<PAGE>
DODGE & COX
=======================================--=======================================
Balanced Fund
PROSPECTUS
April 29, 1997
Dodge & Cox Balanced Fund
- --------------------------------------------------------------------------------
The Dodge & Cox Balanced Fund (the "Fund") is a no-load mutual fund with the
objectives of 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. There can be no assurance that the
Fund will achieve these objectives.
Shares of the Fund are purchased and redeemed at net asset value. There are no
sales, redemption or Rule 12b-1 plan distribution charges.
This prospectus sets forth concisely the information you should know about the
Fund before investing. It should be retained for future reference. A Statement
of Additional Information about the Fund, dated April 29, 1997, which is
incorporated by reference in this prospectus, has been filed with the Securities
and Exchange Commission (the "SEC".) To obtain a free copy, call 1-800-621-3979.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Table of
Contents
<S> <C>
Introduction.............................................................. 1
Expense Information....................................................... 1
Financial Highlights...................................................... 2
Investment Objectives and Policies........................................ 2
Investment Restrictions................................................... 3
Investment Risks.......................................................... 4
Additional Information on Investments..................................... 4
Income Dividends and Capital
Gain Distributions..................................................... 6
How to Purchase Shares.................................................... 7
How to Redeem Shares...................................................... 8
Exchanging Shares......................................................... 10
Telephone Transactions.................................................... 10
Transfer of Shares........................................................ 10
Pricing of Shares......................................................... 11
Shareholder Services...................................................... 11
Performance Information................................................... 11
Fund Organization and Management.......................................... 12
Portfolio Transactions.................................................... 13
Expenses.................................................................. 13
Federal Income Taxes...................................................... 13
Custodian and Transfer Agent.............................................. 13
Reports to Shareholders................................................... 14
Shareholder Inquiries..................................................... 14
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=======================================--=======================================
<PAGE>
DODGE & COX
=======================================--=======================================
Balanced Fund
Introduction
- --------------------------------------------------------------------------------
The Fund is an open-end diversified investment company which continuously offers
its shares to the public. A unique feature of the Fund and other "no-load" funds
is that shares are sold without sales charge, while many other investment
companies sell their shares with a varying sales charge. Shares may be redeemed
at net asset value without any charge.
The Fund enables you to obtain the benefits of experienced and continuous
investment supervision. Shares of the Fund can provide you with the kind of
balanced portfolio ordinarily limited to large investment accounts that is
widely regarded as a conservative strategy designed to cushion an investment
from the volatility associated with mutual funds composed exclusively of common
stocks.
By investing in the Fund, you avoid the time-consuming details involved in
buying and selling individual securities. The Fund also reduces your record
keeping for tax purposes and simplifies the collection of investment income and
the safekeeping of individual securities.
The Fund's investment manager, Dodge &Cox, was founded in 1930 and managed over
$25 billion for individual and institutional investors in mutual fund and
private accounts as of December 31, 1996.
<TABLE>
<CAPTION>
Expense Information
- --------------------------------------------------------------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases ....................................... None
Sales Load Imposed on Reinvested Distributions ........................ None
Deferred Sales Load ................................................... None
Redemption Fees ....................................................... None
Exchange Fees ......................................................... None
ANNUAL FUND OPERATING EXPENSES (as a percentage of
average net assets)
Management Fees ....................................................... .50%
12b-1 Fees ............................................................ None
Other Expenses (accounting, transfer agent, custodial,
legal, etc.) ......................................................... .06%
----
Total Fund Operating Expenses ......................................... .56%
</TABLE>
EXAMPLE: A shareholder would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
Time period 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expenses $6 $18 $31 $70
</TABLE>
This example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the above expense information is to assist you in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. Expense figures are based on amounts incurred during the year
1996 (See "Expenses"). Wire redemptions are subject to a $12 charge which is not
reflected in the above example.
=======================================--=======================================
1
<PAGE>
DODGE & COX
=======================================--=======================================
Balanced Fund
Financial Highlights
- --------------------------------------------------------------------------------
The following table provides information about the Fund's financial history. It
is based on a single share outstanding throughout each year. The table is part
of the Fund's financial statements which are included in the Fund's Annual
Report and incorporated by reference into the Statement of Additional
Information. This document is available to shareholders upon request. The
financial statements in the Annual Report have been audited by Price Waterhouse
LLP, independent accountants, whose unqualified report covers the most recent
five-year period.
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year.... $54.60 $45.21 $46.40 $42.44 $40.09 $35.03 $36.85 $32.09 $30.72 $32.62
Income from investment operations:
Net investment income................. 1.98 1.90 1.76 1.66 1.72 1.75 1.81 1.76 1.68 1.67
Net realized and unrealized gain
(loss)................................ 5.92 10.58 (.83) 5.03 2.43 5.36 (1.49) 5.47 1.83 .80
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total income from investment
operations............................ 7.90 12.48 .93 6.69 4.15 7.11 .32 7.23 3.51 2.47
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Distributions:
Dividends from net investment
income................................ (1.99) (1.90) (1.76) (1.66) (1.72) (1.76) (1.81) (1.76) (1.68) (1.70)
Distributions from net realized gain
on investments........................ (.69) (1.19) (.36) (1.07) (.08) (.29) (.33) (.71) (.46) (2.67)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions................... (2.68) (3.09) (2.12) (2.73) (1.80) (2.05) (2.14) (2.47) (2.14) (4.37)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of year.......... $59.82 $54.60 $45.21 $46.40 $42.44 $40.09 $35.03 $36.85 $32.09 $30.72
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return ......................... 14.75% 28.02% 1.99% 15.95% 10.56% 20.72% .94% 23.02% 11.54% 7.18%
Ratios/Supplemental Data:
Net assets, end of year (millions).... $3,630 $1,800 $725 $487 $269 $179 $83 $51 $39 $34
Ratio of expenses to average
net assets............................ .56% .57% .58% .60% .63% .65% .70% .72% .77% .72%
Ratio of net investment income to
average net assets.................... 3.60% 3.85% 3.94% 3.67% 4.27% 4.78% 5.24% 4.98% 5.19% 4.69%
Portfolio turnover rate............... 17% 20% 20% 15% 6% 10% 10% 12% 9% 15%
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 SEC beginning in 1996.
- --------------------------------------------------------------------------------
Investment Objectives and Policies
The objectives of the Fund are to provide shareholders with regular income,
conservation of principal and an opportunity for long-term growth of principal
and income. However, investors should recognize that the market risks inherent
in investment cannot be avoided, nor is there any assurance that the investment
objectives of the Fund will be achieved. Reasonable appreciation in favorable
periods and conservation of principal in adverse times are objectives that
require flexibility in managing
=======================================--=======================================
2
<PAGE>
DODGE & COX
======================================--========================================
Balanced Fund
- --------------------------------------------------------------------------------
the assets of the Fund under constantly changing investment conditions.
Therefore the proportions held in common and preferred stocks and bonds are
revised by Dodge & Cox when considered advisable in light of its appraisal of
business and investment prospects. Under normal market conditions, it is the
policy of the Fund to maintain no more than approximately 75% of its total
assets in common stocks and that portion of the value of convertible securities
attributable to the conversion right. Bonds are held for their relative
stability of principal and income as well as for a reserve which can be used to
take advantage of investment opportunities. The Fund may also invest up to 20%
of its total assets in U.S. dollar-denominated securities of foreign issuers
traded in the U.S. (such as American Depositary Receipts or ADRs). Moderate
reserves in cash or short-term fixed income securities may be held from time to
time as Dodge & Cox may deem advisable. Further information about specific
investments is provided under "Additional Information on Investments".
It is the Fund's policy to invest in investment grade debt securities rated in
the top four rating categories by either Moody's Investors Service ("Moody's")
(Aaa, Aa, A, Baa) or Standard & Poor's Ratings Group ("S&P") (AAA, AA, A, BBB).
Securities rated Baa or BBB may have speculative characteristics. Securities
that are downgraded below Baa or BBB subsequent to purchase may continue to be
held by the Fund, if Dodge & Cox believes it advantageous to do so. Unrated debt
securities may be purchased if they are, in the opinion of Dodge & Cox, of
equivalent quality to debt securities rated at least A by Moody's and S&P.
The Fund's policies as described above may be changed without shareholder
approval; however these policies will not be changed without notice to
shareholders. The following policies may not be changed without shareholder
approval:
A substantial position will be maintained in common stocks which in the
view of Dodge & Cox have a favorable outlook for long-term growth of
principal and income. Prospective earnings and dividends are major
considerations in these stock selections. The level of security prices and
the trend of business activity are considered in determining the total
investment position of the Fund in equities at any time. Individual
securities are selected with an emphasis on financial strength and a sound
economic background.
In an attempt to minimize unforeseen risks in single securities, the Fund seeks
to provide adequate investment diversification. Investments made in any one
stock or bond issue, with the exception of U.S. government securities, are
seldom in excess of 2% of the total assets of the Fund. Although there is no
restriction on the number of changes in security holdings, purchases are made
with a view to long-term holding and not for short-term trading purposes. (The
Fund's portfolio turnover rates for the fiscal years ended December 31, 1996,
1995 and 1994 were 17%, 20% and 20%, respectively.) However, during rapidly
changing economic, market and political conditions, there may necessarily be
more portfolio changes than in a more stable period. It is the general practice
of the Fund to invest in securities with ready markets, mainly issues listed on
national securities exchanges.
- --------------------------------------------------------------------------------
Investment Restrictions
The Fund has adopted certain restrictions designed to achieve diversification of
investment and to reduce investment risk. The Fund may not: (a) Invest more than
5% of the value of its total assets in the securities of any one issuer except
the U.S. Government, nor acquire more than 10% of the voting securities of any
one issuer; (b) Concentrate investments of more than 25% of the value of its
total
======================================--========================================
3
<PAGE>
DODGE & COX
======================================--========================================
Balanced Fund
assets in any one industry; (c) Borrow money except as a temporary measure for
extraordinary or emergency purposes; (d) Make loans to other persons except this
shall not exclude the purchase of publicly issued debt securities of a type
purchased by institutional investors. The investment restrictions described in
this paragraph and in the Statement of Additional Information may be changed
only with the approval of the Fund's shareholders.
- --------------------------------------------------------------------------------
Investment Risks
You should understand that all investments involve risks, and there can be no
guarantee against loss resulting from an investment in the Fund, nor can there
be any assurance that the Fund's investment objectives will be attained. There
are further risk factors described elsewhere in this prospectus and in the
Statement of Additional Information.
