<PAGE>
D O D G E & C O X
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
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
D O D G E & C O X
- --------------------------------------------------------------------------------
Balanced Fund
Established 1931
- --------------------------------------------------------------------------------
66th Annual Report
December 31, 1996
1996
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
Fellow Shareholders
- --------------------------------------------------------------------------------
Following its strong performance in 1995, the Dodge & Cox Balanced Fund achieved
a total return of 14.8% in 1996. This result compares with 1996 returns for the
Standard & Poor's 500 Index (S&P 500) of common stocks of 23.0% and for the
Lehman Brothers Aggregate Bond Index (LBAG) of 3.6%. Returns for longer time
periods are presented on page 3 of this report.
The net asset value of the Fund increased during the year from $54.60 to $59.82.
In addition, the Fund made distributions totaling $1.99 per share from net
investment income and $0.69 per share from net realized capital gains.
At year-end 1996, the Balanced Fund's total net assets were $3.6 billion.
Approximately 55% of the Fund was invested in stocks, 36% in fixed income
securities and 9% in cash equivalents. This cash position was modestly higher
than during the year due to several large subscriptions that took place on the
last day of the year.
Another Strong Year for Equities
The bull market in U.S. equities continued in 1996 as the economy grew modestly
and inflation remained low. Gross domestic product expanded at a 2.9% annual
rate in the first three quarters of 1996, compared to 2% growth in 1995. The
inflation rate rose only slightly with the consumer price index posting a 3.3%
increase for 1996, but the "core inflation" rate, which excludes food and
energy, was the lowest since 1965. This economic environment proved to be quite
positive for common stocks, as corporate earnings grew at an estimated 8% pace
and price-to-earnings multiples expanded.
The equity portion of the Balanced Fund slightly outperformed the S&P 500 in
1996. Strong contributors in the Fund's portfolio were holdings in the banking,
retailing, energy and consumer products industries. Among the largest
individual stock contributors to the Fund's return in 1996 were IBM, Dayton-
Hudson and American Express. Five bank stocks had total returns greater than
30%, led by BankAmerica and Citicorp.
Equity holdings that did not perform well in 1996 included those in the consumer
durables (e.g., appliances and autos), industrial commodities, business services
and electric utility industries. The Fund's investments that registered the
weakest performance included Digital Equipment, R.R. Donnelley, Nordstrom and
Whirlpool.
Rising Interest Rates Constrain Bonds
Despite the relatively benign inflation environment, interest rates rose quickly
in the first half of 1996, fueled by concerns about resurgence in economic
growth and the possibility of Federal Reserve Board tightening of short-term
rates. After pulling back slightly later in the year, interest rates still
ended 1996 higher across the maturity spectrum - from year-end 1995 to 1996,
two-year U.S. Treasury rates rose from 5.15% to 5.87%, while thirty-year U.S.
Treasury rates rose from 5.95% to 6.64%. As a result, the price of most fixed
income securities declined. However, this price decline was more than offset by
the stream of income from bonds, creating a modest positive total fixed income
return in 1996.
In this challenging environment for fixed income securities, the bond portion of
the Fund slightly outperformed the LBAG. Below we have highlighted the primary
factors that impacted relative performance last year:
. Emphasis on mortgage-related securities. Over 40% of the Fund's bond
portfolio was invested in various types of mortgage-backed securities,
compared to 30% for the LBAG. These issues performed well relative to
other fixed income securities.
. A higher-than-market yield. This differentiating characteristic of the
Fund's fixed income portfolio helped modestly to offset the price
decline in bonds.
. A longer-than-market duration. Compared to the LBAG, a relatively high
percentage of the Fund's bond portfolio was in longer-maturity bonds,
leading to a longer portfolio duration (a measure of a portfolio's
price sensitivity to changes in interest rates) for the Fund. This
longer duration meant that the general rise in interest rates
negatively impacted the Fund's relative performance.
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1
<PAGE>
D O D G E & C O X
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Balanced Fund
Equity Philosophy: Long-term "Bottom Up" Approach
Because we invest with a long-term investment horizon, it is critical that we
develop an understanding of the key factors that we believe will affect an
individual company's business fortunes. This analysis, along with our
assessment of the company's relative and absolute value, are the primary
elements of our investment approach. To provide insight into how we invest your
money, we highlight Sony Corporation, a new equity holding established in the
Fund during 1996. Please note that this company is discussed as an example of
our research and investment process, not because we believe it is necessarily
more attractive than the Fund's other investments.
. Sony is a world leader in the consumer electronics and entertainment
industries. The Sony brand name is among the world's most respected and
recognizable. The widely-publicized problems at the company's film
studio have drawn attention away from Sony's core consumer electronics
franchise and its profitable music and television businesses. This has
helped push its stock valuation to near-historic lows. Our analysis
suggests that new digital products should re-vitalize growth and
margins in the consumer electronics business. As management takes steps
to turn the film business around, we believe investors should begin to
appreciate the strength of the company's worldwide market presence and
growth prospects.
