<PAGE>
D O D G E & C O X
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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D O D G E & C O X
Balanced Fund
Established 1931
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Quarterly Report
March 31, 1996
1996
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<PAGE>
D O D G E & C O X
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1996
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SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CONSUMER: 12.9%
STOCKS: 490,000 Dayton-Hudson Corp............................................... $ 41,588,750
56.8% 617,000 Dillard Department Stores, Inc. Class A.......................... 21,363,625
303,000 Fleming Cos., Inc. .............................................. 4,317,750
536,700 Fruit of the Loom, Inc. ......................................... 13,887,113
756,000 General Motors Corp. ............................................ 40,257,000
340,000 Genuine Parts Co. ............................................... 15,300,000
550,000 James River Corp. of Virginia.................................... 14,162,500
1,070,000 Kmart Corp....................................................... 10,031,250
725,000 Masco Corp....................................................... 21,025,000
648,000 Melville Corp.................................................... 23,247,000
534,900 Nordstrom, Inc................................................... 25,909,486
253,000 Procter & Gamble Co. ............................................ 21,441,750
45,000 Unilever NV...................................................... 6,108,750
285,200 VF Corp.......................................................... 15,757,300
376,700 Whirlpool Corp................................................... 20,812,675
--------------
295,209,949
FINANCE: 10.7%
685,000 American Express Co. ............................................ 33,821,875
127,500 American International Group, Inc................................ 11,937,188
267,000 BankAmerica Corp. ............................................... 20,692,500
225,000 Barnett Banks, Inc............................................... 14,006,250
186,000 Chubb Corp. ..................................................... 17,460,750
427,000 Citicorp......................................................... 34,160,000
90,000 General Re Corp.................................................. 13,117,500
489,000 Golden West Financial Corp....................................... 26,222,625
62,600 Lehman Brothers Holdings, Inc.................................... 1,674,550
200,000 Morgan (J.P.) & Co............................................... 16,600,000
418,000 Norwest Corp..................................................... 15,361,500
330,500 Republic New York Corp........................................... 19,664,750
375,000 The St. Paul Cos., Inc........................................... 20,812,500
--------------
245,531,988
ENERGY: 6.3%
428,000 Amerada Hess Corp................................................ 23,540,000
155,000 Amoco Corp....................................................... 11,198,750
246,000 Chevron Corp..................................................... 13,806,750
20,000 Exxon Corp....................................................... 1,632,500
254,000 Halliburton Co................................................... 14,446,250
20,000 Mobil Corp....................................................... 2,317,500
540,000 Phillips Petroleum Co. .......................................... 21,330,000
136,000 Royal Dutch Petroleum Co......................................... 19,210,000
144,000 Schlumberger Ltd. ............................................... 11,394,000
206,600 Sonat, Inc. ..................................................... 7,437,600
215,000 Union Pacific Resources Group, Inc. ............................. 5,697,500
205,000 Western Atlas, Inc. ............................................. 12,300,000
--------------
144,310,850
BASIC INDUSTRY: 6.0%
426,000 Aluminum Co. of America.......................................... 26,678,250
454,700 Boise Cascade Corp............................................... 19,097,400
138,000 Champion International Corp...................................... 6,244,500
35,500 Crown Vantage, Inc............................................... 510,313
</TABLE>
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1
