<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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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
September 30, 1997
1997
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[RECYCLE LOGO APPEARS HERE] Printed on recycled paper. 9/97 BF QR
<PAGE>
D O D G E & C O X
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Balanced Fund
To Our Shareholders
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The Dodge & Cox Balanced Fund achieved a total return of 7.9% during the quarter
ended September 30, 1997. This performance compares with returns for the
Standard & Poor's 500 Index (S&P 500) of common stocks of 7.5% and for the
Lehman Brothers Aggregate Bond Index (LBAG) of 3.3% during the same period. For
the first nine months of 1997, the Fund's total return stood at 21.0%, versus
29.6% for the S&P 500 and 6.6% for the LBAG. Average annual total returns for
longer time periods are listed on page three of this report.
Asset allocation at the end of the third quarter was essentially unchanged from
June 30, with about 38% of the Fund invested in fixed income assets, 58% in
equities, and the remaining 4% in cash. Total assets were $5.3 billion on
September 30, 1997.
Performance Review
The Balanced Fund's equity portfolio outperformed the S&P 500 during the third
quarter, also bringing the Fund's equity return above that of the S&P 500 for
the year-to-date. Holdings in the electronics/computer, consumer durables,
retail, banking and paper/forest products industries were top performers
relative to the market during the quarter. Stocks which were weak relative
performers included holdings in the capital equipment and consumer products
industries.
Bond yields declined in the third quarter, with the thirty-year U.S. Treasury
yield ending at 6.40%, down 0.38 percent from June 30. Due to their greater
price sensitivity to changes in interest rates, longer duration corporate and
Treasury bond issues within the Fund's fixed income portfolio were strong
performers relative to the LBAG during the quarter. Securities in the mortgage
sector lagged the LBAG. Price appreciation and coupon income contributed equally
to the fixed income portfolio's total return in the quarter, which exceeded that
of the LBAG.
Equity Focus: Always Looking at Laggards
We believe it is important to remind our shareholders that we are long-term
investors. Half of the 76 holdings in the equity portfolio have been held five
and a half years or longer. We do not base investment decisions on speculations
about short-term developments; rather, each decision to buy or sell a stock is
based on our assessment of its investment potential over a three to four year
time horizon. Similarly, each holding in the Fund is continually reviewed in
terms of its long-term outlook.
Over shorter time periods, companies that we purchase don't always perform as
well as we would like. Reviewing and evaluating investments that have had
disappointing performance is an important task, because our experience has
taught us that often companies which appear to be floundering in the short run
can perhaps be strong positive contributors to the Fund's future investment
results. For example, our investment in Pharmacia & Upjohn has proved
disappointing this year. Pharmacia & Upjohn is a large drug company that has
undergone a significant management change. A senior executive from American Home
Products, Fred Hassan, was brought in to run the company earlier this year. We
have talked with him and believe that he can bring a new profit discipline to
the company. Based on our analysis of the situation and Pharmacia & Upjohn's low
valuation, especially in relation to other pharmaceutical companies, we think
the stock is a good value.
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1
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D O D G E & C O X
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Balanced Fund
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Fixed Income Focus: Incremental Yield
At Dodge & Cox, we believe that the income component of return, and its
reinvestment, are the most important contributors to the total return of fixed
income investments over long time periods. While price changes due to interest
rate movements can dominate bond returns over short time periods, our analysis
underscores the importance of income to long-term relative performance. With
this in mind, we seek a higher yielding portfolio than the broad domestic fixed
income market by maintaining overweight positions in the corporate and federal
agency mortgage-backed sectors. At the same time we attempt to maintain high
average credit quality by building the portfolio through a careful process of
individual security selection based on independent fundamental research.
Our analysis of fixed income securities incorporates a careful study of the
credit risk and cash flow structure of each bond to determine if the offered
yield represents adequate compensation for investors. All primary research and
analysis is performed by our portfolio managers and by our in-house security
analysts. These research capabilities give us greater confidence in individual
investment decisions and allow us to take a longer-term perspective when
investing the Fund's assets.
A Word of Caution on Future Returns
The total return on the Dodge & Cox Balanced Fund over the past twelve months
was 29.1%, a level of return surpassed only once by the Fund during the past
twenty calendar years. Although our past words of caution on the subject have
been premature, we believe that it is worth mentioning again that equity returns
have been unusually high during the past few years. While we remain optimistic
about prospects for the world and U.S. economies, possible inflationary
pressures (e.g., in labor costs) need to be closely monitored. In our opinion,
the current high valuation of certain large capitalization common stocks,
referred to as the New Nifty Fifty, leaves little margin for disappointment. We
continue to look for more reasonably valued stocks in this market environment.