Consistent Fixed Income Portfolio Strategies
Similar to our equity approach, Dodge & Cox's fixed income philosophy is
oriented to the long-term and focused on fundamental research. We seek to build
a diversified, high quality fixed income portfolio, with a higher yield-to-
maturity than the bond market as a whole. To this end, we continue to emphasize
mortgage-related securities and corporate bonds relative to their respective
weightings in the LBAG. We carefully analyze the credit quality, structure and
other terms of each individual bond purchased in the Fund, as well as its effect
on the overall portfolio.
Our focus in the mortgage area is on securities that exhibit relatively stable
cash flows over a wide range of interest rate scenarios. Within the corporate
sector, which represents nearly 35% of the bond portion of the Fund, we
purchased new issues of Lockheed Martin, Ralston Purina and Walt Disney in 1996.
These issuers are all strong competitors within their respective industries,
capable of consistently generating the cash flow necessary to service their debt
obligations.
In Closing, A Word of Caution
As we look forward to 1997 and beyond, we see few signs of excesses which could
lead to a recession in the U.S. economy, in spite of the fact that it is in the
sixth year of expansion. The ascendancy of free market economies around the
world is leading to growth opportunities for many global companies. However, a
great deal of this good news has already been incorporated into stock prices.
Therefore, we believe future returns in stocks are unlikely to equal the
relatively high returns of the past few years. However, low inflation and
continued worldwide economic growth should foster an environment for reasonable
long-term returns from equities.
In the context of the Fund's asset allocation, our words of caution mean that we
believe the gap between equity and fixed income returns will be more narrow in
the future. Although we believe that stocks will outperform bonds over the
long-term, the steady stream of current income provided by fixed income
securities is an integral part of the rationale for balanced fund investment.
Thank you for your continued confidence in the Dodge & Cox Balanced Fund. As
always, we welcome your comments and suggestions.
For the Board of Trustees,
/s/ Harry R. Hagey
January 24, 1997 Harry R. Hagey, Chairman
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2
<PAGE>
D O D G E & C O X
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Balanced Fund
20 Years of Investment Performance
----------------------------------
Comparison of change in value of a $10,000 investment in the Dodge & Cox
Balanced Fund, the Standard & Poor's 500 Composite Stock Price (S&P 500)
Index, the Lehman Brothers Aggregate Bond (LBAG) Index and a Combined Index
(a blend of the S&P 500 (60%) and the LBAG (40%) Indices)
<TABLE>
<CAPTION>
[LINE GRAPH APPEARS HERE]
Dodge & Cox S & P 500 LBAG Combined
Year Balanced Fund Index Index Index
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
76 10,000 10,000 10,000 10,000
77 9,674 9,281 10,303 9,685
78 10,256 9,873 10,447 10,134
79 11,640 11,715 10,648 11,329
80 14,160 15,509 10,936 13,639
81 13,800 14,695 11,621 13,544
82 17,406 17,860 15,413 17,089
83 20,345 21,893 16,703 19,956
84 21,305 23,272 19,234 21,949
85 28,229 30,668 23,490 28,089
86 33,539 36,390 27,072 33,036
87 35,947 38,305 27,822 34,906
88 40,099 44,667 30,014 39,469
89 49,329 58,813 34,378 49,235
90 49,793 56,978 37,459 50,124
91 60,110 74,339 43,452 62,544
92 66,464 79,996 46,668 67,281
93 77,065 88,060 51,218 74,004
94 78,599 89,222 49,722 73,756
95 100,622 122,743 58,911 95,613
96 115,447 150,925 61,037 109,917
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended December 31, 1996 1 Year 5 Years 10 Years 20 Years
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 14.75% 13.95% 13.16% 13.01%
Combined Index 14.96 11.95 12.78 12.74
S&P 500 Index 22.96 15.21 15.29 14.54
LBAG Index 3.61 7.03 8.47 9.47
</TABLE>
The chart covers the period from January 1, 1977 to December 31, 1996. 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.
================================================================================
3
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Selected data and ratios for a share outstanding throughout each year
Financial Highlights Year Ended December 31,
- --------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................. $54.60 $45.21 $46.40 $42.44 $40.09
Income from investment operations:
Net investment income .............................. 1.98 1.90 1.76 1.66 1.72
Net realized and unrealized gain (loss) ............ 5.92 10.58 (.83) 5.03 2.43
------- ------- ------- ------- -------
Total income from investment operations ............ 7.90 12.48 .93 6.69 4.15
------- ------- ------- ------- -------
Distributions:
Dividends from net investment income ............... (1.99) (1.90) (1.76) (1.66) (1.72)
Distributions from net realized gain on investments. (.69) (1.19) (.36) (1.07) (.08)
------- ------- ------- ------- -------
Total distributions ................................ (2.68) (3.09) (2.12) (2.73) (1.80)
------- ------- ------- ------- -------
Net asset value, end of year ....................... $59.82 $54.60 $45.21 $46.40 $42.44
======= ======= ======= ======= =======
Total return ....................................... 14.75% 28.02% 1.99% 15.95% 10.56%
Ratios/Supplemental Data:
Net assets, end of year (millions) ................. $3,630 $1,800 $ 725 $ 487 $ 269
Ratio of expenses to average net assets ............ .56% .57% .58% .60% .63%
Ratio of net investment income to average net assets 3.60% 3.85% 3.94% 3.67% 4.27%
Portfolio turnover rate ............................ 17% 20% 20% 15% 6%
Average commission rate paid* ...................... $.0500
</TABLE>
* Represents the average commission rate paid per share on securities
transactions for which commissions were charged. Disclosure is required by
the S.E.C. beginning in 1996.
