<PAGE>
DODGE & COX
Balanced Fund
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
D O D G E & C O X
Balanced Fund
Established 1931
---------------------
Quarterly Report
September 30, 1996
1996
<PAGE>
D O D G E & C O X
======================================----==================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1996
--------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CONSUMER: 13.7%
STOCKS: 1,521,600 Dayton-Hudson Corp.........................$50,212,800
57.4% 617,000 Dillard Department Stores, Inc. Class A.... 19,898,250
303,000 Fleming Cos., Inc.......................... 5,264,625
640,700 Ford Motor Co.............................. 20,021,875
596,700 Fruit of the Loom, Inc..................... 18,497,700
978,000 General Motors Corp........................ 46,944,000
340,000 Genuine Parts Co........................... 14,875,000
620,000 James River Corp. of Virginia.............. 17,127,500
1,900,000 Kmart Corp................................. 19,475,000
972,800 Masco Corp................................. 29,184,000
528,400 Melville Corp.............................. 23,315,650
700,000 Nordstrom, Inc............................. 26,644,100
253,000 Procter & Gamble Co........................ 24,667,500
389,000 Sony Corp. ADR............................. 24,750,125
112,000 Unilever NV................................ 17,654,000
315,200 VF Corp.................................... 18,951,400
466,700 Whirlpool Corp............................. 23,626,688
-----------
401,110,213
FINANCE: 11.1%
840,000 American Express Co........................ 38,850,000
180,500 American International Group, Inc.......... 18,185,375
337,000 BankAmerica Corp........................... 27,676,125
620,000 Barnett Banks, Inc......................... 20,925,000
578,000 Chubb Corp................................. 26,588,000
452,000 Citicorp................................... 40,962,500
127,000 General Re Corp............................ 18,002,250
579,000 Golden West Financial Corp................. 33,799,125
62,600 Lehman Brothers Holdings, Inc.............. 1,596,300
278,000 Morgan (J.P.) & Co......................... 24,707,250
518,000 Norwest Corp............................... 21,173,250
350,500 Republic New York Corp..................... 24,228,313
470,000 The St. Paul Cos., Inc..................... 26,085,000
-----------
322,778,488
ELECTRONICS AND COMPUTERS: 6.8%
1,020,000 Digital Equipment Corp..................... 36,465,000
648,000 Hewlett-Packard Co......................... 31,590,000
371,000 International Business Machines Corp....... 46,189,500
325,800 Motorola, Inc.............................. 16,819,425
945,000 National Semiconductor Corp................ 19,018,125
566,600 Sybase, Inc................................ 8,463,871
1,120,000 Tandem Computers, Inc...................... 12,040,000
480,000 Texas Instruments, Inc..................... 26,460,000
-----------
197,045,921
BASIC INDUSTRY: 6.1%
521,000 Aluminum Co. of America.................... 30,739,000
532,200 Boise Cascade Corp......................... 18,094,800
373,000 Champion International Corp................ 17,111,375
35,500 Crown Vantage, Inc......................... 423,799
413,000 Dow Chemical Co............................ 33,143,250
628,000 International Paper Co..................... 26,690,000
</TABLE>
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1
<PAGE>
D O D G E & C O X
======================================----===================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1996
- --------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON BASIC INDUSTRY (continued)
STOCKS 290,000 Lubrizol Corp............................. $ 8,337,500
(Continued) 505,700 Nalco Chemical Co......................... 18,331,625