Investments in common stock in general are subject to market risks that cause
their prices to fluctuate over time, i.e., the possibility that stock prices
will decline over short or even extended periods. Prices of bonds in the Fund
are sensitive to changes in the market level of interest rates. In general, as
interest rates rise, the prices of fixed-income securities fall and conversely,
as interest rates fall, the prices of these securities rise. Yields on short,
intermediate, and long-term securities are dependent on a variety of factors,
including the general conditions of the money and bond markets, the size of a
particular offering, the maturity of the obligation, and the credit quality and
rating of the issue. Debt securities with longer maturities tend to have higher
yields and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower yields.
Furthermore, because yield levels on securities vary with changing interest
rates, no specific yield on shares of the Fund can be guaranteed. Since the bond
portion of the Fund's portfolio will be invested primarily in higher quality
debt securities, the Fund may not yield as high a level of current income as
funds that invest primarily in lower quality debt securities which generally
have less liquidity, greater market risk and greater price fluctuation. The
value of stocks and bonds may also be affected by changes in the financial
condition of, and other events affecting, specific issuers. Fluctuations in the
value of the securities in which the Fund invests will cause the Fund's share
price to fluctuate. An investment in the Fund therefore may be more suitable for
long-term investors who can bear the risk of short and long-term fluctuations in
the Fund's share price.
Foreign securities involve some special risks such as exposure to potentially
adverse local political and economic developments; nationalization and exchange
controls, potentially lower liquidity and higher volatility, possible problems
arising from accounting, disclosure, settlement, and regulatory practices that
differ from U.S. standards; foreign taxes; and the risk that fluctuations in
foreign exchange rates will decrease the investment's value (although favorable
changes can increase its value).
The Fund, with its mixture of investments in common stocks and bonds, may entail
less investment risk (and a potentially lower return) than a mutual fund
investing only in common stocks.
- --------------------------------------------------------------------------------
Additional Information on Investments
Common and Preferred Stocks. Stocks represent shares of ownership in a company.
Generally, preferred stock has a specified dividend and ranks after bonds and
before common stocks in its claim on income for dividend payments and on assets
should the company be liquidated. After other claims are satisfied, common
stockholders participate in company profits on a pro rata basis; profits may be
paid out in dividends or reinvested in the company to help it grow. Increases
and decreases in earn-
======================================--========================================
4
<PAGE>
DODGE & COX
======================================--========================================
Balanced Fund
ings are usually reflected in a company's stock price, so common stocks
generally have the greatest appreciation and depreciation potential of all
corporate securities.
Convertible Securities. The Fund may invest in debt or preferred equity
securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than nonconvertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent years,
convertibles have been developed which combine higher or lower current income
with other features.
Foreign Securities. The Fund may invest in U.S. dollar-denominated securities of
foreign issuers traded in the U.S. (such as ADRs). Such investments increase a
portfolio's diversification and may enhance return, but they also involve some
special risks.
U.S. Government Obligations. A portion of the Fund may be invested in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Some of the obligations purchased by the Fund are backed by
the full faith and credit of the U.S. Government and are guaranteed as to both
principal and interest by the U.S. Treasury. Examples of these include direct
obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and bonds,
or indirect obligations of the U.S. Treasury, such as obligations of the
Government National Mortgage Association, the Maritime Administration, the
Farmers Home Administration and the Department of Veterans Affairs.
While the obligations of many of the agencies and instrumentalities of the U.S.
Government are not direct obligations of the U.S. Treasury, they are generally
backed indirectly by the U.S. Government. Some of the agencies are indirectly
backed by their right to borrow from the U.S. Government, such as the Federal
Financing Bank, the Federal Home Loan Bank and the U.S. Postal Service. Others
are supported solely by the credit of the agency or instrumentality itself, but
are given additional support due to the U.S. Treasury's authority to purchase
their outstanding debt obligations. These agencies include the Federal Farm
Credit Banks, the Federal Home Loan Mortgage Corporation and the Federal
National Mortgage Association. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government established or
sponsored agencies. Furthermore, with respect to the U.S. Government securities
purchased by the Fund, guarantees as to the timely payment of principal and
interest do not extend to the value or yield of these securities nor do they
extend to the value of the Fund's shares. The Fund may invest in these
securities if it believes they offer an expected return commensurate with the
risks assumed.
Mortgage Pass-Through Securities. The Fund may invest a portion of its assets in
mortgage pass-through securities which are guaranteed by an agency of the U.S.
Government or are issued by a private entity. These securities represent
ownership in "pools" of mortgage loans and are called "pass-throughs" because
principal and interest payments are passed through to security holders monthly.
The security holder may also receive unscheduled principal payments representing
prepayments of the underlying mortgage loans. When the Fund reinvests the
principal and interest payments, it may receive a rate of interest which is
either higher or lower than the rate on the existing mortgage.
During periods of declining interest rates there is increased likelihood that
mortgage securities may be prepaid. Such prepayment would most likely be
reinvested at lower rates. On the other hand, if the pass-through securities had
been purchased at a discount, then such prepayment of principal may benefit the
portfolio.
======================================--========================================
5
<PAGE>
DODGE & COX
======================================--========================================
Balanced Fund
Collateralized Mortgage Obligations. Collateralized Mortgage Obligations
("CMOs") are private entity or U.S. Government agency-issued multi-class bonds
that are collateralized by U.S. agency-guaranteed mortgage pass-through
securities. The issuer typically issues several classes, or "tranches" of bonds,
the debt service of which is provided by the principal and interest payments
from the mortgage pass-through securities in the trust. Each of these tranches
is valued and traded separately based on its distinct cash flow characteristics.
Dodge & Cox will purchase a tranche with the weighted-average life and cash flow
characteristics that it believes will contribute to achieving the objectives of
the Fund.
All CMOs purchased by the Fund will have a AAA rating by either S&P or Moody's,
the major rating services. To qualify for this rating, a CMO is structured so
that even under the most conservative prepayment and reinvestment assumptions,
the principal and interest payments from the collateral are expected to meet or
exceed the cash flow obligations of all the tranches of the CMO. However, there
are risks associated with CMOs which relate to the risks of the underlying
mortgage pass-through securities (i.e., an increase or decrease in prepayment
rates, resulting from a decrease or increase in mortgage interest rates, will
affect the yield, average life and price of CMOs). In a falling interest rate
environment, the mortgage securities may be prepaid faster than the assumed
rate. In this scenario, the prepayments of principal will generally be
reinvested at a rate which is lower than the rate that the security holder is
currently receiving. Conversely, in a rising interest rate environment, the
mortgage collateral may be prepaid at a rate which is slower than the assumed
rate. In this case, the cash flow of the bond decreases. A reduced prepayment
rate effectively lengthens the time period the security will be outstanding and
may adversely affect the value of the security.
- --------------------------------------------------------------------------------
Income Dividends and Capital Gain Distributions
Dividend and capital gain distributions are reinvested in additional Fund shares
in your account unless you select another option on your Account Application
Form. The advantage of reinvesting distributions arises from compounding; that
is, you receive income dividends and capital gain distributions on a rising
number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via electronic transfer using the Automated Clearing House (ACH)
network. If the Post Office cannot deliver your check, or if your check remains
uncashed for six months, the Fund reserves the right to reinvest your
distribution check in your account at the Fund's then current net asset value
per share (NAV) and to reinvest all subsequent distributions in shares of the
Fund.
Income dividends
. The Fund declares and pays dividends (if any) quarterly in March, June,
September and December.
Capital gain distributions
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If the Fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month. If a second distribution is necessary,
it is usually declared and paid in March.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you during the previous year.
This information will also be reported to the IRS.
======================================--========================================
6
<PAGE>
DODGE & COX
======================================--========================================
Balanced Fund
- --------------------------------------------------------------------------------
How to Purchase Shares
Minimum Initial Investment: $2,500; $1,000 for IRA accounts
Subsequent Minimum Investment: $100
By Mail: Please make your check payable to Dodge & Cox Balanced Fund
(otherwise it will be returned) and send your check together with the Account
Application Form to the address below. The Fund does not accept third party
checks (except for properly endorsed IRA Rollover checks).
Regular Mail Mailgram, Express, Certified or Registered Mail
Dodge & Cox Balanced Fund Dodge & Cox Balanced Fund
c/o Firstar Trust Company c/o Firstar Trust Company
P.O. Box 701 615 East Michigan Street, Third Floor
Milwaukee, WI 53201-0701 Milwaukee, WI 53202-5207
By Wire: To purchase shares in the Fund by Federal wire transfer, you should
request that your bank transmit funds to:
Firstar Bank, ABA# 0750-00022
For Credit to: Mutual Fund Services, Account #112-952-137
For Further Credit: Dodge & Cox Balanced Fund,
[shareholder account number], [name of account]
Prior to having the funds wired, you should call Firstar Trust Company at 1-800-
621-3979 and advise the bank that the funds are being wired. Investors making
initial investments by wire must promptly complete an Account Application Form
and mail it to the Fund, c/o Firstar Trust Company, at either of the addresses
listed above. No account services will be established until the completed
application has been received by the Fund. IRA accounts cannot be opened by
wire.
By Telephone: By using the Fund's telephone purchase option, you may make
subsequent investments directly from your bank account. To establish the
telephone purchase option for your account, complete the appropriate section on
the Account Application Form. Only bank accounts held at domestic financial
institutions that are Automated Clearing House (ACH) members may be used for
telephone transactions. To make subsequent investments by telephone, call 1-800-
621-3979. This option will become effective approximately 15 business days after
the Account Application Form is received. The price you pay for your shares will
be the next price the Fund computes after the Fund receives your investment from
your bank, which is usually three business days after you authorize the
transfer. If you want to make an investment the same day, you must invest by
wire. You may not use telephone transactions for initial purchases of the Fund's
shares. (See "Telephone Transactions.")
Additional Information about Purchases: All subscriptions are subject to
acceptance by the Fund, and the price of the shares will be the NAV which is
next computed after receipt by the Fund's transfer agent, or other authorized
agent or sub-agent, of the subscription in proper form (see "Pricing of
Shares"). All purchases must be paid for in U.S. dollars; checks must be drawn
on U.S. banks. If your payment is not received or you pay with a check or ACH
transfer that does not clear, your purchase will be canceled. You will be
responsible for any losses or expenses (including a $20 fee) incurred by the
Fund or transfer agent, and the Fund can redeem shares you own in this or
another identically registered Dodge & Cox Fund account as reimbursement. The
Fund and its agents have the right to reject or cancel any purchase, exchange,
or redemption due to nonpayment. All subscriptions will be invested in full and
fractional shares and you will receive a confirmation of all transactions.