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D O D G E & C O X
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1996
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SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON BASIC INDUSTRY (continued)
STOCKS 300,000 Dow Chemical Co.................................................. $ 26,062,500
(Continued) 538,000 International Paper Co........................................... 21,183,750
455,700 Nalco Chemical Co................................................ 14,012,775
514,000 Weyerhaeuser Co.................................................. 23,708,250
--------------
137,497,738
ELECTRONICS AND COMPUTERS: 5.9%
469,600 Digital Equipment Corp........................................... 25,886,700
254,000 Hewlett-Packard Co............................................... 23,876,000
283,000 International Business Machines Corp............................. 31,448,375
285,800 Motorola, Inc.................................................... 15,147,400
895,000 National Semiconductor Corp...................................... 12,418,125
1,120,000 Tandem Computers, Inc............................................ 9,940,000
300,000 Texas Instruments, Inc........................................... 15,262,500
--------------
133,979,100
BUSINESS PRODUCTS AND SERVICES: 3.5%
713,000 Donnelley (R.R.) & Sons Co....................................... 24,598,500
332,850 Dow Jones & Co................................................... 12,814,725
351,900 Federal Express Corp............................................. 24,589,013
135,700 Xerox Corp....................................................... 17,030,350
--------------
79,032,588
CAPITAL EQUIPMENT: 3.1%
320,000 Caterpillar, Inc................................................. 21,760,000
609,000 Deere & Co....................................................... 25,425,750
236,000 General Electric Co.............................................. 18,378,500
135,000 Parker-Hannifin Corp............................................. 5,062,500
--------------
70,626,750
PUBLIC UTILITIES: 2.9%
566,500 BCE, Inc......................................................... 20,039,938
172,500 Consolidated Natural Gas Co...................................... 7,503,750
32,000 Duke Power Co.................................................... 1,616,000
214,000 FPL Group, Inc................................................... 9,683,500
572,300 Pacific Enterprises.............................................. 14,808,263
316,000 Texas Utilities Co............................................... 13,074,500
--------------
66,725,951
DIVERSIFIED TECHNOLOGY: 2.0%
575,000 Corning, Inc..................................................... 20,125,000
146,000 Minnesota Mining & Manufacturing Co.............................. 9,471,750
246,500 Raychem Corp..................................................... 15,899,250
--------------
45,496,000
TRANSPORTATION: 1.9%
960,000 Canadian Pacific Ltd............................................. 19,200,000
369,000 Union Pacific Corp............................................... 25,322,625
--------------
44,522,625
PHARMACEUTICAL AND HEALTH: 1.6%
150,000 Pfizer, Inc...................................................... 10,050,000
410,350 Pharmacia & Upjohn, Inc.......................................... 16,362,706
205,000 SmithKline Beecham plc ADR....................................... 10,557,500
--------------
36,970,206
--------------
Total Common Stocks (cost $1,016,139,504).................. 1,299,903,745
--------------
</TABLE>
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2
<PAGE>
D O D G E & C O X
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1996
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SHARES MARKET VALUE
<C> <C> <S> <C>
PREFERRED CONSUMER: 0.1%
STOCKS: 76,922 Times Mirror Co. Conversion Preferred Series B................... $ 1,999,972
0.1% --------------
Total Preferred Stocks (cost $1,659,842)................... 1,999,972
--------------
PAR VALUE
BONDS: U.S. TREASURY: 12.4%
39.6% $25,350,000 U.S. Treasury Notes, 51/2%, 1996................................. 25,350,000
48,000,000 U.S. Treasury Notes, 77/8%, 1996................................. 48,389,760
30,000,000 U.S. Treasury Notes, 6%, 1997.................................... 30,117,300
10,000,000 U.S. Treasury Notes, 63/4%, 1997................................. 10,112,500