514,000 Weyerhaeuser Co........................... 23,708,250
------------
176,579,599
ENERGY: 5.1%
569,200 Amerada Hess Corp......................... 30,096,450
155,000 Amoco Corp................................ 10,927,500
246,000 Chevron Corp.............................. 15,405,750
20,000 Exxon Corp................................ 1,665,000
254,000 Halliburton Co............................ 13,112,750
20,000 Mobil Corp................................ 2,315,000
540,000 Phillips Petroleum Co..................... 23,085,000
136,000 Royal Dutch Petroleum Co.................. 21,233,000
144,000 Schlumberger Ltd.......................... 12,168,000
235,000 Union Pacific Resources Group, Inc........ 6,580,000
205,000 Western Atlas, Inc........................ 12,761,250
------------
149,349,700
BUSINESS PRODUCTS AND SERVICES: 3.5%
1,024,100 Donnelley (R.R.) & Sons Co................ 33,027,225
467,850 Dow Jones & Co............................ 17,310,450
411,900 Federal Express Corp...................... 32,643,075
376,000 Xerox Corp................................ 20,163,000
------------
103,143,750
PUBLIC UTILITIES: 3.2%
566,500 BCE, Inc.................................. 24,217,875
32,000 Duke Power Co............................. 1,492,000
500,000 Edison International...................... 8,937,500
277,800 FPL Group, Inc............................ 12,014,850
572,300 Pacific Enterprises....................... 17,312,075
396,000 Texas Utilities Co........................ 15,691,500
821,300 TransCanada PipeLines Ltd................. 13,243,463
------------
92,909,263
CAPITAL EQUIPMENT: 2.1%
375,000 Caterpillar, Inc.......................... 28,265,625
689,000 Deere & Co................................ 28,938,000
135,000 Parker-Hannifin Corp...................... 5,670,000
------------
62,873,625
TRANSPORTATION: 1.9%
960,000 Canadian Pacific Ltd...................... 22,200,000
471,000 Union Pacific Corp........................ 34,500,750
------------
56,700,750
DIVERSIFIED TECHNOLOGY: 1.8%
575,000 Corning, Inc.............................. 22,425,000
14,600 Imation Corp.............................. 357,700
146,000 Minnesota Mining & Manufacturing Co....... 10,201,750
246,500 Raychem Corp.............................. 18,487,500
------------
51,471,950
PHARMACEUTICAL AND HEALTH: 1.6%
180,000 Pfizer, Inc............................... 14,242,500
410,350 Pharmacia & Upjohn, Inc................... 16,926,938
235,000 SmithKline Beecham plc ADR................ 14,305,625
------------
45,475,063
=====================================----======================================
</TABLE>
2
<PAGE>
D O D G E & C O X
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1996
-------------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON MISCELLANEOUS: 0.5%
STOCKS 454,100 Meditrust............................................................. $ 15,723,213
(Continued) -------------
Total Common Stocks (cost $1,333,206,473).................................. 1,675,161,535
-------------
PREFERRED CONSUMER: 0.2%
STOCKS: 61,500 Kmart Financing I, 7-3/4% Trust Convertible Preferred ............... 3,005,813
0.2% 76,922 Times Mirror Co. Conversion Preferred Series B........................ 2,038,433
-------------
Total Preferred Stocks (cost $4,734,842)......................... 5,044,246
-------------
PAR VALUE
BONDS: U.S. TREASURY: 9.8%
38.7% $38,500,000 U.S. Treasury Notes, 6%, 1997......................................... 38,541,965
10,000,000 U.S. Treasury Notes, 6-1/4%, 1997..................................... 10,053,100
17,750,000 U.S. Treasury Notes, 6-7/8%, 1997..................................... 17,877,623
63,100,000 U.S. Treasury Notes, 5-1/8%, 1998..................................... 61,798,247
28,500,000 U.S. Treasury Notes, 5-1/4%, 1998..................................... 28,094,730