<TABLE>
<CAPTION>
The Fund's Ten Largest Stock Holdings As of December 31, 1996
- ---------------------------------------------------------------------
% of Fund
---------
<S> <C>
Dayton-Hudson Corp. ............................ 1.6
General Motors Corp. ........................... 1.6
International Business Machines Corp. .......... 1.5
American Express Co. ........................... 1.5
Citicorp ....................................... 1.4
Digital Equipment Corp. ........................ 1.3
Donnelley (R.R.) & Sons Co. .................... 1.2
Aluminum Co. of America ........................ 1.1
Dow Chemical Co. ............................... 1.1
Amerada Hess Corp. ............................. 1.0
</TABLE>
- --------------------------------------------------------------------------------
S.E.C. yield for the 30 day period ended December 31, 1996 **...... 3.56%
** An annualization of the Fund's total net investment income for the 30 day
period ended on the last day of the month.
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4
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1996
---------------------------------------------------------------------------
COMMON STOCKS: 54.3%
SHARES MARKET VALUE
CONSUMER: 13.3%
<C> <S> <C>
549,700 Bausch & Lomb Inc. ...................... $ 19,239,500
90,300 CVS Corp. ............................... 3,736,162
1,493,800 Dayton-Hudson Corp. ..................... 58,631,650
815,000 Dillard Department Stores, Inc. Class A . 25,163,125
303,000 Fleming Cos., Inc. ...................... 5,226,750
103,903 Footstar, Inc.+ ......................... 2,584,587
890,000 Ford Motor Co. .......................... 28,368,750
596,700 Fruit of the Loom, Inc.+ ................ 22,600,013
1,008,000 General Motors Corp. .................... 56,196,000
390,000 Genuine Parts Co. ....................... 17,355,000
620,000 James River Corp. of Virginia ........... 20,537,500
2,710,000 Kmart Corp.+ ............................ 28,116,250
1,032,800 Masco Corp. ............................. 37,180,800
855,000 Nordstrom, Inc. ......................... 30,299,063
181,500 Procter & Gamble Co. .................... 19,511,250
474,000 Sony Corp. ADR .......................... 31,106,250
151,000 Unilever NV ............................. 26,462,750
340,200 VF Corp. ................................ 22,963,500
591,700 Whirlpool Corp. ......................... 27,588,013
------------
482,866,913
FINANCE: 10.5%
941,000 American Express Co. .................... 53,166,500
180,500 American International Group, Inc. ...... 19,539,125
337,000 BankAmerica Corp. ....................... 33,615,750
659,500 Barnett Banks, Inc. ..................... 27,121,937
613,000 Chubb Corp. ............................. 32,948,750
475,000 Citicorp ................................ 48,925,000
127,000 General Re Corp. ........................ 20,034,250
579,000 Golden West Financial Corp. ............. 36,549,375
62,600 Lehman Brothers Holdings, Inc. .......... 1,964,075
278,000 Morgan (J.P.) & Co. ..................... 27,139,750
518,000 Norwest Corp. ........................... 22,533,000
370,500 Republic New York Corp. ................. 30,242,063
479,500 The St. Paul Cos., Inc. ................. 28,110,688
------------
381,890,263
ELECTRONICS AND COMPUTERS: 6.8%
1,277,000 Digital Equipment Corp.+ ................ 46,450,875
648,000 Hewlett-Packard Co. ..................... 32,562,000
371,000 International Business Machines Corp. ... 56,021,000
495,800 Motorola, Inc. .......................... 30,429,725
945,000 National Semiconductor Corp.+ ........... 23,034,375
666,600 Sybase, Inc.+ ........................... 11,123,887
1,120,000 Tandem Computers, Inc.+ ................. 15,400,000
480,000 Texas Instruments, Inc. ................. 30,600,000
------------
245,621,862
BASIC INDUSTRY: 5.7%
626,000 Aluminum Co. of America ................. 39,907,500
600,000 Boise Cascade Corp. ..................... 19,050,000
603,000 Champion International Corp. ............ 26,079,750
35,500 Crown Vantage, Inc.+ .................... 299,531
</TABLE>
See accompanying Notes to Financial Statements
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5
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1996
------------------------------------------------------------------
COMMON STOCKS: (Continued)
SHARES MARKET VALUE
BASIC INDUSTRY (continued)
<C> <S> <C>
488,000 Dow Chemical Co. ..................... $ 38,247,000
768,000 International Paper Co. .............. 31,008,000
290,000 Lubrizol Corp. ....................... 8,990,000
505,700 Nalco Chemical Co. ................... 18,268,412
564,000 Weyerhaeuser Co. ..................... 26,719,500
------------
208,569,693
ENERGY: 5.0%
644,200 Amerada Hess Corp. ................... 37,283,075
155,000 Amoco Corp. .......................... 12,477,500
351,000 Chevron Corp. ........................ 22,815,000
20,000 Exxon Corp. .......................... 1,960,000
254,000 Halliburton Co. ...................... 15,303,500
20,000 Mobil Corp. .......................... 2,445,000
670,000 Phillips Petroleum Co. ............... 29,647,500
153,000 Royal Dutch Petroleum Co. ............ 26,124,750
655,085 Union Pacific Resources Group, Inc. .. 19,161,236
205,000 Western Atlas, Inc.+ ................. 14,529,375
------------
181,746,936