======================================--========================================
7
<PAGE>
DODGE & COX
======================================--========================================
Balanced Fund
Purchases through the Automatic Investment Plan will be confirmed at least
quarterly. Certificates (for full shares only) are not issued unless requested
by you.
A Social Security or Taxpayer Identification Number must be supplied and
certified on the Account Application Form before an account can be established.
If you fail to furnish the Fund with your correct Social Security or Taxpayer
Identification Number, the Fund may be required to withhold Federal income tax
at a rate of 31% ("backup withholding") from dividends, capital gain
distributions and redemptions.
The purchase or redemption of shares through broker-dealers or other financial
institutions may be subject to a service fee by those entities. The Fund and
its agents reserve the right to accept initial purchases by telephone; to cancel
or rescind any purchase or exchange (for example, if an account has been
restricted due to excessive trading or fraud) upon notice to the shareholder
within five business days of the trade; to freeze any account and temporarily
suspend services on the account when notice has been received of a dispute
between the registered or beneficial account owners or there is reason to
believe a fraudulent transaction may occur; to otherwise modify the conditions
of purchase and any services at any time; or to act on instructions believed to
be genuine.
- --------------------------------------------------------------------------------
How To Redeem Shares
By Mail: Your written instructions to redeem should be sent to the appropriate
address below:
Regular Mail Mailgram, Express, Certified or Registered Mail
Dodge & Cox Balanced Fund Dodge & Cox Balanced Fund
c/o Firstar Trust Company c/o Firstar Trust Company
P.O. Box 701 615 East Michigan Street, Third Floor
Milwaukee, WI 53201-0701 Milwaukee, WI 53202-5207
The request must specify your name, account number, and dollar amount or number
of shares redeemed, and be properly signed. The Fund requires the signatures of
all owners exactly as registered, and possibly a signature guarantee (see
"Signature Guarantees'' below).
By Telephone: Telephone redemption requests can be initiated by calling Firstar
Trust Company at 1-800-621-3979. (See "Telephone Transactions.") Telephone
redemption requests for IRA accounts will not be accepted.
Redemption payments may be made by check, wire or ACH:
By Check: Checks will be made payable to you and will be sent to your address of
record. If the proceeds of the redemption are requested to be sent to other
than the address of record or if the address of record has been changed within
15 days of the redemption request, the request must be in writing with your
signature(s) guaranteed.
By Wire: The Fund will wire redemption proceeds only to the bank account
designated on the initial Account Application Form or in written instructions --
with signature guarantee -- received in advance of the redemption order. Wire
redemption requests are subject to a $12 charge, which is subject to change
without notice.
======================================--========================================
8
<PAGE>
DODGE & COX
=======================================--=======================================
Balanced Fund
By ACH: Redemption proceeds can be sent to your bank account by ACH transfer.
You can elect this option by completing the appropriate section of the Account
Application Form. If money is moved by ACH transfer, you will not be charged by
the Fund for these services. There is a $100 minimum per ACH transfer.
Signature Guarantees: You may need to have your signature guaranteed in certain
situations, such as:
. Written requests to wire redemption proceeds (if not previously authorized on
the Account Application Form).
. Sending redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a Dodge & Cox account with a different
registration (name/ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to the Fund. The Fund cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
Redemptions-in-Kind: The Fund reserves the right, if conditions exist which make
cash payments undesirable, to honor any request for redemption by making payment
in whole or in part in readily marketable securities chosen by the Fund and
valued as they are for purposes of computing the Fund's NAV (a redemption-in-
kind). If payment is made in securities, a shareholder may incur transaction
expenses in converting these securities to cash. The Fund has elected, however,
to be governed by Rule 18f-1 under the Investment Company Act, as a result of
which the Fund is obligated to redeem shares, with respect to any one
shareholder during any 90-day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund at the beginning of the
period.
IRA Accounts: Redemption requests for IRA accounts must be in writing and must
include instructions regarding Federal income tax withholding. Unless you have
elected otherwise, your redemptions will be subject to income tax withholding.
Additional Information about Redemptions: Under certain circumstances, the
Fund's transfer agent may require additional documents, including stock powers
with signatures guaranteed, trust instruments, death certificates, appointments
as executor and certificates of corporate authority. If certificates have been
issued for any of the shares to be redeemed, such certificates must be endorsed
with signatures guaranteed and delivered to the Fund's transfer agent. For any
questions regarding documentation or signature requirements for trusts, estates,
corporations, etc., please call Firstar Trust Company (1-800-621-3979).
The redemption price will be the NAV which is next computed after receipt of a
redemption request in good order (see "Pricing of Shares") by Firstar Trust
Company or other authorized agent or sub-agent. The redemption price may be
more or less than your cost, depending upon the market value of the Fund's
investments at the time of redemption. Redemption payments are made as soon as
practicable, generally within two business days, but no later than the seventh
day after the effective date for redemption, or within such shorter period as
may legally be required. If shares are redeemed
======================================--========================================
9
<PAGE>
DODGE & COX
======================================--========================================
Balanced Fund
within two weeks of purchase, the Fund may delay payment of the redemption
proceeds until your purchase check has cleared, which may take up to 15 days.
There is no such delay when shares being redeemed were purchased by wiring
Federal Funds.
The Fund may suspend your redemption right or postpone payment at times when the
New York Stock Exchange is closed or under any emergency circumstances as
determined by the SEC. If the Post Office cannot deliver your check, or if your
check remains uncashed for six months, the Fund reserves the right to reinvest
your redemption proceeds in your account at the then current NAV.
- --------------------------------------------------------------------------------
Exchanging Shares
You may exchange your shares for shares of another Dodge & Cox Fund, provided
that the registration and Taxpayer Identification Number of both accounts are
identical. An exchange may be initiated by contacting the Fund's transfer agent
in writing or by telephone. (See "Telephone Transactions".) An exchange is
treated as a redemption and a purchase; and, therefore, you may realize a
taxable gain or loss. You should obtain and read a current prospectus of the
fund into which the exchange is being made.
There is a $1,000 minimum for all exchanges. If a new account is being opened
by exchange, the minimum investment requirements must be met. After the
exchange, the account from which the exchange is made must have a remaining
balance of at least $2,500 ($1,000 for an IRA account) in order to remain open.
The Fund reserves the right to terminate or materially modify the exchange
privilege upon 60 days advance notice to shareholders.
- --------------------------------------------------------------------------------
Telephone Transactions
By using telephone purchase, redemption and/or exchange options, you agree to
hold the Fund, Dodge & Cox (any of its affiliated mutual funds), Firstar Trust
Company, and each of their respective directors, trustees, officers, employees
and agents harmless from any losses, expenses, costs or liability (including
attorney fees) which may be incurred in connection with the exercise of these
privileges. Generally, all shareholders are automatically eligible to use these
options. However, you may elect to decline these options in the Account
Application Form or by writing Firstar Trust Company. (You may also reinstate
them at any time by writing Firstar Trust Company.) If the Fund does not employ
reasonable procedures to confirm that the instructions received from any person
with appropriate account information are genuine, the Fund may be liable for
losses due to unauthorized or fraudulent instructions. If you are unable to
reach the Fund by telephone because of technical difficulties, market
conditions, or a natural disaster, purchase, redemption and exchange requests
should be made by regular or express mail. If an account has multiple owners,
the Fund may rely on the instructions of any one account owner. You should note
that purchase and sales orders will not be canceled or modified once received in
good order.
Purchases and sales should be made for long-term investment purposes only.
Because excessive trading may be disadvantageous to the Fund, the Fund reserves
the right to limit purchase and sale transactions, including exchanges, when a
pattern of frequent trading appears evident.
- --------------------------------------------------------------------------------
Transfer of Shares
Changes in account registrations -- such as changing the name(s) on your
account, or transferring shares to another person or legal entity -- must be
submitted in writing and require a signature guarantee. Please call Firstar
Trust Company (1-800-621-3979) for full instructions.
======================================--========================================
10
<PAGE>
DODGE & COX
======================================--========================================
Balanced Fund
- --------------------------------------------------------------------------------
Pricing of Shares
The share price (also called "net asset value per share" or "NAV") for the Fund
is calculated at 4:00 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the Fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
If the Fund, or its authorized agent or subagent receives your request in good
order by 4 p.m. ET, your transaction will be priced at that day's NAV. If your
request is received after 4 p.m., it will be priced at the next business day's
NAV.
The Fund cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
The time at which transactions and shares are priced and the time until which
orders are accepted may be changed in case of an emergency or if the New York
Stock Exchange closes at a time other than 4 p.m. ET.
- --------------------------------------------------------------------------------
Shareholder Services
The Fund offers you the following services: (Please call or write the Fund (1-
800-621-3979) for applications and additional information.)
Automatic Investment Plan: You may make regular monthly or quarterly investments
of $100 or more through automatic deductions from your bank account.
Systematic Withdrawal Plan: If you own $10,000 or more of the Fund's shares, you
may receive regular monthly or quarterly payments of $50 or more. Shares will
automatically be redeemed at NAV to make the withdrawal payments.
Reinvestment Plan: You may direct that dividend and capital gains distributions
be reinvested in additional Fund shares.
Individual Retirement Account (IRA): If you have earned income or are entitled
to certain distributions from eligible retirement plans, you may make or
authorize contributions to your own Individual Retirement Account. The Fund has
an IRA Plan available for shareholders of the Fund.
- --------------------------------------------------------------------------------
Performance Information
The Fund may include figures indicating its total return or yield in
advertisements or reports to shareholders or prospective investors. Quotations
of the Fund's average annual total rate of return will be expressed in terms of
the average annual compounded rate of return on a hypothetical investment in the
Fund over a specified period, will reflect the deduction of a proportional share
of Fund expenses (on an annual basis) and will assume that all dividends and
capital gains distributions are reinvested when paid. Total return indicates
the positive or negative rate of return that an investor would have earned from
reinvested dividends and distributions and changes in net asset value per share
during the period. Quotations of yield, as defined by the SEC will be based on
net investment income per share earned during a given thirty-day period and will
be computed by dividing this net investment income by the net asset value per
share on the last day of the period and annualizing the results. Yield does not
directly reflect changes in net asset value per share which occurred during the
period.
