<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
--------------------------------------------
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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D O D G E & C O X
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Balanced Fund
Established 1931
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Quarterly Report
March 31, 1997
1997
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<PAGE>
D O D G E & C O X
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Balanced Fund
Fellow Shareholders
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The Dodge & Cox Balanced Fund achieved a total return of 1.1% in the first three
months of 1997. This performance compared with total returns for the Standard &
Poor's 500 Index (S&P 500) of common stocks and the Lehman Brothers Aggregate
Bond Index (LBAG) of 2.7% and -0.6%, respectively. As of March 31, 1997, the
Fund's total assets were about $4.0 billion. Average annual total returns for
longer time periods are shown on page three of this report.
Performance Review
The common stock portion of the Fund performed in line with the S&P 500 during
the first quarter. In general, the Fund's equity holdings in the finance,
retail, media/printing and capital equipment industries were strong performers.
Companies in the electronics/computer, energy, utilities and railroad industries
were generally weak performers. As the result of higher interest rates, the
Fund's fixed income portfolio had a small negative return during the quarter,
slightly trailing the LBAG.
New Fixed Income Securities
Given the importance of income to the long-term total return of fixed income
securities, we focus much of our energy on seeking a relatively high and stable
yield for the bond portion of the Balanced Fund. To accomplish this we use our
research and analytic capabilities to identify securities, be they corporate,
mortgage-backed, or others, which will add to the yield of the Fund without
incurring significant risk of principal loss. An example of this opportunistic
and deliberate search for yield is the recent addition to the Fund of several
"Trust-Preferred Securities."
The Fund's holdings of Trust-Preferreds are from three issuers: BankAmerica,
Citicorp, and J.P. Morgan. These securities have both fixed interest payment
schedules and maturity dates, and offer investors a yield premium relative to
more traditional unsecured debt from the same issuers. This additional yield is
due primarily to the unique structure of these securities, rather than credit-
related risk. As such, we believe that the additional 25 to 40 basis points
(one basis point equals 1/100th of one percent) of yield that they offer, over
the straight debt of the same issuers, is more than adequate compensation for
this structure.
Equity Strategy
We continue to find value in a number of companies whose profit growth is more
sensitive to the business cycle. In general, these companies tend to prosper as
the economy expands and experience slowdowns in their business as the economy
contracts or moves into a recession. The Fund holds 38 companies, representing
53% of equity assets, in this broadly diversified "cycle-sensitive" sector,
which includes among others electronics/computer, industrial commodities, autos,
appliances, machinery, transportation and retail companies. Many investors are
pessimistic about the near to intermediate term outlook for companies in this
area due to questions about the sustainability of the U.S. economic expansion.
A few of these companies (e.g., paper and forest products) have also recently
posted disappointing results. Consequently, most are selling at historically
low valuations. Each of the stocks in this group, as well as the rest of the
equity portfolio, is evaluated and selected on its own merits, comparing our
long-term view of the company's potential profitability against its current
price. This is the essence of our long-term, value oriented approach to
investment management.
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1
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D O D G E & C O X
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Balanced Fund
Asset Allocation
Dodge & Cox's investment philosophy is to invest your money in the Balanced Fund
with a view toward the long-term potential of both common stocks and bonds. We
do not engage in "tactical" asset allocation, an approach which often results in
more frequent shifts in the mix of these asset classes. Our asset policy is
more "strategic" in nature, based on the assumption that stocks will outperform
bonds, and bonds outperform cash, over longer time horizons. We are limited to
a maximum weighting of 75% in equities by the Fund's prospectus, and, although
not restricted on the downside, historically we have been reluctant to dip below
50% in stocks.
At the end of the first quarter, the Fund was approximately 57% invested in
common stocks, 39% in fixed income securities and 4% in cash equivalents. This
asset allocation was essentially unchanged from year-end 1996 and one year ago.
We believe that a relatively conservative allocation is still appropriate today,
given the current level of stock prices, our outlook for inflation, and the
approximate 7.3% yield to maturity (before management fees and expenses)
currently priced into the Fund's fixed income portfolio.
