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============================= DODGE & COX FUNDS ===============================
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Prospectus DODGE & COX FUNDS (the "Trust") is a family of three no-load
May 1, 1998 mutual funds: Dodge & Cox Stock Fund, Dodge & Cox Balanced
Fund and Dodge & Cox Income Fund (the "Funds"). Each Fund is a
series of the Trust. The Trust is registered with the
Securities and Exchange Commission (the "SEC") as an open-end
diversified management investment company.
DODGE & COX STOCK FUND seeks long-term growth of principal and
income. A secondary objective is to achieve a reasonable
current income. The Fund seeks to achieve these objectives by
investing primarily in a broadly diversified and carefully
selected portfolio of common stocks.
DODGE & COX BALANCED FUND seeks regular income, conservation
of principal and an opportunity for long-term growth of
principal and income. The Fund seeks to achieve these
objectives by investing in a diversified portfolio of common
stocks, preferred stocks and bonds.
DODGE & COX INCOME FUND seeks 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. The Fund seeks
to achieve these objectives by investing in a diversified
portfolio consisting primarily of high-quality bonds and other
fixed-income securities.
There can be no assurance that any of the Funds will achieve
its objectives.
Shares of the Funds are purchased and redeemed at net asset
value. There are no sales, redemption or Rule 12b-1 plan
distribution charges.
This prospectus sets forth concisely the information you
should know about the Funds before investing. It should be
retained for future reference. A Statement of Additional
Information about the Funds dated May 1, 1998, which is
incorporated by reference in this prospectus, has been filed
with the SEC. To obtain a free copy, call 1-800-621-3979.
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Table of Introduction 1 Telephone Transactions 15
Contents Expense Information 1 Transfer of Shares 15
Financial Highlights 2 Pricing of Shares 15
Investment Objectives and Policies 4 Shareholder Services 15
Investment Restrictions 7 Performance Information 16
Investment Risks 7 Fund Organization and Management 17
Additional Information on Investments 8 Portfolio Transactions 17
Income Dividends and Capital Expenses 18
Gain Distributions 10 Federal Income Taxes 18
How to Purchase Shares 11 Custodian and Transfer Agent 18
How to Redeem Shares 13 Reports to Shareholders 18
Exchanging Shares 14 Shareholder Inquiries 18
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</TABLE>
These securities have not been approved or disapproved by the securities and
exchange commission or any state securities commission nor has the securities
and exchange commission or any state securities commission passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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============================= DODGE & COX FUNDS ===============================
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Introduction Each Fund is an open-end diversified investment company which
continuously offers its shares to the public. A unique feature
of the Funds and other "no-load" funds is that shares are sold
without sales charge, while many other investment companies sell
their shares with a varying sales charge. Shares may be redeemed
at net asset value without any charge.
The Funds enable you to obtain the benefits of experienced and
continuous investment supervision. Shares of the Funds can
provide you with the kind of diversified portfolio ordinarily
limited to large investment accounts. The Funds are designed to
fit the needs of individuals, trustees, guardians, retirement
plans, institutions and others who have funds available for
long-term investment in securities.
By investing in the Funds, you avoid the time-consuming details
involved in buying and selling individual securities. The Funds
also reduce your record keeping for tax purposes and simplify
the collection of investment income and the safekeeping of
individual securities.
The Funds' investment manager, Dodge & Cox, was founded in 1930
and managed over $34 billion for individual and institutional
investors in mutual fund and private accounts as of December 31,
1997.
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Expense The purpose of the expense information below is to assist you in
Information understanding the various costs and expenses that an investor in
the Funds will bear directly or indirectly. Expense figures are
based on amounts incurred during the year 1997 (See "Expenses").
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Shareholder Transaction Expenses
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Distributions None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average net assets) Stock Fund Balanced Fund Income Fund
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<S> <C> <C> <C>
Management Fees .50% .50% .42%
12b-1 Fees None None None
Other Expenses (transfer agent,
custodial, accounting, legal, etc.) .07% .05% .07%
----- ----- -----
Total Fund Operating Expenses .57% .55% .49%
</TABLE>
Examples: A shareholder would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
<TABLE>
<CAPTION>
Time Period 1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C>
Stock Fund $6 $18 $32 $71
Balanced Fund $6 $18 $31 $69
Income Fund $5 $16 $27 $62
</TABLE>
The examples for each Fund should not be considered a
representation of past or future expenses. Actual expenses may
be greater or less than those shown.
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============================= DODGE & COX FUNDS ================================
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Financial The following tables provide information about each Fund's
Highlights financial history. They are based on a single share outstanding
throughout each year. The tables are part of the Funds'
financial statements which are included in the Funds' Annual
Reports and incorporated by reference into the Statement of
Additional Information. These documents are available to
shareholders upon request. The financial statements in the
Annual Reports have been audited by Price Waterhouse LLP,
independent accountants, whose unqualified report covers the
most recent five-year period.
<TABLE>
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Dodge & Cox Stock Fund
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Year Ended December 31, 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $79.81 $67.83 $53.94 $53.23 $48.37 $44.85 $38.79 $42.57 $35.26 $32.94
Income from investment operations:
Net investment income 1.48 1.28 1.27 1.15 1.04 1.11 1.23 1.35 1.24 1.08
Net realized and
unrealized gain (loss) 20.86 13.67 16.54 1.60 7.70 3.68 6.94 (3.50) 8.12 3.42
------- ------- ------- ------ ------ ------ ------ ------- ------ ------
Total from investment operations 22.34 14.95 17.81 2.75 8.74 4.79 8.17 (2.15) 9.36 4.50
------- ------- ------- ------ ------ ------ ------ ------- ------ ------
Distributions to shareholders from:
Net investment income (1.49) (1.29) (1.26) (1.15) (1.04) (1.11) (1.24) (1.35) (1.23) (1.07)
Net realized gain (6.09) (1.68) (2.66) (.89) (2.84) (.16) (.87) (.28) (.82) (1.11)
------- ------- ------- ------ ------ ------ ------ ------- ------ ------
Total distributions (7.58) (2.97) (3.92) (2.04) (3.88) (1.27) (2.11) (1.63) (2.05) (2.18)
------- ------- ------- ------ ------ ------ ------ ------- ------ ------
Net asset value, end of year $ 94.57 $ 79.81 $ 67.83 $53.94 $53.23 $48.37 $44.85 $ 38.79 $42.57 $35.26
======= ======= ======= ====== ====== ====== ====== ======= ====== ======
Total return 28.41% 22.26% 33.38% 5.16% 18.31% 10.82% 21.48% (5.08)% 26.94% 13.76%
Ratios/supplemental data:
Net assets, end of year (millions) $4,087 $ 2,252 $ 1,228 $ 543 $ 436 $ 336 $ 281 $ 173 $ 125 $ 82
Ratio of expenses to average net assets .57% .59% .60% .61% .62% .64% .64% .65% .65% .69%
Ratio of net investment income to
average net assets 1.67% 1.79% 2.07% 2.16% 1.95% 2.43% 2.87% 3.47% 3.12% 3.09%
Portfolio turnover rate 19% 10% 13% 7% 15% 7% 5% 7% 4% 10%
Average commission rate paid* $.0489 $ .0506
</TABLE>
* Represents the average commission rate paid per share on securities
transactions for which commissions were charged. Disclosure is required by
the SEC beginning in 1996.
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<TABLE>
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Dodge & Cox Balanced Fund
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Year Ended December 31, 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $59.82 $54.60 $45.21 $46.40 $42.44 $40.09 $35.03 $36.85 $32.09 $30.72
Income from investment operations:
Net investment income 2.21 1.98 1.90 1.76 1.66 1.72 1.75 1.81 1.76 1.68
Net realized and unrealized gain (loss) 10.24 5.92 10.58 (.83) 5.03 2.43 5.36 (1.49) 5.47 1.83
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations 12.45 7.90 12.48 .93 6.69 4.15 7.11 .32 7.23 3.51
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Distributions to shareholders from:
Net investment income (2.22) (1.99) (1.90) (1.76) (1.66) (1.72) (1.76) (1.81) (1.76) (1.68)
Net realized gain (3.27) (.69) (1.19) (.36) (1.07) (.08) (.29) (.33) (.71) (.46)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (5.49) (2.68) (3.09) (2.12) (2.73) (1.80) (2.05) (2.14) (2.47) (2.14)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of year $66.78 $59.82 $54.60 $45.21 $46.40 $42.44 $40.09 $35.03 $36.85 $32.09
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Total return 21.21% 14.75% 28.02% 1.99% 15.95% 10.56% 20.72% .94% 23.02% 11.54%
Ratios/supplemental data:
Net assets, end of year (millions) $5,077 $3,630 $1,800 $ 725 $ 487 $ 269 $ 179 $ 83 $ 51 $ 39
Ratio of expenses to average net assets .55% .56% .57% .58% .60% .63% .65% .70% .72% .77%
Ratio of net investment income to
average net assets 3.39% 3.60% 3.85% 3.94% 3.67% 4.27% 4.78% 5.24% 4.98% 5.19%
Portfolio turnover rate 32% 17% 20% 20% 15% 6% 10% 10% 12% 9%
Average commission rate paid* $.0488 $.0500
</TABLE>
* Represents the average commission rate paid per share on securities
transactions for which commissions were charged. Disclosure is required by
the SEC beginning in 1996.
<TABLE>
<CAPTION>
Dodge & Cox Income Fund
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Year Ended December 31, 1997 1996 1995 1994 1993 1992 1991 1990 1989
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.68 $12.02 $10.74 $11.89 $11.55 $11.59 $10.61 $10.68 $10.00
Income from investment operations:
Net investment income .73 .74 .78 .77 .78 .82 .81 .82 .69
Net realized and unrealized gain (loss) .40 (.34) 1.34 (1.11) .51 .05 1.02 (.07) .69
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations 1.13 .40 2.12 (.34) 1.29 .87 1.83 .75 1.38
------ ------ ------ ------ ------ ------ ------ ------ ------
Distributions to shareholders from:
Net investment income (.73) (.74) (.78) (.76) (.78) (.82) (.82) (.81) (.69)
Net realized gain - - (.06) (.05) (.17) (.09) (.03) (.01) (.01)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (.73) (.74) (.84) (.81) (.95) (.91) (.85) (.82) (.70)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of year $12.08 $11.68 $12.02 $10.74 $11.89 $11.55 $11.59 $10.61 $10.68
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return 10.00% 3.62% 20.21% (2.89)% 11.34% 7.80% 17.94% 7.41% 14.09%
Ratios/supplemental data:
Net assets, end of year (millions) $ 705 $ 533 $ 303 $ 195 $ 180 $ 136 $ 96 $ 52 $ 33
Ratio of expenses to average net assets .49% .50% .54% .54% .60% .62% .64% .69% .66%
Ratio of net investment income to
average net assets 6.32% 6.65% 6.85% 6.90% 6.50% 7.14% 7.63% 7.99% 7.85%
Portfolio turnover rate 28% 37% 53% 55% 26% 12% 15% 13% 3%
</TABLE>
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============================= DODGE & COX FUNDS ===============================
Dodge & Cox Stock Fund
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Investment The Fund's primary objective is to provide shareholders with an
Objectives opportunity for long-term growth of principal and income. A
and Policies secondary objective is to achieve a reasonable current income.