14,000,000 U.S. Treasury Notes, 7-1/8%, 1998..................................... 14,266,840
50,000,000 U.S. Treasury Notes, 7-7/8%, 1998..................................... 51,179,500
34,100,000 U.S. Treasury Notes, 6-1/4%, 2003..................................... 33,556,446
9,250,000 U.S. Treasury Bonds, 14%, 2011, Callable 2006......................... 14,048,438
15,300,000 U.S. Treasury Bonds, 7-1/2%, 2016..................................... 16,024,302
-------------
285,441,191
FEDERAL AGENCY: 0.2%
5,000,000 Arkansas Dev. Fin. Auth. GNMA Guaranteed Bonds 9-3/4%, 2014........... 5,922,250
FEDERAL AGENCY MORTGAGE PASS-THROUGH, CMO* AND REMIC**: 15.7%
1,773,658 Federal Home Loan Mtge. Corp. Group 25-6637, 8%, 2002................. 1,805,052
1,533,864 Federal Home Loan Mtge. Corp. Group D26241, 6-1/2%, 2006.............. 1,516,393
359,174 Federal Home Loan Mtge. Corp. Group 18-0233, 7%, 2006................. 357,023
1,003,147 Federal Home Loan Mtge. Corp. Group 25-0921, 7-1/2%, 2006............. 1,009,497
38,544,893 Federal Home Loan Mtge. Corp. Group E00210 15 year, 7%, 2008.......... 38,376,066
332,281 Federal Home Loan Mtge. Corp. Group 18-5719, 7-1/4%, 2008............. 332,789
695,480 Federal Home Loan Mtge. Corp. Group 27-2784, 7-1/4%, 2008............. 696,544
376,093 Federal Home Loan Mtge. Corp. Group 25-3827, 7-1/2%, 2008............. 378,474
1,370,544 Federal Home Loan Mtge. Corp. Group 18-0468, 8%, 2008................. 1,404,794
1,267,066 Federal Home Loan Mtge. Corp. Group D10211, 7-1/2%, 2009.............. 1,285,299
9,683,410 Federal Home Loan Mtge. Corp. Group 55-5062, 8%, 2010................. 9,925,398
1,523,091 Federal Home Loan Mtge. Corp. Group 30-9878, 8-3/4%, 2010............. 1,585,005
461,044 Federal Home Loan Mtge. Corp. Group 27-3014, 8-1/4%, 2011............. 472,861
537,961 Federal Home Loan Mtge. Corp. Group 27-2785, 7-3/4%, 2012............. 542,512
1,711,844 Federal Home Loan Mtge. Corp. Group 55-5098, 8-1/4%, 2017............. 1,755,719
13,054,272 Federal Home Loan Mtge. Corp. Group D64097, 8-1/2%, 2023.............. 13,525,009
16,200,000 Federal Home Loan Mtge. Corp. Multi PC Series 1301-E, 7%, 2005........ 16,326,522
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1216-GA, 7%, 2006....... 9,996,800
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1458-H, 7%, 2006........ 10,065,600
5,934,000 Federal Home Loan Mtge. Corp. Multi PC Series 1203-H, 6%, 2007........ 5,622,465
11,500,000 Federal Home Loan Mtge. Corp. Multi PC Series 1450-H, 6-1/2%, 2007.... 11,198,125
16,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1693-H, 6%, 2008........ 14,969,920
12,850,000 Federal Home Loan Mtge. Corp. Multi PC Series 1512-I, 6-1/2%, 2008.... 12,416,313
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1539PL, 6-1/2%, 2008.... 9,718,700
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
================================================================================
3
<PAGE>
D O D G E & C O X
======================================----===================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1996
- --------------------------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
BONDS FEDERAL AGENCY MORTGAGE PASS-THROUGH, CMO* AND REMIC** (continued)
(Continued)
<C> <C> <S> <C>
$17,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1564-H, 6-1/2%, 2008.................... $16,410,270
16,507,000 Federal Home Loan Mtge. Corp. Multi PC Series 1628-PJ, 6-1/2%, 2022................... 15,475,313
947,523 Federal Natl. Mtge. Assn. MBS Pool 55690, 8-1/2%, 2002................................ 982,041
1,159,223 Federal Natl. Mtge. Assn. MBS Pool 22354, 6-1/2%, 2004................................ 1,141,568
4,921,999 Federal Natl. Mtge. Assn. MBS Pool 70992 15 year, 7-1/2%, 2006........................ 4,965,952
