<PAGE>
D O D G E & C O X
Stock Fund
Investment Managers
Dodge & Cox
One Sansome Street
35th Floor
San Francisco
California 94104-4405
(415) 981-1710
For Fund literature and
information, please write or call:
Dodge & Cox Funds
c/o BFDS
P.O. Box 9051
Boston
Massachusetts 02205-9051
(800) 621-3979
- --------------------------------------------------------------------------------
This report is submitted for the general information of the shareholders
of the Fund. The report is not authorized for distribution to prospective
investors in the Fund unless it is accompanied by an effective prospectus.
Printed on recycled paper. 6/98 SF SAR
D O D G E & C O X
Stock Fund
Established 1965
Semi-Annual Report
June 30, 1998
1998
<PAGE>
D O D G E & C O X
================================================================================
Stock Fund
To Our Shareholders
- --------------------------------------------------------------------------------
The Dodge & Cox Stock Fund had a total return of 1.1% for the quarter ended
June 30, 1998, and +8.6% for the first half of 1998. This compared to returns
of +3.3% and +17.7%, respectively, for the Standard & Poor's 500 Index (S&P
500). Longer-term results appear on page three of this report. On June 30,
total net assets in the Fund were $4.8 billion. The asset allocation of the
Fund was essentially unchanged from year-end 1997, with 91% invested in stocks
and 9% in cash and equivalents.
Performance Review
The Fund's performance trailed the S&P 500 during the first half of 1998, held
back by the relatively weak returns in industrial commodities,
electronics/computer, energy and transportation stocks. The Fund's low
representation in healthcare and telecom service stocks, which performed well
during this period, also hurt relative performance. Sectors which contributed
positively to relative performance during this period were in the broadly
defined consumer area, including consumer durables (e.g., autos), consumer
nondurables, retail and media/entertainment stocks.
High Valuation Stocks Rise Even Higher
The stock market's performance this year has been propelled by a relatively
small number of large companies with high valuations. Just six companies in
the S&P 500 accounted for 27% of the Index's 17.7% total return in the first
half of 1998, and 18 companies accounted for one-half of the return. Investors
appear to be enamored with a short list of very large capitalization companies
selling at significant premiums to the market. While many of these "megacap"
companies have excellent records, their stock prices have increased much
faster than their earnings, causing their price/earnings (P/E) ratios to rise
to unprecedented highs. Investors' expectations have increased along with the
market valuations. From the current valuation levels, these stocks do not have
much room for any disappointing news regarding earnings and revenue growth.
With our price-disciplined approach, we have generally not invested in high-
valuation stocks, and consequently the Fund's recent results have trailed the
S&P 500. At this juncture, we believe it is more important than ever to
maintain our approach. Thus, we are primarily buyers of companies with durable
business franchises, but which may be out of favor with other investors.
Thorough analysis can often unearth companies that are currently selling at
reasonable prices and have the potential for strong long-term earnings growth.
Global Economic Concerns Affect Basic Industry and Energy
Last year, investors were mindful that the U.S. was nearing the eighth year of
economic expansion. Yet corporate earnings continued to grow. Already healthy
profit margins continued to increase, due to higher productivity and the
positive benefits of integrating global markets. Many U.S.-based companies
were well-positioned to compete effectively in the world economy, further
adding to investor optimism. This thesis for global growth was upset by
currency devaluations and economic instability in Asia. Especially hard hit
were the global markets for many basic industrial products. It is true that
declines in commodity prices will result in near-term earnings disappointments
for many companies in the basic industry arena, such as chemicals, metals,
paper/forest products and energy. But are these basic industrial companies
permanently weakened by the current instability in global markets? In fact, we
believe that the reverse may be true. Significant, far-reaching changes are
now in process as centralized governments in Asia and elsewhere move toward
free market economies. No longer can these countries afford to subsidize
unprofitable enterprises which have not been required to earn a fair return on
capital. The effect of this change may well be to stabilize these basic
industrial markets by "shaking out" the non-economic competitors. Thus, the
market disruptions which have hurt profits in the near term may provide the
opportunity for growth and higher profitability over the long term for well-
financed industry leaders with a global presence.
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1
<PAGE>
D O D G E & C O X
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Stock Fund
- --------------------------------------------------------------------------------
Staying with Our Price Discipline
Where does our price discipline lead us now? Over the past few months,
incremental purchases in the Fund have largely been in a diversified group of
industrial commodity and energy stocks. Most of the stocks we are buying are
priced near historical lows relative to the market, yet we believe the long-
term investment potential of these companies is promising. As an example, Dow
Chemical is currently priced at about 15 times this year's estimated earnings,
well below the market's P/E ratio of over 25. This discount to the market is
due to concerns about the near-term profit outlook, as the chemical industry
appears headed for a cyclical decline. Dow has been involved in a multi-year
process to restructure and refocus its operations to improve profitability. We
believe much of this progress is under-appreciated as investors focus on the
expected decline in margins for Dow's commodity businesses over the next
twelve months. While it is difficult to predict next year's earnings, the
company has made substantial strides to improve its long-term earnings power,
which we expect will become apparent over time. In the midst of this
pessimism, we believe that patient investors can find investment bargains
which will provide the potential for strong future performance.
We have also found attractive relative values in the technology area. One of
the Fund's technology holdings is Motorola, a leading manufacturer of wireless
communications equipment and semiconductors. We have added to the position in
the Fund since the end of 1997, as Motorola's share price weakened to its
lowest relative valuation (as measured by price to sales) in 20 years.
Earnings are currently depressed due to weak demand in Asia, declining market
share in digital wireless products, and pressure in its semiconductor business
- -- an industry-wide phenomenon. Also, the company has invested heavily in a
satellite communications network (Iridium) that is scheduled to start up later
this year, further pressuring current earnings. We believe that management is
working hard to address the company's problems. A major restructuring is
underway, including realignment of business units and reduction in employees,
and new digital products are being developed and introduced. At its current
depressed valuation, we believe Motorola represents an attractive long-term
investment opportunity in an area of dramatic worldwide growth -- wireless
communications. Please note that we highlight Dow and Motorola as examples of
our investment approach, not because we consider them more attractive than the
Fund's other holdings.
The Caution Light Remains On
The equity market has climbed to a historic high based on most valuation
measures. We reiterate our warning that returns of the past decade are not
likely to be repeated over the coming years. Although the recent investment
results of the Fund compared to the S&P 500 have been disappointing, we
believe our disciplined approach to investing is especially important in the
current market environment.
We appreciate your continued confidence in the Dodge & Cox Stock Fund. Please
write or call us with your comments or questions.
For the Board of Trustees,
/s/ Harry R. Hagey /s/ John A. Gunn
Harry R. Hagey, Chairman John A. Gunn, President
July 31, 1998
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2
<PAGE>
D O D G E & C O X
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Stock Fund
Objective The Fund's primary objective is to provide shareholders with
an opportunity for long-term growth of principal and income.
A secondary objective is to achieve a reasonable current
income.
Strategy The Fund seeks to achieve these objectives by investing in
well-established companies which, in the view of Dodge & Cox,
have positive earnings prospects not reflected in the current
price. Dodge & Cox makes a conscious effort to maintain
representation in major economic sectors and areas with
strong long-term profit potential. The strategy is based on a
long-term investment horizon and, as a result, portfolio
turnover tends to be low.
<TABLE>
<CAPTION>
20 Years of Investment Performance through June 30, 1998
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Dodge & Cox S & P 500
Date Stock Fund Index
<S> <C> <C>
7/1/78 $10,000 $10,000
6/30/79 11,523 11,374
6/30/80 13,251 13,319
6/30/81 16,686 16,041
6/30/82 15,164 14,166
6/30/83 24,216 22,839
6/30/84 23,673 21,777
6/30/85 30,873 28,528
6/30/86 42,229 38,760
6/30/87 54,826 48,514
6/30/88 54,123 45,170
6/30/89 61,338 54,438
6/30/90 70,881 63,412
6/30/91 74,058 68,098
6/30/92 81,785 77,236
6/30/93 99,704 87,755
6/30/94 104,355 88,991
6/30/95 130,640 112,178
6/30/96 160,667 141,338
6/30/97 211,712 190,334
6/30/98 249,588 247,776
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for
periods ended June 30, 1998 1 Year 5 Years 10 Years 20 Years
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Stock Fund 17.90% 20.14% 16.51% 17.45%
S&P 500 Index 30.18 23.07 18.56 17.41
</TABLE>
The chart covers the period from July 1, 1978 to June 30, 1998. It compares a
$10,000 investment made in the Dodge & Cox Stock Fund to a $10,000 investment
made in the Standard & Poor's 500 Stock (S&P 500) Index. The Fund's total
returns include the reinvestment of dividend and capital gain distributions. The
S&P 500 Index is a broad based, unmanaged measure of common stocks. Index
returns include dividends and, unlike Fund returns, do not reflect fees and
expenses. Past performance does not guarantee future results. Investment return
and share price will fluctuate with market conditions, and investors may have a
gain or a loss when shares are sold.
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3
<PAGE>
D O D G E & C O X
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Stock Fund
Fund Information June 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $100.39
Total Net Assets (millions) $ 4,766
1997 Expense Ratio 0.57%
1997 Portfolio Turnover 19%
Fund Inception Date 1965
Investment Manager: Dodge & Cox, San Francisco. Managed by the Investment Policy
Committee, whose eight members' average tenure at Dodge & Cox is 20 years.
</TABLE>
<TABLE>
<CAPTION>
Asset Allocation
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
<S> <C>
Stocks: 90.8%
Short-Term Investments: 9.2%
</TABLE>
<TABLE>
<CAPTION>
Stock Characteristics
- --------------------------------------------------------------------------------
<S> <C>
Number of Stocks 74
Median Market Capitalization 9.5 billion
Price to Earnings Ratio* 19.8x
Price to Book Value (trailing 12 months) 3.2x
Foreign Stocks** (as percentage of Fund) 9%
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
General Motors 2.8
Kmart 2.5
Citicorp 2.4
Dow Chemical 2.2
American Express 2.2
Pharmacia & Upjohn 2.2
Motorola 2.1
Aluminum Co. of America 2.1
News Corp. 2.1
R.R. Donnelley & Sons 2.0
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Sectors % of Fund
- --------------------------------------------------------------------------------
<S> <C>
Energy 9.7
Electronics & Computer 8.6
Banking 8.1
Retail & Distribution 6.7
Electric & Gas Utilities 6.4
Consumer Durables 6.1
Media, Printing & Entertainment 6.0
Consumer Products 5.8
Insurance & Financial Services 5.7
Transportation 5.0
</TABLE>
* Price to earnings ratio is calculated using trailing 12-month earnings and
excludes extraordinary items.
