/4%, 1995....................... 13,000,000
19,014,348 Sara Lee Corp., Variable Demand Note 5.45%, 1995.............................. 19,014,348
7,407,837 Southwestern Bell Telephone Co., Variable Demand Note 5.45%, 1995............. 7,407,837
8,267,566 Wisconsin Electric Power Corp., Variable Demand Note 5.51%, 1995.............. 8,267,566
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TOTAL SHORT-TERM INVESTMENTS (cost $78,097,397).......................... 78,097,397
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TOTAL INVESTMENTS (cost $1,332,128,529)........................... 100.2% 1,534,450,659
OTHER ASSETS LESS LIABILITIES..................................... (0.2) (2,850,439)
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TOTAL NET ASSETS.................................................. 100.0% $1,531,600,220
====== ==============
Beneficial shares outstanding 28,374,196 NET ASSET VALUE PER SHARE $53.98
(par value $1.00 each)
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Operations
-------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1995
<S> <C>
Investment income................................................................................. $ 37,971,756
Expenses.......................................................................................... 4,866,564
------------
Net investment income............................................................................. $ 33,105,192
============
Net realized gain from securities transactions (based on identified cost)......................... $ 34,528,910
Change in unrealized appreciation of investments.................................................. 153,092,741
------------
Net realized and unrealized gain on investments................................................... $187,621,651
============
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended September 30, 1995 1 Year 5 Years 10 Years 20 Years
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 22.86% 15.92% 14.59% 13.76%
S&P 500 Index 29.74 17.23 16.04 14.72
Lehman Bros. Aggregate Bond Index 14.07 9.65 10.00 10.18
</TABLE>
The Fund invests its assets in common stocks and bonds; the S&P
500 is comprised solely of common stocks. The Fund's investment
in common stocks over the past 20 years has ranged from 54% to
74% of the total portfolio.
The average annual total return figures include reinvestment of
dividend and capital gain distributions. These results represent
past performance; past performance is no guarantee of future
results. Investment return and share price will vary, and shares
may be worth more or less at redemption than at original
purchase.
* * *
The financial information has been taken from the records of the
Fund and has not been audited by our independent accountants who
do not express an opinion thereon. The financial statements of
the Fund will be subject to audit by our independent accountants
as of the close of the calendar year.
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DODGE & COX
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Balanced Fund
<TABLE>
<CAPTION>
Condensed Financial Information
-------------------------------------------------------------------------------------------------------------------
Net Asset Value Per Share Distributions Per Share
-------------------------- -------------------------
Year Ended Capital
December 31 Net Assets Actual Adjusted* Income Gains
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1985 $ 24,516,464 $31.93 $32.38 $ 1.70 $ .37
1986 27,516,246 32.62 36.70 1.62 3.55
1987 34,376,651 30.72 37.54 1.70 2.67
1988 39,031,819 32.09 39.76 1.68 .46
1989 50,950,919 36.85 46.54 1.76 .71
1990 82,596,374 35.03 44.66 1.81 .33
1991 179,392,902 40.09 51.52 1.76 .29
1992 268,768,015 42.44 54.62 1.72 .08
1993 486,830,358 46.40 61.06 1.66 1.07
1994 725,271,607 45.21 59.95 1.76 .36
1995 (9/30) 1,531,600,220 53.98 71.69 1.41** .06
------ -----
$18.58 $9.95
====== =====
</TABLE>
* Adjusted for assumed reinvestment of capital gains
distributions.
** A distribution of $.48 per share from net investment income was
paid to shareholders of record September 14, 1995.