13,058,789 Federal Natl. Mtge. Assn. MBS Pool 44047, 7%, 2007.................................... 12,975,605
7,373,444 Federal Natl. Mtge. Assn. MBS Pool 70255, 7-1/2%, 2007................................ 7,462,441
28,677,157 Federal Natl. Mtge. Assn. MBS Pool 351632 15 year, 8%, 2008........................... 29,340,173
8,370,609 Federal Natl. Mtge. Assn. MBS Pool 107047, 8%, 2009................................... 8,599,294
2,230,219 Federal Natl. Mtge. Assn. MBS Pool 169231, 7-1/2%, 2010............................... 2,248,373
5,025,964 Federal Natl. Mtge. Assn. MBS Pool 224484, 7-1/2%, 2011............................... 5,073,459
6,760,940 Federal Natl. Mtge. Assn. MBS Pool 124668, 7-1/2%, 2019............................... 6,851,401
10,376,348 Federal Natl. Mtge. Assn. PC 1993-234-PA, 5%, 2004.................................... 10,197,979
21,840,000 Federal Natl. Mtge. Assn. PC 1992-4-H, 7-1/2%, 2007................................... 22,297,111
15,475,000 Federal Natl. Mtge. Assn. PC 1994-33-H, 6%, 2009...................................... 14,459,376
12,550,674 Federal Natl. Mtge. Assn. PC G1993-39-A, 5.70%, 2016.................................. 11,934,812
13,730,000 Federal Natl. Mtge. Assn. PC G1994-13-J, 7%, 2022..................................... 13,378,100
19,500,000 Federal Natl. Mtge. Assn. PC 1993-185-PE, 6-1/2%, 2023................................ 18,238,545
11,350,603 Federal Natl. Mtge. Assn. SMBS L-1, 5%, 2006.......................................... 10,654,811
1,431,466 Federal Natl. Mtge. Assn. SMBS I-1, 6-1/2%, 2009...................................... 1,405,270
25,444,822 Govt. Natl. Mtge. Assn. Pool 780258, 7-1/2%, 2007..................................... 25,719,881
31,658 FSF Finance Corp. 1985-1-D, 9-1/4%, 2016.............................................. 32,054
13,352,000 Veterans Affairs Vendee Mtge. Trust 1994-2-3 C, 6-1/2%, 2009.......................... 13,109,928
20,929,940 Veterans Affairs Vendee Mtge. Trust 1996-2-1 C, 6-3/4%, 2014.......................... 20,426,156
8,113,253 Veterans Affairs Vendee Mtge. Trust 1995-1A-1 PT, 7.20756%, 2025...................... 7,829,289
11,251,741 Veterans Affairs Vendee Mtge. Trust 1995-2C-3A PT, 8.7925%, 2025...................... 11,744,005
--------------
458,236,087
INDUSTRIAL: 6.1%
10,400,000 Dayton-Hudson Corp. Debentures 9%, 2021.............................................. 11,481,288
6,450,000 Dayton-Hudson Corp. Debentures 9.70%, 2021........................................... 7,598,487
1,300,000 Dayton-Hudson Corp. Debentures 8.8%, 2022............................................ 1,407,952
13,600,000 Dayton-Hudson Corp. MTN 9.35%, 2020, Putable 1997.................................... 15,392,752
7,500,000 Ford Holdings, Inc. Debentures 9-3/8%, 2020.......................................... 8,762,700
20,000,000 Ford Motor Co. Debentures 9.95%, 2032................................................ 25,088,200
14,250,000 General Motors Corp. Debentures 7.70%, 2016.......................................... 14,112,345
9,000,000 Lockheed Martin Corp. Debentures 7.65%, 2016......................................... 9,036,000
23,575,000 Lockheed Martin Corp. Debentures 7-3/4%, 2026........................................ 23,711,028
5,750,000 May Department Stores Notes 7-5/8%, 2013............................................. 5,726,770
8,200,000 May Department Stores Notes 7.60%, 2025.............................................. 8,059,780
6,375,000 Ralston Purina Debentures 7-3/4%, 2015............................................... 6,265,796
28,000,000 Time Warner Entertainment Senior Debentures 8-3/8%, 2033............................. 27,300,560
3,450,000 Union Camp Corp. Debentures 9-1/4%, 2011............................................. 3,988,235