** All U.S. Dollar-denominated.
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4
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D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1998
------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CONSUMER: 22.4%
STOCKS: RETAIL AND DISTRIBUTION: 6.6%
88.6% 6,030,000 Kmart Corp., +.......................... $ 116,077,500
1,060,000 Nordstrom, Inc.......................... 81,885,000
1,330,000 Dillard's, Inc. Class A................. 55,111,875
1,524,750 Genuine Parts Co........................ 52,699,172
320,000 Fleming Cos., Inc....................... 5,620,000
--------------
311,393,547
CONSUMER DURABLES: 6.1%
1,968,000 General Motors Corp..................... 131,487,000
1,380,000 Ford Motor Co........................... 81,420,000
1,146,300 Whirlpool Corp.......................... 78,808,125
--------------
291,715,125
CONSUMER PRODUCTS: 5.8%
874,400 Sony Corp. ADR.......................... 75,253,050
418,600 Matsushita Electric
Industrial Co., Ltd. ADR............... 67,289,950
958,300 Dole Food Co., Inc...................... 47,615,531
1,005,000 Fort James Corp......................... 44,722,500
835,100 Bausch & Lomb, Inc...................... 41,859,388
--------------
276,740,419
MEDIA, PRINTING, AND ENTERTAINMENT: 3.9%
2,145,000 R.R. Donnelley & Sons Co................ 98,133,750
598,000 Time Warner, Inc........................ 51,091,625
672,200 Dow Jones & Co.......................... 37,475,150
--------------
186,700,525
--------------
1,066,549,616
FINANCE: 13.8%
BANKING: 8.1%
772,000 Citicorp................................ 115,221,000
748,400 Golden West Financial Corp.............. 79,564,275
1,198,200 Republic New York Corp.................. 75,411,712
776,000 BankAmerica Corp........................ 67,075,500
1,300,000 Norwest Corp............................ 48,587,500
--------------
385,859,987
INSURANCE AND FINANCIAL SERVICES: 5.7%
915,600 American Express Co..................... 104,378,400
756,100 Loews Corp.............................. 65,875,213
1,236,000 The St. Paul Cos., Inc.................. 51,989,250
620,000 Chubb Corp.............................. 49,832,500
--------------
272,075,363
--------------
657,935,350
BASIC INDUSTRY: 13.0%
PAPER AND FOREST PRODUCTS: 4.8%
1,746,000 Weyerhaeuser Co......................... 80,643,375
1,441,000 International Paper Co.................. 61,963,000
1,258,000 Champion International Corp............. 61,877,875
718,600 Boise Cascade Corp...................... 23,534,150
--------------
228,018,400
</TABLE>
See accompanying Notes to Financial Statements
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5
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D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1998
--------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CHEMICALS: 4.0%
STOCKS 1,094,000 Dow Chemical Co......................... $ 105,776,125
(Continued) 798,100 Eastman Chemical Co..................... 49,681,725
744,000 Nalco Chemical Co....................... 26,133,000
370,000 Lubrizol Corp........................... 11,192,500
--------------
192,783,350
METALS AND MINING: 3.3%
1,535,000 Aluminum Co. of America................. 101,214,063
1,168,600 Rio Tinto Plc........................... 55,216,350
57,100 Rio Tinto Limited....................... 2,715,573
--------------
159,145,986
GENERAL MANUFACTURING: 0.9%
2,170,000 Archer Daniels Midland Co............... 42,043,750
--------------
621,991,486
ENERGY: 9.7%
3,245,200 Occidental Petroleum Corp............... 87,620,400
1,518,200 Amerada Hess Corp....................... 82,457,237
1,531,000 Phillips Petroleum Co................... 73,775,062
745,000 Chevron Corp............................ 61,881,563
3,315,024 Union Pacific Resources Group, Inc...... 58,220,109
1,509,700 Unocal Corp............................. 53,971,775
774,000 Royal Dutch Petroleum Co................ 42,424,875
--------------
460,351,021
ELECTRONICS AND COMPUTER: 8.6%
1,935,000 Motorola, Inc........................... 101,708,437
1,710,000 Electronic Data Systems................. 68,400,000
1,108,000 Hewlett-Packard Co...................... 66,341,500
572,800 International Business Machines Corp.... 65,764,600
1,594,300 NCR Corp.,+............................. 51,814,750
2,100,000 National Semiconductor Corp.,+.......... 27,693,750
460,000 Adobe Systems, Inc...................... 19,521,250
1,008,400 Sybase, Inc.,+ ......................... 7,027,288
--------------
408,271,575
ELECTRIC AND GAS UTILITIES: 6.4%
2,201,000 Central & South West Corp............... 59,151,875
761,900 FPL Group, Inc.......................... 47,999,700
1,150,000 Texas Utilities Co...................... 47,868,750
1,380,000 Pacific Gas & Electric Corp............. 43,556,250
1,890,100 TransCanada PipeLines Ltd............... 42,054,725
1,264,600 Wisconsin Energy Corp................... 38,412,225
869,000 Edison International.................... 25,689,812
--------------
304,733,337
TRANSPORTATION: 5.0%
1,992,900 Union Pacific Corp...................... 87,936,712
1,388,600 FDX Corp.,+............................. 87,134,650
2,233,000 Canadian Pacific Ltd.................... 63,361,375
--------------
238,432,737
</TABLE>
See accompanying Notes to Financial Statements
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6
<PAGE>
D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1998
--------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CAPITAL EQUIPMENT: 4.8%
STOCKS 1,261,200 Deere & Co............................ $ 66,685,950
(Continued) 1,170,000 Caterpillar, Inc...................... 61,863,750
1,200,000 Fluor Corp............................ 61,200,000
372,300 Lockheed Martin Corp.................. 39,417,263
--------------
229,166,963
HEALTHCARE AND PHARMACEUTICAL: 2.7%
2,225,100 Pharmacia & Upjohn, Inc............... 102,632,738
910,000 First Health Group Corp.+............. 25,935,000
--------------
128,567,738
DIVERSIFIED TECHNOLOGY: 2.2%
440,000 Xerox Corp............................ 44,715,000
1,125,000 Corning, Inc.......................... 39,093,750
775,300 Unova, Inc.,+......................... 16,668,950
241,200 Raychem Corp.......................... 7,130,475
--------------
107,608,175
--------------
Total Common Stocks
(cost $3,199,003,031)............ 4,223,607,998
--------------
PREFERRED CONSUMER: 2.2%
STOCKS: 3,500,500 News Corp. Ltd., Limited Voting
2.2% Ordinary Shares ADR.................. 98,889,125
64,100 Kmart Financing I, 7 3/4% Trust
Convertible Preferred................ 4,487,000
--------------
Total Preferred Stocks
(cost $66,942,080)............... 103,376,125
--------------
PAR VALUE
SHORT- $40,000,000 American Express Credit Corp., Comm.
TERM Paper, 5.70%, 7/1/1998............... 40,000,000
INVEST- 36,963,123 SSgA Prime Money Market Fund.......... 36,963,123
MENTS 5,060,307 SSgA United States Treasury
9.0% Money Market Fund.................... 5,060,307
100,000,000 U.S. Treasury Bills, 8/6/1998......... 99,499,600
45,000,000 U.S. Treasury Bills, 8/27/1998........ 44,639,475
12,000,000 U.S. Treasury Bills, 9/17/1998........ 11,868,570
40,000,000 U.S. Treasury Bills, 11/5/1998........ 39,280,333
45,000,000 U.S. Treasury Bills, 12/3/1998........ 44,010,906
50,000,000 U.S. Treasury Bills, 12/24/1998....... 48,758,222
60,000,000 U.S. Treasury Bills, 1/7/1999......... 58,402,417
--------------
Total Short-Term Investments
(cost $428,482,953).............. 428,482,953
--------------
TOTAL INVESTMENTS (cost $3,694,428,064)... 99.8% 4,755,467,076
OTHER ASSETS LESS LIABILITIES............. 0.2% 10,871,906
------ --------------
TOTAL NET ASSETS.......................... 100.0% $4,766,338,982
====== ==============
</TABLE>
+ Non-income producing
See accompanying Notes to Financial Statements
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7
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D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities June 30, 1998
-------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments, at market value
(identified cost $3,694,428,064).......... $4,755,467,076
Cash........................................ 10,054,000
Dividends and interest receivable........... 7,966,606
Receivable for investments sold............. 18,581,115
Prepaid expenses............................ 459,573
--------------
4,792,528,370
--------------
LIABILITIES:
Payable for investments purchased........... 17,006,475
Payable for Fund shares redeemed............ 6,454,217
Management fees payable..................... 1,932,585
Accounts payable............................ 796,111
--------------
Net asset value 26,189,388
--------------
per share $100.39 NET ASSETS............................ $4,766,338,982
==============
Beneficial NET ASSETS CONSIST OF:
shares outstan- Paid in capital............................. $3,491,749,811
ding 47,479,215 Accumulated undistributed net investment
(par value $.01 income..................................... 515,096
each, unlimited Accumulated undistributed net realized
shares gain on investments........................ 213,035,063
authorized) Net unrealized appreciation on investments.. 1,061,039,012
--------------
$4,766,338,982
==============
</TABLE>
See accompanying Notes to Financial Statements
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8
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D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Statement of Operations Six Months Ended June 30, 1998
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends......................................................... $ 38,210,359
Interest.......................................................... 11,197,385
------------
49,407,744
------------
EXPENSES:
Management fees (Note 2).......................................... 11,326,633
Custodian fees.................................................... 116,681
Transfer agent fees............................................... 959,910
Accounting and audit fees......................................... 26,845
Legal fees........................................................ 5,722
Shareholder reports............................................... 256,131
Registration fees................................................. 275,107
Trustees' fees.................................................... 7,000
Miscellaneous..................................................... 32,308
------------
13,006,337
------------
NET INVESTMENT INCOME............................................. 36,401,407
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments................................ 213,035,063
Change in unrealized appreciation of investments................ 115,093,479
------------
Net realized and unrealized gain on investments.............. 328,128,542
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $364,529,949
============
</TABLE>
See accompanying Notes to Financial Statements
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9
<PAGE>
D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Statement of Operations Six Months Ended June 30,
- --------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
OPERATIONS:
Net investment income.......................... $ 36,401,407 $ 21,267,971
Net realized gain.............................. 213,035,063 118,072,505
Net change in unrealized appreciation.......... 115,093,479 319,908,666
-------------- --------------
Net increase in net assets from operations..... 364,529,949 459,249,142
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.......................... (36,155,305) (20,560,861)
Net realized gain.............................. (69,973,703) (15,393,103)
-------------- --------------
Total distributions............................ (106,129,008) (35,953,964)
-------------- --------------
BENEFICIAL SHARE TRANSACTIONS:
Amounts received from sale of shares........... 759,528,361 839,600,793
Net asset value of shares issued in
reinvestment of distributions................ 97,419,696 33,155,786
Amounts paid for shares redeemed............... (435,968,104) (222,209,371)
-------------- --------------
Net increase from beneficial share
transactions................................. 420,979,953 650,547,208
-------------- --------------
Total increase in net assets................... 679,380,894 1,073,842,386
NET ASSETS:
Beginning of period............................ 4,086,958,088 2,252,046,594
-------------- --------------
End of period (including undistributed net
investment income of $515,096 and $919,796,
respectively)................................ $4,766,338,982 $3,325,888,980
============== ==============
Shares sold.................................... 7,658,209 9,733,209
Shares issued in reinvestment of distributions. 960,509 389,010
Shares redeemed................................ (4,356,645) (2,632,615)
-------------- --------------
Net increase in shares outstanding............. 4,262,073 7,489,604
============== ==============
</TABLE>
See accompanying Notes to Financial Statements
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10
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D O D G E & C O X
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Stock Fund
Notes to Financial Statements
------------------------------------------------------------------------
1 Dodge & Cox Stock Fund (the "Fund") reorganized on April 30, 1998, and
became a separate series of Dodge & Cox Funds (the "Trust"), in
accordance with a plan of reorganization approved by the Fund's
shareholders on January 30, 1998. The Trust is organized as a Delaware
business trust and is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment
company. The Fund consistently follows accounting policies which are in
conformity with generally accepted accounting principles for investment
companies. Significant accounting policies are as follows: (a) Security
valuation: stocks are valued at the latest quoted sales prices as of 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; securities for which market quotations are not
readily available are valued at fair value as determined in good faith
by or at the direction of the Board of Trustees; short-term securities
are valued at amortized cost or original cost plus accrued interest,
both of which approximate current value; all securities held by the Fund
are denominated in U.S. Dollars. (b) Security transactions are accounted
for on the trade date in the financial statements. (c) Gains and losses
on securities sold are determined on the basis of identified cost. (d)
Dividend income is recorded on the ex-dividend date and interest income
is recorded on the accrual basis. (e) Distributions to shareholders of
income and capital gains are reflected in the net asset value per share
computation on the ex-dividend date. (f) No provision for Federal income
taxes has been included in the accompanying financial statements since
the Fund intends to distribute all of its taxable income and otherwise
continue to comply with requirements for regulated investment companies.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
2 Under a written agreement, the Fund pays an annual management fee of 1/2
of 1% of the Fund's average daily net asset value to Dodge & Cox,
investment manager of the Fund. The agreement further provides that
Dodge & Cox shall waive its fee to the extent that such fee plus all
other expenses of the Fund exceed 3/4 of 1% of the average daily net
asset value for the year. All officers and seven of the trustees of the
Trust are officers and employees of Dodge & Cox. Those trustees who are
not affiliated with Dodge & Cox receive from the Trust an annual fee of
$3,000 and an attendance fee of $1,500 for each Board or Committee
meeting attended. Payments to trustees are divided equally among each
series of the Trust. The Trust does not pay any other remuneration to
its officers or trustees.
3 For the six months ended June 30, 1998, purchases and sales of
securities, other than short-term securities, aggregated $764,765,773
and $467,146,268, respectively. At June 30, 1998, the cost of
investments for Federal income tax purposes was equal to the cost for
financial reporting purposes. Net unrealized appreciation aggregated
$1,061,039,012, of which $1,157,149,391 represented appreciated
securities and $96,110,379 represented depreciated securities.
The financial information has been taken from the records of the Fund and has
not been audited by our independent accountants who do not express an opinion
thereon. The financial statements of the Fund will be subject to audit by our
independent accountants as of the close of the calendar year.
================================================================================
11
<PAGE>
D O D G E & C O X
================================================================================
Stock Fund
<TABLE>
<CAPTION>
Financial Highlights
- --------------------------------------------------------------------------------
SELECTED DATA AND RATIOS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Six Months Ended
June 30, 1998 Year Ended December 31,
---------------- --------------------------------------------
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 94.57 $79.81 $67.83 $53.94 $53.23 $48.37
Income from investment operations:
Net investment income .78 1.48 1.28 1.27 1.15 1.04
Net realized and unrealized gain 7.35 20.86 13.67 16.54 1.60 7.70
------- ------ ------ ------ ------ ------
Total from investment operations 8.13 22.34 14.95 17.81 2.75 8.74
------- ------ ------ ------ ------ ------
Distributions to shareholders from:
Net investment income (.78) (1.49) (1.29) (1.26) (1.15) (1.04)
Net realized gain (1.53) (6.09) (1.68) (2.66) (.89) (2.84)
------- ------ ------ ------ ------ ------
Total distributions (2.31) (7.58) (2.97) (3.92) (2.04) (3.88)
------- ------ ------ ------ ------ ------
Net asset value, end of period $100.39 $94.57 $79.81 $67.83 $53.94 $53.23
======= ====== ====== ====== ====== ======
Total return 8.57% 28.41% 22.26% 33.38% 5.16% 18.31%
Ratios/supplemental data:
Net assets, end of period (millions) $ 4,766 $4,087 $2,252 $1,228 $ 543 $ 436
Ratio of expenses to average net assets .57%* .57% .59% .60% .61% .62%
Ratio of net investment income to average
net assets 1.59%* 1.67% 1.79% 2.07% 2.16% 1.95%
Portfolio turnover rate 11% 19% 10% 13% 7% 15%
</TABLE>
* Annualized
================================================================================
12
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D O D G E & C O X
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Stock Fund
THIS PAGE INTENTIONALLY LEFT BLANK
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13
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Stock Fund
THIS PAGE INTENTIONALLY LEFT BLANK
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14
<PAGE>
D O D G E & C O X
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Stock Fund
General Information
---------------------------------------------------------------
Investment Since 1930, Dodge & Cox has been providing professional
Manager investment management for individuals, trustees, corporations,
pension and profit-sharing funds, and charitable institutions.