These objectives may not be changed without shareholder
approval. Investors should recognize that the market risks
inherent in investment cannot be avoided, nor is there any
assurance that the investment objectives of the Fund will be
achieved. The Fund seeks to achieve its objective by investing
primarily in a diversified portfolio of common stocks. Under
normal market conditions, the Fund will invest at least 65% of
its total assets in common stocks. The Fund may also purchase
other types of securities, for example, preferred stocks and
debt securities which are convertible into common stock (or
which in the opinion of Dodge & Cox have predominantly common
stock investment characteristics). The Fund may also invest up
to 20% of its total assets in U.S. dollar-denominated securities
of foreign issuers traded in the U.S. (such as American
Depositary Receipts (ADRs)). Further information about specific
investments is provided under "Additional Information on
Investments".
Moderate reserves in cash or short-term fixed-income securities
may be held from time to time as Dodge & Cox may deem advisable.
Nevertheless, the long-term emphasis shall be the maintaining of
a fully invested equity fund.
Common stocks selected for the Fund will be predominantly those
which in the view of Dodge & Cox have a favorable outlook for
long-term growth of principal and income. Prospective earnings
and dividends are major considerations in these stock
selections. Individual securities are selected with an emphasis
on financial strength and sound economic background. The Fund's
policies as described above may be changed without shareholder
approval; however, these policies will not be changed without
notice to shareholders.
In an attempt to minimize unforeseen risks in single securities,
the Fund seeks to provide adequate investment diversification.
Although there is no restriction on the number of changes in
security holdings, purchases are made with a view to long-term
holding and not for short-term trading purposes. (The Fund's
portfolio turnover rates for the fiscal years ended December 31,
1997, 1996 and 1995 were 19%, 10%, and 13%, respectively.)
However, during rapidly changing economic, market and political
conditions, there may necessarily be more portfolio changes than
in a more stable period. A higher turnover rate might result in
increased transaction expenses and the realization of capital
gains and losses (see "Federal Income Taxes"). It is the general
practice of the Fund to invest in securities with ready markets,
mainly issues listed on national securities exchanges.
Dodge & Cox Balanced Fund
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Investment The Fund's objectives are to provide shareholders with regular
Objectives income, conservation of principal and an opportunity for long-
and Policies term growth of principal and income. These objectives may not be
changed without shareholder approval. Investors should recognize
that the market risks inherent in investment cannot be avoided,
nor is there any assurance that the investment objectives of the
Fund will be achieved. Reasonable appreciation in favorable
periods and conservation of principal in adverse times are
objectives that require flexibility in managing the assets of
the Fund under constantly changing investment conditions.
Therefore, the proportions held in common and preferred stocks
and bonds are revised by Dodge & Cox when considered advisable
in light of its appraisal of business and investment prospects.
Under normal market conditions, it is the policy of the Fund to
maintain no more than approximately 75% of its
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total assets in common stocks and that portion of the value of
convertible securities attributable to the conversion right.
Bonds are held for their relative stability of principal and
income as well as for a reserve which can be used to take
advantage of investment opportunities. The Fund may also invest
up to 20% of its total assets in U.S. dollar-denominated
securities of foreign issuers traded in the U.S. (such as
American Depositary Receipts (ADRs) and Yankee bonds). Moderate
reserves in cash or short-term fixed-income securities may be
held from time to time as Dodge & Cox may deem advisable.
Further information about specific investments is provided under
"Additional Information on Investments".
It is the Fund's policy to invest in investment-grade debt
securities rated in the top four rating categories by either
Moody's Investors Service ("Moody's")(Aaa, Aa, A, Baa) or
Standard & Poor's Ratings Group ("S&P")(AAA, AA, A, BBB).
Securities rated Baa or BBB may have speculative
characteristics. Securities that are downgraded below Baa or BBB
subsequent to purchase may continue to be held by the Fund, if
Dodge & Cox believes it advantageous to do so. Unrated debt
securities may be purchased if they are, in the opinion of Dodge
& Cox, of equivalent quality to debt securities rated at least A
by Moody's and S&P. An explanation of Moody's and S&P's rating
groups is included in the Appendix to the Statement of
Additional Information.
A substantial position will be maintained in common stocks which
in the view of Dodge & Cox have a favorable outlook for long-
term growth of principal and income. Prospective earnings and
dividends are major considerations in these stock selections.
The level of security prices and the trend of business activity
are considered in determining the total investment position of
the Fund in equities at any time. Individual securities are
selected with an emphasis on financial strength and a sound
economic background. The Fund's policies as described above may
be changed without shareholder approval; however, these policies
will not be changed without notice to shareholders.
In an attempt to minimize unforeseen risks in single securities,
the Fund seeks to provide adequate investment diversification.
Although there is no restriction on the number of changes in
security holdings, purchases are made with a view to long-term
holding and not for short-term trading purposes. (The Fund's
portfolio turnover rates for the fiscal years ended December 31,
1997, 1996 and 1995 were 32%, 17% and 20%, respectively.)
However, during rapidly changing economic, market and political
conditions, there may necessarily be more portfolio changes than
in a more stable period. A higher turnover rate might result in
increased transaction expenses and the realization of capital
gains and losses (see "Federal Income Taxes"). It is the general
practice of the Fund to invest in equity securities mainly
listed on national securities exchanges and securities with
ready markets.
Dodge & Cox Income Fund
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Investment The Fund's primary objective is to provide shareholders with a
Objectives high and stable rate of current income consistent with long-term
and Policies preservation of capital. A secondary objective is to take
advantage of opportunities to realize capital appreciation.
These objectives may not be changed without shareholder
approval. Investors should recognize that the market risks
inherent in investments cannot be avoided, nor is there any
assurance that the investment objectives of the Fund will be
achieved.
The Fund seeks to achieve its objectives by investing in a
diversified portfolio of fixed-income securities. It is the
policy of the Fund to invest at least 80% of the market value of
its total assets in the following: (1) debt obligations issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities; (2) investment-grade
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============================= DODGE & COX FUNDS ===============================
debt securities, including U.S. dollar-denominated foreign
issues and supranational agencies, rated in the top four rating
groups by either Moody's (Aaa, Aa, A, Baa) or S&P (AAA, AA, A,
BBB); (3) unrated securities if deemed to be of investment-grade
quality by Dodge & Cox; and (4) bankers' acceptances, bank
certificates of deposit, repurchase agreements and commercial
paper. At least 65% of the market value of the portfolio will be
invested in category (1) securities and in category (2)
securities rated in the top three rating groups. In addition,
the Fund will invest no more than 25% of its total assets in
U.S. dollar-denominated securities of foreign issuers. Further
information about specific investments is provided under
"Additional Information on Investments".
No more than 20% of the Fund may be invested in other fixed-
income instruments including: debt obligations rated below
investment grade if, in the opinion of Dodge & Cox, they are of
suitable quality, provide attractive investment opportunities
and have a minimum rating of B by Moody's and/or S&P at the time
of investment; preferred stock; corporate bonds convertible into
common stocks or carrying warrants to purchase common stock. The
Fund will invest in unrated securities only if deemed to be of
investment-grade quality by Dodge & Cox. It should be noted that
securities rated Baa or BBB and below have speculative
characteristics. Securities rated B may yield a higher level of
current income than higher quality securities but generally have
less liquidity, greater market risk and more price fluctuation.
An explanation of Moody's and S&P's rating groups is included in
the Appendix to the Statement of Additional Information.
The proportions held in the various financial instruments will
be revised as appropriate in light of Dodge & Cox's appraisal of
the economy, the relative yields of securities in the various
market sectors, the investment prospects for issuers and other
factors. In making investment decisions, Dodge & Cox will take
many factors into consideration including yield to maturity,
quality, liquidity, current yield and capital appreciation
potential.
The Fund attempts to achieve its secondary objective of capital
appreciation through such techniques as fundamental research
(i.e., seeking a security or group of securities which Dodge &
Cox believes to be undervalued), purchasing securities at a
discount from their maturity or call value and making gradual
adjustments in the average maturity of the Fund's portfolio.
The average maturity of the Fund's portfolio at any given time
depends, in part, on Dodge & Cox's assessment of economic and
market conditions, the future level of inflation and interest
rates, and on the relative yields of securities in the
marketplace. Dodge & Cox normally invests in an array of
securities with short, intermediate and long maturities in
varying proportions, with greater emphasis on long maturities.
Purchases and sales of securities are generally made for long-
term fundamental investment reasons rather than for short-term
trading purposes. Nevertheless, Dodge & Cox may sell any of the
securities in the Fund, regardless of the length of time held,
in seeking to achieve the objectives of the Fund.
In seeking to achieve the objectives of the Fund, Dodge & Cox
may purchase securities on a when-issued basis, purchase or sell
securities for delayed delivery and lend portfolio securities.
The Fund's investment policies as set forth above may be changed
without shareholder approval; however, these policies will not
be changed without notice to shareholder.
Dodge & Cox maintains a long-term investment orientation and
therefore anticipates a relatively low turnover rate. (The
Fund's portfolio turnover rates for the fiscal years ended
December 31, 1997, 1996, and 1995 were 28%, 37%, and 53%,
respectively.) However, during rapidly changing economic,
political and market environments, there may be more portfolio
changes than in a more stable period. A higher turnover rate
might result in increased transaction expenses and the
realization of capital gains and losses (see "Federal Income
Taxes").
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Investment The Funds have adopted certain restrictions designed to achieve
Restrictions diversification of investment and to reduce investment risk.
Each Fund may not: (a) invest more than 5% of the value of its
total assets in the securities of any one issuer except the U.S.
Government, nor acquire more than 10% of the voting securities
of any one issuer; (b) concentrate investments of more than
25% of the value of its total assets in any one industry,
except that the restriction does not apply to securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (or related repurchase agreements); (c)
borrow money except as a temporary measure for extraordinary
or emergency purposes; (d) make loans to other persons except
this shall not exclude the purchase of publicly issued debt
securities of a type purchased by institutional investors. The
investment restrictions described in this paragraph and in the
Statement of Additional Information may be changed only with
the approval of that Fund's shareholders.
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Investment You should understand that all investments involve risks, and
Risks there can be no guarantee against loss resulting from an
investment in the Funds, nor can there be any assurance that a
Fund's investment objectives will be attained. There are further
risk factors described elsewhere in this prospectus and in the
Statement of Additional Information.
Investments in common stock in general are subject to market
risks that cause their prices to fluctuate over time, i.e., the
possibility that stock prices will decline over short or even
extended periods. Prices of bonds are sensitive to changes in
the market level of interest rates. In general, as interest
rates rise, the prices of fixed-income securities fall and
conversely, as interest rates fall, the prices of these
securities rise. Yields on short, intermediate and long-term
securities are dependent on a variety of factors, including the
general conditions of the money and bond markets, the size of a
particular offering, the maturity of the obligation, and the
credit quality and rating of the issue. Debt securities with
longer maturities tend to have higher yields and are generally
subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower
yields. Furthermore, because yield levels on securities vary
with changing interest rates, no specific yield on shares of a
Fund can be guaranteed. Since the Dodge & Cox Income Fund and
the bond portion of the Dodge & Cox Balanced Fund portfolio will
be invested primarily in higher quality debt securities, the
Funds may not yield as high a level of current income as funds
that invest primarily in lower quality debt securities which
generally have less liquidity, greater market risk and greater
price fluctuation. The value of stocks and bonds may also be
affected by changes in the financial condition of, and other
events affecting, specific issuers. Fluctu-ations in the value
of the securities in which a Fund invests will cause the Fund's
share price to fluctuate. An investment in the Funds, therefore,
may be more suitable for long-term investors who can bear the
risk of short and long-term fluctuations in a Fund's share
price.