Thank you for your continued confidence in the Dodge & Cox Balanced Fund. As
always, we welcome your comments and questions.
For the Board of Trustees,
/s/ Harry R. Hagey
April 29, 1997 Harry R. Hagey, Chairman
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2
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D O D G E & C O X
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Balanced Fund
Objective The Fund's objectives are to provide shareholders with regular
income, conservation of principal and an opportunity for long-term
growth of principal and income.
Strategy The Fund seeks to achieve these objectives by remaining fully
invested in a diversified portfolio of stocks and bonds.
Stocks: The Fund invests in well-established companies which, in
the view of Dodge & Cox, have positive earnings prospects not
reflected in the current price. Dodge & Cox makes a conscious
effort to maintain representation in major economic sectors and
areas with strong long-term profit potential. The Fund will hold no
more than 75% of its total assets in stocks.
Bonds: Dodge & Cox constructs a diversified portfolio of high-
quality bonds, while striving to maintain the fixed income yield
higher than that of the broad bond market. Fixed income securities
in the Fund will generally include U.S. Treasury, mortgage-related
and corporate issues.
<TABLE>
<CAPTION>
20 Years of Investment Performance through March 31, 1997
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Comparison of change in value of a $10,000 investment in the Dodge & Cox
Balanced Fund, the S&P 500 Index, the LBAG Index, and a Combined Index
(a blend of the S&P 500 (60%) and the LBAG (40%) Indices)
[LINE GRAPH APPEARS HERE]
S & P 500 COMBINED DODGE & COX
INDEX LBAG INDEX INDEX BALANCED FUND
<S> <C> <C> <C> <C>
4/1/77 10,000 10,000 10,000 10,000
3/31/78 9,527 10,435 9,892 9,748
3/31/79 11,430 10,794 11,214 11,440
3/31/80 12,143 9,801 11,227 11,464
3/31/81 16,971 11,082 14,474 14,943
3/31/82 14,717 12,176 13,818 14,259
3/31/83 21,233 16,058 19,271 19,415
3/31/84 23,088 16,912 20,706 20,918
3/31/85 27,455 19,828 24,544 23,641
3/31/86 37,809 25,523 32,930 33,163
3/31/87 47,722 27,747 39,322 39,927
3/31/88 43,745 29,110 38,501 39,299
3/31/89 51,678 30,610 43,439 43,652
3/31/90 61,641 34,385 50,674 50,726
3/31/91 70,512 38,828 57,823 56,870
3/31/92 78,300 43,253 64,414 63,009
3/31/93 90,216 49,002 73,747 73,803
3/31/94 91,548 50,158 75,137 79,268
3/31/95 105,789 52,665 83,607 88,320
3/31/96 139,740 58,341 102,977 108,044
3/31/97 167,439 61,205 117,179 121,630
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended March 31, 1997 1 Year 5 Years 10 Years 20 Years
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 12.58% 14.05% 11.78% 13.30%
Combined Index 13.80 12.72 11.54 13.10
S&P 500 Index 19.82 16.42 13.37 15.13
Lehman Brothers Aggregate Bond Index 4.91 7.19 8.23 9.48
</TABLE>
The chart covers the period from April 1, 1977 to March 31, 1997. It compares a
$10,000 investment made in the Dodge & Cox Balanced Fund to $10,000 investments
made in the Standard & Poor's 500 Composite Stock Price (S&P 500) Index, the
Lehman Brothers Aggregate Bond (LBAG) Index and a Combined Index. 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 LBAG 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. The Combined Index reflects
an unmanaged portfolio of 60% of the S&P 500 Index and 40% of the LBAG Index.
The Fund may, however, invest up to 75% of its total assets in stocks. Index
returns include dividends and/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.
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3
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D O D G E & C O X
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Balanced Fund
Fund Information March 31, 1997
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<TABLE>
<CAPTION>
General Information
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<S> <C>
Net Asset Value Per Share $59.76
Total Net Assets (millions) $3,959
1996 Expense Ratio 0.56%
1996 Portfolio Turnover 17%
30 Day SEC Yield* 3.68%
Distributions to Shareholders of
Record 3/26/97 (per share): $0.51 Dividend
$0.22 Capital Gain
Fund Inception Date 1931
</TABLE>
Investment Manager: Dodge & Cox, San Francisco.