11,650,000 Walt Disney Co. Debentures 7.55%, 2093............................................... 11,396,613
--------------
179,328,506
FINANCE: 3.4%
2,000,000 Barclays North American Capital Corp. Notes 9-3/4%, 2021, Callable 2001............... 2,240,560
1,800,000 CIGNA Corp. Debentures 7.65%, 2023.................................................... 1,716,462
4,400,000 CIGNA Corp. Notes 8.30%, 2023......................................................... 4,505,600
3,100,000 First Nationwide Bank Subordinated Debentures 10%, 2006............................... 3,474,046
5,000,000 General Electric Capital Debentures 8-3/4%, 2007...................................... 5,564,550
</TABLE>
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4
<PAGE>
D O D G E & C O X
======================================----======================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1996
-------------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS FINANCE (continued)
(Continued) $12,250,000 General Electric Capital Debentures 8 1/2%, 2008................................... $ 13,490,558
19,290,000 GMAC Put Bonds 8 7/8%, 2010, Putable 2000/2005...................................... 21,832,808
3,100,000 Golden West Financial Subordinated Notes 6.70%, 2002................................ 3,045,378
3,000,000 Golden West Financial Subordinated Notes 7 1/4%, 2002............................... 3,012,510
8,075,000 Golden West Financial Subordinated Notes 6%, 2003................................... 7,548,833
6,215,000 ITT Hartford Group Notes 8.30%, 2001................................................ 6,539,672
5,625,000 ITT Hartford Group Notes 6 3/8%, 2002............................................... 5,429,025
14,400,000 Norwest Corp. MTN 6.20%, 2005....................................................... 13,394,304
3,055,000 Norwest Corp. MTN 6 1/2%, 2005...................................................... 2,908,177
5,500,000 Norwest Corp. Subordinated Debentures 6.65%, 2023................................. 4,859,965
-------------
99,562,448
INTERNATIONAL AGENCY: 1.7%
7,200,000 European Investment Bank Bonds 10 1/8%, 2000....................................... 8,057,880
21,800,000 European Investment Bank Bonds 9 1/8%, 2002......................................... 24,297,408
18,815,000 Inter-American Development Bank Debentures 7 1/8%, 2023, Callable 2003.............. 17,446,773
-------------
49,802,061
CANADIAN: 1.3%
8,750,000 Canadian Pacific Ltd. Debentures 9.45%, 2021........................................ 9,993,638
7,550,000 Hydro-Quebec Debentures 7 1/2%, 2016............................................... 7,333,693
18,000,000 Hydro-Quebec Debentures 8.40%, 2022................................................ 18,979,020
-------------
36,306,351
TRANSPORTATION: 0.5%
8,413,018 Consolidated Rail Corp. 95-A Pass Through Trust 6.76%, 2015........................ 8,054,287
5,000,000 Consolidated Rail Corp. Debentures 9 3/4%, 2020.................................... 6,102,000
-------------
14,156,287
PUBLIC UTILITIES: 0.0%
750,000 Idaho Power Co. 1st Mortgage Bonds 9 1/2%, 2021, Callable 2001..................... 820,410
-------------
Total Bonds (cost $1,130,062,671)........................................... 1,129,575,591
--------------
SHORT-TERM 18,015,858 General Mills, Inc., Variable Demand Note 5.19%, 1996.............................. 18,015,858
INVESTMENTS: 20,515,136 Pitney Bowes Credit Corp., Variable Demand Note 5.19%, 1996........................ 20,515,136
4.1% 7,000,000 Prudential Funding Corp., Commercial Paper 5.11%, 1996............................. 7,000,000
27,881,791 Sara Lee Corp., Variable Demand Note 5.17%, 1996................................... 27,881,791