Foreign securities involve some special risks such as exposure
to potentially adverse local political and economic
developments; nationalization and exchange controls; potentially
lower liquidity and higher volatility; possible problems arising
from accounting, disclosure, settlement and regulatory practices
that differ from U.S. standards; foreign taxes; and the risk
that fluctuations in foreign exchange rates will decrease the
investment's value (although favorable changes can increase its
value).
The Dodge & Cox Balanced Fund, with its mixture of investments
in common stocks and bonds, may entail less investment risk (and
a potentially lower return) than a mutual fund investing only in
common stocks.
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============================= DODGE & COX FUNDS ================================
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Additional COMMON STOCKS (DODGE & COX STOCK FUND and DODGE & COX BALANCED
Information FUND) Stocks represent shares of ownership in a company. After
on Investments other claims are satisfied, common stockholders participate in
company profits on a pro rata basis; profits may be paid out in
dividends or reinvested in the company to help it grow.
Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the
greatest appreciation and depreciation potential of all
corporate securities.
PREFERRED STOCKS Each Fund may invest in preferred stocks.
Generally, preferred stock has a specified dividend and ranks
after bonds and before common stocks in its claim on income for
dividend payments and on assets should the company be
liquidated.
CONVERTIBLE SECURITIES Each Fund may invest in debt or preferred
equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid
dividends or interest at rates higher than common stocks but
lower than nonconvertible securities. They generally participate
in the appreciation or depreciation of the underlying stock into
which they are convertible, but to a lesser degree. In recent
years, convertibles have been developed which combine higher or
lower current income with other features.
FOREIGN SECURITIES Each Fund may invest in U.S. dollar-
denominated securities of foreign issuers traded in the U.S.
Such investments increase a portfolio's diversification and may
enhance return, but they also involve some special risks.
U.S. GOVERNMENT OBLIGATIONS A portion of each Fund may be
invested in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Some of the
obligations purchased by a Fund are backed by the full faith and
credit of the U.S. Government and are guaranteed as to both
principal and interest by the U.S. Treasury. Examples of these
include direct obligations of the U.S. Treasury, such as U.S.
Treasury bills, notes and bonds, or indirect obligations of the
U.S. Treasury, such as obligations of the Government National
Mortgage Association, the Maritime Administration, the Farmers
Home Administration and the Department of Veterans Affairs.
While the obligations of many of the agencies and
instrumentalities of the U.S. Government are not direct
obligations of the U.S. Treasury, they are generally backed
indirectly by the U.S. Government. Some of the agencies are
indirectly backed by their right to borrow from the U.S.
Government, such as the Federal Financing Bank, the Federal
Home Loan Bank and the U.S. Postal Service. Others are supported
solely by the credit of the agency or instrumentality itself,
but are given additional support due to the U.S. Treasury's
authority to purchase their outstanding debt obligations. These
agencies include the Federal Farm Credit Banks, the Federal Home
Loan Mortgage Corporation and the Federal National Mortgage
Association. No assurance can be given that the U.S. Government
would provide financial support to U.S. Government-established
or sponsored agencies. Furthermore, with respect to the U.S.
Government securities purchased by the Fund, guarantees as to
the timely payment of principal and interest do not extend to
the value or yield of these securities nor do they extend to the
value of a Fund's shares. A Fund may invest in these securities
if it believes they offer an expected return commensurate with
the risks assumed.
MORTGAGE PASS-THROUGH SECURITIES (DODGE & COX BALANCED FUND and
DODGE & COX INCOME FUND) Mortgage pass-through securities are
guaranteed by an agency of the U.S. Government or are issued by
a private entity. These securities represent ownership in
"pools" of mortgage loans and are called "pass-throughs" because
principal and interest payments are passed through to security
holders monthly. The security holder may also receive
unscheduled
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============================= DODGE & COX FUNDS ================================
principal payments representing prepayments of the underlying
mortgage loans. When a Fund reinvests the principal and interest
payments, it may receive a rate of interest which is either
higher or lower than the rate on the existing mortgage.
During periods of declining interest rates there is increased
likelihood that mortgage securities may be prepaid. Such
prepayment would most likely be reinvested at lower rates. On
the other hand, if the pass-through securities had been
purchased at a discount, then such prepayment of principal may
benefit the portfolio.
COLLATERALIZED MORTGAGE OBLIGATIONS (DODGE & COX BALANCED FUND
and DODGE & COX INCOME FUND) Collateralized Mortgage Obligations
("CMOs") are private entity or U.S. Government agency-issued
multi-class bonds that are collateralized by U.S. agency-
guaranteed mortgage pass-through securities. The issuer
typically issues several classes, or "tranches", of bonds, the
debt service of which is provided by the principal and interest
payments from the mortgage pass-through securities in the trust.
Each of these tranches is valued and traded separately based on
its distinct cash flow characteristics. Dodge & Cox will
purchase a tranche with the weighted-average life and cash flow
characteristics that it believes will contribute to achieving
the objectives of a Fund.
All CMOs purchased by a Fund will have a AAA rating by either
S&P or Moody's, the major rating services. To qualify for this
rating, a CMO is structured so that even under the most
conservative prepayment and reinvestment assumptions, the
principal and interest payments from the collateral are expected
to meet or exceed the cash flow obligations of all the tranches
of the CMO. However, there are risks associated with CMOs which
relate to the risks of the underlying mortgage pass-through
securities (i.e., an increase or decrease in prepayment rates,
resulting from a decrease or increase in mortgage interest
rates, will affect the yield, average life and price of CMOs).
In a falling interest rate environment, the mortgage securities
may be prepaid faster than the assumed rate. In this scenario,
the prepayments of principal will generally be reinvested at a
rate which is lower than the rate that the security holder is
currently receiving. Conversely, in a rising interest rate
environment, the mortgage collateral may be prepaid at a rate
which is slower than the assumed rate. In this case, the cash
flow of the bond decreases. A reduced prepayment rate
effectively lengthens the time period the security will be
outstanding and may adversely affect the value and volatility of
the security.
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<PAGE>
============================= DODGE & COX FUNDS ================================
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Income Dividend and capital gain distributions are reinvested in
Dividends additional Fund shares in your account unless you select another
and option on your Account Application Form. The advantage of
Capital Gain reinvesting distributions arises from compounding; that is, you
Distributions receive income dividends and capital gain distributions on an
increasing number of shares.
Distributions not reinvested are paid by check or transmitted to
your bank account via electronic transfer using the Automated
Clearing House (ACH) network. If the Post Office cannot deliver
your check, or if your check remains uncashed for six months,
the Trust reserves the right to reinvest your distribution check
in your account at your Fund's then current net asset value per
share (NAV) and to reinvest all subsequent distributions in
shares of the Fund.
INCOME DIVIDENDS
* Each Fund declares and pays dividends (if any) quarterly in
March, June, September and December.
CAPITAL GAIN DISTRIBUTIONS
* A capital gain or loss is the difference between the purchase
and sale price of a security.
* If a Fund has net capital gains for the year (after
subtracting any capital losses), they are usually declared
and paid in December to shareholders of record on a specified
date that month. If a second distribution is necessary, it is
usually declared and paid in March.
In January, you will be sent Form 1099-DIV indicating the tax
status of any dividend and capital gain distributions made to
you during the previous year. This information will also be
reported to the IRS.
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<PAGE>
============================= DODGE & COX FUNDS ===============================
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How to MINIMUM INITIAL INVESTMENT
Purchase $2,500; $1,000 for IRA accounts
Shares
SUBSEQUENT MINIMUM INVESTMENT
$100
BY MAIL Please make your check payable to Dodge & Cox Funds
(otherwise it will be returned) and send your check together
with the Account Application Form to the address below. The
Trust does not accept third party checks.
REGULAR MAIL
Dodge & Cox Funds
c/o BFDS
P.O. Box 9051
Boston, MA 02205-9051
EXPRESS, CERTIFIED OR REGISTERED MAIL
Dodge & Cox Funds
c/o BFDS
66 Brooks Drive, Suite 1
Braintree, MA 02184-3839
BY WIRE To purchase shares in a Fund by Federal wire transfer,
you should request that your bank transmit funds to:
State Street Bank and Trust Company
Boston, MA
ABA 0110 0002 8
Deposit DDA 9905-351-4
FFC Dodge & Cox [Fund name] Fund
Fund #/ Account #/ Account Registration
Prior to having the funds wired, you should call the Trust's
transfer agent, Boston Financial Data Services Inc. (BFDS), at
1-800-621-3979 and advise BFDS that the funds are being wired.
Investors making initial investments by wire must promptly
complete an Account Application Form and mail it to the Trust,
c/o BFDS, at either of the addresses listed above. No account
services will be established until the completed application has
been received by the Trust. IRA accounts cannot be opened by
wire.
BY TELEPHONE By using a Fund's telephone purchase option, you
may make subsequent investments directly from your bank account.
To establish the telephone purchase option for your account,
complete the appropriate section on the Account Application
Form. Only bank accounts held at domestic financial institutions
that are Automated Clearing House (ACH) members may be used for
telephone transactions. To make subsequent investments by
telephone, call 1-800-621-3979. This option will become
effective approximately 15 business days after the Account
Application Form is received by BFDS. The price you pay for your
shares of a Fund will be the next price the Fund computes after
the Fund receives your investment instructions. Your order may
be canceled if payment is not received by the third business day
after your order is placed. You may not use telephone
transactions for initial purchases of a Fund's shares. (See
"Telephone Transactions.")
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<PAGE>
============================= DODGE & COX FUNDS ================================
ADDITIONAL INFORMATION ABOUT PURCHASES All subscriptions are
subject to acceptance by the Trust and the price of the shares
will be the NAV which is next computed after receipt by BFDS, or
other authorized agent or sub-agent, of the subscription in
proper form (see "Pricing of Shares"). All purchases must be
paid for in U.S. dollars; checks must be drawn on U.S. banks. If
your payment is not received or you pay with a check or ACH
transfer that does not clear, your purchase will be canceled.
You will be responsible for any losses or expenses (including a
$20 fee) incurred by a Fund or BFDS, and a Fund can redeem
shares you own in this or another identically registered Dodge &
Cox Fund account as reimbursement. The Funds and their agents
have the right to reject or cancel any purchase, exchange or
redemption due to nonpayment. All subscriptions will be invested
in full and fractional shares, and you will receive a
confirmation of all transactions.
Purchases through the Automatic Investment Plan will be
confirmed at least quarterly. Certificates (for full shares
only) are not issued unless requested by you.
A Social Security or Taxpayer Identification Number must be
supplied and certified on the Account Application Form before an
account can be established. If you fail to furnish a Fund with
your correct Social Security or Taxpayer Identification Number,
the Fund may be required to withhold Federal income tax at a
rate of 31% ("backup withholding") from dividends, capital gain
distributions and redemptions.