Managed by eight member Investment Policy Committee, with members' average
tenure at Dodge & Cox of 19 years.
<TABLE>
<CAPTION>
Asset Allocation
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[PIE CHART APPEARS HERE]
<S> <C>
Stocks 56.5%
Bonds 39.3%
Short Term Investments 4.2%
</TABLE>
<TABLE>
<CAPTION>
Stock Portfolio (56.5% of Net Assets)
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<S> <C>
Number of Stocks 78
Median Market Capitalization $8.9 billion
Price to Earnings Ratio (trailing twelve mos.) 18.5x
Price to Book Value (trailing twelve mos.) 2.7x
Foreign Stocks** (as percentage of Fund) 5%
</TABLE>
<TABLE>
<CAPTION>
Five Largest Sector Weightings % of Fund
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<S> <C>
Electronics & Computers 6.6
Energy 5.7
Banks 5.5
Retail & Distribution 4.9
Insurance & Financial Services 4.3
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
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<S> <C>
Dayton-Hudson 1.6
General Motors 1.5
R.R. Donnelley & Sons 1.5
American Express 1.4
International Business Machines 1.4
Citicorp 1.3
Dow Chemical 1.3
Digitial Equipment 1.2
Union Pacific 1.2
Federal Express 1.1
</TABLE>
<TABLE>
<CAPTION>
Bond Portfolio (39.3% of Net Assets)
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<S> <C>
Number of Bonds 110
Average Quality AA+
Average Maturity 11.9 years
Effective Duration 5.21 years
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's Quality Ratings % of Fund
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<S> <C>
U.S. Government & Government Agencies 25.0
Aaa/AAA 1.8
Aa/AA 1.8
A/A 7.0
Baa/BBB 3.6
Ba/BB 0.1
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
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<S> <C>
U.S. Treasury and Government Agency 8.5
Federal Agency CMOs and REMICs+ 9.6
Federal Agency Mortgage Pass-Through 7.0
Corporate 12.4
Foreign, U.S. Dollar Denominated 1.8
</TABLE>
+ Collateralized Mortgage Obligation and Real Estate Mortgage Investment
Conduit
* An annualization of the Fund's total net investment income per share for the
30-day period ended on the last day of the month.
** All U.S. dollar-denominated.
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4
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D O D G E & C O X
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Balanced Fund
Portfolio of Investments March 31, 1997
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<TABLE>
<CAPTION>
PERCENTAGE OF FUND
<S> <C>
COMMON STOCKS: 56.4%
CONSUMER: 15.7%
RETAIL AND DISTRIBUTION: 4.9%
Dayton-Hudson Corp. ............................................... 1.6
Kmart Corp. ....................................................... 0.9
Nordstrom, Inc. ................................................... 0.9
Dillard Department Stores, Inc. Class A ........................... 0.9
Genuine Parts Co. ................................................. 0.5
Fleming Cos., Inc. ................................................ 0.1
CONSUMER DURABLES: 4.2%
General Motors Corp. .............................................. 1.5
Ford Motor Co. .................................................... 1.0
Masco Corp. ....................................................... 0.9
Whirlpool Corp. ................................................... 0.8
CONSUMER PRODUCTS: 4.0%
Sony Corp. ADR .................................................... 0.9
Unilever NV ....................................................... 0.8
VF Corp. .......................................................... 0.7
Bausch & Lomb, Inc. ............................................... 0.6
James River Corp. of Virginia ..................................... 0.4
Matsushita Electric, Inc. ADR ..................................... 0.4
Dole Food Co., Inc. ............................................... 0.2
MEDIA, PRINTING AND ENTERTAINMENT: 2.6%
Donnelley (R.R.) & Sons Co. ....................................... 1.5
Dow Jones & Co. ................................................... 0.7
Time Warner, Inc. ................................................. 0.4
FINANCE: 9.8%
BANKS: 5.5%
Citicorp .......................................................... 1.3
Golden West Financial Corp. ....................................... 1.0