Dodge & Cox manages the Dodge & Cox Stock Fund, the Dodge & Cox
Balanced Fund and the Dodge & Cox Income Fund.
No-Load Fund Shares of the Fund are purchased and redeemed at net asset
value. There are no sales, redemption or Rule 12b-1 plan
distribution charges.
Gifts Fund shares provide a convenient method for making gifts to
children and to other family members. Shares may be held by an
adult custodian for the benefit of a minor under a Uniform
Gifts/Transfers to Minors Act. Trustees and guardians may also
hold shares for a minor's benefit.
Automatic Shareholders may make regular monthly or quarterly investments
Investment Plan of $100 or more through automatic deductions from their bank
accounts.
Withdrawal Plan Shareholders owning $10,000 or more of the Fund's shares may
elect to receive periodic monthly or quarterly payments of at
least $50. Under the plan, all dividend distributions are
automatically reinvested at net asset value with the periodic
payments made from the proceeds of the redemption of sufficient
shares.
Reinvestment Shareholders may direct that dividend and capital gains
Plan distributions be reinvested in additional Fund shares.
The above plans are completely voluntary and involve no service
charge of any kind.
IRA Plan The Fund has a Regular and Roth Individual Retirement Account
Plan (IRA) available for shareholders of the Fund.
Shareholder Fund literature and details on all of these Plans are available
Inquiries from the Fund upon request.
Dodge & Cox Stock Fund
c/o BFDS
P.O. Box 9051
Boston, MA 02205-9051
(800) 621-3979
================================================================================
<PAGE>
D O D G E & C O X
Balanced Fund
Investment Managers
Dodge & Cox
One Sansome Street
35th Floor
San Francisco
California 94104-4405
(415) 981-1710
For Fund literature and
information, please write or call:
Dodge & Cox Funds
c/o BFDS
P.O. Box 9051
Boston
Massachusetts 02205-9051
(800) 621-3979
- --------------------------------------------------------------------------------
This report is submitted for the general information of the shareholders of
the Fund. The report is not authorized for distribution to prospective investors
in the Fund unless it is accompanied by an effective prospectus.
Printed on recycled paper. 6/98 BF SAR
D O D G E & C O X
Balanced Fund
Established 1931
Semi-Annual Report
June 30, 1998
1998
<PAGE>
D O D G E & C O X
===============================================================================
Balanced Fund
To Our Shareholders
-------------------------------------------------------------------------------
During the second quarter, the Dodge & Cox Balanced Fund achieved a total
return of 0.2%. This result compares with total returns of 3.3% for the
Standard & Poor's 500 Index (S&P 500) of common stocks, 2.3% for the Lehman
Brothers Aggregate Bond Index (LBAG), and 2.9% for the Combined Index (60% S&P
500, 40% LBAG) for the same period. For the first half of 1998, the Fund
returned 6.8%, compared to 17.7% for the S&P 500, 3.9% for the LBAG, and 12.1%
for the Combined Index. Longer-term results appear on page three of this
report.
On June 30, total net assets in the Fund were about $6 billion. The asset
allocation of the Fund was essentially unchanged from year-end 1997, with 57%
invested in stocks, 37% in bonds and 6% in cash and equivalents.
Performance Review
The performance of the equity portion of the Fund trailed the S&P 500 during
the first half of 1998. Sectors which contributed positively to equity
performance relative to the S&P 500 were in the broadly defined consumer area,
including consumer durables (e.g., autos), consumer nondurables, retail and
media/entertainment stocks. Equity holdings which were weak relative performers
included industrial commodities, electronics/computer, energy and
transportation stocks.
The performance of the fixed-income portion of the Fund was essentially in line
with the LBAG. Positive contributors to relative performance included the
fixed-income portfolio's higher-than-market yield and individual security
selection; key factors included the Fund's investment in more stable types of
mortgage-related securities and longer-duration, call-protected corporate
bonds. The general widening of corporate and mortgage yield premiums detracted
slightly from relative performance.
High Valuation Stocks Rise Even Higher
The stock market's performance this year has been propelled by a relatively
small number of large companies with high valuations. Just six companies in the
S&P 500 accounted for 27% of the Index's 17.7% total return in the first half
of 1998, and 18 companies accounted for one-half of the return. Investors
appear to be enamored with a short list of very large capitalization companies
selling at significant premiums to the market. While many of these "megacap"
companies have excellent records, their stock prices have increased much faster
than their earnings, causing their price/earnings (P/E) ratios to rise to
unprecedented highs. Investors' expectations have increased along with the
market valuations. From the current valuation levels, these stocks do not have
much room for any disappointing news regarding earnings and revenue growth.
With our price-disciplined approach, we have generally not invested in high-
valuation stocks, and consequently the Fund's recent equity results have
trailed the S&P 500. At this juncture, we believe it is more important than
ever to maintain our approach. Thus, we are primarily buyers of companies with
durable business franchises, but which may be out of favor with other
investors. Thorough analysis can often unearth companies that are currently
selling at reasonable prices and have the potential for strong long-term
earnings growth.
Staying with Our Price Discipline
Where does our price discipline lead us now? Over the past few months,
incremental equity purchases in the Fund have largely been in a diversified
group of industrial commodity and energy stocks. Most of the stocks we are
buying are priced near historical lows relative to the market, yet we believe
the long-term investment potential of these companies is promising. As an
example, Dow Chemical is currently priced at about 15 times this year's
estimated earnings, well below the market's P/E ratio of over 25. This discount
to the market is due to concerns about the near-term profit outlook, as the
chemical industry appears headed for a cyclical decline. Dow has been involved
in a multi-year process to restructure and refocus its operations to improve
profitability. We believe much of this progress is under-appreciated as
investors focus on the expected decline in margins for Dow's commodity
businesses over the next
===============================================================================
1
<PAGE>
D O D G E & C O X
===============================================================================
Balanced Fund
-------------------------------------------------------------------------------
twelve months. While it is difficult to predict next year's earnings, the
company has made substantial strides to improve its long-term earnings power,
which we expect will become apparent over time. In the midst of this pessimism,
we believe that patient investors can find investment bargains which will
provide the potential for strong future performance. Please note that we
highlight Dow as an example of our investment approach, not because we consider
it more attractive than the Fund's other holdings.
A Disciplined Approach to Fixed-Income Investing
In the current fixed-income environment of relatively low interest rates and
narrow yield premiums vs. U.S. Treasury issues, the temptation is to "reach for
yield" when buying fixed-income securities. By this we mean purchasing higher-
yielding securities in an attempt to enhance short-term performance, with less
emphasis placed on each investment's fundamental characteristics and long-term
total return potential. The danger of this approach is that a sudden change in
economic conditions can lead to rapid credit deterioration, an outcome that
would be most detrimental to higher-yielding, generally weaker credits. The
financial distress in Southeast Asia is only the most recent example of how
quickly economic conditions can change and how costly the consequences of these
changes can be to fixed-income investors.
At Dodge &Cox, we counter this temptation to "reach for yield" by asking
ourselves a set of very basic questions before each corporate bond purchase.
These questions include:
. Is the company a weak player in a declining or cyclical commodity
business?
. Does the company have the financial wherewithal to withstand an ordinary
economic downturn?
. Does the company rely upon a "fad" product which could be subject to
sudden or severe shifts in demand?
. Is there a non-trivial possibility of an adverse change in the company's
regulatory or legal environment?
While these types of questions may seem simple, a great deal of research is
required to be able to answer them with a high degree of confidence.
To this end, we are committed to independent fundamental research, a hallmark
of our investment philosophy. We utilize our in-house team of analysts to
develop a thorough understanding of specific industries and conduct intensive
research on industry participants. Only when we have a solid grasp of the
fundamentals of a company will we consider the company's bonds as an investment
for the Fund. This credit analysis, combined with the evaluation of each
security's characteristics (e.g., structure and price), forms the basis of our
corporate bond investment decisions.
The Caution Light Remains On
The equity market has climbed to a historic high based on most valuation
measures. We reiterate our warning that returns of the past decade are not
likely to be repeated over the coming years. Although the recent investment
results of the equity portion of the Fund compared to the S&P 500 have been
disappointing, we believe our disciplined approach to investing is especially
important in the current market environment. In addition, we believe that a
balanced approach to investing which utilizes both equity and fixed-income
securities is a sound investment program, as over the long term, bonds provide
relative stability and higher current income compared to the more volatile
equity markets.
We appreciate your continued confidence in the Dodge & Cox Balanced Fund.
Please write or call us with your
comments or questions.
For the Board of Trustees,
/s/ Harry R. Hagey, Chairman /s/ John A. Gunn, President
Harry R. Hagey, Chairman John A. Gunn, President
July 31, 1998
===============================================================================
2
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
Objective The Fund's objectives are to provide shareholders with regular
income, conservation of principal and an opportunity for long-term
growth of principal and income.
Strategy The Fund seeks to achieve these objectives by investing in a
diversified portfolio of stocks and bonds.
Stocks: The Fund invests in well-established companies which, in the
view of Dodge & Cox, have positive earnings prospects not reflected
in the current price. Dodge & Cox makes a conscious effort to
maintain representation in major economic sectors and areas with
strong long-term profit potential. The Fund will hold no more than
75% of its total assets in stocks.
Bonds: Dodge & Cox constructs a diversified portfolio of high-quality
bonds, while striving to maintain the fixed-income yield higher than
that of the broad bond market. Fixed-income securities in the Fund
will generally include U.S. Treasury, mortgage-related and corporate
issues.
<TABLE>
<CAPTION>
20 Years of Investment Performance through June 30, 1998
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
DODGE
& COX
S & P 500 LBAG COMBINED BALANCED
INDEX INDEX INDEX FUND
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
7/1/1978 $ 10,000 $ 10,000 $ 10,000 $ 10,000
6/30/1979 11,374 10,784 11,154 11,447
6/30/1980 13,319 11,194 12,496 12,763
6/30/1981 16,041 10,621 13,728 14,285
6/30/1982 14,166 12,038 13,415 13,957
6/30/1983 22,839 15,679 19,903 20,167
6/30/1984 21,777 15,924 19,472 19,416
6/30/1985 28,528 20,695 25,485 25,073
6/30/1986 38,760 24,836 33,004 33,111
6/30/1987 48,514 26,206 38,728 39,965
6/30/1988 45,170 28,319 38,724 39,875
6/30/1989 54,438 31,776 45,395 45,589
6/30/1990 63,412 34,270 51,376 51,490
6/30/1991 68,098 37,935 55,989 55,732
6/30/1992 77,236 43,267 63,748 63,207
6/30/1993 87,755 48,369 71,992 74,718
6/30/1994 88,991 47,735 72,248 76,964
6/30/1995 112,178 53,723 87,070 92,728
6/30/1996 141,338 56,415 102,054 107,289
6/30/1997 190,334 61,015 126,148 131,169
6/30/1998 247,776 67,447 154,196 151,352
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended June 30, 1998 1 Year 5 Years 10 Years 20 Years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 15.36% 15.15% 14.26% 14.55%
Combined Index 22.24 16.46 14.82 14.66
S&P 500 Index 30.18 23.07 18.56 17.41
Lehman Brothers Aggregate Bond Index 10.54 6.88 9.07 10.01
</TABLE>
The chart covers the period from July 1, 1978 to June 30, 1998. It compares a
$10,000 investment made in the Dodge & Cox Balanced Fund to $10,000 investments
made in the Standard & Poor's 500 Stock (S&P 500) Index, the Lehman Brothers
Aggregate Bond (LBAG) Index and a Combined Index. The Fund's total returns
include the reinvestment of dividend and capital gain distributions. The S&P 500
Index is a broad-based, unmanaged measure of common stocks. The LBAG Index is a
broad-based, unmanaged measure of investment grade-rated corporate and U.S.
Government fixed-income securities. The Combined Index reflects an unmanaged
portfolio of 60% of the S&P 500 Index and 40% of the LBAG Index. The Fund may,
however, invest up to 75% of its total assets in stocks. Index returns include
dividends and/or interest income, and unlike Fund returns, do not reflect fees
or expenses. Past performance does not guarantee future results. Investment
return and share price will fluctuate with market conditions, and investors may
have a gain or loss when shares are sold.
================================================================================
3
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
Fund Information June 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $69.39
Total Net Assets (millions) $5,956
1997 Expense Ratio 0.55%
1997 Portfolio Turnover 32%
Fund Inception Date 1931
</TABLE>
Investment Manager: Dodge & Cox, San Francisco. Managed by the Investment Policy
Committee, whose eight members' average tenure at Dodge & Cox is 20 years, and
by the Fixed-Income Strategy Committee, whose ten members' average tenure is 12
years.