The purchase or redemption of shares through broker-dealers or
other financial institutions may be subject to a service fee by
those entities. The Funds and their agents reserve the right to
accept initial purchases by telephone; to cancel or rescind any
purchase or exchange (for example, if an account has been
restricted due to excessive trading or fraud) upon notice to the
shareholder within five business days of the trade; to freeze
any account and temporarily suspend services on the account when
notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a
fraudulent transaction may occur; to otherwise modify the
conditions of purchase and any services at any time; or to act
on instructions believed to be genuine.
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<PAGE>
============================= DODGE & COX FUNDS ================================
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How to BY MAIL Your written instructions to redeem should be sent to
Redeem the appropriate address below:
Shares
REGULAR MAIL
Dodge & Cox Funds
c/o BFDS
P.O. Box 9051
Boston, MA 02205-9051
EXPRESS, CERTIFIED OR REGISTERED MAIL
Dodge & Cox Funds
c/o BFDS
66 Brooks Drive, Suite 1
Braintree, MA 02184-3839
The request must specify your name, Fund name and account
number, and dollar amount or number of shares redeemed, and be
properly signed. The Funds require the signatures of all owners
exactly as registered, and possibly a signature guarantee (see
"Signature Guarantees" below).
BY TELEPHONE Telephone redemption requests can be initiated by
calling BFDS at 1-800-621-3979. (See "Telephone Transactions.")
Telephone redemption requests for IRA accounts will not be
accepted.
REDEMPTION PAYMENTS MAY BE MADE BY CHECK, WIRE OR ACH
BY CHECK Checks will be made payable to you and will be sent to
your address of record. If the proceeds of the redemption are
requested to be sent to other than the address of record or if
the address of record has been changed within 30 days of the
redemption request, the request must be in writing with your
signature(s) guaranteed.
BY WIRE The Fund will wire redemption proceeds only to the bank
account designated on the initial Account Application Form or in
written instructions - with signature guarantee - received in
advance of the redemption order.
BY ACH Redemption proceeds can be sent to your bank account by
ACH transfer. You can elect this option by completing the
appropriate section of the Account Application Form. There is a
$100 minimum per ACH transfer.
SIGNATURE GUARANTEES You may need to have your signature
guaranteed in certain situations, such as:
* Written requests to wire redemption proceeds (if not
previously authorized on the Account Application Form).
* Sending redemption proceeds to any person, address or bank
account not on record.
* Transferring redemption proceeds to a Dodge & Cox account
with a different registration (name/ownership) from yours.
* Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings
institutions, broker-dealers and other guarantors acceptable to
the Funds. A Fund cannot accept guarantees from notaries public
or organizations that do not provide reimbursement in the case
of fraud.
REDEMPTIONS-IN-KIND The Funds reserve the right, if conditions
exist which make cash payments undesirable, to honor any request
for redemption by making payment in whole or in part in readily
marketable securities chosen by a Fund and valued as they are
for purposes of computing a Fund's NAV (a redemption-in-kind).
If payment is made in securities, a shareholder may incur
transaction expenses in converting these securities to cash. The
Funds have elected, however, to be governed by Rule 18f-1 under
the Investment Company Act, as a result of which a Fund is
obligated to redeem shares, with respect to any one shareholder
during any 90-day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund at the
beginning of the period.
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<PAGE>
============================= DODGE & COX FUNDS ================================
IRA ACCOUNTS Redemption requests for IRA accounts must be in
writing and must include instructions regarding Federal income
tax withholding. Unless you have elected otherwise, your
redemptions will be subject to income tax withholding.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS Under certain
circumstances, BFDS may require additional documents, including
stock powers with signatures guaranteed, trust instruments,
death certificates, appointments as executor and certificates of
corporate authority. If certificates have been issued for any of
the shares to be redeemed, such certificates must be endorsed
with signatures guaranteed and delivered to BFDS. For any
questions regarding documentation or signature requirements for
trusts, estates, corporations, etc., please call BFDS
(1-800-621-3979).
The redemption price will be the NAV which is next computed
after receipt of a redemption request in good order (see
"Pricing of Shares") by BFDS or other authorized agent or sub-
agent. The redemption price may be more or less than your cost,
depending upon the market value of a Fund's investments at the
time of redemption. Redemption payments are made as soon as
practicable, generally within two business days, but no later
than the seventh day after the effective date for redemption, or
within such shorter period as may legally be required. If shares
are redeemed within two weeks of purchase, a Fund may delay
payment of the redemption proceeds until your purchase check has
cleared, which may take up to 15 days. There is no such delay
when shares being redeemed were purchased by wiring Federal
Funds. The Funds may suspend your redemption right or postpone
payment at times when the New York Stock Exchange is closed or
under any emergency circumstances as determined by the SEC. If
the Post Office cannot deliver your check, or if your check
remains uncashed for six months, the Funds reserve the right to
reinvest your redemption proceeds in your account at the then
current NAV.
- --------------------------------------------------------------------------------
Exchanging You may exchange your shares for shares of another Fund,
Shares provided that the registration and Taxpayer Identification
Number of both accounts are identical. An exchange may be
initiated by contacting BFDS in writing or by telephone (see
"Telephone Transactions"). An exchange is treated as a
redemption and a purchase; and, therefore, you may realize a
taxable gain or loss. You should read the current prospectus of
the Fund into which the exchange is being made.
There is a $1,000 minimum for all exchanges. If a new account is
being opened by exchange, the minimum investment requirements
must be met. After the exchange, the account from which the
exchange is made must have a remaining balance of at least
$2,500 ($1,000 for an IRA account) in order to remain open. The
Funds reserve the right to terminate or materially modify the
exchange privilege upon 60 days advance notice to
shareholders.
===================================== 14 ======================================
<PAGE>
============================= DODGE & COX FUNDS ================================
- --------------------------------------------------------------------------------
Telephone By using telephone purchase, redemption and/or exchange options,
Transactions you agree to hold the Trust, Dodge & Cox, BFDS and each of their
respective directors, trustees, officers, employees and agents
harmless from any losses, expenses, costs or liability
(including attorney fees) which may be incurred in connection
with the exercise of these privileges. Generally, all
shareholders are automatically eligible to use these options.
However, you may elect to decline these options in the Account
Application Form or by writing BFDS. (You may also reinstate
them at any time by writing BFDS.) If a Fund does not employ
reasonable procedures to confirm that the instructions received
from any person with appropriate account information are
genuine, the Fund may be liable for losses due to unauthorized
or fraudulent instructions. If you are unable to reach a Fund by
telephone because of technical difficulties, market conditions,
or a natural disaster, you should make purchase, redemption and
exchange requests by regular or express mail. If an account has
multiple owners, a Fund may rely on the instructions of any one
account owner. You should note that purchase and sales orders
will not be canceled or modified once received in good order.
Purchases and sales should be made for long-term investment
purposes only. Because excessive trading may be disadvantageous
to a Fund, each Fund reserves the right to limit purchase and
sale transactions, including exchanges, when a pattern of
frequent trading appears evident.
- --------------------------------------------------------------------------------
Transfer of Changes in account registrations - such as changing the name(s)
Shares on your account or transferring shares to another person or
legal entity - must be submitted in writing and require a
signature guarantee. Please call BFDS (1-800-621-3979) for full
instructions.
- --------------------------------------------------------------------------------
Pricing of The share price (also called "net asset value per share" or
Shares "NAV") for a Fund is calculated at 4:00 p.m. ET each day the New
York Stock Exchange is open for business. To calculate the NAV,
a Fund's assets are valued and totaled, liabilities are
subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
If a Fund, or its authorized agent or sub-agent receives your
request in good order by 4 p.m. ET, your transactions will be
priced at that day's NAV. If your request is received after 4
p.m., it will be priced at the next business day's NAV.
A Fund cannot accept orders that request a particular day or
price for your transaction or any other special conditions. The
time at which transactions and shares are priced and the time
until which orders are accepted may be changed in case of an
emergency or if the New York Stock Exchange closes at a time
other than 4 p.m. ET.
- --------------------------------------------------------------------------------
Shareholder The Funds offer you the following services: (Please call (1-800-
Services 621-3979) or write the Funds for applications and additional
information.)
AUTOMATIC INVESTMENT PLAN You may make regular monthly or
quarterly investments of $100 or more through automatic
deductions from your bank account.
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<PAGE>
============================= DODGE & COX FUNDS ===============================
SYSTEMATIC WITHDRAWAL PLAN If you own $10,000 or more of a
Fund's shares, you may receive regular monthly or quarterly
payments of $50 or more. Shares will be redeemed automatically
at NAV to make the withdrawal payments
REINVESTMENT PLAN You may direct that dividend and capital gain
distributions be reinvested in additional Fund shares.
INDIVIDUAL RETIREMENT ACCOUNT (IRA) If you have earned income or
are entitled to certain distributions from eligible retirement
plans, you may make or authorize contributions to your own
Individual Retirement Account. The Funds have Regular IRA and
Roth IRA Plans available for shareholders of the Funds.
- --------------------------------------------------------------------------------
Performance A Fund may include figures indicating its total return and/or
Information yield in advertisements or reports to shareholders or
prospective investors. Quotations of a Fund's average annual
total rate of return will be expressed in terms of the average
annual compounded rate of return on a hypothetical investment in
the Fund over a specified period, will reflect the deduction of
a proportional share of Fund expenses (on an annual basis) and
will assume that all dividends and capital gain distributions
are reinvested when paid. Total return indicates the positive or
negative rate of return that an investor would have earned from
reinvested dividends and distributions and changes in net asset
value per share during the period. Quotations of yield, as
defined by the SEC, will be based on net investment income per
share earned during a given thirty-day period and will be
computed by dividing this net investment income by the net asset
value per share on the last day of the period and annualizing
the results. Yield does not directly reflect changes in net
asset value per share which occurred during the period.
As appropriate, performance information for a Fund may be
compared, in reports and promotional literature to: (i) the
Standard & Poor's 500 Stock Index, the Dow Jones Industrial
Average, the Lehman Brothers Aggregate Bond Index, or various
other unmanaged indices of the performance of various types of
investments, so that investors may compare a Fund's results with
those of indices widely regarded by investors as representative
of the security markets in general, and (ii) the performance of
other mutual funds. Unmanaged indices may assume the
reinvestment of income distributions, but generally do not
reflect deductions for administrative and management costs and
expenses.
Performance information for a Fund reflects only the performance
of hypothetical investments in the Fund during the particular
time periods on which the calculations are based. Such
information should not be considered as representative of the
performance of a Fund in the future because, unlike some bank
deposits or other investments which pay a fixed yield for a
stated period of time for a fixed principal amount, the
performance of a Fund will vary based not only on the current
market value of the securities held in its portfolio, but also
on changes in a Fund's expenses and in the asset size of the
Fund. Performance information should be considered in light of a
Fund's investment objectives and policies, the types and quality
of a Fund's portfolio investments, market conditions during the
particular time period and operating expenses. For a description
of the methods used to determine a Fund's total return and
yield, see "Performance Information" in the Statement of
Additional Information. Further information about Fund
performance is contained in each Fund's Annual Report which may
be obtained without charge from the Fund.