======================================--========================================
11
<PAGE>
DODGE & COX
=======================================--=======================================
Balanced Fund
Performance information for the Fund may be compared, in reports and promotional
literature to: (i) the Standard & Poor's 500 Stock Index, the Dow Jones
Industrial Average, the Lehman Brothers Aggregate Bond Index, or various other
unmanaged indices of the performance of various types of investments, so that
investors may compare the Fund's results with those of indices widely regarded
by investors as representative of the security markets in general, and (ii) the
performance of other mutual funds. Unmanaged indices may assume the
reinvestment of income distributions, but generally do not reflect deductions
for administrative and management costs and expenses.
Performance information for the Fund reflects only the performance of
hypothetical investments in the Fund during the particular time periods on which
the calculations are based. Such information should not be considered as
representative of the performance of the Fund in the future because, unlike some
bank deposits or other investments which pay a fixed yield for a stated period
of time for a fixed principal amount, the performance of the Fund will vary
based not only on the current market value of the securities held in its
portfolio, but also on changes in the Fund's expenses and in the asset size of
the Fund. Performance information should be considered in light of the Fund's
investment objectives and policies, the types and quality of the Fund's
portfolio investments, market conditions during the particular time period and
operating expenses. For a description of the methods used to determine the
Fund's total return and yield, see "Performance Information" in the Statement of
Additional Information. Further information about the performance of the Fund
is contained in the Fund's Annual Report which may be obtained without charge
from the Fund.
- --------------------------------------------------------------------------------
Fund Organization and Management
Fund Organization and Voting Rights. The Fund, organized as a California common
law trust in 1931, is registered as an open-end, diversified management
investment company under the Investment Company Act. The Fund's Board of
Trustees supervises Fund operations and performs duties required by applicable
state and Federal law. The Fund has one class of beneficial shares and each
share evidences an equal beneficial ownership in the Fund and there is no limit
to the number that may be issued. All shares have the same rights as to
redemption, dividends, and in liquidation. All shares issued are fully paid and
non-assessable, are transferable, and are redeemable at net asset value upon
demand of the shareholder. Shares have no preemptive or conversion rights. The
Fund is not required to hold annual meetings of shareholders.
Investment Manager. Dodge & Cox, a California corporation, has served as
investment manager to the Fund since inception. Dodge & Cox is one of the
oldest professional investment management firms in the United States, having
acted continuously as investment managers since 1930. The Fund's investments
are managed by Dodge & Cox's Investment Policy Committee, and no one person is
primarily responsible for making investment recommendations to the Committee.
Dodge & Cox is located at One Sansome Street, 35th Floor, San Francisco,
California 94104.
Dodge & Cox's activities are devoted to investment research and the supervision
of investment accounts for individuals and institutions. In addition, Dodge &
Cox is investment manager to other registered mutual funds, the Dodge & Cox
Stock Fund since 1965 and the Dodge & Cox Income Fund since 1989. The Fund pays
Dodge & Cox a management fee which is payable monthly at the annual rate of
0.50% of the average daily net asset value of the Fund.
======================================--========================================
12
<PAGE>
DODGE & COX
======================================--========================================
Balanced Fund
Dodge & Cox has adopted a Code of Ethics that restricts personal investing
practices by its employees. Among other provisions, the Code of Ethics requires
that employees with access to information about the purchase or sale of
securities in the Fund's portfolio obtain preclearance before executing certain
personal trades. The Code of Ethics is designed to ensure that the interests of
the Fund's shareholders come before the interests of the people who manage the
Fund.
- --------------------------------------------------------------------------------
Portfolio Transactions
Orders for the Fund's portfolio securities transactions are placed by Dodge &
Cox, which seeks to obtain the best available prices, taking into account the
costs and quality of executions. In the over-the-counter market, purchases and
sales are transacted directly with principal market-makers except in those
circumstances where it appears better prices and executions are available
elsewhere.
Subject to the above policy, when two or more brokers are in a position to offer
comparable prices and executions, preference may be given to brokers that have
provided investment research, statistical, and other related services for the
benefit of the Fund and/or of other funds and accounts over which Dodge & Cox
exercises investment and brokerage discretion.
- --------------------------------------------------------------------------------
Expenses
In addition to Dodge & Cox's fee, the Fund pays other direct expenses, including
custodian, transfer agent, legal, accounting and audit fees; costs of preparing
and printing prospectuses and reports sent to shareholders; registration fees
and expenses; proxy and annual meeting expenses (if any); and trustees fees and
expenses. In 1996 the ratio of total operating expenses to average net assets
of the Fund was 0.56%. Dodge & Cox furnishes personnel and other facilities
necessary for the operation of the Fund for which it receives no additional
compensation.
- --------------------------------------------------------------------------------
Federal Income Taxes
The Fund intends to qualify each year as a regulated investment company under
the Internal Revenue Code. A regulated investment company that distributes for
the year all of its ordinary income and capital gains pays no tax on its
ordinary income or capital gains. A regulated investment company that fails to
distribute all of its ordinary income and capital gains must pay tax on the
undistributed amounts at a maximum rate of 35%. If the company does not
distribute at least 98% of its ordinary income and capital gains, it must pay an
additional 4% excise tax on the amount by which the 98% requirements exceed
actual distributions.
Distributions designated as long-term capital gains distributions are taxed to a
shareholder as though they were long-term capital gains realized by the
shareholder whether received in cash or shares of the Fund and regardless of the
period of time shares of the Fund have been held. All taxable distributions,
except for long-term capital gains distributions, are taxed to a shareholder as
ordinary income dividends whether received in cash or shares of the Fund. Part
of the Fund's ordinary dividends will be eligible for the 70% deduction for
dividends received by corporations. State taxation of distributions to
shareholders varies from state to state. You should consult your own tax
adviser about the Federal, state and local tax consequences of an investment in
the Fund.
- --------------------------------------------------------------------------------
Custodian and Transfer Agent
Firstar Trust Company, P.O. Box 701, Milwaukee, Wisconsin 53201-0701, (1-800-
621-3979), acts as custodian of all cash and securities of the Fund and receives
and disburses cash and securities for the account of the Fund. Firstar Trust
Company also acts as transfer and dividend disbursing agent for the Fund.
======================================--========================================
13
<PAGE>
DODGE & COX
=======================================--=======================================
Balanced Fund
- --------------------------------------------------------------------------------
Reports to Shareholders
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio characteristics. To reduce Fund expenses, the Fund attempts to
identify related shareholders within a household and send only one copy of a
report. Call 1-800-621-3979 if you would like an additional free copy of the
Fund's financial report.
- --------------------------------------------------------------------------------
Shareholder Inquiries
For Fund literature and information, or if you have questions concerning your
account, please call Firstar Trust Company (1-800-621-3979).
=======================================--=======================================
14
<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
INVESTMENT MANAGER
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
DODGE & COX BALANCED FUND
c/o Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
Telephone (800) 621-3979
---------------------------------------------------
D O D G E & C O X
---------------------------------------------------
Balanced Fund
Established 1931
-----------------------------------------------
-----------------------------------------------
Prospectus
April 29, 1997
-----------------------------------------------
-----------------------------------------------
---------------------------------------------------
[LOGO OF PRINTED ON RECYCLED PAPER APPEARS HERE]
4/97 BF PR
<PAGE>
DODGE & COX BALANCED FUND
c/o Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
(800) 621-3979
STATEMENT OF ADDITIONAL INFORMATION
Dated April 29, 1997
This Statement of Additional Information is not the Fund's Prospectus,
but provides additional information which should be read in conjunction with the
Fund's Prospectus dated April 29, 1997. The Fund's Prospectus and most recent
annual financial statements may be obtained from the Fund at no charge by
writing or telephoning the Fund at the address or telephone number shown above.
<TABLE>
<CAPTION>
----------------------------
TABLE OF CONTENTS
Page
----
<S> <C>
Investment Objectives and Policies................ 1
Risk Factors...................................... 4
Investment Restrictions........................... 7
Purchase, Redemption, and Pricing of Shares....... 8
Performance Information........................... 8
Officers and Trustees............................. 9
Investment Manager................................ 11
Portfolio Transactions............................ 12
Additional Tax Considerations..................... 13
Independent Accountants........................... 14
Financial Statements.............................. 14
----------------------------
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The objectives of the Fund are to provide shareholders with regular
income, conservation of principal and an opportunity for long-term growth of
principal and income. However, it should be recognized that the market risks
inherent in investment cannot be avoided nor is there any assurance that the
investment objectives of the Fund will be achieved. Reasonable appreciation in
favorable periods and conservation of principal in adverse times are objectives
that require flexibility in managing the assets of the Fund under constantly
changing investment conditions. There can be no assurance that the Fund will
achieve its investment objectives.
Therefore, the proportions of the Fund's portfolio invested in common
and preferred stocks and bonds are revised by the Fund's manager, Dodge & Cox,
when considered advisable in light of Dodge & Cox's appraisal of business and
investment prospects. Under normal market conditions, the Fund seeks to maintain
no more than approximately 75% of its total assets in common stocks and that
portion of the value of convertible securities attributable to the conversion
right.
Bonds are held for their relative stability of principal and income as
well as for a reserve which can be used to take advantage of investment
opportunities. The Fund may invest up to 20% of its total assets in U.S.
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Moderate reserves in cash or short-term fixed income securities may be
held from time to time as Dodge & Cox may deem advisable.
In an attempt to reduce unforeseen risks in single securities, the Fund
seeks to achieve adequate investment diversification. The Fund does not
concentrate its investments in any particular industry or group of industries
but seeks instead to diversify investments among different industries as well as
among individual companies. The amount invested in any particular industry will
vary from time to time in accordance with the judgment of Dodge & Cox.
Although there is no restriction on the number of changes in security
holdings, purchases are made with a view to long-term holding and not for
short-term trading purposes. During rapidly changing economic and political
conditions, there may necessarily be more portfolio changes than in a more
stable period.
It is the policy to invest in investment-grade bonds rated in the top
four rating categories by either Moody's Investors Service ("Moody's") (Aaa, Aa,
A, Baa) or Standard & Poor's Ratings Group ("S&P") (AAA, AA, A, BBB). Securities
rated Baa or BBB may have speculative characteristics. Securities that are
downgraded below Baa or BBB subsequent to purchase may continue to be held by
the Fund, if Dodge & Cox believes it advantageous to do so. Unrated bonds may be
purchased if such securities are, in the opinion of Dodge & Cox, of equivalent
quality to bonds rated at least A by Moody's and S&P.