In fact, the efforts of our team of research analysts have led to new positions
in 12 companies since the beginning of 1997. Despite our optimism about
individual company prospects in the Fund's equity portfolio, we continue to
expect more modest returns looking forward. This is one reason why we have
maintained the fixed income exposure of the Balanced Fund at almost 40%.
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
October 24, 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.
20 Years of Investment Performance through September 30, 1997
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[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
LBAG Dodge & Cox
S&P 500 Index Index Combined Index Balanced Fund
------------- ----- -------------- -------------
<S> <C> <C> <C> <C>
10/1/1977 10,000 10,000 10,000 10,000
9/30/1978 11,185 10,275 10,832 11,006
9/30/1979 12,589 10,653 11,824 12,175
9/30/1980 15,245 10,462 13,231 13,586
9/30/1981 14,800 10,190 12,897 13,275
9/30/1982 16,253 13,779 15,427 15,948
9/30/1983 23,464 15,926 20,401 20,735
9/30/1984 24,576 17,324 21,733 21,291
9/30/1985 28,147 21,139 25,559 25,606
9/30/1986 37,091 25,426 32,565 32,648
9/30/1987 53,204 25,496 40,593 42,384
9/30/1988 46,622 28,885 39,871 40,735
9/30/1989 62,002 32,139 49,439 49,569
9/30/1990 56,268 34,565 48,146 47,749
9/30/1991 73,806 40,096 60,220 59,562
9/30/1992 81,961 45,132 67,327 66,341
9/30/1993 92,608 49,635 75,295 78,768
9/30/1994 96,021 48,030 75,983 81,373
9/30/1995 124,579 54,785 93,674 99,984
9/30/1996 149,898 57,459 106,786 112,060
9/30/1997 210,492 63,056 136,178 144,632
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended September 30, 1997 1 Year 5 Years 10 Years 20 Years
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 29.06% 16.86% 13.05% 14.29%
Combined Index 27.53 15.14 12.87 13.95
S&P 500 Index 40.42 20.76 14.74 16.46
Lehman Brothers Aggregate Bond Index 9.74 6.92 9.48 9.65
</TABLE>
The chart covers the period from October 1, 1977 to September 30, 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 Stock (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 gain 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 investment-grade corporate and U.S.
Government fixed income securities. 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 September 30, 1997
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<TABLE>
<CAPTION>
General Information
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<S> <C>
Net Asset Value Per Share $70.38
Total Net Assets (millions) $5,340
1996 Expense Ratio 0.56%
1996 Portfolio Turnover 17%
Quarterly Distribution to Shareholders of
Record 9/25/97 (per share): $0.57 Dividend
Fund Inception Date 1931
</TABLE>
Investment Manager: Dodge & Cox, San Francisco.
Managed by a ten-member committee, with members' average tenure at Dodge & Cox
of 18 years.
Asset Allocation
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[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Stocks: 57.6%
Bonds: 38.4%
Short-Term Investments: 4.0%
</TABLE>
<TABLE>
<CAPTION>
Stock Portfolio (57.6% of Fund)
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<S> <C>
Number of Stocks 76
Median Market Capitalization $9.2 billion
Price to Earnings Ratio (trailing 12 months) 21.7x
Price to Book Value (trailing 12 months) 3.0x
Foreign Stocks* (as percentage of Fund) 5%
<CAPTION>
Five Largest Sector Weightings % of Fund
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<S> <C>
Energy 6.2
Electronics & Computer 6.1
Banking 5.2
Consumer Durables 4.7
Insurance & Financial Services 4.6
<CAPTION>
Ten Largest Stock Holdings % of Fund
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<S> <C>
General Motors 1.7
International Business Machines 1.5
Citicorp 1.4
American Express 1.4
Digital Equipment 1.4
Federal Express 1.4
Union Pacific 1.3
Kmart 1.3
Dow Chemical 1.2
Golden West Financial 1.2
</TABLE>
<TABLE>
<CAPTION>
Bond Portfolio (38.4% of Fund)
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<S> <C>
Number of Bonds 128
Average Quality AA+
Average Maturity 11.4 years
Effective Duration 5.30 years
<CAPTION>
Moody's/Standard & Poor's Quality Ratings % of Fund
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<S> <C>
U.S. Government & Government Agencies 23.9
Aaa/AAA 1.6
Aa/AA 1.7
A/A 6.7
Baa/BBB 4.4
Ba/BB 0.1
<CAPTION>
Sector Breakdown % of Fund
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<S> <C>
U.S. Treasury and Government Agency 8.6
Federal Agency CMO and REMIC+ 8.4
Federal Agency Mortgage Pass-Through 6.9
Corporate 13.0
Foreign (U.S. Dollar-denominated) 1.5
</TABLE>
+ Collateralized Mortgage Obligation and Real Estate Mortgage Investment Conduit
* All U.S. Dollar-denominated.