===================================== 16 =======================================
<PAGE>
============================= DODGE & COX FUNDS ================================
- --------------------------------------------------------------------------------
Fund FUND ORGANIZATION AND VOTING RIGHTS The Trust, organized as a
Organization Delaware business trust in 1998, is registered as an open-end,
and diversified management investment company under the Investment
Management Company Act. The Trust's Board of Trustees supervises Trust
operations and performs duties required by applicable state and
Federal law. The Trust has three classes of beneficial shares
and each share evidences an equal beneficial ownership in a Fund
and there is no limit to the number of shares that may be
issued. The three series of the Trust are successors to Dodge &
Cox Stock Fund established in 1965, Dodge & Cox Balanced Fund
established in 1931 and Dodge & Cox Income Fund established in
1989. All shares have the same rights as to redemption,
dividends, and in liquidation. All shares issued are fully paid
and non-assessable, are transferable, and are redeemable at net
asset value upon demand of the shareholder. Shares have no
preemptive or conversion rights. The Trust is not required to
hold annual meetings of shareholders.
INVESTMENT MANAGER Dodge & Cox, a California corporation, has
served as investment manager to the Funds and their predecessors
since inception. Dodge & Cox is one of the oldest professional
investment management firms in the United States, having acted
continuously as investment managers since 1930. The Funds'
investments are managed by Dodge & Cox's Investment Policy
Committee (the Bond Strategy Committee for fixed-income
securities), and no one person is primarily responsible for
making investment recommendations to the Committees. Dodge & Cox
is located at One Sansome Street, 35th Floor, San Francisco,
California 94104-4405.
Dodge & Cox's activities are devoted to investment research and
the supervision of investment accounts for individuals and
institutions. Dodge & Cox Balanced Fund and Dodge & Cox Stock
Fund each pay Dodge & Cox a management fee which is payable
monthly at the annual rate of 0.50% of the average daily net
asset value of the Fund. Dodge & Cox Income Fund pays Dodge &
Cox a management fee which is payable monthly at the annual rate
of 0.50% of the average daily net asset value of the Fund up to
$100 million and 0.40% of the average daily net asset value of
the Fund in excess of $100 million.
The investment management agreements with Dodge & Cox Income
Fund and Dodge & Cox Stock Fund provide that Dodge & Cox will
waive its fee for any calendar year to the extent that such fee
plus all other ordinary operating expenses paid by the Fund
exceed 1% and 0.75%, respectively, of the average daily net
asset value of the Fund. No waiver of management fee was
required for 1997 under the agreements.
Dodge & Cox has adopted a Code of Ethics that restricts personal
investing practices by its employees. Among other provisions,
the Code of Ethics requires that employees with access to
information about the purchase or sale of securities in a Fund's
portfolio obtain preclearance before executing certain personal
trades. The Code of Ethics is designed to ensure that the
interests of the Funds' share-holders come before the interests
of the people who manage the Funds.
- --------------------------------------------------------------------------------
Portfolio Orders for a Fund's portfolio securities transactions are placed
Transactions by Dodge & Cox, which seeks to obtain the best available prices,
taking into account the costs and quality of executions. In the
over-the-counter market, purchases and sales are transacted
directly with principal market-makers except in those
circumstances where it appears better prices and executions are
available elsewhere.
Subject to the above policy, when two or more brokers are in a
position to offer comparable prices and executions, preference
may be given to brokers that have provided investment research,
statistical and other related services for the benefit of a Fund
and/or accounts over which Dodge & Cox exercises investment and
brokerage discretion.
===================================== 17 =======================================
<PAGE>
============================= DODGE & COX FUNDS ================================
- --------------------------------------------------------------------------------
Expenses In addition to Dodge & Cox's management fee, each Fund pays
other direct expenses, including custodian, transfer agent,
legal, accounting and audit fees; costs of preparing and
printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and shareholder meeting
expenses (if any); and trustees fees and expenses. In 1997, the
ratios of total operating expenses to average net assets of
Dodge & Cox Stock Fund, Dodge & Cox Balanced Fund and Dodge &
Cox Income Fund were 0.57%, 0.55% and 0.49%, respectively. Dodge
& Cox furnishes personnel and other facilities necessary for the
operation of the Funds for which it receives no additional
compensation.
- --------------------------------------------------------------------------------
Federal Each Fund intends to qualify each year as a regulated investment
Income company under the Internal Revenue Code. A regulated investment
Taxes company that distributes for the year all of its ordinary income
and capital gains pays no tax on its ordinary income or capital
gains. A regulated investment company that fails to distribute
all of its ordinary income and capital gains must pay tax on the
undistributed amounts at a maximum rate of 35%. If the company
does not distribute at least 98% of its ordinary income and
capital gains, it must pay an additional 4% excise tax on the
amount by which the 98% requirements exceed actual
distributions.
Distributions designated as long-term capital gain distributions
are taxed to a shareholder as though they were long-term capital
gains realized by the shareholder whether received in cash or
shares of a Fund and regardless of the period of time shares of
a Fund have been held. All taxable distributions, except for
long-term capital gain distributions, are taxed to a shareholder
as ordinary income dividends whether received in cash or shares
of a Fund. Part of Dodge & Cox Stock and Balanced Funds'
ordinary dividends may be eligible for the 70% deduction for
dividends received by corporations. State taxation of
distributions to shareholders varies from state to state. You
should consult your own tax adviser about the Federal, state and
local tax consequences of an investment in a Fund.
- -------------------------------------------------------------------------------
Custodian and State Street Bank and Trust Company, P.O. Box 9051, Boston,
Transfer Agent Massachusetts 02205-9051, (1-800-621-3979), acts as custodian of
all cash and securities of the Funds and receives and disburses
cash and securities for the account of the Funds. BFDS acts as
transfer and dividend disbursing agent for the Funds.>>
- -------------------------------------------------------------------------------
Reports to In addition to account statements, you will receive periodic
Shareholders shareholder reports highlighting relevant information, including
investment results and a review of portfolio characteristics. To
reduce Fund expenses, the Funds attempt to identify related
shareholders within a household and send only one copy of a
report. Call 1-800-621-3979 if you would like an additional free
copy of a Fund's financial report.
- -------------------------------------------------------------------------------
Shareholder For Fund literature and information, or if you have questions
Inquiries concerning your account, please call BFDS (1-800-621-3979).
===================================== 18 =======================================
<PAGE>
D O D G E & C O X
F U N D S
- -----------------------------------------------------------------
Officers and Trustees
HARRY R. HAGEY, Chairman & Trustee
Chairman & CEO, Dodge & Cox
JOHN A. GUNN, President & Trustee
President, Dodge & Cox
A. HORTON SHAPIRO, Executive Vice President & Trustee
Senior Vice President, Dodge & Cox
W. Timothy Ryan, Treasurer, Secretary & Trustee
Senior Vice President, Dodge & Cox
Katherine Herrick Drake, Vice President & Trustee
Vice President, Dodge & Cox
Dana M. Emery, Vice President & Trustee
Senior Vice President, Dodge & Cox
Kenneth E. Olivier, Vice President & Trustee
Senior Vice President, Dodge & Cox
Max Gutierrez, Jr., Trustee
Partner, Brobeck, Phleger & Harrison, Attorneys
Frank H. Roberts, Trustee
Retired Partner, Pillsbury, Madison & Sutro, Attorneys
John B. Taylor, Trustee
Professor of Economics, Stanford University
Will C. Wood, Trustee
Principal, Kentwood Associates, Financial Advisers
Thomas M. Mistele, Asst. Secretary & Asst. Treasurer
Vice President & General Counsel, Dodge & Cox
- -----------------------------------------------------------------
INVESTMENT MANAGER
Dodge & Cox
One Sansome Street, 35th Floor
San Francisco, California 94104-4405
Telephone (415) 981-1710
TRANSFER AGENT
Boston Financial Data Services Inc.
P.O. Box 9051, Boston, Massachusetts 02205-9051
Telephone (800) 621-3979
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 9051, Boston, Massachusetts 02205-9051
Telephone (800) 621-3979
DODGE & COX FUNDS
c/o BFDS
P.O. Box 9051, Boston, Massachusetts 02205-9051
Telephone (800) 621-3979
D O D G E & C O X
F U N D S
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Stock Fund
Established 1965
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Balanced Fund
Established 1931
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Income Fund
Established 1989
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Prospectus
May 1, 1998
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DODGE & COX STOCK FUND
DODGE & COX BALANCED FUND
DODGE & COX INCOME FUND
c/o BFDS
P.O. Box 9051
Boston, Massachusetts 02205-9051
(800) 621-3979
STATEMENT OF ADDITIONAL INFORMATION
Dated May 1, 1998
Dodge & Cox Funds (the "Trust") is a family of three no-load mutual funds,
Dodge & Cox Stock Fund, Dodge & Cox Balanced Fund and Dodge & Cox Income Fund
(the "Funds"). Each Fund is a series of the Trust. The Trust is registered
with the Securities and Exchange Commission (the "SEC") as an open-end
diversified management investment company.
This Statement of Additional Information is not the Funds' Prospectus, but
provides additional information which should be read in conjunction with the
Prospectus dated May 1, 1998. The Funds' Prospectus and most recent annual
financial statements may be obtained from the Funds at no charge by writing or
telephoning the Funds at the address or telephone number shown above.
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TABLE OF CONTENTS
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Investment Objectives and Policies
Dodge & Cox Stock Fund................................... 1
Dodge & Cox Balanced Fund................................ 1
Dodge & Cox Income Fund.................................. 2
Risk Factors.................................................. 8
Investment Restrictions....................................... 10
Purchase, Redemption, and Pricing of Shares................... 12
Performance Information....................................... 13
Officers and Trustees......................................... 14
Investment Manager............................................ 16
Portfolio Transactions........................................ 17
Additional Tax Considerations................................. 19
Independent Accountants....................................... 20
Financial Statements.......................................... 20
Appendix: Ratings............................................. 21
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INVESTMENT OBJECTIVES AND POLICIES
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DODGE & COX STOCK FUND
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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. These objectives may not be changed
without shareholder approval. It should be recognized that the market risks
inherent in investment cannot be avoided, nor is there any assurance that the
Fund will achieve its investment objectives.
Under normal circumstances, the Fund will invest at least 65% of total
assets in common stocks. The Fund may also purchase other types of securities,
for example, preferred stocks and debt securities which are convertible into
common stock (or which in the opinion of the Fund's investment manager, Dodge &
Cox, have predominantly common stock investment characteristics). The Fund may
invest up to 20% of its total assets in U.S. dollar denominated securities of
foreign issuers (such as ADRs).
Moderate reserves in cash or fixed-income securities may be held from
time to time as Dodge & Cox may deem advisable. Nevertheless, the long-term
emphasis shall be the maintaining of a fully invested equity fund.
Common stocks selected for the Fund will be predominantly those which, in
the view of Dodge & Cox have a favorable outlook for long-term growth of
principal and income. Prospective earnings and dividends are major
considerations in these stock selections. Individual securities are selected
with an emphasis on financial strength and a sound economic background. The
Fund's policies as described above may be changed without shareholder approval;
however, these policies will not be changed without notice to shareholders.
In an attempt to reduce unforeseen risks in single securities, the Fund
seeks to provide adequate investment diversification. To that end, the Fund
will not concentrate its investments in any particular industry or group of
industries, but will diversify investments among different industries as well as
among individual companies. The amount invested in any particular industry will
vary from time to time in accordance with the judgment of Dodge & Cox.
Although there is no restriction on the number of changes in security
holdings, purchases are made with a view to long-term holding and not for short-
term trading purposes. During rapidly changing economic and political
conditions, there may necessarily be more portfolio changes than in a more
stable period. A higher turnover rate might result in increased transaction
expenses and the realization of capital gains and losses.