<TABLE>
<CAPTION>
Asset Allocation
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
<S> <C>
Bonds 36.6%
Stocks 57.4%
Short-Term Investments 6.0%
</TABLE>
<TABLE>
<CAPTION>
Stock Portfolio (57.4% of Fund)
- --------------------------------------------------------------------------------
<S> <C>
Number of Stocks 76
Median Market Capitalization 9.9 billion
Price to Earnings Ratio* 19.7x
Price to Book Value (trailing 12 months) 3.1x
Foreign Stocks** (as percentage of Fund) 6%
</TABLE>
<TABLE>
<CAPTION>
Five Largest Sectors % of Fund
- --------------------------------------------------------------------------------
<S> <C>
Energy 6.1
Electronics & Computer 5.4
Banking 5.4
Retail & Distribution 4.2
Electric & Gas Utilities 3.9
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
General Motors 1.7
Citicorp 1.6
Kmart 1.5
American Express 1.5
Dow Chemical 1.4
Aluminum Co. of America 1.4
Pharmacia &Upjohn 1.3
Motorola 1.3
News Corp. 1.3
R.R. Donnelley & Sons 1.2
</TABLE>
<TABLE>
<CAPTION>
Bond Portfolio (36.6% of Fund)
- --------------------------------------------------------------------------------
<S> <C>
Number of Bonds 124
Average Quality AA+
Average Maturity 9.6 years
Effective Duration 4.35 years
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's Quality Ratings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 23.2
Aaa/AAA 1.4
Aa/AA 1.2
A/A 6.3
Baa/BBB 4.5
Ba/BB 0.0
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 9.3
Federal Agency CMO and REMIC+ 8.3
Federal Agency Mortgage Pass-Through 5.6
Asset-Backed 0.8
Corporate 11.1
Foreign (U.S. Dollar-denominated) 1.5
</TABLE>
+Collateralized Mortgage Obligation and
Real Estate Mortgage Investment Conduit
* Price to earnings ratio is calculated using trailing 12-month earnings and
excludes extraordinary items.
** All U.S. Dollar-denominated.
================================================================================
4
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1998
----------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CONSUMER: 14.0%
STOCKS: RETAIL AND DISTRIBUTION: 4.1%
56.0%
4,628,000 Kmart Corp.,+ ......................... $ 89,089,000
842,000 Nordstrom, Inc......................... 65,044,500
1,180,000 Dillard's, Inc. Class A................ 48,896,250
1,161,000 Genuine Parts Co....................... 40,127,062
287,000 Fleming Cos., Inc...................... 5,040,438
--------------
248,197,250
CONSUMER DURABLES: 3.8%
1,530,000 General Motors Corp.................... 102,223,125
1,133,000 Ford Motor Co.......................... 66,847,000
832,100 Whirlpool Corp......................... 57,206,875
--------------
226,277,000
CONSUMER PRODUCTS: 3.7%
730,000 Sony Corp. ADR......................... 62,825,625
331,200 Matsushita Electric Industrial Co.,
Ltd. ADR............................... 53,240,400
780,000 Fort James Corp........................ 34,710,000
690,100 Dole Food Co., Inc..................... 34,289,344
682,100 Bausch & Lomb, Inc..................... 34,190,262
--------------
219,255,631
MEDIA, PRINTING, AND ENTERTAINMENT: 2.4%
1,622,000 R.R. Donnelley & Sons Co............... 74,206,500
395,000 Time Warner, Inc....................... 33,747,812
600,650 Dow Jones & Co......................... 33,486,238
--------------
141,440,550
--------------
835,170,431
FINANCE: 9.2%
BANKING: 5.4%
642,000 Citicorp............................... 95,818,500
660,000 Golden West Financial Corp............. 70,166,250
948,400 Republic New York Corp................. 59,689,925
634,000 BankAmerica Corp....................... 54,801,375
1,087,000 Norwest Corp........................... 40,626,625
--------------
321,102,675
INSURANCE AND FINANCIAL SERVICES: 3.8%
758,900 American Express Co.................... 86,514,600
608,100 Loews Corp............................. 52,980,712
534,000 Chubb Corp............................. 42,920,250
1,009,000 The St. Paul Cos., Inc................. 42,441,062
4,575 General Re Corp........................ 1,159,763
--------------
226,016,387
--------------
547,119,062
BASIC INDUSTRY: 8.2%
PAPER AND FOREST PRODUCTS: 3.1%
1,430,000 Weyerhaeuser Co........................ 66,048,125
1,120,000 Champion International Corp............ 55,090,000
1,034,000 International Paper Co................. 44,462,000
566,000 Boise Cascade Corp..................... 18,536,500
--------------
184,136,625
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
5
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1998
-------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CHEMICALS: 2.5%
STOCKS 850,000 Dow Chemical Co........................ $ 82,184,375
(Continued) 596,700 Eastman Chemical Co.................... 37,144,575
567,700 Nalco Chemical Co...................... 19,940,463
274,000 Lubrizol Corp.......................... 8,288,500
--------------
147,557,913
METALS AND MINING: 2.1
1,227,000 Aluminum Co. of America................ 80,905,312
925,900 Rio Tinto Plc.......................... 43,748,775
42,900 Rio Tinto Limited...................... 2,040,247
--------------
126,694,334
GENERAL MANUFACTURING: 0.5%
1,710,000 Archer Daniels Midland Co.............. 33,131,250
--------------
491,520,122
ENERGY: 6.1%
2,500,000 Occidental Petroleum Corp.............. 67,500,000
1,220,200 Amerada Hess Corp...................... 66,272,112
1,130,200 Phillips Petroleum Co.................. 54,461,512
557,000 Chevron Corp........................... 46,265,813
2,528,085 Union Pacific Resources Group, Inc..... 44,399,493
1,219,700 Unocal Corp............................ 43,604,275
578,000 Royal Dutch Petroleum Co............... 31,681,625
292,000 Amoco Corp............................. 12,154,500
--------------
366,339,330
ELECTRONICS AND COMPUTER: 5.4%
1,500,000 Motorola, Inc. ........................ 78,843,750
872,000 Hewlett-Packard Co. ................... 52,211,000
453,800 International Business Machines Corp. . 52,101,912
1,275,400 Electronic Data Systems................ 51,016,000
1,325,500 NCR Corp.,+ .......................... 43,078,750
1,720,000 National Semiconductor Corp.,+......... 22,682,500
370,000 Adobe Systems, Inc. ................... 15,701,875
901,800 Sybase, Inc.,+......................... 6,284,419
--------------
321,920,206
ELECTRIC AND GAS UTILITIES: 3.9%
1,772,200 Central & South West Corp.............. 47,627,875
827,000 Texas Utilities Co..................... 34,423,875
502,800 FPL Group, Inc......................... 31,676,400
1,388,100 TransCanada PipeLines Ltd.............. 30,885,225
926,000 Pacific Gas & Electric Corp............ 29,226,875
933,000 Wisconsin Energy Corp.................. 28,339,875
953,000 Edison International................... 28,173,063
--------------
230,353,188
TRANSPORTATION: 3.1%
1,597,600 Union Pacific Corp..................... 70,494,100
1,040,000 FDX Corp.,+ ........................... 65,260,000
1,690,000 Canadian Pacific Ltd................... 47,953,750
--------------
183,707,850
CAPITAL EQUIPMENT: 3.0%
949,000 CATERPILLAR, INC....................... 50,178,375
934,000 Deere & Co............................. 49,385,250
905,500 Fluor Corp............................. 46,180,500
286,100 Lockheed Martin Corp................... 30,290,838
--------------
176,034,963
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
6
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1998
----------------------------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON HEALTHCARE AND PHARMACEUTICAL: 1.7%
STOCKS 1,719,200 Pharmacia & Upjohn, Inc................................................................ $ 79,298,100
(Continued) 754,000 First Health Group Corp.+.............................................................. 21,489,000
--------------
100,787,100
DIVERSIFIED TECHNOLOGY: 1.4%
320,000 Xerox Corp............................................................................. 32,520,000
810,000 Corning, Inc........................................................................... 28,147,500
632,100 Unova, Inc.,+ ........................................................................ 13,590,150
270,400 Raychem Corp........................................................................... 7,993,700
--------------
82,251,350
--------------
Total Common Stocks (cost $2,520,707,407).................................................. 3,335,203,602
PREFERRED CONSUMER: 1.4%
STOCKS: 2,718,000 News Corp. Ltd., Limited Voting Ordinary Shares ADR.................................... 76,783,500
1.4% 57,500 Kmart Financing I, 7 3/4% Trust Convertible Preferred.................................. 4,025,000
--------------
Total Preferred Stocks (cost $52,150,153).................................................. 80,808,500
PAR VALUE
BONDS: U.S. TREASURY AND GOVERNMENT AGENCY: 9.3%
36.6% U.S. TREASURY: 8.3%
$ 26,925,000 U.S. Treasury Notes, 5.25%, 7/31/1998.................................................. 26,925,000
83,500,000 U.S. Treasury Notes, 7.125%, 10/15/1998................................................ 83,956,745
104,050,000 U.S. Treasury Notes, 5.125%, 11/30/1998................................................ 103,968,841
97,225,000 U.S. Treasury Notes, 5.875%, 11/15/1999................................................ 97,665,429
70,850,000 U.S. Treasury Notes, 7.125%, 2/29/2000................................................. 72,621,250
40,000,000 U.S. Treasury Notes, 6.75%, 4/30/2000.................................................. 40,843,600
53,000,000 U.S. Treasury Notes, 5.625%, 11/30/2000................................................ 53,116,070
13,200,000 U.S. Treasury Notes, 6.25%, 2/15/2003.................................................. 13,583,592
--------------
492,680,527
GOVERNMENT AGENCY: 1.0%
5,000,000 Arkansas Dev. Fin. Auth. GNMA Guaranteed Bonds, 9.75%, 11/15/2014...................... 6,393,200
16,278,853 Govt. Small Business Admin. 504 Series 97-20F, 7.20%, 6/1/2017......................... 17,149,283
18,417,303 Govt. Small Business Admin. 504 Series 97-20I, 6.90%, 9/1/2017......................... 19,153,811
19,675,000 Govt. Small Business Admin. 504 Series 98-20D, 6.15%, 4/1/2018......................... 19,783,212
--------------
62,479,506
--------------
555,160,033
FEDERAL AGENCY CMO* AND REMIC**: 8.3%
16,200,000 Federal Home Loan Mtge. Corp., 7.00%, 3/15/2005........................................ 16,336,566
15,000,000 Federal Home Loan Mtge. Corp., 7.00%, 1/15/2006........................................ 15,238,950
15,000,000 Federal Home Loan Mtge. Corp., 7.00%, 10/15/2006....................................... 15,281,250
30,115,957 Federal Home Loan Mtge. Corp., 6.75%, 11/15/2006....................................... 30,369,834
5,934,000 Federal Home Loan Mtge. Corp., 6.00%, 1/15/2007....................................... 5,904,330
21,500,000 Federal Home Loan Mtge. Corp., 6.50%, 10/15/2007....................................... 21,876,250
12,609,000 Federal Home Loan Mtge. Corp., 7.00%, 1/15/2008........................................ 12,955,748
10,000,000 Federal Home Loan Mtge. Corp., 6.50%, 5/15/2008........................................ 10,162,500
14,750,000 Federal Home Loan Mtge. Corp., 6.50%, 5/15/2008........................................ 14,998,832
16,474,350 Federal Home Loan Mtge. Corp., 6.50%, 8/15/2008........................................ 16,829,537
26,000,000 Federal Home Loan Mtge. Corp., 6.00%, 12/15/2008....................................... 26,040,560
18,331,153 Federal Home Loan Mtge. Corp., 7.00%, 5/17/2020........................................ 18,491,551
22,072,689 Federal Home Loan Mtge. Corp., 6.50%, 5/15/2021........................................ 21,955,262
25,000,000 Federal Home Loan Mtge. Corp., 6.75%, 8/15/2021........................................ 25,390,500
28,000,000 Federal Home Loan Mtge. Corp., 7.00%, 8/25/2023........................................ 29,058,680
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
7
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1998
-------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS FEDERAL AGENCY CMO* AND REMIC** (CONTINUED)
(Continued) $ 4,600,803 Federal Natl. Mtge. Assn., 5.00%, 12/25/2004................................. $ 4,561,972
29,051,707 Federal Natl. Mtge. Assn., 6.00%, 9/18/2005.................................. 29,006,096
7,690,498 Federal Natl. Mtge. Assn., 5.00%, 1/1/2006................................... 7,370,804
21,840,000 Federal Natl. Mtge. Assn., 7.50%, 2/25/2007.................................. 22,597,411
21,674,800 Federal Natl. Mtge. Assn., 6.50%, 8/25/2008.................................. 22,209,734
15,475,000 Federal Natl. Mtge. Assn., 6.00%, 3/25/2009.................................. 15,392,673
925,866 Federal Natl. Mtge. Assn., 6.50%, 4/1/2009................................... 927,023
9,989,005 Federal Natl. Mtge. Assn., 5.70%, 8/25/2016.................................. 9,907,794
13,730,000 Federal Natl. Mtge. Assn., 7.00%, 6/17/2022.................................. 14,347,850
12,586,553 Veterans Affairs Vendee Mtge. Trust, 6.50%, 11/15/2009....................... 12,590,455
15,929,940 Veterans Affairs Vendee Mtge. Trust, 6.75%, 8/15/2014........................ 16,173,828
27,000,000 Veterans Affairs Vendee Mtge. Trust, 6.75%, 9/15/2014........................ 27,432,270
8,000,000 Veterans Affairs Vendee Mtge. Trust, 6.75%, 5/15/2019........................ 8,151,840
23,000,000 Veterans Affairs Vendee Mtge. Trust, 7.00%, 6/15/2019........................ 23,486,680
--------------
495,046,780
FEDERAL AGENCY MORTGAGE PASS-THROUGH: 5.6%
801,173 Federal Home Loan Mtge. Corp., 6.50%, 2/1/2006............................... 805,908
646,764 Federal Home Loan Mtge. Corp., 7.50%, 7/1/2006............................... 657,455
182,945 Federal Home Loan Mtge. Corp., 7.00%, 9/1/2006............................... 184,924
432,780 Federal Home Loan Mtge. Corp., 7.25%, 1/1/2008............................... 437,986
250,349 Federal Home Loan Mtge. Corp., 7.50%, 2/1/2008............................... 253,663
1,093,340 FEderal Home Loan Mtge. Corp., 8.00%, 2/1/2008............................... 1,130,863
214,903 Federal Home Loan Mtge. Corp., 7.25%, 4/1/2008............................... 218,150
27,249,582 Federal Home Loan Mtge. Corp., 7.00%, 5/1/2008............................... 27,853,705
40,472,405 Federal Home Loan Mtge. Corp., 7.00%, 12/1/2008.............................. 41,369,679
10,063,115 Federal Home Loan Mtge. Corp., 6.50%, 2/1/2009............................... 10,158,816
21,117,835 Federal Home Loan Mtge. Corp., 6.00%, 9/1/2009............................... 21,086,158
1,024,244 Federal Home Loan Mtge. Corp., 8.75%, 5/1/2010............................... 1,069,146
16,876,229 Federal Home Loan Mtge. Corp., 7.50%, 8/1/2010............................... 17,391,967
6,415,812 Federal Home Loan Mtge. Corp., 8.00%, 11/1/2010.............................. 6,636,002
362,926 Federal Home Loan Mtge. Corp., 7.75%, 1/1/2012............................... 370,341
1,147,336 Federal Home Loan Mtge. Corp., 8.25%, 2/1/2017............................... 1,187,585
9,257,286 Federal Home Loan Mtge. Corp., 8.50%, 1/1/2023............................... 9,717,188
608,664 Federal Natl. Mtge. Assn., 6.50%, 1/1/2004................................... 611,640
3,212,471 Federal Natl. Mtge. Assn., 7.50%, 12/1/2006.................................. 3,293,361