BankAmerica Corp. ................................................. 0.9
Republic New York Corp. ........................................... 0.9
Barnett Banks, Inc. ............................................... 0.8
Norwest Corp. ..................................................... 0.6
INSURANCE AND FINANCIAL SERVICES: 4.3%
American Express Co. .............................................. 1.4
The St. Paul Cos., Inc. ........................................... 1.0
Chubb Corp. ....................................................... 0.8
General Re Corp. .................................................. 0.6
American International Group, Inc. ................................ 0.5
ELECTRONICS AND COMPUTERS: 6.6%
International Business Machines Corp. ............................. 1.4
Digital Equipment Corp. ........................................... 1.2
Motorola, Inc. .................................................... 1.1
Texas Instruments, Inc. ........................................... 0.9
Hewlett-Packard Co. ............................................... 0.9
National Semiconductor Corp. ...................................... 0.5
Tandem Computers, Inc. ............................................ 0.3
Sybase, Inc. ...................................................... 0.3
BASIC INDUSTRY: 6.1%
PAPER AND FOREST PRODUCTS: 3.0%
Weyerhaeuser Co. .................................................. 0.9
Champion International Corp. ...................................... 0.8
International Paper Co. ........................................... 0.8
Boise Cascade Corp. ............................................... 0.5
Crown Vantage, Inc. ............................................... 0.0
CHEMICALS: 2.0%
Dow Chemical Co. .................................................. 1.3
Nalco Chemical Co. ................................................ 0.5
Lubrizol Corp. .................................................... 0.2
METALS AND MINING: 1.1%
Aluminum Co. of America ........................................... 1.1
ENERGY: 5.7%
Amerada Hess Corp. ................................................ 1.1
Phillips Petroleum Co. ............................................ 0.9
Union Pacific Resources Group, Inc. ............................... 0.8
Chevron Corp. ..................................................... 0.7
Western Atlas, Inc. ............................................... 0.7
Royal Dutch Petroleum Co. ......................................... 0.6
Halliburton Co. ................................................... 0.4
Amoco Corp. ....................................................... 0.3
Mobil Corp. ....................................................... 0.1
Exxon Corp. ....................................................... 0.1
UTILITIES: 3.2%
ELECTRIC AND GAS UTILITIES: 2.5%
Texas Utilities Co. ............................................... 0.6
TransCanada PipeLines Ltd. ........................................ 0.6
Pacific Enterprises ............................................... 0.5
Edison International .............................................. 0.5
FPL Group, Inc. ................................................... 0.3
Telephone: 0.7%
BCE, Inc. ......................................................... 0.7
</TABLE>
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5
<PAGE>
D O D G E & C O X
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Balanced Fund
Portfolio of Investments March 31, 1997
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<TABLE>
<CAPTION>
PERCENTAGE OF FUND
<S> <C>
COMMON STOCKS (Continued)
TRANSPORTATION: 3.0%
Union Pacific Corp. ............................................... 1.2
Federal Express Corp. ............................................. 1.1
Canadian Pacific Ltd. ............................................. 0.7
DIVERSIFIED TECHNOLOGY: 2.0%
Corning, Inc. ..................................................... 0.6
Xerox Corp. ....................................................... 0.6
Raychem Corp. ..................................................... 0.5
Minnesota Mining & Manufacturing Co. .............................. 0.3
HEALTHCARE AND PHARMACEUTICAL: 1.8%
Pharmacia & Upjohn, Inc. .......................................... 1.1
SmithKline Beecham plc ADR ........................................ 0.4