It is the general practice of the Fund to invest in securities with ready
markets, mainly issues listed on national securities exchanges.
The Fund has no present intention of making investments in securities
which are restricted as to resale under Federal securities laws. The Fund does
not write put and call options and has no present intention of writing such
options.
DODGE & COX BALANCED FUND
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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. These objectives may not be changed without shareholder approval.
It should be recognized that the market risks inherent in investment cannot be
avoided, nor is there any assurance that the Fund will achieve its investment
objectives. Reasonable appreciation in favorable periods and conservation of
principal in adverse times are objectives that require flexibility in managing
the assets of the Fund under constantly changing investment conditions.
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Therefore, the proportions of the Fund's portfolio invested in common and
preferred stocks and bonds are revised by the Fund's manager, Dodge & Cox, when
considered advisable in light of Dodge & Cox's appraisal of business and
investment prospects. Under normal market conditions, the Fund seeks to
maintain no more than approximately 75% of its total assets in common stocks and
that portion of the value of convertible securities attributable to the
conversion right.
Bonds are held for their relative stability of principal and income as
well as for a reserve which can be used to take advantage of investment
opportunities. The Fund may invest up to 20% of its total assets in U.S.
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs and Yankee bonds). Moderate reserves in cash or short-term fixed income
securities may be held from time to time as Dodge & Cox may deem advisable.
It is the policy to invest in investment-grade bonds rated in the top
four rating categories by either Moody's Investors Service ("Moody's") (Aaa, Aa,
A, Baa) or Standard & Poor's Ratings Group ("S&P") (AAA, AA, A, BBB).
Securities rated Baa or BBB may have speculative characteristics. Securities
that are downgraded below Baa or BBB subsequent to purchase may continue to be
held by the Fund, if Dodge & Cox believes it advantageous to do so. Unrated
bonds may be purchased if such securities are, in the opinion of Dodge & Cox, of
equivalent quality to bonds rated at least A by Moody's and S&P. An explanation
of the Moody's and S&P ratings groups is included in the Appendix.
The Fund will maintain a substantial position in common stocks which in the
view of Dodge & Cox have a favorable outlook for long-term growth of principal
and income. Prospective earnings and dividends are major considerations in
these stock selections. The level of security prices and the trend of business
activity are given weight in determining the total investment position of the
Fund in equities at any time. Individual securities are selected with an
emphasis on financial strength and a sound economic background. The Fund's
investment policies as set forth above may be changed without shareholder
approval; however, these policies will not be changed without notice to
shareholders.
In an attempt to reduce unforeseen risks in single securities, the Fund
seeks to achieve adequate investment diversification. The Fund does not
concentrate its investments in any particular industry or group of industries
but seeks instead to diversify investments among different industries as well as
among individual companies. The amount invested in any particular industry will
vary from time to time in accordance with the judgment of Dodge & Cox.
Although there is no restriction on the number of changes in security
holdings, purchases are made with a view to long-term holding and not for short-
term trading purposes. During rapidly changing economic and political
conditions, there may necessarily be more portfolio changes than in a more
stable period. A higher turnover rate might result in increased transaction
expenses and the realization of capital gains and losses.
It is the general practice of the Fund to invest in equity securities
mainly listed on national securities exchanges and securities with ready
markets. The Fund does not write put and call options and has no present
intention of writing such options.
DODGE & COX INCOME FUND
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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. These objectives may not be changed without shareholder approval.
It should be recognized that the market risks inherent in investment cannot be
avoided nor is there any assurance that the Fund will achieve its investment
objectives.
The Fund seeks to achieve these objectives by investing in a diversified
portfolio of fixed-income securities. It is the policy of the Fund to invest at
least 80% of the market value of its total assets in the
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following: (1) debt obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities; (2) investment-grade debt securities, including
U.S. dollar-denominated foreign issues, rated in the top four rating groups by
either Moody's (Aaa, Aa, A, Baa) or S&P (AAA, AA, A, BBB); (3) unrated
securities if deemed to be of investment-grade quality by Dodge & Cox; and (4)
cash equivalents, bankers' acceptances, bank certificates of deposit, repurchase
agreements and commercial paper. At least 65% of the market value of the
portfolio will be invested in category (1) securities and in category (2)
securities rated in the top three rating groups. Further information about
specific investments is provided below.
No more than 20% of the Fund may be invested in other fixed-income instruments
including: debt obligations rated below investment grade, if, in the opinion of
Dodge & Cox, they are of suitable quality, provide attractive investment
opportunities and have a minimum rating of B by Moody's and/or S&P at the time
of investment; preferred stock; and corporate bonds convertible into common
stocks or carrying warrants to purchase common stock. The Fund will invest in
unrated securities only if deemed to be of investment-grade quality by Dodge &
Cox. It should be noted that securities rated Baa or BBB and those securities
rated below investment grade have speculative characteristics. Securities rated
B by the major rating agencies may yield a higher level of current income than
higher quality securities but generally have less liquidity, greater market risk
and more price fluctuation. An explanation of the Moody's and S&P rating groups
is included in the Appendix.
Under normal market conditions, the Fund will invest no more than 25% of its
total assets in U.S. dollar-denominated securities of foreign issuers.
The proportions held in the various financial instruments will be revised as
appropriate in light of Dodge & Cox's appraisal of the economy, the relative
yields of securities in the various market sectors, the investment prospects for
issuers, and other factors. In making investment decisions, Dodge & Cox will
take many factors into consideration, including yield to maturity, quality,
liquidity, current yield, and capital appreciation potential.
The Fund attempts to achieve its secondary objective of capital appreciation
through such techniques as fundamental research (i.e., seeking a security or
group of securities which Dodge & Cox believes to be undervalued), purchasing
securities at a discount to their maturity or call value and making gradual
adjustments in the average maturity of the Fund's portfolio.
The average maturity of the Fund's portfolio at any given time depends, in
part, on Dodge & Cox's assessment of economic and market conditions, the future
level of inflation and interest rates, and on the relative yields of securities
in the marketplace. Dodge & Cox normally invests in an array of securities with
short, intermediate and long maturities in varying proportions, with greater
emphasis on longer maturities.
Purchases and sales of securities in the Fund are generally made for long-term
fundamental investment reasons rather than for short-term trading purposes.
Nevertheless, Dodge & Cox may sell any of the securities in the Fund, regardless
of the length of time held, in seeking to achieve the objectives of the Fund.
In seeking to achieve the objectives of the Fund, Dodge & Cox may purchase
securities on a when-issued basis, purchase or sell securities for delayed
delivery and lend portfolio securities. The Fund's investment policies as set
forth above may be changed without shareholder approval; however, these policies
will not be changed without notice to shareholders.
Dodge & Cox maintains a long-term investment orientation and therefore
anticipates a relatively low turnover rate, which, under normal circumstances,
should not exceed 50% on an annual basis. However, during rapidly changing
economic, political, and market environments, there may be more
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portfolio changes than in a more stable period. A higher turnover rate might
result in increased transaction expenses and the realization of capital gains
and losses.
TYPES OF PORTFOLIO SECURITIES
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In seeking to meet its investment objectives, each Fund will invest in
securities or instruments whose investment characteristics are consistent with
the Fund's investment program. The following further describes the principal
types of portfolio securities and investment management practices of the Funds.
COMMON STOCKS (DODGE & COX BALANCED FUND AND DODGE & COX STOCK FUND). Stocks
represent shares of ownership in a company. After other claims are satisfied,
common stockholders participate in company profits on a pro rata basis; profits
may be paid out in dividends or reinvested in the company to help it grow.
Increases and decreases in earnings are usually reflected in a company's stock
price, so common stocks generally have the greatest appreciation and
depreciation potential of all corporate securities.
PREFERRED STOCKS. Each Fund may invest in preferred stocks. Generally,
preferred stock has a specified dividend and ranks after bonds and before common
stocks in its claim on income for dividend payments and on assets should the
company be liquidated.
CONVERTIBLE SECURITIES AND WARRANTS. The Funds may invest in debt or preferred
equity securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stock dividend rates but lower than nonconvertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree.
In recent years, convertibles have been developed which combine higher or lower
current income with other features. Warrants are options to buy a stated number
of shares of common stock at a specified price anytime during the life of the
warrants (generally two or more years).
FOREIGN SECURITIES. The Funds may invest in U.S. dollar-denominated securities
of foreign issuers traded in the U.S.
U.S. GOVERNMENT OBLIGATIONS. A portion of each Fund may be invested in
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Some of the obligations purchased by a Fund are backed by
the full faith and credit of the U.S. government and are guaranteed as to both
principal and interest by the U.S. Treasury. Examples of these include direct
obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and bonds,
or indirect obligations of the U.S. Treasury, such as obligations of the
Government National Mortgage Association, the Maritime Administration, the
Farmers Home Administration, the Veterans Administration, the Federal Housing
Administration and the Export-Import Bank.
While the obligations of many of the agencies and instrumentalities of the
U.S. government are not direct obligations of the U.S. Treasury, they are
generally backed indirectly by the U.S. government. Some of the agencies are
indirectly backed by their right to borrow from the U.S. government, such as the
Federal Financing Bank, the Federal Home Loan Bank and the U.S. Postal Service.
Others are supported solely by the credit of the agency or instrumentality
itself, but are given additional support due to the U.S. Treasury's authority to
purchase their outstanding debt obligations. These agencies include the Federal
Farm Credit Banks, the Federal National Mortgage Association, the Federal Home
Loan Mortgage Corporation, and the Student Loan Marketing Association. No
assurance can be given that the U.S. government would provide financial support
to U.S. government established or sponsored agencies. Furthermore, with respect
to the U.S. government securities purchased by a Fund, guarantees as to the
timely payment of principal and
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interest do not extend to the value or yield of these securities nor do they
extend to the value of a Fund's shares. A Fund may invest in these securities if
it believes they offer an expected return commensurate with the risks assumed.
MORTGAGE PASS-THROUGH SECURITIES (DODGE & COX BALANCED FUND AND DODGE & COX
INCOME FUND). Each Fund may invest a portion of its assets in mortgage pass-
through securities which are guaranteed by an agency of the U.S. government or
are issued by a private entity. These securities represent ownership in "pools"
of mortgage loans and are called "pass-throughs" because principal and interest
payments are passed through to security holders monthly. The security holder
may also receive unscheduled principal payments representing prepayments of the
underlying mortgage loans. When a Fund reinvests the principal and interest
payments, it may receive a rate of interest which is either higher or lower than
the rate on the existing mortgage.
During periods of declining interest rates there is increased likelihood that
mortgage securities may be prepaid. Such prepayment would most likely be
reinvested at lower rates. On the other hand, if the pass-through securities
had been purchased at a discount, then such prepayments of principal would
benefit the portfolio.
COLLATERALIZED MORTGAGE OBLIGATIONS (DODGE & COX BALANCED FUND AND DODGE & COX
INCOME FUND). Collateralized Mortgage Obligations ("CMOs") are private entity
or U.S. government agency-issued multi-class bonds that are collateralized by
U.S. agency-guaranteed mortgage pass-through securities. A CMO is created when
the issuer purchases a collection of mortgage pass-through securities ("the
collateral") and places these securities in a trust, which is administered by an
independent trustee. Next, the issuer typically issues several classes, or
"tranches" of bonds, the debt service of which is provided by the principal and
interest payments from the mortgage pass-through securities in the trust. Each
of these tranches is valued and traded separately based on its distinct cash
flow characteristics.