24,956,493 Southwestern Bell Telephone Co., Variable Demand Note 5.17%, 1996.................. 24,956,493
14,487,541 Warner Lambert Co., Variable Demand Note 5.17%, 1996............................... 14,487,541
7,232,222 Wisconsin Electric Power Corp., Variable Demand Note 5.24%, 1996................... 7,232,222
--------------
Total Short-Term Investments (cost $120,089,041)............................ 120,089,041
--------------
TOTAL INVESTMENTS (cost $2,588,093,027)..................... 100.4% 2,929,870,413
OTHER ASSETS LESS LIABILITIES............................... (0.4) (12,579,438)
-------- --------------
TOTAL NET ASSETS............................................ 100.0% $2,917,290,975
======== ==============
Beneficial shares outstanding 51,045,812 Net asset value per share $57.15
(par value $1.00 each)
==============================================================----==================================================================
</TABLE>
5
<PAGE>
D O D G E & C O X
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Balanced Fund
<TABLE>
<CAPTION>
Condensed Statement of Operations
-----------------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1996
<S> <C>
Investment income.................................................................................... $ 76,852,057
Expenses............................................................................................. 10,387,265
-------------------
Net investment income................................................................................ $ 66,464,792
===================
Net realized gain from securities transactions (based on identified cost)............................ $ 20,209,948
Change in unrealized appreciation of investments..................................................... 90,168,469
-------------------
Net realized and unrealized gain on investments...................................................... $ 110,378,417
===================
</TABLE>
<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>
1986 $ 27,516,246 $32.62 $36.18 $ 1.62 $3.55
1987 34,376,651 30.72 37.02 1.70 2.67
1988 39,031,819 32.09 39.21 1.68 .46
1989 50,950,919 36.85 45.92 1.76 .71
1990 82,596,374 35.03 44.07 1.81 .33
1991 179,392,902 40.09 50.79 1.76 .29
1992 268,768,015 42.44 53.86 1.72 .08
1993 486,830,358 46.40 60.23 1.66 1.07
1994 725,271,607 45.21 59.13 1.76 .36
1995 1,800,300,864 54.60 73.00 1.90 1.19
1996 (9/30) 2,917,290,975 57.15 76.52 1.46** .10
------ ------
$18.83 $10.81
====== ======
</TABLE>
* Adjusted for assumed reinvestment of capital gains distributions.
** During the quarter, a distribution of $.50 per share from net investment
income was paid to shareholders of record September 17, 1996.
<TABLE>
<CAPTION>
Average annual total returns for periods ended September 30, 1996 1 Year 5 Years 10 Years 20 Years
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 12.09% 13.47% 13.12% 12.96%
S&P 500 Index 20.32 15.22 14.99 14.26
Lehman Brothers Aggregate Bond Index 4.88 7.46 8.49 9.59
</TABLE>
The Fund invests its assets in stocks and bonds. The Fund's investment in
common stocks over the past 20 years has ranged from 54% to 74% of the total
portfolio.
The Fund's total returns include the reinvestment of dividend and capital
gains distributions. The S&P 500 Index is a broad-based, unmanaged measure
of common stocks. The Lehman Brothers Aggregate Bond Index is a broad-based,
unmanaged measure of U.S. dollar-denominated investment grade rated
securities, including U.S. Government, corporate, asset-backed and mortgage-
backed issues. Index returns include dividends or interest income and,
unlike Fund returns, do not reflect fees or expenses. Past performance does
not guarantee future results. Investment return and share price will
fluctuate with market conditions, and investors may have a gain or loss when
shares are sold.