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D O D G E & C O X
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Balanced Fund
Portfolio of Investments September 30, 1997
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<TABLE>
<CAPTION>
Percentage of Fund
<S> <C>
COMMON STOCKS: 57.3%
CONSUMER: 15.5%
CONSUMER DURABLES: 4.7%
General Motors Corp. .......................................... 1.7
Whirlpool Corp. ............................................... 1.1
Ford Motor Co. ................................................ 1.0
Masco Corp. ................................................... 0.9
RETAIL AND DISTRIBUTION: 4.5%
Kmart Corp. ................................................... 1.3
Nordstrom, Inc. ............................................... 1.1
Dillard's, Inc. Class A ....................................... 0.9
Dayton Hudson Corp. ........................................... 0.7
Genuine Parts Co. ............................................. 0.4
Fleming Cos., Inc. ............................................ 0.1
CONSUMER PRODUCTS: 4.2%
Sony Corp. ADR ................................................ 0.9
Unilever NV ................................................... 0.7
Matsushita Electric, Inc. ADR ................................. 0.6
Fort James Corp. .............................................. 0.5
VF Corp. ...................................................... 0.5
Bausch & Lomb, Inc. ........................................... 0.5
Dole Food Co., Inc. ........................................... 0.5
MEDIA, PRINTING AND ENTERTAINMENT: 2.1%
R.R. Donnelley & Sons Co. ..................................... 1.1
Dow Jones & Co. ............................................... 0.6
Time Warner, Inc. ............................................. 0.4
FINANCE: 9.8%
BANKING: 5.2%
Citicorp ...................................................... 1.4
Golden West Financial Corp. ................................... 1.2
BankAmerica Corp. ............................................. 1.0
Republic New York Corp. ....................................... 0.9
Norwest Corp. ................................................. 0.7
INSURANCE AND FINANCIAL SERVICES: 4.6%
American Express Co. .......................................... 1.4
The St. Paul Cos., Inc. ....................................... 0.9
Loews Corp. ................................................... 0.9
Chubb Corp. ................................................... 0.8
General Re Corp. .............................................. 0.6
BASIC INDUSTRY: 6.5%
PAPER AND FOREST PRODUCTS: 3.2%
Weyerhaeuser Co. .............................................. 1.0
Champion International Corp. .................................. 0.9
International Paper Co. ....................................... 0.8
Boise Cascade Corp. ........................................... 0.5
CHEMICALS: 2.2%
Dow Chemical Co. .............................................. 1.2
Eastman Chemical Co. .......................................... 0.4
Nalco Chemical Co. ............................................ 0.4
Lubrizol Corp. ................................................ 0.2
METALS AND MINING: 1.1%
Aluminum Co. of America ....................................... 1.1
ENERGY: 6.2%
Amerada Hess Corp. ............................................ 1.1
Union Pacific Resources Group, Inc. ........................... 1.0
Phillips Petroleum Co. ........................................ 0.9
Occidental Petroleum Corp. .................................... 0.8
Western Atlas, Inc. ........................................... 0.8
Chevron Corp. ................................................. 0.7
Royal Dutch Petroleum Co. ..................................... 0.6
Amoco Corp. ................................................... 0.3
ELECTRONICS AND COMPUTER: 6.1%
International Business Machines Corp. ......................... 1.5
Digital Equipment Corp. ....................................... 1.4
Hewlett-Packard Co. ........................................... 1.0
Motorola, Inc. ................................................ 0.9
Electronic Data Systems ....................................... 0.6
NCR Corp. ..................................................... 0.4
Sybase, Inc. .................................................. 0.3
UTILITIES: 4.2%
ELECTRIC AND GAS UTILITIES: 3.6%
Central & South West Corp. .................................... 0.8
Texas Utilities Co. ........................................... 0.6
FPL Group, Inc. ............................................... 0.5
Edison International .......................................... 0.5
TransCanada PipeLines Ltd. .................................... 0.4
Pacific Enterprises ........................................... 0.4
Wisconsin Energy Corp. ........................................ 0.4
TELEPHONE: 0.6%