17,750,000 U.S. Treasury Notes, 67/8%, 1997................................. 17,980,218
28,500,000 U.S. Treasury Notes, 51/4%, 1998................................. 28,125,795
50,000,000 U.S. Treasury Notes, 77/8%, 1998................................. 51,750,000
25,000,000 U.S. Treasury Notes, 57/8%, 1999................................. 24,953,000
18,000,000 U.S. Treasury Notes, 61/4%, 2000................................. 18,112,500
11,000,000 U.S. Treasury Bonds, 14%, 2011, Callable 2006.................... 17,197,840
11,000,000 U.S. Treasury Bonds, 77/8%, 2021................................. 12,282,160
--------------
284,371,073
FEDERAL AGENCY: 0.3%
5,000,000 Arkansas Dev. Fin. Auth. GNMA Guaranteed Bonds 9 3/4%, 2014...... 6,115,350
FEDERAL AGENCY MORTGAGE PASS-THROUGH, CMO* AND REMIC**: 14.1%
2,011,096 Federal Home Loan Mtge. Corp. Group 25-6637, 8%, 2002............ 2,053,952
1,742,437 Federal Home Loan Mtge. Corp. Group D26241, 61/2%, 2006.......... 1,742,559
414,522 Federal Home Loan Mtge. Corp. Group 18-0233, 7%, 2006............ 415,819
1,118,954 Federal Home Loan Mtge. Corp. Group 25-0921, 71/2%, 2006......... 1,137,428
373,578 Federal Home Loan Mtge. Corp. Group 18-5719, 71/4%, 2008......... 377,519
813,326 Federal Home Loan Mtge. Corp. Group 27-2784, 71/4%, 2008......... 823,428
421,806 Federal Home Loan Mtge. Corp. Group 25-3827, 71/2%, 2008......... 428,770
1,542,301 Federal Home Loan Mtge. Corp. Group 18-0468, 8%, 2008............ 1,583,681
1,403,576 Federal Home Loan Mtge. Corp. Group D10211, 71/2%, 2009.......... 1,427,156
1,719,002 Federal Home Loan Mtge. Corp. Group 30-9878, 83/4%, 2010......... 1,815,249
526,272 Federal Home Loan Mtge. Corp. Group 27-3014, 81/4%, 2011......... 541,244
631,222 Federal Home Loan Mtge. Corp. Group 27-2785, 73/4%, 2012......... 646,763
1,884,123 Federal Home Loan Mtge. Corp. Group 55-5098, 81/4%, 2017......... 1,938,894
14,559,022 Federal Home Loan Mtge. Corp. Group D64097, 81/2%, 2023.......... 15,201,948
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1216-GA, 7%, 2006.. 9,956,200
5,934,000 Federal Home Loan Mtge. Corp. Multi PC Series 1203-H, 6%, 2007... 5,618,727
11,500,000 Federal Home Loan Mtge. Corp. Multi PC Series 1450-H, 61/2%, 2007 11,262,870
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1693-H, 6%, 2008... 9,475,000
12,850,000 Federal Home Loan Mtge. Corp. Multi PC Series 1512-I, 61/2%, 2008 12,621,013
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1539PL, 61/2%, 2008 9,812,500
17,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1564-H, 61/2%, 2008 16,612,060
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1628-PJ, 61/2%, 2022 9,571,800
1,044,538 Federal Natl. Mtge. Assn. MBS Pool 55690, 81/2%, 2002............ 1,086,539
1,320,993 Federal Natl. Mtge. Assn. MBS Pool 22354, 61/2%, 2004............ 1,305,405
5,459,955 Federal Natl. Mtge. Assn. MBS Pool 70992, 71/2%, 2006............ 5,543,547
14,386,718 Federal Natl. Mtge. Assn. MBS Pool 44047, 7%, 2007............... 14,355,930
8,077,135 Federal Natl. Mtge. Assn. MBS Pool 70255, 71/2%, 2007............ 8,195,788
</TABLE>
*CMO: Collateralized Mortgage Obligation
**REMIC: Real Estate Mortgage Investment Conduit
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3
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1996
-------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
FEDERAL AGENCY MORTGAGE PASS-THROUGH, CMO* AND REMIC** (continued)
BONDS $ 9,377,355 Federal Natl. Mtge. Assn. MBS Pool 107047, 8%, 2009.............. $ 9,661,020
(Continued) 2,349,290 Federal Natl. Mtge. Assn. MBS Pool 169231, 71/2%, 2010........... 2,376,448
5,737,183 Federal Natl. Mtge. Assn. MBS Pool 224484, 71/2%, 2011........... 5,803,505
7,411,402 Federal Natl. Mtge. Assn. MBS Pool 124668, 71/2%, 2019........... 7,520,275
4,620,425 Federal Natl. Mtge. Assn. PC 1993-234-PA, 5%, 2004............... 4,512,122
12,275,000 Federal Natl. Mtge. Assn. PC 1992-4-H, 71/2%, 2007............... 12,447,587
15,475,000 Federal Natl. Mtge. Assn. PC 1994-33-H, 6%, 2009................. 14,628,672
12,422,100 Federal Natl. Mtge. Assn. PC G1993-39-A, 5.70%, 2016............. 12,022,978
13,730,000 Federal Natl. Mtge. Assn. PC G1994-13-J, 7%, 2022................ 13,528,306
19,500,000 Federal Natl. Mtge. Assn. PC 1993-185-PE, 61/2%, 2023............ 18,531,045
12,608,336 Federal Natl. Mtge. Assn. SMBS L-1, 5%, 2006..................... 11,905,295