The Fund's policies as set forth above may be changed without
shareholder approval; however, these policies will not be changed without notice
to shareholders. The following policies may not be changed without shareholder
approval (as defined below):
The Fund will maintain a substantial position in common stocks which in
the view of Dodge & Cox have a favorable outlook for long-term growth
of principal and income. Prospective earnings and dividends are major
considerations in these stock selections. The level of security prices
and the trend of business activity are given weight in determining the
total investment position of the Fund in equities at any time.
Individual securities are selected with an emphasis on financial
strength and a sound economic background.
Investments made in any one stock or bond issue, with the exception of
U.S. government securities, are seldom in excess of 2% of the total assets of
the Fund.
It is the general practice of the Fund to invest in securities with
ready markets, mainly issues listed on national securities exchanges. The Fund
has no present intention of making investments in securities which are
restricted as to resale under Federal securities laws. The Fund does not write
put and call options and has no present intention of writing such options.
-1-
<PAGE>
TYPES OF PORTFOLIO SECURITIES
In seeking to meet its investment objectives, the Fund will invest in
securities or instruments whose investment characteristics are consistent with
the Fund's investment program. The following further describes the principal
types of portfolio securities and investment management practices of the Fund.
COMMON AND PREFERRED STOCKS. Stocks represent shares of ownership in a company.
Generally, preferred stock has a specified dividend and ranks after bonds and
before common stocks in its claim on income for dividend payments and on assets
should the company be liquidated. After other claims are satisfied, common
stockholders participate in company profits on a pro rata basis; profits may be
paid out in dividends or reinvested in the company to help it grow. Increases
and decreases in earnings are usually reflected in a company's stock price, so
common stocks generally have the greatest appreciation and depreciation
potential of all corporate securities.
CONVERTIBLE SECURITIES AND WARRANTS. The Fund may invest in debt or preferred
equity securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stock dividend rates but lower than nonconvertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertibles have been developed which combine higher or lower
current income with other features. Warrants are options to buy a stated number
of shares of common stock at a specified price anytime during the life of the
warrants (generally two or more years).
FOREIGN SECURITIES. The Fund may invest in U.S. dollar denominated securities of
foreign issuers traded in the U.S. (such as ADRs).
U.S. GOVERNMENT OBLIGATIONS. A portion of the Fund may be invested in
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Some of the obligations purchased by the Fund are backed by
the full faith and credit of the U.S. government and are guaranteed as to both
principal and interest by the U.S. Treasury. Examples of these include direct
obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and bonds,
or indirect obligations of the U.S. Treasury, such as obligations of the
Government National Mortgage Association, the Maritime Administration, the
Farmers Home Administration, the Veterans Administration, the Federal Housing
Administration and the Export-Import Bank.
While the obligations of many of the agencies and instrumentalities of
the U.S. government are not direct obligations of the U.S. Treasury, they are
generally backed indirectly by the U.S. government. Some of the agencies are
indirectly backed by their right to borrow from the U.S. government, such as the
Federal Financing Bank, the Federal Home Loan Bank and the U.S. Postal Service.
Others are supported solely by the credit of the agency or instrumentality
itself, but are given additional support due to the U.S. Treasury's authority to
purchase their outstanding debt obligations. These agencies include the Federal
Farm Credit Banks, the Federal National Mortgage Association, the Federal Home
Loan Mortgage Corporation, and the Student Loan Marketing Association. No
assurance can be given that the U.S. government would provide financial support
to U.S. government established or sponsored agencies. Furthermore, with respect
to the U.S. government securities purchased by the Fund, guarantees as to the
timely payment of principal and interest do not extend to the value or yield of
these securities nor do they extend to the value of the Fund's shares. Dodge &
Cox will invest the Fund's assets in these securities if it believes they offer
an expected return commensurate with the risks assumed.
MORTGAGE PASS-THROUGH SECURITIES. In addition, the Fund may invest a portion of
its assets in mortgage pass-through securities which are guaranteed by an agency
of the U.S. government or are issued by a private entity. These securities
represent ownership in "pools" of mortgage loans and are called "pass-throughs"
because principal and interest payments are passed through to security holders
monthly. The security holder may also receive unscheduled principal payments
representing prepayments of the underlying mortgage loans. When the Fund
reinvests the principal and interest payments, it may receive a rate of interest
which is either higher or lower than the rate on the existing mortgage.
During periods of declining interest rates there is increased
likelihood that mortgage securities may be prepaid. Such prepayment would most
likely be reinvested at lower rates. On the other hand, if the pass-through
securities had been purchased at a discount, then such prepayments of principal
would benefit the Fund's portfolio.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized Mortgage Obligations
("CMOs") are private entity or U.S. government agency-issued multi-class bonds
that are collateralized by U.S. agency-guaranteed mortgage pass-through
securities. A CMO is created when the issuer purchases a collection of mortgage
pass-through securities
-2-
<PAGE>
("the collateral") and places these securities in a trust, which is administered
by an independent trustee. Next, the issuer typically issues several classes, or
"tranches" of bonds, the debt service of which is provided by the principal and
interest payments from the mortgage pass-through securities in the trust. Each
of these tranches is valued and traded separately based on its distinct cash
flow characteristics.
Although the mortgage pass-through collateral typically has monthly
payments of principal and interest, CMO bonds will generally have semiannual or
quarterly payments of principal and interest. Payments received from the
collateral are reinvested in short-term debt securities by the trustee between
payment dates on the CMO. On the CMO payment dates, the principal and interest
payments received from the collateral plus reinvestment income, are applied
first to pay interest on the bonds and then to repay principal. Generally, the
bonds are retired sequentially; the first payments of principal are applied to
retire the first tranche, while all other tranches receive interest only. Only
after the first tranche is retired do principal payments commence on the second
tranche. The process continues in this sequence until all tranches are retired.
At issuance, each CMO tranche has a stated final maturity date. The
stated final maturity date is the date by which the bonds would be completely
retired assuming standard amortization of principal but no prepayments of
principal on the underlying collateral. However, since it is likely that the
collateral will have principal prepayments, the CMO bonds are actually valued on
the basis of an assumed prepayment rate. The assumed prepayment rate is used in
the calculation of the securities' weighted-average life, a measure of the
securities' cash flow characteristics. Dodge & Cox will purchase the tranche
with the weighted-average life and cash flow characteristics that it believes
will contribute to achieving the objectives of the Fund.
All CMOs purchased by the Fund will have a AAA rating by either S&P or
Moody's. To qualify for this rating, a CMO is structured so that even under the
most conservative prepayment and reinvestment assumptions, the principal and
interest payments from the collateral are expected to meet or exceed the cash
flow obligations of all the tranches of the CMO. However, there are risks
associated with CMOs, which relate to the risks of the underlying mortgage
pass-through securities. In a falling interest rate environment, the mortgage
securities may be prepaid faster than the assumed rate. In this scenario, the
prepayments of principal will generally be reinvested at a rate which is lower
than the rate that the security holder is currently receiving. Conversely, in a
rising interest rate environment, the mortgage collateral may be prepaid at a
rate which is slower than the assumed rate. In this case, the cash flow of the
bond decreases. A reduced prepayment rate effectively lengthens the time period
the security will be outstanding and may adversely affect the value of the
security.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities
in which the Fund may invest are entities organized and operated solely for the
purpose of restructuring the investment characteristics of various securities.
These entities are typically organized by investment banking firms which receive
fees in connection with establishing each entity and arranging for the placement
of its securities. This type of restructuring involves the deposit with or
purchases by an entity, such as a corporation or trust, of specified instruments
and the issuance by that entity of one or more classes of securities (structured
investments) backed by, or representing interests in, the underlying
instruments. The cash flow on the underlying instruments may be apportioned
among the newly issued structured investments to create securities with
different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to structured investments is dependent on the extent of the cash flow on
the underlying instruments.
The Fund is permitted to invest in a class of structured investments
that is either subordinated or unsubordinated to the right of payment of another
class. Subordinated structured investments typically have higher yields and
present greater risks than unsubordinated structured investments. Although the
Fund's purchase of subordinated structured investments would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the limitations
placed on the extent of the Fund's assets that may be used for borrowing
activities.
Certain issuers of structured investments may be deemed to be
"investment companies" as defined in the Investment Company Act. As a result,
the Fund's investment in these structured investments may be limited by the
restrictions contained in the Investment Company Act.
WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. The Fund may purchase securities on
a when-issued or a delayed-delivery basis, that is, for payment and delivery on
a date later than normal settlement, but generally within 30 days.
The purchase price and yield on these securities are generally set at
the time of purchase. On the date that a security is purchased on a when-issued
basis, the Fund reserves liquid assets with a value at least as great as the
purchase price of the security, in a segregated account at the custodian bank,
as long as the obligation to purchase continues. The value of the
delayed-delivery security is reflected in the Fund's net asset value as of the
purchase
-3-
<PAGE>
date, however, no income accrues to the Fund from these securities prior to
their delivery to the Fund. The Fund makes such purchases for long-term
investment reasons, but may actually sell the securities prior to settlement
date if Dodge & Cox deems it advisable in seeking to achieve the objectives of
the Fund. The purchase of these types of securities may increase the Fund's
overall investment exposure and involves a risk of loss if the value of the
securities declines prior to the settlement date. Unsettled securities purchased
on a when-issued or delayed-delivery basis will not exceed 5% of the Fund's
total assets at any one time.
CASH POSITION. The Fund will hold a certain portion of its assets in U.S. dollar
denominated money market securities, including repurchase agreements, commercial
paper, and bank obligations in the two highest rating categories maturing in one
year or less. For temporary, defensive purposes, the Fund may invest without
limitation in such securities. This reserve position provides flexibility in
meeting redemptions, expenses, and the timing of new investments and serves as a
short-term defense during periods of unusual market volatility.
Bank Obligations. Certificates of deposit, bankers' acceptances, and
-----------------
other short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn on
a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The Fund may invest in U.S. banks, foreign branches of U.S. banks, U.S.
branches of foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible
-------------------------------------
corporate debt securities (such as bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates.
Commercial Paper. Short-term promissory notes issued by corporations
-----------------
primarily to finance short-term credit needs. Certain notes may have floating
or variable rates.