BUSINESS PRODUCTS AND SERVICES: 3.3%
1,390,000 Donnelley (R.R.) & Sons Co. .......... 43,611,250
575,650 Dow Jones & Co. ...................... 19,500,144
823,800 Federal Express Corp.+ ............... 36,659,100
376,000 Xerox Corp. .......................... 19,787,000
------------
119,557,494
PUBLIC UTILITIES: 3.0%
566,500 BCE, Inc. ............................ 27,050,375
600,000 Edison International ................. 11,925,000
277,800 FPL Group, Inc. ...................... 12,778,800
652,400 Pacific Enterprises .................. 19,816,650
486,000 Texas Utilities Co. .................. 19,804,500
1,061,300 TransCanada PipeLines Ltd. ........... 18,572,750
------------
109,948,075
CAPITAL EQUIPMENT: 1.7%
400,000 Caterpillar, Inc. .................... 30,100,000
739,000 Deere & Co. .......................... 30,021,875
------------
60,121,875
DIVERSIFIED TECHNOLOGY: 1.6%
575,000 Corning, Inc. ........................ 26,593,750
146,000 Minnesota Mining & Manufacturing Co. . 12,099,750
246,500 Raychem Corp. ........................ 19,750,812
------------
58,444,312
TRANSPORTATION: 1.5%
960,000 Canadian Pacific Ltd. ................ 25,440,000
496,000 Union Pacific Corp. .................. 29,822,000
------------
55,262,000
PHARMACEUTICAL AND HEALTH: 1.3%
770,000 Pharmacia & Upjohn, Inc. ............. 30,511,250
235,000 SmithKline Beecham plc ADR ........... 15,980,000
------------
46,491,250
</TABLE>
See accompanying Notes to Financial Statements
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6
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1996
-------------------------------------------------------------------------------------------------------
COMMON STOCKS (Continued)
SHARES MARKET VALUE
MISCELLANEOUS: 0.6%
<C> <S> <C>
504,100 Meditrust ................................................................ $ 20,164,000
--------------
Total Common Stocks (cost $1,497,129,533) ......................... 1,970,684,673
--------------
PREFERRED STOCK, 0.1%
CONSUMER: 0.1%
61,500 Kmart Financing I, 7 3/4% Trust Convertible Preferred .................... 2,998,125
--------------
Total Preferred Stocks (cost $3,075,000) .......................... 2,998,125
--------------
BONDS, 36.3%
PAR VALUE
U.S. TREASURY: 8.8%
$38,500,000 U.S. Treasury Notes, 6%, 1997 .......................................... 38,620,120
7,500,000 U.S. Treasury Notes, 6 3/4%, 1997 ...................................... 7,517,550
2,750,000 U.S. Treasury Notes, 6 7/8%, 1997 ...................................... 2,759,872
63,100,000 U.S. Treasury Notes, 5 1/8%, 1998 ...................................... 62,262,032
28,500,000 U.S. Treasury Notes, 5 1/4%, 1998 ...................................... 28,264,020
14,000,000 U.S. Treasury Notes, 7 1/8%, 1998 ...................................... 14,297,500
50,000,000 U.S. Treasury Notes, 7 7/8%, 1998 ...................................... 51,109,500
13,000,000 U.S. Treasury Notes, 6 1/4%, 2001 ...................................... 13,012,220
73,000,000 U.S. Treasury Notes, 6 1/4%, 2003 ...................................... 72,908,750
14,250,000 U.S. Treasury Bonds, 14%, 2011, Callable 2006 .......................... 21,911,655
5,000,000 U.S. Treasury Bonds, 7 1/2%, 2016 ...................................... 5,412,500
------------
318,075,719
FEDERAL AGENCY: 0.2%
5,000,000 Arkansas Dev. Fin. Auth. GNMA Guaranteed Bonds 9 3/4%, 2014 ............ 6,048,950
FEDERAL AGENCY MORTGAGE PASS-THROUGH, CMO* AND REMIC**: 15.0%
1,665,713 Federal Home Loan Mtge. Corp. Group 25-6637, 8%, 2002 .................. 1,704,958
1,404,932 Federal Home Loan Mtge. Corp. Group D26241, 6 1/2%, 2006 ............... 1,396,291
338,716 Federal Home Loan Mtge. Corp. Group 18-0233, 7%, 2006 .................. 338,442
944,123 Federal Home Loan Mtge. Corp. Group 25-0921, 7 1/2%, 2006 .............. 955,830
37,162,792 Federal Home Loan Mtge. Corp. Group E00210 15 year, 7%, 2008 ........... 37,371,647
317,417 Federal Home Loan Mtge. Corp. Group 18-5719, 7 1/4%, 2008 .............. 321,201
649,448 Federal Home Loan Mtge. Corp. Group 27-2784, 7 1/4%, 2008 .............. 657,450
351,604 Federal Home Loan Mtge. Corp. Group 25-3827, 7 1/2%, 2008 .............. 356,428
1,333,561 Federal Home Loan Mtge. Corp. Group 18-0468, 8%, 2008 .................. 1,378,982
1,188,553 Federal Home Loan Mtge. Corp. Group D10211, 7 1/2%, 2009 ............... 1,216,567
9,296,239 Federal Home Loan Mtge. Corp. Group 55-5062, 8%, 2010 .................. 9,587,119
1,432,077 Federal Home Loan Mtge. Corp. Group 30-9878, 8 3/4%, 2010 .............. 1,501,289
425,654 Federal Home Loan Mtge. Corp. Group 27-3014, 8 1/4%, 2011 .............. 440,037
504,732 Federal Home Loan Mtge. Corp. Group 27-2785, 7 3/4%, 2012 .............. 516,074
1,642,613 Federal Home Loan Mtge. Corp. Group 55-5098, 8 1/4%, 2017 .............. 1,698,117
12,521,631 Federal Home Loan Mtge. Corp. Group D64097, 8 1/2%, 2023 ............... 13,140,575
16,200,000 Federal Home Loan Mtge. Corp. Multi PC Series 1301-E, 7%, 2005 ......... 16,437,816
36,500,000 Federal Home Loan Mtge. Corp. Multi PC Series 1883-B, 6 3/4%, 2006 ..... 36,504,380
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1216-GA, 7%, 2006 ........ 10,100,000
15,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1458-H, 7%, 2006 ......... 15,210,900