1,603,998 Federal Natl. Mtge. Assn. SMBS I-1, 61/2%, 2009.................. 1,582,713
28,024,858 Govt. Natl. Mtge. Assn. Pool 780258, 71/2%, 2007................. 28,634,118
58,099 FSF Finance Corp. 1985-1-D, 91/4%, 2016.......................... 59,352
13,352,000 Veterans Affairs Vendee Mtge. Trust 1994-2-3C, 61/2%, 2009....... 13,210,068
8,267,245 Veterans Affairs Vendee Mtge. Trust 1995-1A-1 PT, 7.20731%, 2025. 8,029,562
11,660,255 Veterans Affairs Vendee Mtge. Trust 1995-2C-3A PT, 8.7925%, 2025. 12,201,291
--------------
322,206,146
INDUSTRIAL: 4.8%
7,500,000 Dayton-Hudson Corp. Debentures 9%, 2021.......................... 8,164,500
6,450,000 Dayton-Hudson Corp. Debentures 9.70%, 2021....................... 7,481,742
10,835,000 Dayton-Hudson Corp. MTN 9.35%, 2020, Putable 1997................ 12,304,118
7,500,000 Ford Holdings, Inc. Debentures 9 3/8%, 2020...................... 8,846,850
14,000,000 Ford Motor Co. Debentures 9.95%, 2032............................ 17,780,560
5,750,000 May Department Stores Notes 75/8%, 2013.......................... 5,843,668
8,200,000 May Department Stores Notes 7.60%, 2025.......................... 8,097,172
6,375,000 Ralston Purina Debentures 73/4%, 2015............................ 6,423,004
19,375,000 Time Warner Entertainment Senior Debentures 83/8%, 2033.......... 19,432,350
3,450,000 Union Camp Corp. Debentures 91/4%, 2011.......................... 4,023,701
11,650,000 Walt Disney Co. Debentures 7.55%, 2093........................... 11,548,878
--------------
109,946,543
FINANCE: 3.9%
2,000,000 Barclays North American Capital Corp. Notes 93/4%, 2021,
Callable 2001 ................................................. 2,258,520
1,800,000 CIGNA Corp. Debentures 7.65%, 2023............................... 1,723,716
4,400,000 CIGNA Corp. Notes 8.30%, 2023.................................... 4,546,344
3,100,000 First Nationwide Bank Subordinated Debentures 10%, 2006.......... 3,565,000
12,250,000 General Electric Capital Debentures 81/2%, 2008.................. 13,757,118
18,600,000 GMAC Put Bonds 87/8%, 2010, Putable 2000/2005.................... 21,441,336
3,100,000 Golden West Financial Subordinated Notes 6.70%, 2002............. 3,060,382
3,000,000 Golden West Financial Subordinated Notes 71/4%, 2002............. 3,063,870
8,075,000 Golden West Financial Subordinated Notes 6%, 2003................ 7,634,993
6,215,000 ITT Hartford Group Notes 8.30%, 2001............................. 6,655,830
5,625,000 ITT Hartford Group Notes 63/8%, 2002............................. 5,464,013
8,150,000 Norwest Corp. MTN 6.20%, 2005.................................... 7,760,349
2,000,000 Norwest Corp. MTN 61/2%, 2005.................................... 1,934,720
5,500,000 Norwest Corp. Subordinated Debentures 6.65%, 2023................ 4,886,530
--------------
87,752,721
</TABLE>
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4
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D O D G E & C O X
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1996
-------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS TRANSPORTATION: 1.7%
(Continued) $ 3,900,000 AMR Corp. Debentures 9.88%, 2020................................. $ 4,552,314
7,925,000 AMR Corp. Debentures 93/4%, 2021................................. 9,237,697
9,225,000 AMR Corp. Debentures 10%, 2021................................... 10,958,193
8,479,638 Consolidated Rail Corp. 95-A Pass Through Trust 6.76%, 2015...... 8,301,566
5,000,000 Consolidated Rail Corp. Debentures 93/4%, 2020................... 6,214,650
--------------
39,264,420
CANADIAN: 1.3%
8,750,000 Canadian Pacific Ltd. Debentures 9.45%, 2021..................... 10,269,963
7,550,000 Hydro-Quebec Debentures 71/2%, 2016.............................. 7,431,239
11,250,000 Hydro-Quebec Debentures 8.40%, 2022.............................. 12,013,088
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29,714,290
INTERNATIONAL AGENCY: 1.1%
7,200,000 European Investment Bank Bonds 101/8%, 2000...................... 8,200,152
18,815,000 Inter-American Development Bank Debentures 71/8%, 2023,
Callable 2003................................................. 17,580,172
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25,780,324
PUBLIC UTILITIES: 0.0%
750,000 Idaho Power Co. 1st Mortgage Bonds 91/2%, 2021, Callable 2001 ... 824,685
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Total Bonds (cost $902,381,348)............................ 905,975,552