Repurchase Agreements. The Fund may enter into a repurchase agreement
----------------------
through which an investor (such as the Fund) purchases a security (known as the
"underlying security") from a well-established securities dealer or bank that is
a member of the Federal Reserve System. Any such dealer or bank will be on Dodge
& Cox's approved list and have a credit rating with respect to its short-term
debt of at least A1 by S&P, P1 by Moody's, or the equivalent rating by Dodge &
Cox. At that time, the bank or securities dealer agrees to repurchase the
underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will be
treated as illiquid securities. The Fund will only enter into repurchase
agreements where (i) the underlying securities are issued by the U.S.
government, its agencies and instrumentalities, (ii) the market value of the
underlying security, including interest accrued, will be at all times equal to
or exceed the value of the repurchase agreement, and (iii) payment for the
underlying security is made only upon physical delivery or evidence of
book-entry transfer to the account of the custodian or a bank acting as agent.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the underlying
security and losses, including: (a) possible decline in the value of the
underlying security during the period which the Fund seeks to enforce its rights
thereto; (b) possible subnormal levels of income and lack of access to income
during this period; and (c) expenses of enforcing its rights.
BORROWING MONEY. The Fund can borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. Such borrowing may be
collateralized with Fund assets, subject to restrictions.
RISK FACTORS
GENERAL
Because of its investment policy, the Fund may not be suitable or
appropriate for all investors. The Fund is not a money market fund and is not an
appropriate investment for those whose primary objective is principal stability.
The Fund will normally have a substantial portion of its assets in equity
securities (e.g., common stocks). This portion of the Fund's assets will be
subject to all of the risks of investing in the stock market. There is risk in
all investment. The value of the portfolio securities of the Fund will fluctuate
based upon market conditions. Although the Fund seeks to reduce risk by
investing in a diversified portfolio, such diversification does not eliminate
all risk. There can be no assurance that the Fund will achieve its investment
objectives.
-4-
<PAGE>
DEBT OBLIGATIONS
Although a substantial portion of the Fund's assets are invested in
common stocks, the Fund will invest in debt securities which hold the prospect
of contributing to the achievement of the Fund's objectives. Yields on short,
intermediate, and long-term securities are dependent on a variety of factors,
including the general conditions of the money and bond markets, the size of a
particular offering, the maturity of the obligation, and the credit quality and
rating of the issue. Debt securities with longer maturities tend to have higher
yields and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower yields. The
market prices of debt securities usually vary, depending upon available yields.
An increase in interest rates will generally reduce the value of portfolio
investments, and a decline in interest rates will generally increase the value
of portfolio investments. The ability of the Fund to achieve its investment
objectives is also dependent on the continuing ability of the issuers of the
debt securities in which the Fund invests to meet their obligations for the
payment of interest and principal when due. As discussed below, the Fund's
investment program permits it to hold investment grade securities that have been
downgraded. Since investors generally perceive that there are greater risks
associated with investment in lower quality securities, the yields from such
securities normally exceed those obtainable from higher quality securities.
However, the principal value of lower-rated securities generally will fluctuate
more widely than higher quality securities. Lower quality investments entail a
higher risk of default--that is, the nonpayment of interest and principal by the
issuer--than higher quality investments. Such securities are also subject to
special risks, discussed below. Although the Fund seeks to reduce risk by
portfolio diversification, credit analysis, and attention to trends in the
economy, industries and financial markets, such efforts will not eliminate all
risk.
After purchase by the Fund, a debt security may cease to be rated or
its rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, Dodge &
Cox will consider such event in its determination of whether the Fund should
continue to hold the security. To the extent that the ratings given by Moody's
or S&P may change as a result of changes in such organizations or their rating
systems, the Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in the
Prospectus.
SPECIAL RISKS OF HIGH YIELD INVESTING
As described above, under limited circumstances the Fund may hold low
quality bonds commonly referred to as "junk bonds". Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low and lower-medium
quality bonds involves greater investment risk, to the extent the Fund holds
such bonds, achievement of its investment objective will be more dependent on
Dodge & Cox's credit analysis than would be the case if the Fund was investing
in higher quality bonds. High yield bonds may be more susceptible to real or
perceived adverse economic conditions than investment grade bonds. A projection
of an economic downturn, or higher interest rates, for example, could cause a
decline in high yield bond prices because the advent of such events could lessen
the ability of highly leveraged issuers to make principal and interest payments
on their debt securities. In addition, the secondary trading market for high
yield bonds may be less liquid than the market for higher grade bonds, which can
adversely affect the ability of the Fund to dispose of its portfolio securities.
Bonds for which there is only a "thin" market can be more difficult to value
inasmuch as objective pricing data may be less available and judgment may play a
greater role in the valuation process.
FOREIGN SECURITIES
While the Fund emphasizes investments in companies domiciled in the
United States, it may invest in U.S. dollar-denominated securities of foreign
issuers.
RISK FACTORS OF FOREIGN INVESTING
There are special risks in foreign investing. Many of the risks are
more pronounced for investments in developing or emerging countries, such as
many of the countries of Southeast Asia, Latin America, Eastern Europe, and the
Middle East. The Fund has no present intention of investing in developing or
emerging countries.
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respect as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position. The
internal politics of certain foreign countries are not as stable as in the
United States. In addition, significant external political risks currently
affect some foreign countries.
-5-
<PAGE>
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies of
many foreign countries are heavily dependent upon international trade and are
accordingly affected by protective trade barriers and economic conditions of
their trading partners. The enactment by these trading partners of protectionist
trade legislation could have a significant adverse effect upon the securities
markets of such countries.
CURRENCY FLUCTUATIONS. Although the Fund will invest in U.S.
dollar-denominated foreign securities, the underlying securities will be
denominated in various currencies. Accordingly, a change in the value of any
such currency against the U.S. dollar will result in a corresponding change in
the U.S. dollar value of the Fund's assets. Such changes will also affect the
Fund's income. Generally, when a given currency appreciates against the dollar
(the dollar weakens), the value of securities denominated in that currency will
rise. When a given currency depreciates against the dollar (the dollar
strengthens), the value of securities denominated in that currency would be
expected to decline.
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may limit at times and preclude investment
in certain of such countries and may increase the cost and expenses of the Fund.
Investments by foreign investors are subject to a variety of restrictions. These
restrictions may take the form of prior governmental approval, limits on the
amount or type of securities held by foreigners, and limits on the types of
companies in which foreigners may invest. Additional or different restrictions
may be imposed at any time by these or other countries in which the Fund
invests. In addition, the repatriation of both investment income and capital
from some foreign countries is restricted and controlled under certain
regulations, including in some cases the need to obtain certain government
consents.
MARKET CHARACTERISTICS. Foreign stock markets are generally not as
developed or efficient as, and may be more volatile than, those in the United
States. While growing in volume, they usually have substantially less volume
than U.S. markets and the Fund's portfolio securities may be less liquid and
subject to more rapid and erratic price movements than securities of comparable
U.S. companies. Equity securities may trade at price/earnings multiples higher
than comparable United States securities and such levels may not be sustainable.
Fixed commissions on foreign stock exchanges are generally higher than
negotiated commissions on United States exchanges. There is generally less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in United States markets.
Such differences may include delays beyond periods customary in the United
States and practices, such as delivery of securities prior to receipt of
payment, which increase the likelihood of a "failed settlement." Failed
settlements can result in losses to the Fund.
INFORMATION AND SUPERVISION. There is generally less publicly available
information about foreign companies comparable to reports and ratings that are
published about companies in the United States. Foreign companies are also
generally not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies. It also may be more difficult to keep currently informed of
corporate actions which affect the prices of portfolio securities.
TAXES. The dividends and interest payable on certain of the Fund's
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders.
OTHER. With respect to certain foreign countries, there is the
possibility of adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect investments by U.S. persons in those countries.
-6-
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions. These restrictions, as
well as the Fund's investment objectives, cannot be changed without the approval
of the holders of a majority of the Fund's outstanding shares. The Investment
Company Act defines a majority as the lesser of (1) 67% or more of the voting
shares present at a meeting if the holders of more than 50% of the outstanding
voting shares are present or represented by proxy, or (2) more than 50% of the
outstanding voting shares of the Fund. The Fund may not:
1. Invest more than 5% of the value of its total assets in the securities
of any one issuer except the United States government, nor acquire
more than 10% of the voting securities of any one issuer.
2. Invest in other investment companies except in the open market at
customary brokers' commissions.
3. Invest in any company for the purpose of exercising control or
management.
4. Issue senior securities.
5. Borrow money except as a temporary measure for extraordinary or
emergency purposes and not for the purchase of investment securities
and then only from banks. The amount borrowed shall not exceed 10% of
the Fund's total assets at cost or 5% of the value of total assets,
whichever is less, provided that such borrowings shall have an asset
coverage of 300%.
6. Underwrite securities of other issuers.
7. Purchase or sell commodities, commodity contracts or real estate
(although the Fund may invest in marketable securities secured by real
estate or interests therein or issued by companies or investment
trusts which invest in real estate or interests therein).
8. Make loans to other persons except this shall not exclude the purchase
of publicly issued debt securities of a type purchased by
institutional investors.
9. Purchase securities on margin or sell short.
10. Concentrate investments of more than 25% of the value of its total
assets in any one industry.
11. Purchase any security if as a result the Fund would then have more
than 15% of its total assets invested in securities which are
illiquid, including repurchase agreements not maturing in seven days
or less and securities restricted as to disposition under federal
securities laws.
12. Purchase warrants if as a result the Fund would then have more than 5%
of its net assets invested in warrants (valued at the lower of cost or
market), or more than 2% of its net assets invested in warrants which
are not listed on the New York or American Stock Exchanges.
13. Purchase interests in oil, gas and mineral leases or other mineral
exploration or development programs, although the Fund may invest in
stocks or debt instruments of companies which invest in or sponsor
such programs.
14. Purchase securities of another investment company ("acquired company")
except in connection with a merger, consolidation, acquisition or
reorganization and except as otherwise permitted by Section 12(d) of
the Investment Company Act, if after such purchase more than 5% of the
value of the Fund's total assets would be invested in securities
issued by the acquired company, or the Fund would own more than 3% of
the total outstanding voting stock of the acquired company, or more
than 10% of the value of the Fund's total assets would be invested in
securities of investment companies.