5,934,000 Federal Home Loan Mtge. Corp. Multi PC Series 1203-H, 6%, 2007 ......... 5,696,640
11,500,000 Federal Home Loan Mtge. Corp. Multi PC Series 1450-H, 6 1/2%, 2007 ..... 11,320,255
16,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1693-H, 6%, 2008 ......... 15,209,920
12,850,000 Federal Home Loan Mtge. Corp. Multi PC Series 1512-I, 6 1/2%, 2008 ..... 12,604,951
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1539-PL, 6 1/2%, 2008 .... 9,837,500
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
7
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1996
-------------------------------------------------------------------------------------------------------
BONDS (Continued)
PAR VALUE MARKET VALUE
FEDERAL AGENCY MORTGAGE PASS-THROUGH, CMO* AND REMIC** (continued)
<C> <S> <C>
$17,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1564-H, 6 1/2%, 2008 ........ $ 16,675,810
18,309,000 Federal Home Loan Mtge. Corp. Multi PC Series 1473-HA, 7%, 2008 ........... 18,463,345
16,507,000 Federal Home Loan Mtge. Corp. Multi PC Series 1628-PJ, 6 1/2%, 2022 ....... 15,764,185
906,546 Federal Natl. Mtge. Assn. MBS Pool 55690, 8 1/2%, 2002 .................... 943,678
1,069,633 Federal Natl. Mtge. Assn. MBS Pool 22354, 6 1/2%, 2004 .................... 1,058,499
4,678,714 Federal Natl. Mtge. Assn. MBS Pool 70992 15 year, 7 1/2%, 2006 ............ 4,757,082
12,536,693 Federal Natl. Mtge. Assn. MBS Pool 44047, 7%, 2007 ........................ 12,632,473
30,094,765 Federal Natl. Mtge. Assn. MBS Pool 362446 15 year, 7%, 2007 ............... 30,226,279
7,058,339 Federal Natl. Mtge. Assn. MBS Pool 70255, 7 1/2%, 2007 .................... 7,222,869
27,597,635 Federal Natl. Mtge. Assn. MBS Pool 351632 15 year, 8%, 2008 ............... 28,442,674
7,945,143 Federal Natl. Mtge. Assn. MBS Pool 107047, 8%, 2009 ....................... 8,227,910
2,055,657 Federal Natl. Mtge. Assn. MBS Pool 169231, 7 1/2%, 2010 ................... 2,095,516
4,771,937 Federal Natl. Mtge. Assn. MBS Pool 224484, 7 1/2%, 2011 ................... 4,870,716
6,387,588 Federal Natl. Mtge. Assn. MBS Pool 124668, 7 1/2%, 2019 ................... 6,544,850
9,612,696 Federal Natl. Mtge. Assn. PC 1993-234 PA, 5%, 2004 ........................ 9,474,465
21,840,000 Federal Natl. Mtge. Assn. PC 1992-4 H, 7 1/2%, 2007 ....................... 22,536,041
15,475,000 Federal Natl. Mtge. Assn. PC 1994-33 H, 6%, 2009 .......................... 14,676,954
12,066,453 Federal Natl. Mtge. Assn. PC G1993-39 A, 5.70%, 2016 ...................... 11,655,349
13,730,000 Federal Natl. Mtge. Assn. PC G1994-13 J, 7%, 2022 ......................... 13,618,375
19,500,000 Federal Natl. Mtge. Assn. PC 1993-185 PE, 6 1/2%, 2023 .................... 18,531,045
10,786,973 Federal Natl. Mtge. Assn. SMBS L-1, 5%, 2006 .............................. 10,200,917
1,345,143 Federal Natl. Mtge. Assn. SMBS I-1, 6 1/2%, 2009 .......................... 1,331,395
24,328,408 Govt. Natl. Mtge. Assn. Pool 780258, 7 1/2%, 2007 ......................... 24,785,782
19,741 FSF Finance Corp. 1985-1-D, 9 1/4%, 2016 .................................. 19,895
13,352,000 Veterans Affairs Vendee Mtge. Trust 1994-2 3C, 6 1/2%, 2009 ............... 13,197,517
20,929,940 Veterans Affairs Vendee Mtge. Trust 1996-2 1C, 6 3/4%, 2014 ............... 20,720,641
7,982,303 Veterans Affairs Vendee Mtge. Trust 1995-1A 1, 7.20806%, 2025 ............. 7,837,583
11,079,076 Veterans Affairs Vendee Mtge. Trust 1995-2C 3A, 8.7925%, 2025 ............. 11,736,840
------------
543,752,054
INDUSTRIAL: 6.1%
10,400,000 Dayton-Hudson Corp. Debentures 9%, 2021 ................................... 11,866,088
6,450,000 Dayton-Hudson Corp. Debentures 9.70%, 2021 ................................ 7,849,585
2,000,000 Dayton-Hudson Corp. Debentures 8.80%, 2022 ................................ 2,254,760
14,600,000 Dayton-Hudson Corp. MTN 9.35%, 2020, Putable 1997 ......................... 17,171,644
8,000,000 Ford Holdings, Inc. Debentures 9 3/8%, 2020 ............................... 9,631,760
20,000,000 Ford Motor Co. Debentures 9.95%, 2032 ..................................... 25,904,400
14,250,000 General Motors Corp. Debentures 7.70%, 2016 ............................... 14,737,778
15,000,000 Lockheed Martin Corp. Debentures 7.65%, 2016 .............................. 15,516,150
23,575,000 Lockheed Martin Corp. Debentures 7 3/4%, 2026 ............................. 24,486,881
14,000,000 May Department Stores Debentures 8 1/8%, 2035, Callable 2015 .............. 14,555,380
12,500,000 May Department Stores Debentures 7 7/8%, 2036, Callable 2016 .............. 12,701,250
5,750,000 May Department Stores Debentures 7 5/8%, 2013 ............................. 5,914,565
6,375,000 Ralston Purina Debentures 7 3/4%, 2015 .................................... 6,537,307
28,000,000 Time Warner Entertainment Senior Debentures 8 3/8%, 2033 .................. 28,100,520
3,450,000 Union Camp Corp. Debentures 9 1/4%, 2011 .................................. 4,078,314
20,000,000 Walt Disney Co. Debentures 7.55%, 2093 .................................... 20,205,000
------------
221,511,382
FINANCE: 4.1%
2,000,000 Barclays North American Capital Corp. Notes 9 3/4%, 2021, Callable 2001 ... 2,279,280
1,800,000 CIGNA Corp. Notes 7.65%, 2023 ............................................. 1,771,146
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