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SHORT-TERM 2,000,000 American Express Co., Commercial Paper 5.40%, 1996............... 2,000,000
INVESTMENTS: 15,293,668 General Mills, Inc., Variable Demand Note 5.10%, 1996............ 15,293,668
3.2% 22,379,573 Pitney Bowes Credit Corp., Variable Demand Note 5.11%, 1996...... 22,379,573
10,827,178 Sara Lee Corp., Variable Demand Note 5.09%, 1996................. 10,827,178
15,432,515 Southwestern Bell Telephone Co., Variable Demand Note 5.09%, 1996 15,432,515
6,767,315 Wisconsin Electric Power Corp., Variable Demand Note 5.16%, 1996. 6,767,315
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Total Short-Term Investments (cost $72,700,249)............ 72,700,249
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TOTAL INVESTMENTS (cost $1,992,880,943).................... 99.7% 2,280,579,518
OTHER ASSETS LESS LIABILITIES.............................. 0.3 6,469,312
----- --------------
TOTAL NET ASSETS........................................... 100.0% $2,287,048,830
===== ==============
Beneficial shares outstanding 41,050,761 Net asset value per share $55.71
(par value $1.00 each)
</TABLE>
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5
<PAGE>
D O D G E & C O X
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Balanced Fund
<TABLE>
<CAPTION>
Condensed Statement of Operations
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For the Three Months Ended March 31, 1996
<S> <C>
Investment income............................................... $21,607,953
Expenses........................................................ 2,982,812
-----------
Net investment income........................................... $18,625,141
===========
Net realized gain from securities transactions
(based on identified cost).................................... $ 7,866,383
Change in unrealized appreciation of investments................ 36,089,658
----------
Net realized and unrealized gain on investments................. $43,956,041
===========
</TABLE>
<TABLE>
<CAPTION>
Condensed Financial Information
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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 (3/31) 2,287,048,830 55.71 74.60 .46** .10**
------ ------
$17.83 $10.81
====== ======
</TABLE>
* Adjusted for assumed reinvestment of capital gains distributions.
** Distributions of $.46 per share from net investment income and $.10 per
share from net capital gains were paid to shareholders of record March 14,
1996. The capital gain distribution of $.10 per share includes a net
short-term capital gain of $.01 per share.
<TABLE>
<CAPTION>
Average annual total return for periods ended March 31, 1996 1 Year 5 Years 10 Years 20 Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 22.34% 13.69% 12.53% 13.00%
S&P 500 Index 32.09 14.66 13.97 14.08
Lehman Bros. Aggregate Bond Index 10.78 8.48 8.62 9.76
</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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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 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,
Management 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 an effective
prospectus.
================================================================================
<PAGE>
DODGE & COX
=======================================-========================================
Balanced Fund
Dear Shareholder April 1996
The Dodge & Cox Balanced Fund achieved a total return of 3.1% for the quarter
ended March 31, 1996. The equity portion of the Fund contributed positively to
the return, exceeding the 5.4% return of the Standard & Poor's Index (S&P 500)
of common stocks. In an environment of rising interest rates, the Fund's fixed
income portfolio had a negative total return during the quarter, finishing
slightly below the -1.8% return of the Lehman Brothers Aggregate Bond (LBAG)
Index. The Fund's longer term results are presented in the table below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return
For periods ended March 31, 1996 1 Year 5 Years 10 Years 20 Years
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 22.34% 13.69% 12.53% 13.00%
S&P 500 Index 32.09 14.66 13.97 14.08
LBAG Index 10.78 8.48 8.62 9.76
</TABLE>
The Fund's average annual total return figures include reinvestment of dividend
and capital gain distributions and are net of expenses and investment management
fees. 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.