15. Purchase securities of any issuer if, to the knowledge of the Fund,
any officer or trustee or director of the Fund or Dodge & Cox, owns
more than 1/2 of 1% of the outstanding securities of such issuer, or
if such officers, trustees or directors in the aggregate own more than
5% of the outstanding securities of such issuer.
Whenever any investment policy or investment restriction states a
maximum percentage of the Fund's assets which may be invested in any security or
other instrument, it is intended that such maximum percentage limitation be
determined immediately after and as a result of the Fund's acquisition of such
security or instrument. Industries are determined by reference to the
classifications of industries set forth in the Fund's semi-annual and annual
reports.
-7-
<PAGE>
PURCHASE, REDEMPTION, AND PRICING OF SHARES
The procedures for purchasing and redeeming shares of the Fund are
described in the Fund's Prospectus, which is incorporated herein by reference.
NET ASSET VALUE PER SHARE. The purchase and redemption price of the
Fund's shares is equal to the Fund's net asset value per share or share price.
The Fund determines its net asset value per share by subtracting the Fund's
total liabilities (including accrued expenses and dividends payable) from its
total assets (the market value of the securities the Fund holds plus cash and
other assets, including income accrued but not yet received) and dividing the
result by the total number of shares outstanding. The net asset value per share
of the Fund is normally calculated as of the close of trading on the New York
Stock Exchange ("NYSE") every day the NYSE is open for trading. The NYSE is
closed on the following days: New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering, sale redemption and
repurchase of shares) for the Fund may be suspended when (a) the NYSE is closed,
other than customary weekend and holiday closings, (b) trading on the NYSE is
restricted, (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (d)
a governmental body having jurisdiction over the Fund may by order permit such a
suspension for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange Commission (or
any succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b), (c), or (d) exist.
In determining total net asset value of the Fund, stocks are valued at
market, using as a price the last sale of the day at the close of the New York
Stock Exchange or, if no sale, then a representative price within the limits of
the bid and ask prices for the day. A security which is listed or traded on more
than one exchange is valued at the quotation on the exchange determined to be
the primary market for such security. Fixed income securities are priced at fair
value based on dealer-supplied valuations and a pricing service. Securities for
which market quotations are not readily available and all other assets are
valued at fair value as determined in good faith by or at the direction of the
Board of Trustees.
PERFORMANCE INFORMATION
The Fund may include figures indicating its total return or yield in
advertisements or reports to shareholders or prospective investors. Quotations
of the Fund's average annual total rate of return will be expressed in terms of
the average annual compounded rate of return on a hypothetical investment in the
Fund over periods of one, five and ten years, will reflect the deduction of a
proportional share of Fund expenses (on an annual basis), will assume that all
dividends and capital gains distributions are reinvested when paid, and will be
calculated pursuant to the following formula:
P (1 + T)/n/ = ERV
where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years,
ERV = the ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of the period.
The average annual total return of the Fund for the one, five and
ten-year periods ended December 31, 1996 was 14.75%, 13.95%, and 13.16%,
respectively. Total return indicates the positive or negative rate of return
that an investor would have earned from reinvested dividends and distributions
and changes in net asset value per share during the period.
Quotations of yield, as defined by the Securities and Exchange
Commission, will be based on net investment income per share earned during a
given thirty-day period and will be computed by dividing this net investment
income by the net asset value per share on the last day of the period and
annualizing the results according to the following formula:
-8-
<PAGE>
YIELD = 2[(a-b+1)/6/ -1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of
reimbursements or waivers),
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends, and
d = the maximum offering price per share on the
last day of the period.
The Fund's current yield for the thirty days ended December 31, 1996
was 3.56%. Yield does not directly reflect changes in net asset value per share
which occurred during the period.
Performance information for the Fund may be compared in reports and
promotional literature to: (i) the Standard & Poor's 500 Stock Index, the Dow
Jones Industrial Average, the Lehman Brothers Aggregate Bond Index, or various
other unmanaged indices of the performance of various types of investments, so
that investors may compare the Fund's results with those of indices widely
regarded by investors as representative of the security markets in general, and
(ii) the performance of other mutual funds. Unmanaged indices may assume the
reinvestment of income distributions, but generally do not reflect deductions
for administrative and management costs and expenses.
Performance information for the Fund reflects only the performance of
hypothetical investments in the Fund during the particular time periods on which
the calculations are based. Such information should not be considered as
representative of the performance of the Fund in the future because, unlike some
bank deposits or other investments which pay a fixed yield for a stated period
of time for a fixed principal amount, the performance of the Fund will vary
based not only on the current market value of the securities held in its
portfolio, but also on changes in the Fund's expenses and in the asset size of
the Fund. Performance information should be considered in light of the Fund's
investment objectives and policies, the types and quality of the Fund's
portfolio investments, market conditions during the particular time period and
operating expenses. Further information about the performance of the Fund is
contained in the Fund's Annual Report which may be obtained without charge from
the Fund. From time to time, the Fund and Dodge & Cox may also refer to the
following information:
1. Portfolio information, including median market capitalization,
price to earnings ratio, price to book value, average bond
quality, average bond maturity, and effective bond duration.
2. The asset allocation and sector weightings of the Fund's
portfolio and the Fund's top ten holdings.
3. A description of the Dodge & Cox investment management
philosophy and approach.
OFFICERS AND TRUSTEES
<TABLE>
<CAPTION>
Total 1996
Aggregate 1996 Compensation
Position(s) Principal Occupation Compensation from Fund and Fund
Name and Address Age with Fund During Past 5 Years from Fund Complex **
- ---------------- --- --------- ------------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Harry R. Hagey* 55 Chairman and Chairman and Chief Executive $ 0 $ 0
Trustee Officer of Dodge & Cox; Vice
President and Director, Dodge &
Cox Stock Fund; Vice President,
Dodge & Cox Income Fund
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
Total 1996
Aggregate 1996 Compensation
Position(s) Principal Occupation Compensation from Fund and Fund
Name and Address Age with Fund During Past 5 Years from Fund Complex **
- ---------------- --- --------- ------------------- --------- ----------
<S> <C> <C> <C> <C> <C>
A. Horton Shapiro* 57 Vice-Chairman Senior Vice-President of Dodge & $ 0 $ 0
and Trustee Cox; President and Director, Dodge
& Cox Income Fund; Vice President,
Dodge & Cox Stock Fund
Kenneth E. Olivier* 44 Assistant Senior Vice-President of Dodge & 0 0
Secretary and Cox
Trustee
Max Gutierrez, Jr. 66 Trustee Partner in Brobeck, Phleger & 1,500 4,500
One Market Plaza Harrison, Attorneys; Director,
San Francisco, Dodge & Cox Income Fund; Director,
California Dodge & Cox Stock Fund
Frank H. Roberts 77 Trustee Retired Partner in Pillsbury, 3,000 9,000
114 Sansome Street Madison & Sutro, Attorneys;
San Francisco, Director, Dodge & Cox Income Fund;
California Director, Dodge & Cox Stock Fund
John B. Taylor 50 Trustee Professor of Economics and 2,500 7,500
Department of Director of the Center for
Economics Economic Policy Research, Stanford
Stanford University University; Director, Dodge & Cox
Stanford, California Income Fund; Director, Dodge & Cox
Stock Fund
Will C. Wood 57 Trustee Principal, Kentwood Associates, 3,000 9,000
1550 El Camino Real Financial Advisers; prior to 1994,
Menlo Park, California Managing Director, IDI Associates,
Financial Advisers; Director,
Dodge & Cox Income Fund; Director,
Dodge & Cox Stock Fund
W. Timothy Ryan 59 Secretary Senior Vice-President and 0 0
Secretary-Treasurer of Dodge &
Cox; Secretary-Treasurer and
Director, Dodge & Cox Income Fund;
Secretary-Treasurer and Director,
Dodge & Cox Stock Fund
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Total 1996
Aggregate 1996 Compensation
Position(s) Principal Occupation Compensation from Fund and Fund
Name and Address Age with Fund During Past 5 Years from Fund Complex **
- ---------------- --- --------- ------------------- --------- ----------
<S> <C> <C> <C>
Thomas M. Mistele 43 Assistant General Counsel of Dodge & Cox; $ 0 $ 0
Secretary Assistant Secretary-Treasurer,
Dodge & Cox Income Fund; Assistant
Secretary-Treasurer, Dodge & Cox
Stock Fund; formerly Senior Vice
President of Templeton Global
Investors, Inc. and Secretary of
the Templeton Mutual Funds
E. Morris Cox* 94 Honorary Honorary Chairman of the Board of 0 0
Trustee Dodge & Cox
- -----------------------
</TABLE>
* Each has been an employee of Dodge & Cox, 35th Floor, One Sansome
Street, San Francisco, California for over ten years in an
executive position and is an "interested person" of the Fund as
defined in the Investment Company Act. E. Morris Cox retired from
Dodge & Cox as of January 1, 1984. He serves as an honorary
trustee of the Fund but is not responsible for and does not
participate in the management or administration of the Fund.
** Total 1996 Compensation from "Fund and Fund Complex" consists of
compensation and fees paid to directors and trustees by all Dodge
& Cox Funds: Dodge & Cox Balanced Fund, Dodge & Cox Stock Fund
and Dodge & Cox Income Fund.
Trustees and officers of the Fund affiliated with Dodge & Cox hold a
controlling interest in 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 Board or Committee meeting attended. The Fund does not pay any
other remuneration to its officers or trustees, and has no bonus,
profit-sharing, pension or retirement plan. On March 31, 1997 the officers and
trustees of the Fund and members of their families and relatives owned less than
1.0% of the outstanding shares of the Fund.
On March 31, 1997, Charles Schwab & Co., 101 Montgomery Street, San
Francisco, California 94104 owned of record 5,940,235 shares (or 8.97% of the
outstanding shares of the Fund); and Monsanto Co. Savings Plan, 800 North
Lindbergh Blvd., St. Louis, Missouri 63167 owned beneficially and of record
3,670,542 shares (or 5.54% of the outstanding shares of the Fund). The Fund
knows of no other person who owns beneficially or of record more than 5% of the
outstanding shares of the Fund.