Although the mortgage pass-through collateral typically has monthly payments
of principal and interest, CMO bonds will generally have semiannual or quarterly
payments of principal and interest. Payments received from the collateral are
reinvested in short-term debt securities by the trustee between payment dates on
the CMO. On the CMO payment dates, the principal and interest payments received
from the collateral plus reinvestment income, are applied first to pay interest
on the bonds and then to repay principal. Generally, the bonds are retired
sequentially; the first payments of principal are applied to retire the first
tranche, while all other tranches receive interest only. Only after the first
tranche is retired do principal payments commence on the second tranche. The
process continues in this sequence until all tranches are retired.
At issuance, each CMO tranche has a stated final maturity date. The stated
final maturity date is the date by which the bonds would be completely retired
assuming standard amortization of principal but no prepayments of principal on
the underlying collateral. However, since it is likely that the collateral will
have principal prepayments, the CMO bonds are actually valued on the basis of an
assumed prepayment rate. The assumed prepayment rate is used in the calculation
of the securities' weighted-average life, a measure of the securities' cash flow
characteristics. Dodge & Cox will purchase the tranche with the weighted-
average life and cash flow characteristics that it believes will contribute to
achieving the objectives of a Fund.
All CMOs purchased by a Fund will have a AAA rating by either S&P or Moody's.
To qualify for this rating, a CMO is structured so that even under the most
conservative prepayment and reinvestment assumptions, the principal and interest
payments from the collateral are expected to meet or exceed the cash flow
obligations of all the tranches of the CMO. However, there are risks associated
with CMOs, which relate to the risks of the underlying mortgage pass-through
securities. In a falling interest rate environment,
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the mortgage securities may be prepaid faster than the assumed rate. In this
scenario, the prepayments of principal will generally be reinvested at a rate
which is lower than the rate that the security holder is currently receiving.
Conversely, in a rising interest rate environment, the mortgage collateral may
be prepaid at a rate which is slower than the assumed rate. In this case, the
cash flow of the bond decreases. A reduced prepayment rate effectively lengthens
the time period the security will be outstanding and may adversely affect the
value of the security.
RESTRICTED SECURITIES (DODGE & COX BALANCED FUND AND DODGE & COX INCOME FUND).
The Fund may invest in restricted securities (privately-placed debt and
preferred equity securities) and other securities without readily available
market quotations, but will not acquire such securities or other illiquid
securities, including repurchase agreements maturing in more than seven days, if
as a result they would comprise more than 15% of the value of the Fund's total
assets (10% for Dodge & Cox Income Fund).
Restricted securities may be sold only in privately-negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act of 1933. Where registration is required, a Fund may be
obligated to pay all or a part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, a Fund
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined in good faith
by the Trust's Board of Trustees.
STRUCTURED INVESTMENTS (DODGE & COX BALANCED FUND AND DODGE & COX INCOME FUND).
Included among the issuers of debt securities in which a Fund may invest are
entities organized and operated solely for the purpose of restructuring the
investment characteristics of various securities. These entities are typically
organized by investment banking firms which receive fees in connection with
establishing each entity and arranging for the placement of its securities.
This type of restructuring involves the deposit with or purchases by an entity,
such as a corporation or trust, of specified instruments and the issuance by
that entity of one or more classes of securities (structured investments) backed
by, or representing interests in, the underlying instruments. The cash flow on
the underlying instruments may be apportioned among the newly issued structured
investments to create securities with different investment characteristics such
as varying maturities, payment priorities or interest rate provisions; the
extent of the payments made with respect to structured investments is dependent
on the extent of the cash flow on the underlying instruments.
Each Fund is permitted to invest in a class of structured investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated structured investments typically have higher yields and present
greater risks than unsubordinated structured investments. Although a Fund's
purchase of subordinated structured investments would have a similar economic
effect to that of borrowing against the underlying securities, the purchase will
not be deemed to be leverage for purposes of the limitations placed on the
extent of a Fund's assets that may be used for borrowing activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the Investment Company Act. As a result, a Fund's
investment in these structured investments may be limited by the restrictions
contained in the Investment Company Act of 1940, as amended (the "Investment
Company Act").
WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES (DODGE & COX BALANCED FUND AND DODGE
& COX INCOME FUND). Each Fund may purchase securities on a when-issued or a
delayed-delivery basis, that is, for payment and delivery on a date later than
normal settlement, but generally within 30 days.
The purchase price and yield on these securities are generally set at the time
of purchase. On the date that a security is purchased on a when-issued basis, a
Fund reserves liquid assets with a value at least as
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great as the purchase price of the security, in a segregated account at the
custodian bank, as long as the obligation to purchase continues. The value of
the delayed-delivery security is reflected in a Fund's net asset value as of the
purchase date, however, no income accrues to a Fund from these securities prior
to their delivery to the Fund. A Fund makes such purchases for long-term
investment reasons, but may actually sell the securities prior to settlement
date if Dodge & Cox deems it advisable in seeking to achieve the objectives of
the Fund. The purchase of these types of securities may increase a Fund's
overall investment exposure and involves a risk of loss if the value of the
securities declines prior to the settlement date. Unsettled securities purchased
on a when-issued or delayed-delivery basis will not exceed 5% of a Fund's total
assets at any one time.
CASH POSITION. Each Fund will hold a certain portion of its assets in U.S.
dollar-denominated money market securities, including repurchase agreements,
commercial paper, and bank obligations in the two highest rating categories
maturing in one year or less. For temporary, defensive purposes, a Fund may
invest without limitation in such securities. This reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new investments
and serves as a short-term defense during periods of unusual market volatility.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other
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short-term debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. A Fund may invest in U.S. banks, foreign branches of U.S. banks, U.S.
branches of foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible corporate
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debt securities (such as bonds and debentures) which have one year or less
remaining to maturity. Corporate notes may have fixed, variable, or floating
rates.
Commercial Paper. Short-term promissory notes issued by corporations
-----------------
primarily to finance short-term credit needs. Certain notes may have floating
or variable rates.
Repurchase Agreements. A Fund may enter into a repurchase agreement through
----------------------
which an investor (such as a Fund) purchases a security (known as the
"underlying security") from a well-established securities dealer or bank that is
a member of the Federal Reserve System. Any such dealer or bank will be on
Dodge & Cox's approved list and have a credit rating with respect to its short-
term debt of at least A1 by S&P, P1 by Moody's, or the equivalent rating by
Dodge & Cox. At that time, the bank or securities dealer agrees to repurchase
the underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will be
treated as illiquid securities. A Fund will only enter into repurchase
agreements where (i) the underlying securities are issued by the U.S.
government, its agencies and instrumentalities, (ii) the market value of the
underlying security, including interest accrued, will be at all times equal to
or exceed the value of the repurchase agreement, and (iii) payment for the
underlying security is made only upon physical delivery or evidence of book-
entry transfer to the account of the custodian or a bank acting as agent. In
the event of a bankruptcy or other default of a seller of a repurchase
agreement, a Fund could experience both delays in liquidating the underlying
security and losses, including: (a) possible decline in the value of the
underlying security during the period which the Fund seeks to enforce its rights
thereto; (b) possible subnormal levels of income and lack of access to income
during this period; and (c) expenses of enforcing its rights.
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BORROWING MONEY. The Funds can borrow money from banks as a temporary measure
for emergency purposes or to facilitate redemption requests. Such borrowing may
be collateralized with Fund assets, subject to restrictions.
LENDING OF PORTFOLIO SECURITIES (DODGE & COX INCOME FUND). The Fund has
reserved the right to lend its securities to qualified broker-dealers, banks or
other financial institutions. By lending its portfolio securities, the Fund
would attempt to increase its income by receiving a fixed fee or a percentage of
the collateral, in addition to continuing to receive the interest or dividends
on the securities loaned. The terms, structure and the aggregate amount of such
loans would be consistent with the Investment Company Act. The borrower would
be required to secure any such loan with collateral in cash or cash equivalents
maintained on a current basis in an amount at least equal to the total market
value and accrued interest of the securities loaned by the Fund. The Fund does
not presently intend to lend portfolio securities.
INVESTMENT COMPANIES. The Funds can purchase the securities of other investment
companies as permitted by the Investment Company Act.
RISK FACTORS
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GENERAL
Because of its investment policy, each Fund may not be suitable or appropriate
for all investors. The Funds are not money market funds and are not appropriate
investments for those whose primary objective is principal stability. A Fund's
assets will be subject to all of the risks of investing in the financial
markets. There is risk in all investment. The value of the portfolio
securities of a Fund will fluctuate based upon market conditions. Although a
Fund seeks to reduce risk by investing in a diversified portfolio, such
diversification does not eliminate all risk. There can be no assurance that a
Fund will achieve its investment objectives.
DEBT OBLIGATIONS
A Fund will invest in debt securities which hold the prospect of contributing
to the achievement of a Fund's objectives. Yields on short, intermediate, and
long-term securities are dependent on a variety of factors, including the
general conditions of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the credit quality and rating of
the issue. Debt securities with longer maturities tend to have higher yields
and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower yields. The
market prices of debt securities usually vary, depending upon available yields.
An increase in interest rates will generally reduce the value of portfolio
investments, and a decline in interest rates will generally increase the value
of portfolio investments. The ability of a Fund to achieve its investment
objectives is also dependent on the continuing ability of the issuers of the
debt securities in which a Fund invests to meet their obligations for the
payment of interest and principal when due. As discussed below, each Fund's
investment program permits it to hold investment grade securities that have been
downgraded. In addition, the Dodge & Cox Income Fund may invest in lower
quality securities. Since investors generally perceive that there are greater
risks associated with investment in lower quality securities, the yields from
such securities normally exceed those obtainable from higher quality securities.
However, the principal value of lower-rated securities generally will fluctuate
more widely than higher quality securities. Lower quality investments entail a
higher risk of default--that is, the nonpayment of interest and principal by the
issuer--than higher quality investments. Such securities are also subject to
special risks, discussed below. Although a Fund seeks to reduce risk by
portfolio diversification, credit analysis, and attention to trends in the
economy, industries and financial markets, these efforts will not eliminate all
risk.
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After purchase by a Fund, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by a Fund.
Neither event will require a sale of such security by the Fund. However, Dodge
& Cox will consider such event in its determination of whether a Fund should
continue to hold the security. To the extent that the ratings given by Moody's
or S&P may change as a result of changes in such organizations or their rating
systems, a Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in the
Prospectus.
SPECIAL RISKS OF HIGH YIELD INVESTING
As described above, under limited circumstances, a Fund may hold low quality
bonds commonly referred to as "junk bonds". Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low and lower-
medium quality bonds involves greater investment risk, to the extent a Fund
holds such bonds, achievement of its investment objective will be more dependent
on Dodge & Cox's credit analysis than would be the case if a Fund was investing
in higher quality bonds. High yield bonds may be more susceptible to real or
perceived adverse economic conditions than investment grade bonds. A projection
of an economic downturn, or higher interest rates, for example, could cause a
decline in high yield bond prices because the advent of such events could lessen
the ability of highly leveraged issuers to make principal and interest payments
on their debt securities. In addition, the secondary trading market for high
yield bonds may be less liquid than the market for higher grade bonds, which can
adversely affect the ability of a Fund to dispose of its portfolio securities.