5,276,306 Federal Natl. Mtge. Assn., 7.50%, 9/1/2007................................... 5,457,019
9,296,582 Federal Natl. Mtge. Assn., 7.00%, 12/1/2007.................................. 9,515,795
19,147,924 Federal Natl. Mtge. Assn., 7.00%, 12/1/2007.................................. 19,491,629
10,056,820 Federal Natl. Mtge. Assn., 6.50%, 5/1/2008................................... 10,137,778
17,795,021 Federal Natl. Mtge. Assn., 8.00%, 6/1/2008................................... 18,406,636
25,285,242 Federal Natl. Mtge. Assn., 6.50%, 11/1/2008.................................. 25,509,522
10,706,060 Federal Natl. Mtge. Assn., 6.00%, 1/1/2009................................... 10,642,466
5,211,914 Federal Natl. Mtge. Assn., 8.00%, 1/1/2009................................... 5,334,029
1,366,617 Federal Natl. Mtge. Assn., 7.50%, 8/1/2010................................... 1,414,613
4,551,535 Federal Natl. Mtge. Assn., 7.50%, 7/1/2019................................... 4,680,753
17,668,746 Govt. Natl. Mtge. Assn., 7.50%, 7/15/2007.................................... 18,154,813
21,494,923 Govt. Natl. Mtge. Assn., 7.50%, 1/15/2008.................................... 22,227,041
10,666,943 Govt. Natl. Mtge. Assn., 8.00%, 12/15/2008................................... 11,009,778
9,608,249 Veterans Affairs Vendee Mtge. Trust, 5.63439%, 2/15/24....................... 9,184,813
7,224,048 Veterans Affairs Vendee Mtge. Trust, 7.20914%, 2/15/25....................... 7,494,950
8,978,209 Veterans Affairs Vendee Mtge. Trust, 8.7925%, 6/15/2025...................... 9,749,707
--------------
332,845,879
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
8
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1998
--------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS ASSET-BACKED SECURITIES: 0.8%
(Continued) $ 27,700,000 CA Infrastructure and Econ. Dev. Bank SP Trust PGE-1 Rate
Reduction CTF. 1997-, A-5, 6.25%, 6/25/2004.............................. $ 27,942,375
18,000,000 CA Infrastructure and Econ. Dev. Bank SP Trust SCE-1 Rate
Reduction Cft. 1997-, A-6, 6.38%, 9/25/2008.............................. 18,303,660
--------------
46,246,035
CORPORATE: 11.1%
FINANCE: 5.6%
19,775,000 BankAmerica Capital II, 8.00%, 12/15/2026, Callable 2006++............... 21,491,668
2,000,000 Barclays No. American Capital, 9.75%, 5/15/2021, Callable 2001........... 2,259,640
4,400,000 CIGNA Corp., 8.30%, 1/15/2023............................................ 5,079,624
1,800,000 CIGNA Corp., 7.65%, 3/1/2023............................................. 1,952,820
18,680,000 Citicorp Capital Trust I, 7.933%, 2/15/2027, Callable 2007++............. 20,321,412
5,000,000 First Nationwide Bank Sub. Debentures, 10.00%, 10/1/2006................. 6,032,550
40,700,000 Ford Motor Credit Co. Global Notes, 7.20%, 6/15/2007..................... 43,217,295
22,500,000 GMAC Global Notes, 6.125%, 1/22/2008..................................... 22,260,375
30,000,000 GMAC Put Notes, 8.875%, 6/1/2010, Putable 2000/2005...................... 36,043,800
7,500,000 General Electric Capital Corp., 8.70%, 3/1/2007.......................... 8,835,825
5,000,000 Golden West Financial, 7.875%, 1/15/2002................................. 5,267,050
10,000,000 Golden West Financial, 6.70%, 7/1/2002................................... 10,168,900
24,100,000 Golden West Financial, 6.00%, 10/1/2003.................................. 23,844,781
6,000,000 Hartford Financial Services Group, 8.30%, 12/1/2001...................... 6,384,960
10,000,000 Hartford Financial Services Group, 6.375%, 11/1/2002..................... 10,079,200
25,160,000 J.P. Morgan Capital Trust I, 7.54%, 1/15/2027, Callable 2007++........... 26,118,344
14,400,000 Norwest Corp., 6.20%, 12/1/2005.......................................... 14,488,560
11,050,000 Norwest Corp., 6.875%, 8/8/2006.......................................... 11,572,223
19,700,000 Norwest Corp., 6.75%, 10/1/2006.......................................... 20,447,812
7,500,000 Norwest Corp., 6.55%, 12/1/2006.......................................... 7,726,650
15,000,000 Norwest Corp., 6.75%, 6/15/2007.......................................... 15,616,350
14,175,000 Safeco Corp. Notes, 6.875%, 7/15/2007.................................... 14,812,308
--------------
334,022,147
INDUSTRIAL: 5.1%
13,800,000 Dayton Hudson Corp., 9.35%, 6/16/2020.................................... 17,983,884
7,500,000 Dayton Hudson Corp., 9.875%, 7/1/2020.................................... 10,247,850
8,450,000 Dayton Hudson Corp., 9.70%, 6/15/2021.................................... 11,369,222
12,750,000 Dayton Hudson Corp., 9.00%, 10/1/2021.................................... 16,135,507
9,000,000 Dayton Hudson Corp., 8.80%, 5/15/2022.................................... 11,267,190
25,000,000 Lockheed Martin Corp., 7.65%, 5/1/2016................................... 27,884,000
35,000,000 Lockheed Martin Corp., 7.75%, 5/1/2026................................... 39,881,800
5,975,000 May Department Stores, 7.625%, 8/15/2013................................. 6,693,374
14,000,000 May Department Stores, 8.125%, 8/15/2035, Callable 2015.................. 15,923,180
10,700,000 May Department Stores, 7.875%, 8/15/2036, Callable 2016.................. 11,903,643
28,325,000 Raytheon Co., 6.75%, 8/15/2007........................................... 29,045,305
20,000,000 Raytheon Co., 6.75%, 3/15/2018........................................... 20,418,800
17,500,000 Raytheon Co., 7.20%, 8/15/2027........................................... 18,721,150
26,425,000 Time Warner Entertainment Sr. Debentures, 8.375%, 7/15/2033.............. 31,239,899
3,450,000 Union Camp Corp. Debentures, 9.25%, 2/1/2011............................. 4,240,499
24,650,000 Walt Disney Co. Debentures, 7.55%, 7/15/2093, Callable 2023.............. 28,173,717
--------------
301,129,020
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
9
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1998
--------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS TRANSPORTATION: 0.4%
(Continued) $ 7,802,254 Consolidated Rail Corp., 95-A Pass-Through Trust, 6.76%, 5/25/2015........... $ 8,020,483
12,550,000 Consolidated Rail Corp., 9.75%, 6/15/2020.................................... 16,838,084
--------------
24,858,567
UTILITIES: 0.0%
750,000 Idaho Power Co. 1st Mtge. Bonds, 9.50%, 1/1/2021, Callable 2001.............. 826,170
--------------
660,835,904
FOREIGN (U.S. DOLLAR-DENOMINATED): 1.5%
CANADIAN CORPORATE: 1.0%
8,750,000 Canadian Pacific Ltd., 9.45%, 8/1/2021....................................... 11,397,925
12,000,000 Hydro-Quebec, 7.50%, 4/1/2016................................................ 13,287,360
30,000,000 Hydro-Quebec, 8.40%, 1/15/2022............................................... 36,629,100
--------------
61,314,385
INTERNATIONAL AGENCY: 0.5%
7,200,000 European Investment Bank, 10.125%, 10/1/2000................................. 7,838,856
17,765,000 Inter-American Development Bank, 7.125%, 3/15/2023, Callable 2003............ 18,501,182
--------------
26,340,038
--------------
87,654,423
--------------
Total Bonds (cost $2,101,308,930)........................................... 2,177,789,054
--------------
SHORT-TERM 60,000,000 American Express Credit Corp., Commercial Paper, 5.70%, 7/1/1998............. 60,000,000
INVESTMENTS: 20,528,175 SSGA Prime Money Market Fund................................................. 20,528,175
6.1% 6,804,313 SSGA United States Treasury Money Market Fund................................ 6,804,313
75,000,000 U.S. Treasury Bills, 7/2/1998................................................ 74,989,688
40,000,000 U.S. Treasury Bills, 7/9/1998................................................ 39,955,733
35,000,000 U.S. Treasury Bills, 8/6/1998................................................ 34,824,050
20,000,000 U.S. Treasury Bills, 9/17/1998............................................... 19,781,817
75,000,000 U.S. Treasury Bills, 10/15/1998.............................................. 73,882,583
35,000,000 U.S. Treasury Bills, 11/5/1998............................................... 34,370,292
--------------
Total Short-Term Investments (cost $365,136,651)............................ 365,136,651
TOTAL INVESTMENTS (cost $5,039,303,141).............................. 100.1% 5,958,937,807
OTHER ASSETS LESS LIABILITIES........................................ (0.1) (3,223,530)
----- --------------
TOTAL NET ASSETS..................................................... 100.0% $5,955,714,277
===== ==============
</TABLE>
+ Non-income producing
++ Cumulative Preferred Securities
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
See accompanying Notes to Financial Statements
================================================================================
10
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Statements of Assets and Liabilities June 30, 1998
-----------------------------------------------------------------------------
ASSETS:
<C> <S> <C>
Investments, at market value (identified cost $5,039,303,141) $5,958,937,807
Cash......................................................... 7,017,599
Dividends and interest receivable............................ 29,447,858
Receivable for investments sold.............................. 19,957,517
Prepaid expenses............................................. 170,995
--------------
6,015,531,776
--------------
LIABILITIES:
Payable for investments purchased............................ 19,823,381
Payable for Fund shares redeemed............................. 36,829,742
Management fees payable...................................... 2,448,730
Accounts payable............................................. 715,646
--------------
Net asset value 59,817,499
per share $69.39 --------------
NET ASSETS............................................... $5,955,714,277
Beneficial ==============
shares outstanding NET ASSETS CONSIST OF:
85,827,536 Paid in capital.............................................. $4,844,555,334
(par value $.01 Accumulated undistributed net investment income.............. 154,448
each, unlimited Accumulated undistributed net realized gain on investments... 191,369,829
shares authorized) Net unrealized appreciation on investments................... 919,634,666
--------------
$5,955,714,277
==============
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations Six Months Ended June 30, 1998
-----------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends.................................................... $ 30,210,343
Interest..................................................... 78,445,110
--------------
108,655,453
--------------
EXPENSES:
Management fees (Note 2)..................................... 14,354,593
Custodian fees............................................... 143,750
Transfer agent fees.......................................... 843,297
Accounting and audit fees.................................... 36,635
Legal fees................................................... 10,941
Shareholder reports.......................................... 162,550
Registration fees............................................ 270,477
Trustees' fees............................................... 7,000
Miscellaneous................................................ 43,524
--------------
15,872,767
--------------
NET INVESTMENT INCOME........................................ 92,782,686
--------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments........................... 191,181,093
Change in unrealized appreciation of investments........... 89,938,177
--------------
Net realized and unrealized gain on investments.......... 281,119,270
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......... $ 373,901,956
==============
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
11
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Six Months Ended June 30,
------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
OPERATIONS:
Net investment income................................ $ 92,782,686 $ 71,382,956
Net realized gain.................................... 191,181,093 109,101,970
Net change in unrealized appreciation................ 89,938,177 308,368,285
-------------- --------------
Net increase in net assets from operations........... 373,901,956 488,853,211
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................ (93,508,952) (70,206,661)
Net realized gain.................................... (68,169,038) (14,501,695)
-------------- --------------
Total distributions.................................. (161,677,990) (84,708,356)
-------------- --------------
BENEFICIAL SHARE TRANSACTIONS:
Amounts received from sale of shares................. 1,210,723,604 951,280,707
Net asset value of shares issued in reinvestment of
distributions....................................... 156,195,103 81,739,496
Amounts paid for shares redeemed..................... (700,025,656) (357,020,943)
-------------- --------------
Net increase from beneficial share transactions...... 666,893,051 675,999,260
-------------- --------------
Total increase in net assets......................... 879,117,017 1,080,144,115
NET ASSETS:
Beginning of period.................................. 5,076,597,260 3,629,826,889
-------------- --------------
End of period (including undistributed net
investment income of $154,448 and $1,766,263,
respectively)....................................... $5,955,714,277 $4,709,971,004
============== ==============
Shares sold.......................................... 17,704,691 15,379,771
Shares issued in reinvestment of distributions....... 2,246,471 1,307,411
Shares redeemed...................................... (10,146,111) (5,766,787)
-------------- --------------
Net increase in shares outstanding................... 9,805,051 10,920,395
============== ==============
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
12
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
Notes to Financial Statements
---------------------------------------------------------------------------
1 Dodge & Cox Balanced Fund (the "Fund") reorganized on April 30, 1998, and
became a separate series of Dodge & Cox Funds (the "Trust"), in accordance
with a plan or reorganization approved by the Fund's shareholders on
January 30, 1998. The Trust is organized as a Delaware business trust and
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund consistently
follows accounting policies which are in conformity with generally accepted
accounting principles for investment companies. Significant accounting
policies are as follows: (a) Security valuation: stocks are valued at the
latest quoted sales prices as of 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; long-term debt securities are priced on the
basis of valuations furnished by pricing services which utilize both
dealer-supplied valuations and electronic data processing techniques; 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; securities for which market quotations are not readily available
are valued at fair value as determined in good faith by or at the direction
of the Board of Trustees; short-term securities are valued at amortized
cost or original cost plus accrued interest, both of which approximate
current value; all securities held by the Fund are denominated in U.S.