8
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1996
- ------------------------------------------------------------------------------------------------------------------
BONDS
(continued)
PAR VALUE MARKET VALUE
FINANCE(continued)
<C> <S> <C>
$ 4,400,000 CIGNA Corp. Notes 8.30%, 2023................................................ $ 4,621,540
12,750,000 Citicorp Capital Trust I, 7.93%, 2027, Callable 2007......................... 12,882,983
3,100,000 First Nationwide Bank Subordinated Debentures 10%, 2006...................... 3,565,403
5,000,000 General Electric Capital Debentures 8 3/4%, 2007............................. 5,667,900
12,250,000 General Electric Capital Debentures 8 1/2%, 2008............................. 13,769,245
19,290,000 GMAC Put Notes 8 7/8%, 2010, Putable 2000/2005............................... 22,322,774
5,100,000 Golden West Financial Subordinated Notes 6.70%, 2002......................... 5,081,589
3,000,000 Golden West Financial Subordinated Notes 7 1/4%, 2002........................ 3,052,080
9,075,000 Golden West Financial Subordinated Notes 6%, 2003............................ 8,636,405
6,215,000 ITT Hartford Group Notes 8.30%, 2001......................................... 6,597,720
11,000,000 ITT Hartford Group Notes 6 3/8%, 2002........................................ 10,720,710
12,000,000 J.P. Morgan Capital Trust I, 7.54%, 2027, Callable 2007...................... 11,727,480
14,400,000 Norwest Corp. MTN 6.20%, 2005................................................ 13,670,496
3,055,000 Norwest Corp. MTN 6 1/2%, 2005............................................... 2,964,175
15,875,000 Norwest Corp. MTN 6 3/4%, 2006............................................... 15,640,844
5,500,000 Norwest Corp. Subordinated Debentures 6.65%, 2023............................ 5,012,865
-------------
149,984,635
CANADIAN: 1.0%
8,750,000 Canadian Pacific Ltd. Debentures 9.45%, 2021................................. 10,325,000
7,550,000 Hydro-Quebec Debentures 7 1/2%, 2016......................................... 7,630,860
18,000,000 Hydro-Quebec Debentures 8.40%, 2022.......................................... 19,658,700
-------------
37,614,560
INTERNATIONAL AGENCY: 0.7%
7,200,000 European Investment Bank Notes 10 1/8%, 2000................................. 8,086,392
18,815,000 Inter-American Development Bank Debentures 7 1/8%, 2023, Callable 2003....... 18,126,559
-------------
26,212,951
TRANSPORTATION: 0.4%
8,294,483 Consolidated Rail Corp. 95-A Pass Through Trust 6.76%, 2015................. 8,160,776
5,000,000 Consolidated Rail Corp. Debentures 9 3/4%, 2020............................. 6,146,650
-------------
14,307,426
PUBLIC UTILITIES: 0.0%
750,000 Idaho Power Co. 1st Mortgage Bonds 9 1/2%, 2021, Callable 2001............... 842,100
-------------
Total Bonds (cost $1,301,890,470)..................................... 1,318,349,777
-------------
SHORT TERM
INVESTMENTS: 2.8%
22,536,610 General Mills, Inc., Variable Demand Note 5.50%, 1997........................ 22,536,610
22,701,379 Pitney Bowes Credit Corp., Variable Demand Note 5.51%, 1997.................. 22,701,379
24,993,204 Sara Lee Corp., Variable Demand Note 5.49%, 1997............................. 24,993,204
27,804,491 Southwestern Bell Telephone Co., Variable Demand Note 5.49%, 1997............ 27,804,491
3,640,329 Warner Lambert Co., Variable Demand Note 5.48%, 1997......................... 3,640,329
804,000 Wisconsin Electric Power Corp., Variable Demand Note 5.55%, 1997............. 804,000
-------------
Total Short-Term Investments (cost $102,480,013)....................... 102,480,013
-------------
TOTAL INVESTMENTS (cost $2,904,575,016).................. 93.5% 3,394,512,588
OTHER ASSETS LESS LIABILITIES............................ 6.5 235,314,301
------ --------------
TOTAL NET ASSETS......................................... 100.0% $3,629,826,889
====== ==============
</TABLE>
+ Non-income producing
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estatc Mortgage Investment Conduit
See accompanying Notes to Financial Statements
================================================================================
9
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities December 31, 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments (identified cost $2,904,575,016) at market quotations........................ $3,394,512,588
Cash..................................................................................... 288,914,568
Dividends receivable and interest accrued................................................ 22,420,850
Receivable for investments sold.......................................................... 358,826
Prepaid expenses......................................................................... 37,322
--------------
3,706,244,154
--------------
LIABILITIES:
Payable for Fund shares redeemed......................................................... 10,045,518
Payable for investments purchased........................................................ 66,102,739
Accounts payable......................................................................... 269,008
--------------
76,417,265
--------------
NET ASSETS........................................................................... $3,629,826,889
==============
NET ASSETS CONSIST OF:
Paid in capital.......................................................................... $3,124,797,654
Accumulated undistributed net investment income.......................................... 589,968
Accumulated undistributed net realized gain on investments............................... 14,501,695
Net unrealized appreciation on investments............................................... 489,937,572
--------------
$3,629,826,889
==============
Net asset value
per share $59.82
Beneficial
shares outstanding
60,681,531
(par value $1.00 each,
unlimited shares
authorized)
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations Year Ended December 31, 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends................................................................................ $ 32,414,073
Interest................................................................................. 77,254,885
--------------
109,668,958
--------------
EXPENSES:
Management fees (Note 2)................................................................. 13,196,680
Custodian fees........................................................................... 267,511
Transfer agent fees...................................................................... 617,969
Accounting and audit fees................................................................ 60,010
Legal fees............................................................................... 2,134
Shareholder reports...................................................................... 158,048
S.E.C. and state registration fees....................................................... 396,604
Trustees' fees........................................................................... 10,000
Miscellaneous............................................................................ 68,898
--------------
14,777,854
--------------
NET INVESTMENT INCOME.................................................................... 94,891,104
--------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments....................................................... 46,644,856
Change in unrealized appreciation of investments....................................... 238,328,655
--------------
Net realized and unrealized gain on investments..................................... 284,973,511
--------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.............................................................. $379,864,615
==============
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
10
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Year Ended December 31,
- -------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
OPERATIONS:
Net investment income....................... $ 94,891,104 $ 48,728,457
Net realized gain........................... 46,644,856 40,099,262
Net change in unrealized appreciation....... 238,328,655 202,379,528
-------------- --------------
Net increase in net assets from operations.. 379,864,615 291,207,247
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income....................... (94,929,171) (48,423,029)
Net realized gain........................... (36,143,876) (37,087,374)
-------------- --------------
Total distributions to shareholders......... (131,073,047) (85,510,403)
-------------- --------------
BENEFICIAL SHARE TRANSACTIONS:
Amounts received from sale of shares........ 1,888,815,434 950,177,869
Net asset value of shares issued in
reinvestment of distributions............... 126,272,384 81,994,507
-------------- --------------
2,015,087,818 1,032,172,376
Amounts paid for shares redeemed............ (434,353,361) (162,839,963)
-------------- --------------
Net increase from beneficial
share transactions.......................... 1,580,734,457 869,332,413
-------------- --------------
Total increase in net assets................ 1,829,526,025 1,075,029,257
NET ASSETS:
Beginning of year........................... 1,800,300,864 725,271,607
-------------- --------------
End of year (including undistributed net
investment income of $589,968 and $628,035,
respectively)............................... $3,629,826,889 $1,800,300,864
============== ==============
Shares sold................................. 33,113,538 18,517,367
Shares issued in reinvestment
of distributions............................ 2,190,482 1,549,186
Shares redeemed............................. (7,595,736) (3,134,045)
-------------- --------------
Net increase in shares outstanding.......... 27,708,284 16,932,508
============== ==============
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
11
<PAGE>
DODGE & COX
================================================================================
Balanced Fund
Notes to Financial Statements
-------------------------------------------------------------------
1 The Fund is registered under the Investment Company Act of 1940, as
amended, as a diversified open-end management company. The Fund
consistently follows accounting policies which are in conformity
with generally accepted accounting principles for investment
companies. Significant policies are: (a) Securities are stated at
market value based on latest quoted prices; (b) Security
transactions are accounted for on the trade date in the financial
statements; (c) Gains and losses on securities sold are determined