BCE, Inc. ..................................................... 0.6
</TABLE>
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5
<PAGE>
D O D G E & C O X
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Balanced Fund
Portfolio of Investments September 30, 1997
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<TABLE>
<CAPTION>
Percentage of Fund
COMMON STOCKS (CONTINUED)
<S> <C>
TRANSPORTATION: 3.4%
Federal Express Corp. ......................................... 1.4
Union Pacific Corp. ........................................... 1.3
Canadian Pacific Ltd. ......................................... 0.7
HEALTHCARE AND PHARMACEUTICAL: 1.9%
Pharmacia & Upjohn, Inc. ...................................... 1.1
SmithKline Beecham plc ADR .................................... 0.4
HealthCare COMPARE Corp. ...................................... 0.4
CAPITAL EQUIPMENT: 1.7%
Deere & Co. ................................................... 0.9
Caterpillar, Inc. ............................................. 0.8
DIVERSIFIED TECHNOLOGY: 1.4%
Xerox Corp. ................................................... 0.6
Corning, Inc. ................................................. 0.5
Raychem Corp. ................................................. 0.3
MISCELLANEOUS: 0.6%
REAL ESTATE INVESTMENT TRUST: 0.6%
Meditrust ..................................................... 0.6
PREFERRED STOCKS: 0.3%
CONSUMER: 0.3%
News Corp. Ltd., Limited Voting Ordinary Shares ADR ........... 0.2
Kmart Financing I, 73/4% Trust Convertible Preferred .......... 0.1
BONDS: 38.4%
U.S. TREASURY & GOV'T AGENCY: 8.6%
FEDERAL AGENCY CMO AND REMIC+: 8.4%
FEDERAL AGENCY MTG. PASS-THROUGH: 6.9%
CORPORATE: 13.0%
INDUSTRIAL: 6.3%
Dayton Hudson Corp., various securities ....................... 1.3
Lockheed Martin Corp., various securities ..................... 1.0
Raytheon Co., various securities .............................. 0.9
May Department Stores, various securities ..................... 0.6
General Motors Corp., various securities ...................... 0.6
Time Warner Ent. Sr. Debentures 83/8%, 7/15/2033 .............. 0.6
Walt Disney Co. Debentures 7.55%, 7/15/2093, Callable 2023 .... 0.5
Ford Motor Co. Debentures 9.95%, 2/15/2032 .................... 0.4
Ford Holdings, Inc. Debentures 93/8%, 3/1/2020 ................ 0.3
Union Camp Corp. Debentures 91/4%, 2/1/2011 ................... 0.1
FINANCE: 6.1%
Norwest Corp., various securities ............................. 1.2
General Electric Capital, various securities .................. 1.1
Golden West Financial, various securities ..................... 0.8
GMAC Put Notes 87/8%, 6/1/2010, Putable 2000/2005 ............. 0.5
J.P. Morgan Capital Trust I, 7.54%, 1/15/2027, Callable 2007 .. 0.5
BankAmerica Capital II, 8%, 12/15/2026, Callable 2006 ......... 0.4
Ford Motor Credit Co. Global Notes 7.20%, 6/15/2007 ........... 0.4
Citicorp Capital Trust I, 7.93%, 2/15/2027, Callable 2007 ..... 0.4
Hartford Financial Services Group, various securities ......... 0.3
Safeco Corp. Notes 144A, 67/8%, 7/15/2007 ..................... 0.3
CIGNA Corp., various securities ............................... 0.1
First Nationwide Bank Sub. Debentures 10%, 10/1/2006 .......... 0.1
Barclays No. Am. Capital 93/4%, 5/15/2021, Callable 2001 ...... 0.0
TRANSPORTATION: 0.6%
Norfolk Southern Bonds 7.70%, 5/15/2017 ....................... 0.3
Consolidated Rail Corp.,various securities .................... 0.3
UTILITIES: 0.0%
Idaho Power 1st Mtg. 91/2%, 1/1/2021, Callable 2001 ........... 0.0
FOREIGN (U.s. Dollar-Denominated): 1.5%
CANADIAN CORPORATE: 1.0%
Hydro-Quebec, various securities .............................. 0.8
Canadian Pacific Ltd. Debentures 9.45%, 8/1/2021 .............. 0.2
INTERNATIONAL AGENCY: 0.5%
Inter-American Dev. Bank 71/8%, 3/15/2023,Callable 2003 ....... 0.4
European Investment Bank Notes 101/8%, 10/1/2000 .............. 0.1
SHORT-TERM INVESTMENTS: 4.1%
OTHER ASSETS LESS LIABILITIES: (0.1%)
TOTAL NET ASSETS: 100.0%
</TABLE>
+ Collateralized Mortgage Obligation and Real Estate Mortgage Investment Conduit
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6
<PAGE>
D O D G E & C O X
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Balanced Fund
General Information
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Investment Since 1930, Dodge & Cox has been providing professional
Manager 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 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.
Reinvestment Shareholders may direct that dividend and capital gains
Plan 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 an Individual Retirement Plan (IRA) available
for shareholders of the Fund.
Shareholder Fund literature and details on all of these Plans are
Inquiries 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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