Dollars. (b) Security transactions are accounted for on the trade date in
the financial statements. (c) Gains and losses on securities sold are
determined on the basis of identified cost. (d) Dividend income is recorded
on the ex-dividend date and interest income is recorded on the accrual
basis. (e) Distributions to shareholders of income and capital gains are
reflected in the net asset value per share computation on the ex-dividend
date. (f) No provision for Federal income taxes has been included in the
accompanying financial statements since the Fund intends to distribute all
of its taxable income and otherwise continue to comply with requirements
for regulated investment companies.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Actual results could
differ from those estimates.
2 Under a written agreement, the Fund pays an annual management fee of 1/2 of
1% of the Fund's average daily net asset value to Dodge & Cox, investment
manager of the Fund. All officers and seven of the trustees of the Trust
are officers and employees of Dodge & Cox. Those trustees who are not
affiliated with Dodge & Cox receive from the Trust an annual fee of $3,000
and an attendance fee of $1,500 for each Board or Committee meeting
attended. Payments to trustees are divided equally among each series of the
Trust. The Trust does not pay any other remuneration to its officers or
trustees.
3 For the six months ended June 30, 1998, purchases and sales of securities,
other than short-term securities, aggregated $1,089,507,864 and
$668,282,119, respectively, of which U.S. government obligations aggregated
$304,246,895 and $144,206,521, respectively. At June 30, 1998, the cost of
investments for Federal income tax purposes was equal to the cost for
financial reporting purposes. Net unrealized appreciation aggregated
$919,634,666, of which $999,829,594 represented appreciated securities and
$80,194,928 represented depreciated securities.
The financial information has been taken from the records of the Fund and
has not been audited by our independent accountants who do not express an
opinion thereon. The financial statements of the Fund will be subject to audit
by our independent accountants as of the close of the calendar year.
See accompanying Notes to Financial Statements
================================================================================
13
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
Financial Highlights
------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECTED DATA AND RATIOS (for a share outstanding throughout each period)
Six Months Ended
June 30, Year Ended December 31,
---------------- ------------------------------------------
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 66.78 $59.82 $54.60 $45.21 $46.40 $42.44
Income from investment operations:
Net investment income 1.10 2.21 1.98 1.90 1.76 1.66
Net realized and unrealized gain (loss) 3.43 10.24 5.92 10.58 (.83) 5.03
------- ------ ------ ------ ------ ------
Total from investment operations 4.53 12.45 7.90 12.48 .93 6.69
------- ------ ------ ------ ------ ------
Distributions to shareholders from:
Net investment income (1.11) (2.22) (1.99) (1.90) (1.76) (1.66)
Net realized gain (.81) (3.27) (.69) (1.19) (.36) (1.07)
------- ------ ------ ------ ------ ------
Total distributions (1.92) (5.49) (2.68) (3.09) (2.12) (2.73)
------- ------ ------ ------ ------ ------
Net asset value, end of period $ 69.39 $66.78 $59.82 $54.60 $45.21 $46.40
======= ====== ====== ====== ====== ======
Total return 6.80% 21.21% 14.75% 28.02% 1.99% 15.95%
Ratios/supplemental data
Net assets, end of period (millions) $ 5,956 $5,077 $3,630 $1,800 $ 725 $ 487
Ratio of expenses to average net assets .55%* .55% .56% .57% .58% .60%
Ratio of net investment income to average
net assets 3.21%* 3.39% 3.60% 3.85% 3.94% 3.67%
Portfolio turnover rate 13% 32% 17% 20% 20% 15%
</TABLE>
* Annualized
See accompanying Notes to Financial Statements
================================================================================
14
<PAGE>
D O D G E & C O X
================================================================================
Balanced Fund
General Information
---------------------------------------------------------------
Investment Since 1930, Dodge & Cox has been providing professional
Manager investment management for individuals, trustees, corporations,
pension and profit-sharing funds, and charitable institutions.
Dodge & Cox manages the Dodge & Cox Balanced Fund, the Dodge &
Cox Stock Fund and the Dodge & Cox Income Fund.
No-Load Fund Shares of the Fund are purchased and redeemed at net asset
value. There are no sales, redemption or Rule 12b-1 plan
distribution charges.
Gifts Fund shares provide a convenient method for making gifts to
children and to other family members. Shares may be held by an
adult custodian for the benefit of a minor under a Uniform
Gifts/Transfers to Minors Act. Trustees and guardians may also
hold shares for a minor's benefit.
Automatic Shareholders may make regular monthly or quarterly investments
Investment Plan of $100 or more through automatic deductions from their bank
accounts.
Withdrawal Plan Shareholders owning $10,000 or more of the Fund's shares may
elect to receive periodic monthly or quarterly payments of at
least $50. Under the plan, all dividend distributions are
automatically reinvested at net asset value with the periodic
payments made from the proceeds of the redemption of sufficient
shares.
Reinvestment Shareholders may direct that dividend and capital gains
Plan distributions be reinvested in additional Fund shares.
The above plans are completely voluntary and involve no service
charge of any kind.
IRA Plan The Fund has a Regular and Roth Individual Retirement Account
Plan (IRA) available for shareholders of the Fund.
Shareholder Fund literature and details on all of these Plans are available
Inquiries from the Fund upon request.
Dodge & Cox Balanced Fund
c/o BFDS
P.O. Box 9051
Boston, MA 02205-9051
(800) 621-3979
================================================================================
<PAGE>
D O D G E & C O X
Income Fund
Investment Managers
Dodge & Cox
One Sansome Street
35th Floor
San Francisco
California 94104-4405
(415) 981-1710
For Fund literature and
information, please write or call:
Dodge & Cox Funds
c/o BFDS
P.O. Box 9051
Boston
Massachusetts 02205-9051
(800) 621-3979
- --------------------------------------------------------------------------------
This report is submitted for the general information of the shareholders of
the Fund. The report is not authorized for distribution to prospective investors
in the Fund unless it is accompanied by an effective prospectus.
Printed on recycled paper. 6/98 IF SAR
D O D G E & C O X
Income Fund
Established 1989
Semi-Annual Report
June 30, 1998
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
To Our Shareholders
- --------------------------------------------------------------------------------
The Dodge & Cox Income Fund provided a total return of 2.4% for the quarter
ended June 30, 1998, and 3.9% for the first half of 1998. This compared to
returns of 2.3% and 3.9%, respectively, for the Lehman Brothers Aggregate Bond
Index (LBAG), a broad-based index composed of investment-grade bonds. Longer-
term results appear on page three of this report. On June 30, total net assets
in the Fund were $827 million.
Expectations of Slower Growth and Low Inflation Lead to a Drop in Interest Rates
Bond yields fell during the second quarter amid expectations that the economy is
slowing, inflation will remain low, and the Federal Reserve will not raise
interest rates. The yield on the 30-year U.S. Treasury bond dropped 35 basis
points (one basis point equals 1/100th of one percent) to 5.62%. U.S. gross
domestic product (GDP), which grew at a rapid rate of 5.5% in the first quarter,
slowed considerably during the second quarter. Inflation (as measured by the
Consumer Price Index) remained under control, growing at a 1.4% rate through
June 30, and the Federal Reserve left the Fed Funds rate unchanged at its May
meeting.
Positive contributors to performance relative to the LBAG included the
portfolio's higher-than-market yield and individual security selection; key
factors included the Fund's investment in more stable types of mortgage-related
securities and longer-duration, call-protected corporate bonds. The Fund's
relative performance was negatively affected by a slightly lower-than-market
duration (a measure of a bond's price sensitivity to changes in interest rates).
The general widening of corporate and mortgage yield premiums also detracted
marginally from relative performance, as the Fund had overweighted positions in
both of these sectors.
The Importance of a Disciplined Approach
We are fortunate to be living in an extended period of domestic prosperity.
Though we do not anticipate its imminent demise, we do believe that it is now
especially important to remain disciplined investors. In the current environment
of relatively low interest rates and narrow yield premiums, the temptation is to
"reach for yield." By this we mean purchasing higher-yielding securities in an
attempt to enhance short-term performance, with less emphasis placed on each
investment's fundamental characteristics and long-term total return potential.
The danger of this approach is that a sudden change in economic conditions can
lead to rapid credit deterioration, an outcome that would be most detrimental to
higher-yielding, generally weaker credits. The financial distress in Southeast
Asia is only the most recent example of how quickly economic conditions can
change and how costly the consequence of these changes can be to fixed-income
investors.
At Dodge &Cox, we counter this temptation to "reach for yield" by asking
ourselves a set of very basic questions before each corporate bond purchase.
These questions include:
. Is the company a weak player in a declining or cyclical commodity
business?
. Does the company have the financial wherewithal to withstand an ordinary
economic downturn?
. Does the company rely upon a "fad" product which could be subject to
sudden or severe shifts in demand?
. Is there a non-trivial possibility of an adverse change in the company's
regulatory or legal environment?
While these types of questions may seem simple, a great deal of research is
required to be able to answer them with a high degree of confidence.
To this end, we are committed to independent fundamental research, a hallmark of
our investment philosophy. We do not rely upon Wall Street or rating agency
research to make investment decisions. Rather, we utilize our in-house team of
analysts to develop a thorough understanding of specific industries, conduct
extensive research on industry participants, and monitor factors critical to
industry and company performance. Only when we have a solid grasp of the
fundamentals of a company--its market position, strength of franchise, cash flow
outlook, and quality of the
================================================================================
1
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
balance sheet--will we consider the company's bonds as an investment for the
Fund. This credit analysis, combined with the evaluation of each security's
characteristics (e.g., structure and price), forms the basis of our corporate
bond investment decisions.
An Example of our Approach
The Fund's investment in the Lockheed Martin Corporation is an example of our
approach. The Fund currently holds two Lockheed Martin debentures, which
together comprise approximately 2.7% of the portfolio. Please note that we
highlight these bonds as examples of our investment approach, not because we
consider them more attractive than the Fund's other holdings.
Lockheed Martin is the largest defense company in the United States with 1997
revenues of $28 billion. The company is organized into five divisions: Space
and Strategic Missiles, Electronics, Information and Services, Aeronautics and
Energy, and Materials. The core of the company is the former Martin Marietta,
which purchased GE's Aerospace division in 1993, merged with Lockheed in 1995
and acquired Loral in 1996. Lockheed Martin today represents the consolidation
of 17 major defense companies. The strength of its market position is reflected
in its involvement in all of the U.S. government's "high-priority" programs,
most of which involve long-term contracts.
We consider Lockheed Martin to be a well-managed company. Its strong profit
margins and high free cash flow are due to modest capital spending needsgiven
the mature nature of the defense business, as well as to lower costs resulting
from ongoing productivity programs. Though current debt levels are relatively
high at 70% of total capital, Lockheed Martin's cash flow covers its interest
expense by almost five times. We believe this strong cash flow will continue
due to the company's durable business franchises, its competitive market
position and the sustainability of its key product lines. Management intends to
use excess cash flow to reduce Lockheed's overall debt level over the next few
years. These factors give us confidence in the company's ability to meet its
debt obligations over a wide variety of economic conditions.
The structure of the debentures is attractive as well: both are non-callable
and have long maturities (20 and 30 years, respectively). We find these
features attractive because the longer maturity gives them a higher yield than
comparable shorter-maturity bonds, and the combination of the longer duration
and non-callable feature allows the Fund to benefit from improvement in the
issuer's credit strength. These securities are priced at yield premiums of 90
and 100 basis points, respectively, compared to the benchmark 30-year Treasury.
While much of this incremental yield is due to the company's high debt load,
our analysis suggests that the company's strong cash flow appears stable and
more than adequate to service its obligations. We believe the combination of
strong fundamentals, attractive security structure and incremental yield makes
the Lockheed Martin bonds an attractive investment opportunity.