Officers and Trustees
----------------------------------------------------------------
Harry R. Hagey, Chairman and Trustee
Chairman & CEO, Dodge & Cox
A. Horton Shapiro, Vice-Chairman and Trustee
Senior Vice-President, Dodge & Cox
Kenneth E. Olivier, Assistant Secretary and Trustee
Senior Vice-President, Dodge & Cox
Peter Avenali, Trustee
Retired Officer, Dodge & Cox
Max Gutierrez, Jr., Trustee
Partner, Brobeck, Phleger & Harrison, Attorneys
Robert C. Harris, Trustee
Of Counsel to Heller, Ehrman, White & McAuliffe, Attorneys
Frank H. Roberts, Trustee
Retired Partner, Pillsbury, Madison & Sutro, Attorneys
John B. Taylor, Trustee
Professor of Economics, Stanford University
Will C. Wood, Trustee
Principal, Kentwood Associates, Financial Advisers
W. Timothy Ryan, Secretary
Senior Vice-President, Dodge & Cox
E. Morris Cox, Honorary Trustee
----------------------------------------------------------------
MANAGERS
Dodge & Cox
One Sansome Street, 35th Floor
San Francisco, California 94104
Telephone (415) 981-1710
CUSTODIAN & TRANSFER AGENT
Firstar Trust Company
P. O. Box 701
Milwaukee, Wisconsin 53201-0701
Telephone (800) 621-3979
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
San Francisco, California
LEGAL COUNSEL
Heller, Ehrman, White & McAuliffe
San Francisco, California
----------------------------------------------------------------
This report is submitted for the general information of the
shareholders of the Fund. The report is not authorized for
distribution to prospective investors in the Fund unless it is
accompanied by an effective prospectus.
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DODGE & COX
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Balanced Fund
General Information
----------------------------------------------------------------
DODGE & COX The Fund enables investors to obtain the benefits of experienced
BALANCED FUND and continuous investment supervision. Shares of the Fund
represent a well-balanced, diversified investment designed to
provide a complete long-term investment program in one
convenient holding. The portfolio of the Fund is balanced
between common stocks, which provide an opportunity for long-
term growth of principal and income, and fixed-income
securities, which provide a higher level of income and stability
of principal.
INVESTMENT Since 1930, Dodge & Cox has been providing professional
COUNSEL investment management for individuals, trustees, corporations,
MANAGEMENT pension and profit-sharing funds, and charitable institutions.
In addition, Dodge & Cox manages the Dodge & Cox Stock Fund and
the Dodge & Cox Income Fund. Dodge & Cox is not engaged in the
brokerage business nor in the business of dealing in or selling
securities.
NO SALES There are no commissions on the purchase or redemption of shares
CHARGE of the Fund.
GIFTS Dodge & Cox Balanced Fund shares provide a convenient method for
making gifts to children and to other family members. Fund
shares may be held by an adult custodian for the benefit of a
minor under a Uniform Gifts/Transfers to Minors Act. Trustees
and guardians may also hold shares for a minor's benefit.
REINVESTMENT Shareholders may direct that dividend and capital gains
PLAN distributions be reinvested in additional Fund shares.
AUTOMATIC Shareholders may make regular monthly or quarterly investments
INVESTMENT of $100 or more through automatic deductions from their bank
PLAN accounts.
WITHDRAWAL Shareholders owning $10,000 or more of the Fund's shares may
PLAN elect to receive periodic monthly or quarterly payments of at
least $50. Under the plan, all dividend distributions are
automatically reinvested at net asset value with the periodic
payments made from the proceeds of the redemption of sufficient
shares.
The above plans are completely voluntary and involve no service
charge of any kind.
IRA PLAN The Fund has available an Individual Retirement plan (IRA) for
shareholders of the Fund.
Fund literature and details on all of these plans are available
from the Fund upon request.
DODGE & COX BALANCED FUND
c/o Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
Telephone (800) 621-3979
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<PAGE>
Dodge & Cox
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Balanced Fund
Dear Shareholder October 1995
The Dodge & Cox Balanced Fund achieved a total return of 5.5% for the quarter
ended September 30, 1995. This result compares with returns for the Standard &
Poor's 500 Index (S&P 500) of 8.0% and for the Lehman Brothers Aggregate Bond
(LBAG) Index of 2.0% for the same period. For the first nine months of 1995 the
Balanced Fund returned 22.9%, compared to 29.8% for the S&P 500 and 13.6% for
the LBAG Index.
- --------------------------------------------------------------------------------
Average Annual Total Return
<TABLE>
<CAPTION>
For periods ended September 30, 1995 1 Year 5 Years 10 Years 20 Years
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 22.86% 15.92% 14.59% 13.76%
S&P 500 Index 29.74 17.23 16.04 14.72
LBAG Index 14.07 9.65 10.00 10.18
</TABLE>
The average annual total return figures include reinvestment of dividend and
capital gain distributions. These results represent past performance; past
performance is no guarantee of future results. Investment return and share price
will vary, and shares may be worth more or less at redemption than at original
purchase.