INVESTMENT MANAGER
Since 1931, Dodge & Cox, One Sansome Street, San Francisco, California
94104, a corporation, has been employed by the Fund as manager and investment
adviser, subject to the direction of the Board of Trustees. Dodge & Cox is one
of the oldest professional investment management firms in the United States,
having acted continuously as investment managers since 1930. The Fund's
investments are managed by Dodge & Cox's Investment Policy Committee, and no one
person is primarily responsible for making investment recommendations to the
Committee. The research work of the firm is organized for comprehensive and
continuous appraisal of the economy and of various industries and companies.
Supplemental research facilities are used to obtain additional coverage of
business and financial developments affecting comparative security values.
-11-
<PAGE>
Dodge & Cox is not engaged in the brokerage business nor in the
business of dealing in or selling securities. Its activities are devoted to
investment research and the supervision of investment accounts for individuals,
trustees, corporations, pension and profit-sharing funds, and charitable
institutions. In addition, Dodge & Cox has managed Dodge & Cox Stock Fund since
1965 and Dodge & Cox Income Fund since 1989. The investment advisory contract
between the Fund and Dodge & Cox was approved by a majority of the shares of the
Fund and provides for a management fee which is accrued daily and payable
monthly to Dodge & Cox at an annual rate of 0.50% of average daily net assets.
The Manager was paid a fee of $13,196,680 for the year 1996, $6,321,900 for the
year 1995, and $3,188,284 for the year 1994. The contract may be terminated at
any time without penalty upon 60 days written notice by action of the trustees,
shareholders or by Dodge & Cox. The contract will terminate automatically should
there be an assignment thereof. In addition to Dodge & Cox's fee, the Fund pays
other direct expenses, including transfer agent, custodial, accounting, legal,
and audit fees; costs of preparing and printing prospectuses and reports sent to
shareholders; registration fees and expenses; proxy and annual meeting expenses
(if any); and Trustee fees and expenses. In 1996, the ratio of total operating
expenses to average net assets of the Fund was 0.56%. Dodge & Cox furnishes
personnel and other facilities necessary for the operation of the Fund for which
it receives no additional compensation. Dodge & Cox supervises the operations of
the Fund and directs the investment and reinvestment of its assets and furnishes
all executive personnel and office space required.
PORTFOLIO TRANSACTIONS
The Investment Management Agreement provides that Dodge & Cox is
responsible for selecting members of securities exchanges, brokers and dealers
(such members, brokers and dealers being hereinafter referred to as "brokers")
for the execution of the Fund's portfolio transactions and, when applicable, the
negotiation of commissions. All decisions and placements are made in accordance
with the following principles:
1. Purchase and sale orders will usually be placed with brokers who are
selected by Dodge & Cox as able to achieve "best execution" of such
orders. "Best execution" means prompt and reliable execution at the most
favorable securities price, taking into account the other provisions
hereinafter set forth. The determination of what may constitute best
execution and price in the execution of a securities transaction by a
broker involves a number of considerations, including without limitation,
the overall direct net economic result to the Fund (involving both price
paid or received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the ability to effect
the transaction at all where a large block is involved, availability of
the broker to stand ready to execute possibly difficult transactions in
the future, and the financial strength and stability of the broker. Such
considerations are judgmental and are weighed by Dodge & Cox in
determining the overall reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, Dodge & Cox takes into
account its past experience as to brokers qualified to achieve best
execution, including brokers who specialize in any foreign securities
held by the Fund.
3. Dodge & Cox is authorized to allocate brokerage business to brokers who
have provided brokerage and research services, as such services are
defined in Section 28(e) of the Securities Exchange Act of 1934 (the
"1934 Act"), for the Fund and/or other accounts, if any, for which Dodge
& Cox exercises investment discretion (as defined in Section 3(a)(35) of
the 1934 Act) and, as to transactions as to which fixed minimum
commission rates are not applicable. Such allocation may cause the Fund
to pay a commission for effecting a securities transaction in excess of
the amount another broker would have charged for effecting that
transaction, if Dodge & Cox determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms of either that
particular transaction or with Dodge & Cox's overall responsibilities
with respect to the Fund and the other accounts, if any, as to which it
exercises investment discretion. In reaching such determination, Dodge &
Cox is not required to place or attempt to place a specific dollar value
on the research or execution services of a broker or on the portion of
any commission reflecting brokerage or research services. In
demonstrating that such determinations were made in good faith, Dodge &
Cox will be prepared to show that all commissions were allocated and paid
for purposes contemplated by the Fund's brokerage policy; that
commissions were paid only for products or services which provide lawful
and appropriate assistance to Dodge & Cox in the performance of its
investment decision-making responsibilities; and that the commissions
paid were within a reasonable range. The determination that commissions
were within a reasonable range will be based on any available information
as to the level of commissions known to be charged
-12-
<PAGE>
by other brokers on comparable transactions, but there will also be taken
into account the Fund's policies that (i) obtaining a low commission is
deemed secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to the Fund to obtain a
favorable price than to pay the lowest commission; and (ii) the quality,
comprehensiveness and frequency of research studies which are provided
for Dodge & Cox are useful to Dodge & Cox in performing its advisory
services under its Investment Management Agreement with the Fund.
Research services provided by brokers to Dodge & Cox are considered to be
in addition to, and not in lieu of, services required to be performed by
Dodge & Cox under its Investment Management Agreement. Research furnished
by brokers through whom the Fund effects securities transactions may be
used by Dodge & Cox for any of its accounts, and not all such research
may be used by Dodge & Cox for the Fund.
4. Purchases and sales of portfolio securities within the United States
other than on a securities exchange will be executed with primary market
makers acting as principal except where, in the judgment of Dodge & Cox,
better prices and execution may be obtained on a commission basis or from
other sources.
Insofar as known to management, no Trustee or officer of the Fund, nor
Dodge & Cox or any person affiliated with any of them, has any material direct
or indirect interest in any broker employed by or on behalf of the Fund. There
is no fixed method used in determining which broker-dealers receive which order
or how many orders.
Periodically Dodge & Cox reviews the current commission rates and
discusses the execution capabilities and the services provided by the various
broker-dealers Dodge & Cox is utilizing in the execution of orders. Research
services furnished by the brokers through whom Dodge & Cox effects security
transactions for the Fund may be used in servicing some or all of Dodge & Cox's
accounts, however, all such services may not be used by Dodge & Cox in
connection with the Fund. Aggregate brokerage commissions paid by the Fund
during the last three years were as follows: $1,131,834 in 1996, $763,087 in
1995, and $251,196 in 1994. Securities transactions totaling $110,267,587 in
1996 were allocated to brokers based on arrangements to provide research
services to Dodge & Cox; $161,274 in brokerage commissions was paid on such
transactions. Except as indicated above, Dodge & Cox does not intend to place
portfolio transactions with any particular broker-dealers.
Investment decisions for the Fund are made independently from those of
Dodge & Cox Stock Fund, Dodge & Cox Income Fund, and other accounts managed by
Dodge & Cox. It may frequently develop that the same investment decision is made
for more than one account. Simultaneous transactions may often occur when the
same security is suitable for the investment objective of more than one account.
When two or more accounts are simultaneously engaged in the purchase or sale of
the same security, the transactions are averaged as to price and allocated as to
amount in accordance with a formula equitable to each account. It is recognized
that in some cases this system could have a detrimental effect on the price or
availability of the security as far as the Fund is concerned. In other cases,
however, it is believed that the ability of the Fund to participate in volume
transactions will produce better executions for the Fund.
ADDITIONAL TAX CONSIDERATIONS
You need to be aware of the possible tax consequences when:
o You sell Fund shares, including an exchange from one Fund to
another.
o The Fund makes a distribution to your account.
TAXES ON FUND REDEMPTIONS. When you sell shares in the Fund, you may
realize a gain or loss. An exchange from one Fund to another is a sale for tax
purposes.
In January, you will be sent Form 1099-B, indicating the amount of
sales made in the Fund during the prior year. This information will also be
reported to the IRS. For certain accounts opened after September 30, 1987, the
Fund will provide you with the average cost of the shares sold during the year,
based on the "average cost" method. This information is not reported to the IRS,
and you do not have to use it. You may calculate the cost basis using other
methods acceptable to the IRS, such as "specific identification".
To help you maintain accurate records, the Fund sends a confirmation
immediately following each transaction (except for systematic purchases) and
quarterly and year-end statements detailing all transactions in your account
during the year.
-13-
<PAGE>
TAXES ON FUND DISTRIBUTIONS. The following summary does not apply to
retirement accounts, such as IRAs, which are tax-deferred until shareholders
withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of
any distributions paid to you during the prior year. This information will also
be reported to the IRS. All distributions made by the Fund are taxable to you
for the year in which they were paid.
Short-term capital gain distributions are taxable as ordinary income
and long-term capital gain distributions are taxable at the applicable long-term
capital gain rate. If you realize a capital loss on the sale or exchange of Fund
shares held six months or less, your short-term capital loss is reclassified to
long-term to the extent of any long-term capital gain distribution received with
respect to such Fund shares.
TAX EFFECT OF BUYING SHARES BEFORE A CAPITAL GAIN OR INCOME
DISTRIBUTION. If you buy shares shortly before or on the "record date" for a
Fund distribution -- the date that establishes you as the person to receive the
upcoming distribution -- you will receive, in the form of a taxable
distribution, a portion of the money you just invested. Therefore, you may wish
to find out the Fund's record date before investing. Of course, the Fund's share
price may, at any time, reflect undistributed capital gains or income and
unrealized appreciation. When these amounts are eventually distributed, they are
taxable.
The discussion above and in the Fund's Prospectus regarding the Federal
income tax consequences of investing in the Fund have been prepared by Dodge &
Cox and do not purport to be complete descriptions of all tax implications of an
investment in the Fund. You are advised to consult with your own tax adviser
concerning the application of Federal, state and local taxes to an investment in
the Fund. The Fund's legal counsel has expressed no opinion in respect thereof.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 555 California Street, San Francisco, California
94104, are independent accountants to the Fund, subject to annual appointment by
the Board of Trustees. Price Waterhouse conducts an annual audit of the accounts
and records of the Fund, reports on the Fund's annual financial statements and
performs tax and accounting advisory services.
FINANCIAL STATEMENTS
Please refer to the Fund's Financial Statements consisting of the
financial statements of the Fund and the notes thereto, and the report of
independent accountants contained in the Fund's 1996 Annual Report to
Shareholders. The Financial Statements and the report of independent accountants
(but no other material from that Annual Report) are incorporated herein by
reference. Additional copies of the Annual Report may be obtained from the Fund
at no charge by writing or telephoning the Fund.
-14-