In Closing
Over time, our investment philosophy and methodology have not changed. We will
remain committed to a disciplined approach, relying upon independent
fundamental research.
Thank you for your continued confidence in the Dodge & Cox Income Fund. As
always, we welcome your comments and questions.
For the Board of Trustees,
/s/ Harry R. Hagey, Chairman /s/ A. Horton Shapiro, Executive Vice President
- ---------------------------- -----------------------------------------------
Harry R. Hagey, Chairman A. Horton Shapiro, Executive Vice President
July 31, 1998
================================================================================
2
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
Objective The Fund's primary objective is to provide shareholders with a
high and stable rate of current income, consistent with long-term
preservation of capital. A secondary objective is to take advantage
of opportunities to realize capital appreciation.
Strategy The Fund seeks to achieve these objectives by investing in a
diversified portfolio of primarily high-quality bonds and other
fixed-income securities, while striving to maintain the Fund's
yield higher than that of the broad bond market. Dodge & Cox
conducts thorough fundamental research on each of the Fund's
investments, taking many factors into consideration including
creditworthiness and structural characteristics. Fixed-income
securities in the Fund will generally include U.S. Treasury,
mortgage-related and corporate issues.
<TABLE>
<CAPTION>
Investment Performance Since Inception through June 30, 1998
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
DODGE & COX
INCOME LBAG
FUND INDEX
---- -----
<S> <C> <C>
1/1/89 $ 10,000 $ 10,000
12/31/89 11,411 11,455
12/31/90 12,256 12,482
12/31/91 14,451 14,479
12/31/92 15,581 15,550
12/31/93 17,350 17,067
12/31/94 16,848 16,568
12/31/95 20,252 19,630
12/31/96 20,988 20,339
12/31/97 23,088 22,308
6/30/98 23,980 23,182
</TABLE>
<TABLE>
<CAPTION>
9.5 Years
Average annual total return for periods ended June 30, 1998 1 Year 5 Years (Since Inception)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 11.04% 7.31% 9.64%
Lehman Brothers Aggregate Bond Index 10.54 6.88 9.25
</TABLE>
The chart covers the period from January 1, 1989 to June 30, 1998. It compares a
$10,000 investment made in the Dodge & Cox Income Fund to a $10,000 investment
made in the Lehman Brothers Aggregate Bond (LBAG) Index. The Fund's total
returns include the reinvestment of dividend and capital gain distributions.
The LBAG Index is a broad-based unmanaged measure of investment grade-rated
corporate and U.S. Government fixed-income securities. Index returns include
interest income and, unlike Fund returns, do not reflect fees or expenses. Past
performance does not guarantee future results. Investment return and share
price will fluctuate with market conditions, and investors may have a gain or
loss when shares are sold.
================================================================================
3
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
Fund Information June 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $12.14
Total Net Assets (millions) $ 827
1997 Expense Ratio 0.49%
1997 Portfolio Turnover 28%
30 Day SEC Yield* 5.93%
Fund Inception Date 1989
Investment Manager: Dodge & Cox, San Francisco.
Managed by the Fixed-Income Strategy Committee, whose ten members' average
tenure at Dodge & Cox is 12 years, and by the Investment Policy Committee, whose
eight members' average tenure at Dodge & Cox is 20 years.
</TABLE>
<TABLE>
Asset Allocation
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
<S> <C>
Bonds: 96.5%
Short-Term Investments: 3.5%
</TABLE>
<TABLE>
<CAPTION>
Bond Characteristics
- --------------------------------------------------------------------------------
<S> <C>
Number of Bonds 96
Average Quality AA+
Average Maturity 10.4 years
Effective Duration 4.25 years
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 23.8
Federal Agency CMO and REMIC+ 20.0
Federal Agency Mortgage Pass-Through 17.1
Asset-Backed 2.1
Corporate 28.4
Foreign (U.S. Dollar-denominated) 5.1
Short-Term Investments 3.5
</TABLE>
+Collateralized Mortgage Obligation and
Real Estate Mortgage Investment Conduit
<TABLE>
<CAPTION>
Moody's/Standard & Poor's
Quality Ratings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 60.9
Aaa/AAA 3.8
Aa/AA 3.1
A/A 17.0
Baa/BBB 11.7
Ba/BB 0.0
Short-Term Investments 3.5
</TABLE>
<TABLE>
<CAPTION>
Maturity Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
0-1 Years to Maturity 13.2
1-5 39.8
5-10 19.9
10-15 4.6
15-20 3.5
20-25 9.9
25 and Over 9.1
</TABLE>
* An annualization of the Fund's total net investment income per share for the
30-day period ended on the last day of the month.
================================================================================
4
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1998
----------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS: U.S. TREASURY AND GOVERNMENT AGENCY: 23.8%
96.5% U.S. TREASURY: 21.4%
$24,500,000 U.S. Treasury Notes, 5.25%, 7/31/1998.............................. $ 24,500,000
29,000,000 U.S. Treasury Notes, 7.125%, 10/15/1998............................ 29,158,630
15,000,000 U.S. Treasury Notes, 5.125%, 11/30/1998............................ 14,988,300
10,000,000 U.S. Treasury Notes, 5.625%, 11/30/1998............................ 10,012,500
45,000,000 U.S. Treasury Notes, 5.875%, 11/15/1999............................ 45,203,850
32,500,000 U.S. Treasury Notes, 6.75%, 4/30/2000.............................. 33,185,425
20,000,000 U.S. Treasury Notes, 6.25%, 2/15/2003.............................. 20,581,200
-----------
177,629,905
GOVERNMENT AGENCY: 2.4%
6,234,199 Govt. Small Business Admin. 504 Series 97-20E, 7.30%, 5/1/2017..... 6,603,138
6,643,811 Govt. Small Business Admin. 504 Series 97-20J, 6.55%, 10/1/2017.... 6,791,968
6,325,000 Govt. Small Business Admin. 504 Series 98-20C, 6.35%, 3/1/2018..... 6,422,532
-----------
19,817,638
-----------
197,447,543
FEDERAL AGENCY CMO* AND REMIC**: 20.0%
370,264 FBC Mtge. Sec. Trust IV-A2, 8.30%, 8/1/2009........................ 371,997
255,009 Federal Home Loan Mtge. Corp., 7.00%, 10/15/2005................... 254,450
21,000,000 Federal Home Loan Mtge. Corp., 7.10%, 11/15/2006................... 21,360,780
10,900,000 Federal Home Loan Mtge. Corp., 8.00%, 4/15/2007.................... 11,284,879
13,000,000 Federal Home Loan Mtge. Corp., 7.00%, 9/15/2007.................... 13,406,250
13,284,798 Federal Home Loan Mtge. Corp., 6.00%, 8/15/2008.................... 13,263,941
14,100,000 Federal Home Loan Mtge. Corp., 6.00%, 10/15/2008................... 14,047,125
20,000,000 Federal Home Loan Mtge. Corp., 6.50%, 4/15/2022.................... 20,456,200
10,000,000 Federal Home Loan Mtge. Corp., 6.00%, 6/17/2022.................... 9,834,300
3,000,000 Federal Natl. Mtge. Assn., 7.00%, 2/25/2007........................ 3,064,680
10,000,000 Federal Natl. Mtge. Assn., 7.00%, 7/17/2015........................ 10,184,300
9,000,000 Federal Natl. Mtge. Assn., 6.00%, 6/25/2023........................ 8,884,620
12,616,000 Veterans Affairs Vendee Mtge. Trust, 7.00%, 6/15/2010.............. 13,112,692
14,877,000 Veterans Affairs Vendee Mtge. Trust, 7.25%, 7/15/2016.............. 15,304,714
10,000,000 Veterans Affairs Vendee Mtge. Trust, 8.00%, 7/15/2018.............. 10,393,700
-----------
165,224,628
FEDERAL AGENCY MORTGAGE PASS-THROUGH: 17.1%
29,617 Federal Home Loan Mtge. Corp., 7.00%, 1/1/2003..................... 29,757
6,595 Federal Home Loan Mtge. Corp., 6.00%, 10/1/2003.................... 6,565
1,808,444 Federal Home Loan Mtge. Corp., 8.00%, 12/1/2003.................... 1,852,443
42,032 Federal Home Loan Mtge. Corp., 7.00%, 3/1/2006..................... 42,366
194,072 Federal Home Loan Mtge. Corp., 7.00%, 9/1/2006..................... 196,172
481,959 Federal Home Loan Mtge. Corp., 7.25%, 1/1/2008..................... 487,757
293,973 Federal Home Loan Mtge. Corp., 8.00%, 1/1/2008..................... 301,125
391,594 Federal Home Loan Mtge. Corp., 8.00%, 1/1/2008..................... 403,843
171,094 Federal Home Loan Mtge. Corp., 7.50%, 10/1/2008.................... 175,335
6,050,404 Federal Home Loan Mtge. Corp., 7.00%, 11/1/2008.................... 6,184,542
305,330 Federal Home Loan Mtge. Corp., 8.00%, 5/1/2009..................... 315,809
156,130 Federal Home Loan Mtge. Corp., 8.25%, 5/1/2009..................... 160,432
651,618 Federal Home Loan Mtge. Corp., 8.00%, 8/1/2009..................... 672,001
94,186 Federal Home Loan Mtge. Corp., 6.50%, 6/1/2012..................... 94,531
</TABLE>
See accompanying Notes to Financial Statements
===============================================================================
5
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1998
----------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS FEDERAL AGENCY MORTGAGE PASS-THROUGH (continued)
(Continued) $ 5,865,635 Federal Natl. Mtge. Assn., 7.50%, 9/1/2007......................... $ 6,066,533
2,390,380 Federal Natl. Mtge. Assn., 6.25%, 12/1/2007........................ 2,386,364
16,386,495 Federal Natl. Mtge. Assn., 7.00%, 7/1/2008......................... 16,712,751
14,213,207 Federal Natl. Mtge. Assn., 6.50%, 12/1/2008........................ 14,339,278
11,629,617 Federal Natl. Mtge. Assn., 6.50%, 7/1/2009......................... 11,732,771
7,630,477 Federal Natl. Mtge. Assn., 8.00%, 8/1/2010......................... 7,892,737
642,610 Federal Natl. Mtge. Assn., 7.50%, 2/1/2011......................... 656,927
1,774,968 Federal Natl. Mtge. Assn., 8.00%, 1/1/2012......................... 1,848,629
383,679 Federal Natl. Mtge. Assn., 6.50%, 1/1/2013......................... 386,437
1,983,207 Federal Natl. Mtge. Assn., 8.00%, 8/1/2022......................... 2,065,014
5,579,039 Govt. Natl. Mtge. Assn., 7.25%, 2/15/2006.......................... 5,711,262
7,067,498 Govt. Natl. Mtge. Assn., 7.50%, 7/15/2007.......................... 7,261,925
20,430,856 Govt. Natl. Mtge. Assn., 7.00%, 4/15/2009.......................... 20,826,602
9,575,378 Govt. Natl. Mtge. Assn., 7.50%, 9/15/2017.......................... 9,928,423
6,412,372 Veterans Affairs Vendee Mtge. Trust, 9.2925%, 5/15/2025............ 6,983,458
14,653,748 Veterans Affairs Vendee Mtge. Trust, 8.098%, 10/15/2027............ 15,711,455
-----------
141,433,244
ASSET-BACKED SECURITIES: 2.1%
10,000,000 CA Infrastructure and Econ. Dev. Bank SP Trust PGE-1 Rate
Reduction Cft. 1997-1 A-7, 6.42%, 9/25/2008........................ 10,189,000
7,251,000 CA Infrastructure and Econ. Dev. Bank SP Trust SCE-1 Rate
Reduction Cft. 1997-1 A-2, 6.14%, 3/25/2002........................ 7,270,215
-----------
17,459,215
CORPORATE: 28.4%
INDUSTRIAL: 13.2%
2,450,000 Dayton Hudson Corp., 9.35%, 6/16/2020.............................. 3,192,791
1,000,000 Dayton Hudson Corp., 9.70%, 6/15/2021.............................. 1,345,470
8,250,000 Dayton Hudson Corp., 9.00%, 10/1/2021.............................. 10,440,622
4,435,000 Dayton Hudson Corp., 8.875%, 4/1/2022.............................. 5,589,076
9,750,000 Lockheed Martin Corp., 7.65%, 5/1/2016............................. 10,874,760
10,000,000 Lockheed Martin Corp., 7.75%, 5/1/2026............................. 11,394,800
5,000,000 May Department Stores, 7.625%, 8/15/2013........................... 5,601,150
7,500,000 May Department Stores, 7.875%, 8/15/2036, Callable 2016............ 8,343,675
10,000,000 Raytheon Co., 6.75%, 8/15/2007..................................... 10,254,300
12,500,000 Raytheon Co., 6.75%, 3/15/2018..................................... 12,761,750
8,000,000 Time Warner Entertainment Sr. Debentures, 8.375%, 7/15/2033........ 9,457,680
2,500,000 Union Camp Corp. Debentures, 9.25%, 2/1/2011....................... 3,072,825
15,034,000 Walt Disney Co. Debentures, 7.55%, 7/15/2093, Callable 2023........ 17,183,111
-----------
109,512,010
FINANCE: 11.4%
6,000,000 BankAmerica Capital II, 8.00%, 12/15/2026, Callable 2006++......... 6,520,860
1,450,000 Barclays No. American Capital, 9.75%, 5/15/2021, Callable 2001..... 1,638,239
1,000,000 CIGNA Corp., 7.65%, 3/1/2023....................................... 1,084,900
5,430,000 Citicorp Capital Trust I, 7.933%, 2/15/2027, Callable 2007++....... 5,907,134
1,315,000 Citicorp Capital Trust II, 8.015%, 2/15/2027, Callable 2007++...... 1,431,654
4,000,000 First Nationwide Bank Sub. Debentures, 10.00%, 10/1/2006........... 4,826,040
10,000,000 Ford Motor Credit Co. Global Notes, 7.20%, 6/15/2007............... 10,618,500
</TABLE>
See accompanying Notes to Financial Statements
===============================================================================
6
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1998
----------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS FINANCE (CONTINUED)
(Continued) $13,500,000 GMAC Put Notes, 8.875%, 6/1/2010, Putable 2000/2005................ $ 16,219,710
4,500,000 Hartford Financial Services Group, 8.30%, 12/1/2001................ 4,788,720
10,000,000 Hartford Financial Services Group, 6.375%, 11/1/2002............... 10,079,200
6,800,000 J.P. Morgan Capital Trust I, 7.54%, 1/15/2027, Callable 2007++..... 7,059,012
5,000,000 Norwest Corp., 5.75%, 2/1/2003..................................... 4,934,550
3,375,000 Norwest Corp., 6.50%, 6/1/2005..................................... 3,456,709
5,200,000 Norwest Corp., 6.20%, 12/1/2005.................................... 5,231,980
7,625,000 Norwest Corp., 6.875%, 8/8/2006.................................... 7,985,357
2,500,000 Norwest Corp., 6.55%, 12/1/2006.................................... 2,575,550
------------
94,358,115
TRANSPORTATION: 3.6%
5,630,000 Consolidated Rail Corp., 9.75%, 6/15/2020.......................... 7,553,658
400,000 Norfolk & Western Railroad Equip. Tr., 10.125%, 7/1/2000........... 431,024
1,000,000 Seaboard Coast Line Railroad Equip. Tr., 11.25%, 3/1/1999.......... 1,033,590
20,000,000 Union Pacific Corp., 6.70%, 2/23/2019.............................. 20,335,000
-----------
29,353,272
UTILITIES: 0.2%
1,500,000 Idaho Power Co. 1st Mtge. Bonds, 9.50%, 1/1/2021, Callable 2001.... 1,652,340
------------
234,875,737
FOREIGN (U.S. DOLLAR-DENOMINATED): 5.1%
CANADIAN CORPORATE: 3.4%
7,062,000 Canadian Pacific Ltd., 9.45%, 8/1/2021............................. 9,199,102