* * *
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.
======================================---=======================================
6
<PAGE>
D O D G E & C O X
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Balanced Fund
General Information
------------------------------------------------------------
Dodge & Cox The Fund enables investors to obtain the benefits of
Balanced Fund experienced and continuous investment supervision. Shares of
the Fund represent a balanced, diversified investment
designed to provide a long-term investment program in one
convenient holding. The portfolio of the Fund is balanced
between stocks, which provide an opportunity for long-term
growth of principal and income, and fixed-income securities,
which generally provide stability of principal and a higher
level of income.
Investment Since 1930, Dodge & Cox has been providing professional
Manager investment management for individuals, trustees,
corporations, 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 Charge There are no commissions on the purchase or redemption of
shares 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
Investment Plan investments of $100 or more through automatic deductions
from their bank accounts.
Withdrawal Plan Shareholders owning $10,000 or more of the Fund's shares may
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
------------------------------------------------------------
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 a current prospectus.
======================================---=======================================
<PAGE>
DODGE & COX
=====================================----=======================================
Balanced Fund
Dear Shareholder October 1996
The Dodge & Cox Balanced Fund had a total return of 2.2% for the quarter ended
September 30, 1996. This result compares with total returns of 3.1% for the
Standard & Poor's 500 Index (S&P 500) and 1.8% for the Lehman Brothers Aggregate
Bond Index (LBAG) for the same period. For the first nine months of 1996, the
Balanced Fund returned 7.6%, compared to 13.5% for the S&P 500 and 0.6% for the
LBAG. Returns for longer time periods are presented in the box below. The Fund's
asset allocation did not change materially during the quarter and stood at 57%
equities, 39% fixed income securities and 4% cash as of September 30, 1996.
<TABLE>
<CAPTION>
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Average Annual Total Return
For periods ended September 30, 1996 1 Year 5 Years 10 Years 20 Years
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<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 12.09% 13.47% 13.12% 12.96%
S&P 500 20.32 15.22 14.99 14.26
Lehman Brothers Aggregate Bond Index 4.88 7.46 8.49 9.59
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The Fund's total returns include the reinvestment of dividend and capital gain
distributions. The S&P 500 (a broad-based, unmanaged measure of common stocks)
returns include reinvested dividends. The LBAG is a broad-based unmanaged
measure of U.S. dollar-denominated investment grade rated securities, including
U.S. Government, corporate, asset-backed and mortgage-backed issues. Index
returns, unlike Fund returns, do not reflect fees or expenses. Past performance
does not guarantee future results. Investment return and share price will
fluctuate with market conditions, and you may have a gain or loss when you sell
your shares.
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Performance Review
For the first nine months of 1996, the equity component of the Fund provided a
strong positive return, but narrowly lagged the total return of the S&P 500.
Holdings in the banking, capital equipment, diversified technology and consumer
non-durables industries performed well relative to the overall equity market.
While IBM was one of the top performing stocks in the Fund, the Fund's equity
holdings in the electronics/computer sector trailed the market, as did the
Fund's consumer durables and insurance stocks. Retail stocks have been some of
the Fund's strongest holdings year-to-date; although, as a group, they lagged
the S&P 500 in the third quarter. The equity portfolio's results relative to the
S&P 500 in the third quarter were also hampered by its underweighted position in
consumer products and health care companies.
The Fund's fixed income portfolio had its strongest performance of the year in
the third quarter, pushing its year-to-date total return back into positive
territory. Mortgage-backed securities have been the Fund's best performing
sector this year. Despite intra-period volatility, interest rates closed the
quarter at roughly the same level as at June 30, 1996. Absent significant price
changes, the bond portfolio's income was the dominant component of its third
quarter total return.