on the basis of identified cost; (d) Dividend income is recorded on
the ex-dividend date and interest income is recorded on the accrual
basis; (e) Distributions to shareholders of income and capital
gains are reflected in the net asset value per share computation on
the ex-dividend date; (f) No provision for Federal income taxes has
been included in the accompanying financial statements since the
Fund intends to distribute all of its taxable income and otherwise
continue to comply with requirements for regulated investment
companies.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
2 Under a written agreement, the Fund pays an annual management fee
of 1/2 of 1% of the Fund's average weekly net asset value to Dodge
& Cox, a corporation and manager of the Fund. All officers and
three of the trustees of the Fund are officers and employees of
Dodge & Cox. Those trustees who are not affiliated with Dodge & Cox
receive from the Fund an annual fee of $1,000 and an attendance fee
of $500 for each meeting of the Board of Trustees attended. The
Fund does not pay any other remuneration to its officers or
trustees.
3 For the year ended December 31, 1996, purchases and sales of
securities, other than short-term securities, aggregated
$1,728,516,735 and $426,732,299, respectively, of which U.S.
government obligations aggregated $653,642,897 and $222,993,364,
respectively. At December 31, 1996, the cost of investments for
Federal income tax purposes was equal to the cost for financial
reporting purposes. Net unrealized appreciation aggregated
$489,937,571, of which $516,900,423 represented appreciated
securities and $26,962,851 represented depreciated securities.
================================================================================
12
<PAGE>
DODGE & COX
================================================================================
Balanced Fund
Report of Independent Accountants
-------------------------------------------------------------------
To the Trustees and Shareholders of Dodge & Cox Balanced Fund
In our opinion, the accompanying statement of assets and
liabilities, including the portfolio of investments, and the
related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects,
the financial position of the Dodge & Cox Balanced Fund (the
"Fund") at December 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two
years in the period then ended and the financial highlights for
each of the five years in the period then ended, in conformity with
generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits
of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of securities at
December 31, 1995 by correspondence with the custodian and brokers,
provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
January 24, 1997
-------------------------------------------------------------------
Special 1996 Tax Information (unaudited)
Corporate shareholders should note that for the year ended December
31, 1996, a total of 28% of the Fund's ordinary income
distributions qualified for the corporate dividends received
deduction.
================================================================================
13
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
Officers and Trustees
--------------------------------------------------------------------------
Harry R. Hagey, Chairman and Trustee
Chairman & CEO, Dodge & Cox
A. Horton Shapiro, Vice-Chairman and Trustee
Senior Vice-President, Dodge & Cox
Kenneth E. Olivier, Assistant Secretary and Trustee
Senior Vice-President, Dodge & Cox
Max Gutierrez, Jr., Trustee
Partner, Brobeck, Phleger & Harrison, Attorneys
Frank H. Roberts, Trustee
Retired Partner, Pillsbury, Madison & Sutro, Attorneys
John B. Taylor, Trustee
Professor of Economics, Stanford University
Will C. Wood, Trustee
Principal, Kentwood Associates, Financial Advisers
W. Timothy Ryan, Secretary
Senior Vice-President, Dodge & Cox
Thomas M. Mistele, Assistant Secretary
General Counsel, Dodge &Cox
E. Morris Cox, Honorary Trustee
--------------------------------------------------------------------------
MANAGERS
Dodge & Cox
One Sansome Street, 35th Floor
San Francisco, California 94104
Telephone (415) 981-1710
CUSTODIAN & TRANSFER AGENT
Firstar Trust Company
P. O. Box 701
Milwaukee, Wisconsin 53201-0701
Telephone (800) 621-3979
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
San Francisco, California
LEGAL COUNSEL
Heller, Ehrman, White & McAuliffe
San Francisco, California
================================================================================
14
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
General Information
---------------------------------------------------------------
Dodge & Cox The Fund is a no-load mutual fund with the objectives of
Balanced Fund providing shareholders with regular income, conservation of
principal and an opportunity for long-term growth of principal
and income. The Fund seeks to achieve these objectives by
investing in a diversified portfolio of common stocks,
preferred stocks and bonds.
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.
Automatic Shareholders may make regular monthly or quarterly investments
Investment Plan 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 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
================================================================================