9,000,000 Hydro-Quebec, 8.40%, 1/15/2022..................................... 10,988,730
6,000,000 Hydro-Quebec, 9.50%, 11/15/2030.................................... 8,265,120
------------
28,452,952
INTERNATIONAL AGENCY: 1.7%
4,150,000 European Investment Bank, 10.125%, 10/1/2000....................... 4,518,230
8,750,000 Inter-American Development Bank, 7.125%, 3/15/2023, Callable 2003.. 9,112,600
------------
13,630,830
------------
42,083,782
------------
Total Bonds (cost $768,037,357)....................... 798,524,149
------------
SHORT-TERM 22,065,439 SSgA Prime Money Market Fund....................................... 22,065,439
INVESTMENTS: 9,792,891 SSGA United States Treasury Money Market Fund...................... 9,792,891
3.9% ------------
Total Short-Term Investments (cost$31,858,330)........ 31,858,330
TOTAL INVESTMENTS (cost $799,895,687)...................... 100.4% 830,382,479
OTHER ASSETS LESS LIABILITIES.............................. (0.4) (3,053,166)
----- -----------
TOTAL NET ASSETS........................................... 100.0% $827,329,313
===== ============
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
++ Cumulative Preferred Securities
See accompanying Notes to Financial Statements
===============================================================================
7
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities June 30, 1998
-------------------------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments, at market value (identified cost $799,895,687)..................... $830,382,479
Cash............................................................................ 3,807,811
Dividends and interest receivable............................................... 9,459,292
Receivable for investments sold................................................. 135,631
Prepaid expenses................................................................ 41,430
------------
843,826,643
------------
LIABILITIES:
Payable for investments purchased............................................... 15,773,839
Payable for Fund shares redeemed................................................ 360,511
Management fees payable......................................................... 279,351
Accounts payable................................................................ 83,629
------------
16,497,330
Net asset value ------------
per share $12.14 NET ASSETS................................................................ $827,329,313
============
Beneficial NET ASSETS CONSIST OF:
shares outstanding Paid in capital................................................................. $794,123,344
68,136,078 Accumulated undistributed net investment income................................. 721,737
(par value $.01 each, Accumulated undistributed net realized gain on investments...................... 1,997,440
unlimited shares Net unrealized appreciation on investments...................................... 30,486,792
authorized) ------------
$827,329,313
============
</TABLE>
See accompanying Notes to Financial Statements
===============================================================================
8
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
<TABLE>
<CAPTION>
Statement of Operations Six Months Ended June 30, 1998
- --------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest........................................................................ $25,595,910
-----------
EXPENSES:
Management fees (Note 2)........................................................ 1,591,411
Custodian fees.................................................................. 25,767
Transfer agent fees............................................................. 67,354
Accounting and audit fees....................................................... 27,862
Legal fees...................................................................... 5,446
Shareholder reports............................................................. 51,397
Registration fees............................................................... 73,611
Trustees' fees.................................................................. 7,000
Miscellaneous................................................................... 24,127
-----------
1,873,975
-----------
NET INVESTMENT INCOME........................................................... 23,721,935
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments.............................................. 2,003,320
Change in unrealized appreciation of investments.............................. 4,049,370
-----------
Net realized and unrealized gain on investments............................ 6,052,690
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $29,774,625
===========
</TABLE>
See accompanying Notes to Financial Statements
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9
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Income Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Six Months Ended June 30, 1998
- -------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
OPERATIONS:
Net investment income................................ $ 23,721,935 $ 18,968,810
Net realized gain (loss)............................. 2,003,320 (700,805)
Net change in unrealized appreciation (depreciation). 4,049,370 (938,755)
------------- ------------
Net increase in net assets from operations........... 29,774,625 17,329,250
------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................ (23,583,997) (18,622,099)
Net realized gain.................................... (2,724,449) --
------------- ------------
Total distributions.................................. (26,308,446) (18,622,099)
------------- ------------
BENEFICIAL SHARE TRANSACTIONS:
Amounts received from sale of shares................. 243,987,786 148,156,989
Net asset value of shares issued in reinvestment of
distributions....................................... 16,600,663 11,279,293
Amounts paid for shares redeemed..................... (142,175,403) (80,862,819)
------------- ------------
Net increase from beneficial share transactions...... 118,413,046 78,573,463
------------- ------------
Total increase in net assets......................... 121,879,225 77,280,614
NET ASSETS:
Beginning of period.................................. 705,450,088 532,840,160
------------- ------------
End of period (including undistributed net investment
income of $721,737 and $738,424, respectively)....... $ 827,329,313 $610,120,774
============= ============
Shares sold.......................................... 20,085,638 12,736,845
Shares issued in reinvestment of distributions....... 1,375,879 978,299
Shares redeemed...................................... (11,734,424) (6,933,657)
------------- ------------
Net increase in shares outstanding................... 9,727,093 6,781,487
============= ============
</TABLE>
See accompanying Notes to Financial Statements
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D O D G E & C O X
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Income Fund
Notes to Financial Statements
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1 Dodge & Cox Income Fund (the "Fund") reorganized on April 30, 1998,
and became a separate series of Dodge & Cox Funds (the "Trust"), in
accordance with a plan of reorganization approved by the Fund's
shareholders on January 30, 1998. The Trust is organized as a Delaware
business trust and is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment
company. The Fund consistently follows accounting policies which are
in conformity with generally accepted accounting principles for
investment companies. Significant accounting policies are as follows:
(a) Security valuation: long-term debt securities are priced on the
basis of valuations furnished by pricing services which utilize both
dealer-supplied valuations and electronic data processing techniques;
securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or at the
direction of the Board of Trustees; short-term securities are valued
at amortized cost or original cost plus accrued interest, both of
which approximate current value; all securities held by the Fund are
denominated in U.S. Dollars. (b) Security transactions are accounted
for on the trade date in the financial statements. (c) Gains and
losses on securities sold are determined on the basis of identified
cost. (d) Interest income is recorded on the accrual basis and
dividend income is recorded on the ex-dividend date. (e) Distributions
to shareholders of income and capital gains are reflected in the net
asset value per share computation on the ex-dividend date. (f) No
provision for Federal income taxes has been included in the
accompanying financial statements since the Fund intends to distribute
all of its taxable income and otherwise continue to comply with
requirements for regulated investment companies.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
2 Under a written agreement, the Fund pays an annual management fee
of 5/10 of 1% of the Fund's average daily net asset value up to $100
million and 4/10 of 1% of the Fund's average daily net asset value in
excess of $100 million to Dodge & Cox, investment manager of the Fund.
The agreement further provides that Dodge & Cox shall waive its fee to
the extent that such fee plus all other ordinary operating expenses of
the Fund exceed 1% of the average daily net asset value for the year.
All officers and seven of the trustees of the Trust are officers and
employees of Dodge & Cox. Those trustees who are not affiliated with
Dodge & Cox receive from the Trust an annual fee of $3,000 and an
attendance fee of $1,500 for each Board or Committee meeting attended.
Payments to trustees are divided equally among each series of the
Trust. The Trust does not pay any other remuneration to its officers
or trustees.
3 For the six months ended June 30, 1998, purchases and sales of
securities, other than short-term securities, aggregated $225,569,731
and $101,174,980, respectively, of which U.S. government obligations
aggregated $168,413,449 and $57,353,753, respectively. At June 30,
1998, the cost of investments for Federal income tax purposes was
equal to the cost for financial reporting purposes. Net unrealized
appreciation aggregated $30,486,792, of which $30,753,366 represented
appreciated securities and $266,574 represented depreciated
securities.
The financial information has been taken from the records of the Fund and
has not been audited by our independent accountants who do not express an
opinion thereon. The financial statements of the Fund will be subject to
audit by our independent accountants as of the close of the calendar year.
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Income Fund
<TABLE>
<CAPTION>
Financial Highlights
---------------------------------------------------------------------------------------------------------------------------
SELECTED DATA AND RATIOS (for a share outstanding throughout each period)
Six Months Ended
June 30, Year Ended December 31,
---------------- -------------------------------------------------------
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.08 $11.68 $12.02 $10.74 $ 11.89 $11.55
Income from investment operations:
Net investment income .36 .73 .74 .78 .77 .78
Net realized and unrealized gain (loss) .10 .40 (.34) 1.34 (1.11) .51
------- ------ ------ ------ ------- ------
Total from investment operations .46 1.13 .40 2.12 (.34) 1.29
------- ------ ------ ------ ------- ------
Distributions to shareholders from:
Net investment income (.36) (.73) (.74) (.78) (.76) (.78)
Net realized gain (.04) -- -- (.06) (.05) (.17)
------- ------ ------ ------ ------- ------
Total distributions (.40) (.73) (.74) (.84) (.81) (.95)
------- ------ ------ ------ ------- ------
Net asset value, end of period $ 12.14 $12.08 $11.68 $12.02 $ 10.74 $11.89
------- ------ ------ ------ ------- ------
Total return 3.86% 10.00% 3.62% 20.21% (2.89)% 11.34%
Ratios/supplemental data:
Net assets, end of period (millions) $ 827 $ 705 $ 533 $ 303 $ 195 $ 180
Ratio of expenses to average net assets .48%* .49% .50% .54% .54% .60%
Ratio of net investment income
to average net assets 6.10%* 6.32% 6.65% 6.85% 6.90% 6.50%
Portfolio turnover rate 14% 28% 37% 53% 55% 26%
* Annualized
</TABLE>
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Income Fund
General Information
- --------------------------------------------------------------------------------
Investment Manager
Since 1930, Dodge & Cox has been providing professional investment management
for individuals, trustees, corporations, pension and profit-sharing funds, and
charitable institutions. Dodge & Cox manages the Dodge & Cox Income Fund, the
Dodge & Cox Balanced Fund and the Dodge & Cox Stock Fund.
No-Load Fund
Shares of the Fund are purchased and redeemed at net asset value.
There are no sales, redemption or rule 12b-1 plan distribution charges.
Gifts
Fund shares provide a convenient method for making gifts to children and
to other family members. Shares may be held by an adult custodian for the
benefit of a minor under a Uniform Gifts/Transfers to Minors Act. Trustees and
guardians may also hold shares for a minor's benefit.
Automatic Investment Plan
Shareholders may make regular monthly or quarterly investments of $100 or more
through automatic deductions from their bank accounts.
Withdrawal Plan
Shareholders owning $10,000 or more of the Fund's shares may elect to receive
periodic monthly or quarterly payments of at least $50. Under the plan, all
dividend distributions are automatically reinvested at net asset value with the
periodic payments made from the proceeds of the redemption of sufficient shares.
Reinvestment Plan
Shareholders may direct that dividend and capital gains distributions be
reinvested in additional Fund shares.
The above plans are completely voluntary and involve no service charge of any
kind.
IRA Plan
The Fund has a Regular and Roth Individual Retirement Account Plan (IRA)
available for shareholders of the Fund.
Shareholder Inquiries
Fund literature and details on all of these Plans are available from the Fund
upon request.
Dodge & Cox Income Fund
c/o BFDS
P.O. Box 9051
Boston, MA 02205-9051
(800) 621-3979
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