Equity Highlight: Cycle Sensitive Stocks
Our equity investment philosophy remains unchanged; we look at stock price in
relation to our analysis of a company's earnings prospects over the next three
to five years, focusing on individual companies, rather than "top-down"
macroeconomic or sector analysis. Using this "bottom-up" approach, we have
invested in many companies in "cycle sensitive" industries. At quarter-end, 43%
of the Fund's equity portfolio was invested in this sector, compared to 30% of
the S&P 500.
The Fund's 30 holdings in this broadly diversified sector include companies in
the technology, industrial commodities, transportation, consumer durables and
capital equipment industries. At September 30, 1996, the five largest stock
positions in this category were General Motors, IBM, Digital Equipment, Union
Pacific and Dow Chemical.
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Dodge & Cox One Sansome Street San Francisco, California 94104
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DODGE & COX
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Balanced Fund
Further illustrating our belief in the potential of companies in this area is a
new position in Ford Motor Co., which was purchased in the Fund in the third
quarter. At the current price of $32, Ford trades at less than 10 times our 1996
earnings estimate and yields 4.9% on its current dividend.
Many companies in the cycle sensitive sector have depressed valuations relative
to the market. Many investors are worried about the longevity of the current
U.S. business cycle, since it is 5 1/2 years old. We believe it is difficult to
forecast recessions and, based on our three to five year investment horizon,
believe that stock prices of many cycle sensitive companies appear attractive.
In addition, many companies in this area have substantial revenues outside of
the United States. For example, IBM, Digital Equipment and Dow Chemical have
62%, 65% and 55% of their sales overseas, respectively. Even General Motors
derives approximately one fourth of its revenues from foreign markets. The world
economy is integrating, and U.S. companies have a substantial stake
overseas--the domestic business cycle is only one factor among many to be
considered. The Fund's stocks in this sector are impacted by very different
cycles; for instance, Deere is affected by global agricultural equipment
spending and Weyerhaeuser by worldwide paper and forest products pricing.
Fixed Income Highlight: Mortgage-Related Securities
At September 30, 1996, 41% of the Fund's bond portfolio consisted of Federal
Agency mortgage pass-through and other mortgage-related securities. Dodge & Cox
holds these securities in the Fund as a way to add incremental yield without
sacrificing the high average quality (AA+) of the Fund's fixed income portfolio.
Our strategy in this sector is to focus our investments in securities that
exhibit relatively stable cash flows over a wide range of interest rate
scenarios. A recent purchase is worth highlighting because it represents an
implementation of this strategy, but with a security that is new to the Fund.
Please note that the following security is discussed as an example of our
investment process, not because we believe it is necessarily more attractive
than the Fund's other investments.
In the third quarter we purchased a "pool" of 7% 15-year mortgage loans
securitized by "Freddie Mac" (the Federal Home Loan Mortgage Corporation). With
43 months average time from origination, the underlying mortgages in this pool
are considered "seasoned." We believe this feature gives this particular
mortgage security favorable investment characteristics that are not fully
reflected in its yield premium versus comparable fixed income alternatives. We
see the following benefits to this seasoning:
. Lower loan balances on the underlying mortgages--a result of regular principal
amortization on the accelerated 15-year schedule;
. homeowners whose average-tenure-in-the-home is understated, as many of the
mortgages in the pool were from the refinancings of 30-year mortgages:
. the previous departure from the pool of those homeowners who are more likely
or able to refinance; and
. a lack of potential refinancing alternatives.
We believe that these characteristics should lead to a more stable pool, meaning
less volatile mortgage prepayments in changing interest rate environments. For
long-term investors, prepayment stability is important to achieving high
relative returns in mortgage-backed securities. At Dodge & Cox, we have always
invested in the mortgage-backed area with an objective of reducing some of the
risks of prepayment instability.
In Closing
Thank you for your continued confidence in the Dodge & Cox Balanced Fund. As
always, we welcome your comments and questions.
Dodge & Cox
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Dodge & Cox One Sansome Street San Francisco, California 94104