HealthCare COMPARE Corp. .......................................... 0.3
CAPITAL EQUIPMENT: 1.8%
Deere & Co. ....................................................... 0.9
Caterpillar, Inc. ................................................. 0.9
MISCELLANEOUS: 0.7%
REAL ESTATE INVESTMENT TRUST: 0.7%
Meditrust ......................................................... 0.7
PREFERRED STOCKS: 0.1%
CONSUMER: 0.1%
Kmart Financing I, 7 3/4% Trust Convertible Preferred ............. 0.1
BONDS: 39.3%
U.S. TREASURY & GOV'T. AGENCY: 8.5%
FEDERAL AGENCY CMOs AND REMICs*: 9.6%
FEDERAL AGENCY MTG. PASS-THROUGH: 7.0%
CORPORATE: 12.4%
INDUSTRIAL: 6.2%
Lockheed Martin Corp., various securities ......................... 1.3
Dayton-Hudson Corp., various securities ........................... 1.1
Ford Motor Co. Debentures 9.95%, 2032 ............................. 0.7
May Department Stores, various securities ......................... 0.7
Time Warner Entertainment Senior Debentures 8 3/8%, 2033 .......... 0.7
Walt Disney Co. Debentures 7.55%, 2093, Callable 2023 ............. 0.6
Ford Holdings, Inc. Debentures 9 3/8%, 2020 ....................... 0.4
General Motors Corp. Debentures 7.70%, 2016 ....................... 0.4
Ralston Purina Debentures 7 3/4%, 2015 ............................ 0.2
Union Camp Corp. Debentures 9 1/4%, 2011 .......................... 0.1
FINANCE: 5.8%
General Electric Capital, various securities ...................... 1.1
Norwest Corp., various securities ................................. 1.1
Golden West Financial, various securities ......................... 1.0
GMAC Put Notes 8 7/8%, 2010, Putable 2000/2005 .................... 0.5
ITT Hartford Group, various securities ............................ 0.5
J.P. Morgan Capital Trust I, 7.54%, 2027, Callable 2007+ .......... 0.5
BankAmerica Capital II, 8%, 2026, Callable 2006+ .................. 0.4
Citicorp Capital Trust I, 7.93%, 2027, Callable 2007+ ............. 0.4
CIGNA Corp., various securities ................................... 0.1
First Nationwide Bank Sub. Debentures 10%, 2006 ................... 0.1
Barclays No. American Capital 9 3/4%, 2021, Callable 2001 ......... 0.1
TRANSPORTATION: 0.4%
Consolidated Rail Corp., various securities ....................... 0.4
UTILITIES: 0.0%
Idaho Power Co. 1st Mtg. Bonds 9 1/2%, 2021, Callable 2001 ........ 0.0
FOREIGN, U.S. Dollar-Denominated: 1.8%
CANADIAN CORPORATE: 1.2%
Hydro-Quebec, various securities .................................. 1.0
Canadian Pacific Ltd. Debentures 9.45%, 2021 ...................... 0.2
INTERNATIONAL AGENCY: 0.6%
Inter-American Dev. Bank 7 1/8%, 2023, Callable 2003 .............. 0.4
European Investment Bank Notes 10 1/8%, 2000 ...................... 0.2
SHORT-TERM INVESTMENTS: 3.3%
OTHER ASSETS LESS LIABILITIES: 0.9%
TOTAL NET ASSETS: 100.0%
</TABLE>
* Collateralized Mortgage Obligation and Real Estate Mortgage Investment Conduit
+ Cumulative Preferred Securities
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6
<PAGE>
D O D G E & C O X
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Balanced Fund
General Information
- --------------------------------------------------------------------------------
Investment Manager
Since 1930, Dodge & Cox has been providing professional investment management
for individuals, trustees, corporations, pension and profit-sharing funds, and
charitable institutions. Dodge & Cox manages the Dodge & Cox Balanced Fund, the
Dodge & Cox Stock Fund and the Dodge & Cox Income Fund.
No-Load Fund
Shares of the Fund are purchased and redeemed at net asset value. There are no
sales, redemption or Rule 12b-1 plan distribution charges.
Gifts
Fund shares provide a convenient method for making gifts to children and to
other family members. 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.
Automatic Investment Plan
Shareholders may make regular monthly or quarterly 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.
Reinvestment Plan
Shareholders may direct that dividend and capital gains distributions be
reinvested in additional Fund 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.
Shareholder Inquiries
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
(800) 621-3979
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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