- --------------------------------------------------------------------------------
Equities Continue to Advance
In the wake of very strong 1995 performance, the stock market continued to move
forward in early 1996. The Balanced Fund's equity portfolio benefited from the
strong performance of its holdings in retail, energy, industrial commodities and
other cycle sensitive companies. Finance stocks also performed well. Results of
the Fund's technology holdings were mixed.
We want to reiterate our caution that recent equity returns, especially the
strong performance of the last five quarters, are unlikely to be repeated in
the near future. However, we continue to identify companies that we believe
represent good long term investment value. Since the beginning of the year, for
example, we have established new equity positions in three companies: National
Semiconductor, Unilever and Champion International. Assuming the world economy
continues to expand over the next several years and inflation remains low, we
believe the equity portion of the Fund is well positioned to provide
satisfactory returns. We expect that earnings growth will be the most
significant factor in equity returns, although cycle sensitive stocks could
also see expansion of their price-to-earnings (P/E) multiples. A good example
is General Motors, the second largest equity holding in the Fund, which trades
at 7 times 1996 estimated earnings. This valuation compares to the overall
equity market P/E of about 18.
An Illustration of Individual Stock Selection
We started these quarterly letters last year to give you a clear idea of the
"bottom-up" investment philosophy we apply when managing your money. Because our
equity approach always starts at the individual investment--the company--we
want to focus this quarter on one representative stock in the Fund's
portfolio--Dayton-Hudson. Please note that this company is discussed as an
example of our research process, not because we believe it is necessarily more
attractive than the Fund's other investments. Dayton-Hudson represents 3.2% of
the Fund's equity portfolio. The Fund holds 77 other stocks, each of which
receive the same kind of analytical and research scrutiny we will describe
below.
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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
Dayton-Hudson, currently the Fund's largest equity holding, was first
purchased in 1987. Problems in one of its retail divisions, Mervyn's, had
caused the stock to drop significantly relative to the market in the previous
two years. At that time, we believed Dayton-Hudson had good growth prospects
with Target and Mervyn's stores and steady earnings from its department stores
division.
In retrospect, we underestimated Target, which has grown revenues at 14%
annually since 1987 and occupies a strong position in discount retailing. Target
plans to continue to expand by growing its store base by 8-10% annually over the
next 3-4 years. Mervyn's, however, we overestimated. After recovering from the
problems of 1987 to earn good returns in 1989-1990, this division has had weak
profits from 1993-1995. The division has changed management and merchandising
strategy. Results have improved somewhat in late 1995 and early 1996.
As we got to know the management at Dayton-Hudson, we have been impressed with
their merchandising skills and ability to solve problems when they materialize.
In the tough retailing environment of 1995, Dayton-Hudson's stock price rose
only slightly in a sharply higher market. Believing in the company's underlying
strengths and future prospects, we took the opportunity to continue to build
the Fund's position. The stock currently trades at about 15 times 1996 earnings
and 25% of the company's sales per share.
Weak Bond Market, Remembering 1994
The bond market has been unusually volatile over the past two years. Buffeted by
government reports which indicated a strengthening U.S. economy, bond yields
rose and prices generally declined in the first quarter, a setback that was only
partially offset by the current income earned on fixed income securities. The
Fund's bond portfolio has a higher yield than the broad LBAG Index, but this
advantage was not enough to overcome its greater price sensitivity to changes in
interest rates. Since the end of 1995, prevailing yields for five and thirty
year U.S. Treasury issues increased from about 5.4% and 5.9% respectively, to
about 6.1% and 6.7% at the end of the quarter.
In the short run, total returns from bonds are often driven by price changes due
to fluctuations in interest rates. However, over longer term time horizons,
income, and the reinvestment of income, are more significant factors in fixed
income total returns. Although evidence of modestly rising price inflation
does exist, we believe that bond yields today provide adequate protection for
investors, generating a steady stream of current income and acting as a hedge
against unforeseen economic events. The Fund remains significantly invested in
the fixed income area with an allocation of 39.6% on March 31, 1996.
Thank you for your continued confidence in the Dodge & Cox Balanced Fund. As
always, we welcome your comments and suggestions.
Dodge & Cox
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