- --------------------------------------------------------------------------------
The largest component of the Fund's return in the third quarter came from the
equity portfolio, with many of our stocks in the financial and technology
sectors continuing their strong first half performance. Transportation stocks
also achieved good results, led by Federal Express, which was the Fund's top
performing stock in the quarter. Retail stocks continued to underperform, with
the one exception of Dayton-Hudson, the Fund's largest equity holding. Capital
equipment and energy stocks were also generally weak performers.
The fixed income portfolio also contributed positively to total return during
the quarter, primarily due to current income from the Fund's holdings.
Additionally, there was some modest price appreciation in our longer maturity
corporate securities, the result of a narrowing of their yield premiums and a
small decline in long term interest rates.
As of September 30, 1995, the Fund was 56% invested in common stocks, 39% in
fixed income securities and 5% in cash, similar to where it was at midyear.
Equity Strategy: Sell Discipline; Increasing Investment in Energy Sector
While the Fund's strategy in the equity portfolio does not change significantly
from quarter to quarter, we do have a disciplined sell strategy. This discipline
begins with a hypothetical question: "Would we still buy a stock today in a new
portfolio which starts as all cash and must be fully invested?" If the answer
changes to no, then we challenge ourselves to explain why the stock should not
be sold or at least trimmed to a smaller position in the Fund. Following this
approach, we sold five stocks in the Fund during the third quarter, including
two technology stocks and one finance company.
======================================---=======================================
Dodge & Cox One Sansome Street San Francisco, California 94104
<PAGE>
Dodge & Cox
======================================---=======================================
Balanced Fund
As we trim our portfolio, we also continue to seek new attractive long term
investments. Seven new equity positions were established in the Fund during the
third quarter, including Chevron and two other energy-related companies.
Subsequent to the end of the quarter, the Fund also participated in the initial
public offering of Union Pacific Resources, a leading oil and gas exploration
and production company. We have followed U.P. Resources for many years as a
shareholder in its parent company, Union Pacific. We have stepped up our
research efforts in the energy sector as the price of petroleum and natural gas
products is currently depressed, while worldwide energy demand is increasing.
Fixed Income Portfolio: Emphasis on Incremental Yield and Mortgage Securities
As with our equity holdings, we manage the fixed income portion of the Balanced
Fund with a three to five year investment horizon. As discussed in our last
letter, this discipline enabled the Fund to weather a difficult year for the
bond market in 1994. A key assumption in our investment approach is that income
return and the reinvestment of income will be the major components of the fixed
income portfolio's total return over a long term time frame. Therefore, a
cornerstone of our fixed income strategy is building incremental yield into the
bond portfolio without sacrificing its broad diversification and high average
quality. We accomplish this by allocating a significant percentage of the bond
portfolio's assets to corporate and mortgage securities, which provide a greater
yield than similar duration U.S. Treasuries.
At quarter end, various types of mortgage-backed securities--such as issues of
the Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation--represented about 40% of the Fund's fixed income portfolio. These
investments offer greater yields than direct U.S. Treasury obligations,
primarily due to less certainty regarding the timing of future cash flows (e.g.
prepayment of principal from mortgage payments).
A clear illustration of the key role that fundamental research plays in our
security selection process was the Fund's purchases earlier this year of several
mortgage pass-through issues of the U.S. Department of Veteran Affairs, known as
the V.A. Vendee 1994 and 1995 Series. After a visit by one of our fixed income
analysts to the Veteran Affairs headquarters in Washington, D.C., we concluded
that these issues offer more stable cash flow characteristics, and yet also have
a higher yield premium than alternative mortgage investments. At quarter end, we
held $34 million of V.A. Vendee securities in the Fund.
In closing, we want to thank you for your continued confidence in Dodge & Cox.
We believe that our ongoing commitment to independent fundamental research and
individual security selection will continue to benefit Fund shareholders in the
years ahead.
Dodge & Cox
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