Bonds for which there is only a "thin" market can be more difficult to value
inasmuch as objective pricing data may be less available and judgment may play a
greater role in the valuation process.
FOREIGN SECURITIES
While each Fund emphasizes investments in securities domiciled in the United
States, it may invest in U.S. dollar-denominated securities of foreign issuers.
RISK FACTORS OF FOREIGN INVESTING
There are special risks in foreign investing. Many of the risks are more
pronounced for investments in developing or emerging countries, such as many of
the countries of Southeast Asia, Latin America, Eastern Europe, and the Middle
East. Each Fund has no present intention of investing in developing or emerging
countries.
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such matters as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position. The
internal politics of certain foreign countries are not as stable as in the
United States. In addition, significant external political risks currently
affect some foreign countries.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and are
accordingly affected by protective trade barriers and economic conditions of
their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon the
securities markets of such countries.
CURRENCY FLUCTUATIONS. Although a Fund will invest in U.S. dollar-denominated
foreign securities, the underlying securities will be denominated in various
currencies. Accordingly, a change in the value of any such currency against the
U.S. dollar will result in a corresponding change in the
9
<PAGE>
U.S. dollar value of a Fund's assets. Such changes will also affect a Fund's
income. Generally, when a given currency appreciates against the dollar (the
dollar weakens), the value of securities denominated in that currency will rise.
When a given currency depreciates against the dollar (the dollar strengthens),
the value of securities denominated in that currency would be expected to
decline.
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may limit at times and preclude investment
in certain of such countries and may increase the cost and expenses of a Fund.
Investments by foreign investors are subject to a variety of restrictions.
These restrictions may take the form of prior governmental approval, limits on
the amount or type of securities held by foreigners, and limits on the types of
companies in which foreigners may invest. Additional or different restrictions
may be imposed at any time by these or other countries in which a Fund invests.
In addition, the repatriation of both investment income and capital from some
foreign countries is restricted and controlled under certain regulations,
including in some cases the need to obtain certain government consents.
MARKET CHARACTERISTICS. Foreign markets are generally not as developed or
efficient as, and may be more volatile than, those in the United States. While
growing in volume, they usually have substantially less volume than U.S. markets
and a Fund's portfolio securities may be less liquid and subject to more rapid
and erratic price movements than securities of comparable U.S. companies.
Equity securities may trade at price/earnings multiples higher than comparable
United States securities and such levels may not be sustainable. Fixed
commissions on foreign exchanges are generally higher than negotiated
commissions on United States exchanges. There is generally less government
supervision and regulation of foreign exchanges, brokers and listed companies
than in the United States. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets. Such
differences may include delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of payment, which
increase the likelihood of a "failed settlement." Failed settlements can result
in losses to a Fund.
INFORMATION AND SUPERVISION. There is generally less publicly available
information about foreign companies comparable to reports and ratings that are
published about companies in the United States. Foreign companies are also
generally not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies. It also may be more difficult to keep currently informed of
corporate actions which affect the prices of portfolio securities.
TAXES. The dividends and interest payable on certain of a Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to a Fund's shareholders.
OTHER. With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of a
Fund, political or social instability, or diplomatic developments which could
affect investments by U.S. persons in those countries.
INVESTMENT RESTRICTIONS
- -----------------------
Each Fund has adopted the following restrictions. These restrictions, as well
as a Fund's investment objectives, cannot be changed without the approval of the
holders of a majority of a Fund's outstanding shares. The Investment Company Act
defines a majority as the lesser of (1) 67% or more of the voting shares present
at a meeting if the holders of more than 50% of the outstanding voting shares
10
<PAGE>
are present or represented by proxy, or (2) more than 50% of the outstanding
voting shares of a Fund. As applicable, each Fund may not:
DODGE & COX BALANCED FUND, DODGE & COX INCOME FUND AND DODGE & COX STOCK FUND
1. Invest more than 5% of the value of its total assets in the securities
of any one issuer, except the obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or issues backed
or collateralized by such obligations, nor acquire more than 10% of
the voting securities of any one issuer.
2. Invest in any company for the purpose of exercising control or
management.
3. Underwrite securities of other issuers, except insofar as a Fund may
be deemed an underwriter under the Securities Act of 1933, as amended,
in selling portfolio securities.
4. Purchase securities on margin or sell short.
5. Invest in a security if, as a result of such investment, more than 25%
of its total assets would be invested in the securities of issuers in
any particular industry, except that the restriction does not apply to
securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities (or repurchase agreements with respect thereto).
6. Purchase any security if as a result a Fund would then have more than
15%, (10%, DODGE & COX INCOME FUND) of its total assets invested in
securities which are illiquid, including repurchase agreements not
maturing in seven days or less and securities restricted as to
disposition under Federal securities laws.
7. Purchase interests in oil, gas and mineral leases or other mineral
exploration or development programs, although a Fund may invest in
stocks or debt instruments of companies which invest in or sponsor
such programs.
8. Purchase or sell commodities, commodity contracts or real estate
(although a Fund may invest in marketable securities secured by real
estate or interests therein or issued by companies or investment
trusts which invest in real estate or interests therein).
DODGE & COX BALANCED FUND AND DODGE & COX STOCK FUND
9. Issue senior securities.
10. Borrow money except as a temporary measure for extraordinary or
emergency purposes and not for the purchase of investment securities
and then only from banks. The amount borrowed shall not exceed 10% of
the Fund's total assets at cost or 5% of the value of total assets,
whichever is less, provided that such borrowings shall have an asset
coverage of 300%.
11. Make loans to other persons except this shall not exclude the purchase
of publicly issued debt securities of a type purchased by
institutional investors.
DODGE & COX INCOME FUND
12. Issue senior securities, as defined in the Investment Company Act, or
mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as
may be necessary in connection with borrowing, and then such
mortgaging, pledging or hypothecating may not exceed 10% of the Fund's
total assets, taken at the lesser of cost or market value.
11
<PAGE>
13. Borrow money, except the Fund may borrow money from banks as a
temporary measure for extraordinary or emergency purposes. Such
temporary borrowing may not exceed 5% of the value of the Fund's total
assets at the time the loan is made. The Fund may pledge up to 10% of
the lesser of the cost or market value of its total assets to secure
temporary borrowings. The Fund will not borrow for investment
purposes. Immediately after any borrowing, the Fund will maintain an
asset coverage of not less than 300% with respect to all borrowings.
14. Make loans of money, except by the purchase of debt securities or by
entering into repurchase agreements, as permitted by the Fund's other
investment policies and restrictions. Although there is no present
intention of doing so in the foreseeable future, the Fund reserves the
authority to make loans of its portfolio securities in an aggregate
amount not exceeding 20% of its total assets. Such loans will only be
made upon approval of, and subject to any conditions imposed by, the
Fund's Board of Trustees.
15. Write put or call options.
Whenever any investment policy or investment restriction states a maximum
percentage of a Fund's assets which may be invested in any security or other
instrument, it is intended that such maximum percentage limitation be determined
immediately after and as a result of the Fund's acquisition of such security or
instrument. Industries are determined by reference to the classifications of
industries set forth in a Fund's semi-annual and annual report.
PURCHASE, REDEMPTION, AND PRICING OF SHARES
- -------------------------------------------
The procedures for purchasing and redeeming shares of a Fund are described in
the Funds' Prospectus, which is incorporated herein by reference.
NET ASSET VALUE PER SHARE. The purchase and redemption price of a Fund's
shares is equal to a Fund's net asset value per share or share price. A Fund
determines its net asset value per share by subtracting a Fund's total
liabilities (including accrued expenses and dividends payable) from its total
assets (the market value of the securities a Fund holds plus cash and other
assets, including income accrued but not yet received) and dividing the result
by the total number of shares outstanding. The net asset value per share of a
Fund is normally calculated as of the close of trading on the New York Stock
Exchange ("NYSE") every day the NYSE is open for trading. The NYSE is closed on
the following days: New Year's Day, Martin Luther King, Jr. Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
Determination of net asset value (and the offering, sale redemption and
repurchase of shares) for a Fund may be suspended when (a) the NYSE is closed,
other than customary weekend and holiday closings, (b) trading on the NYSE is
restricted, (c) an emergency exists as a result of which disposal by a Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for a Fund to fairly determine the value of its net assets, or (d) a
governmental body having jurisdiction over a Fund may by order permit such a
suspension for the protection of a Fund's shareholders; provided that applicable
rules and regulations of the Securities and Exchange Commission (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b), (c), or (d) exist.
In determining total net asset value of a Fund, stocks are valued at market,
using as a price the last sale of the day at the close of the New York Stock
Exchange or, if no sale, it will be valued at the mean between the bid and ask
prices for the day. Debt securities, including listed issues, are priced on the
basis of valuations furnished by a pricing service which utilizes both dealer-
supplied valuations and electronic data processing techniques. These values
take into account appropriate factors such as institutional-size trading markets
in similar groups of securities, yield, quality, coupon rate, maturity,
12
<PAGE>
type of issue, trading characteristics and other market data and do not rely
exclusively upon exchange or over-the-counter listed prices. Use of the pricing
service has been approved by the Board of Trustees. 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 and all other assets are valued at
fair value as determined in good faith by or at the direction of the Board of
Trustees.
PERFORMANCE INFORMATION
- -----------------------
Each Fund may include figures indicating its total return or yield in
advertisements or reports to shareholders or prospective investors. Quotations
of a Fund's average annual total rate of return will be expressed in terms of
the average annual compounded rate of return on a hypothetical investment in the
Fund over periods of one, five and ten years (or since inception), will reflect
the deduction of a proportional share of Fund expenses (on an annual basis),
will assume that all dividends and capital gains distributions are reinvested
when paid, and will be calculated pursuant to the following formula:
<TABLE>
<CAPTION>
P (1 + T)/n/ = ERV
<S> <C> <C> <C>
where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years,
ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.
</TABLE>
The average annual total returns of the Funds for the one, five and
ten-year (since inception) periods ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years (or inception)
------- -------- ------------------------
<S> <C> <C> <C>
Dodge & Cox Stock Fund 28.41% 21.11% 17.00%
Dodge & Cox Balanced Fund 21.21 16.06 14.56
Dodge & Cox Income Fund 10.00 8.18 9.74 (9 years)
</TABLE>
Total return indicates the positive or negative rate of return that an investor
would have earned from reinvested dividends and distributions and changes in net
asset value per share during the period.
Quotations of yield, as defined by the Securities and Exchange
Commission, will be based on net investment income per share earned during a
given thirty-day period and will be computed by dividing this net investment
income by the net asset value per share on the last day of the period and
annualizing the results according to the following formula:
YIELD = 2[(a-b+1)/6/ -1]
---
cd
<TABLE>
<CAPTION>
<S> <C><C><C>
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements
or waivers),
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day
of the period.
</TABLE>
13
<PAGE>
The Funds' current yields for the thirty days ended December 31, 1997
were as follows:
Dodge & Cox Stock Fund 1.81%
Dodge & Cox Balanced Fund 3.48%
Dodge & Cox Income Fund 6.21%
Yield does not directly reflect changes in net asset value per share which
occurred during the period.
As appropriate, performance information for a Fund may be compared in reports
and promotional literature to: (i) the Standard & Poor's 500 Stock Index, the
Dow Jones Industrial Average, the Lehman Brothers Aggregate Bond Index, or
various other unmanaged indices of the performance of various types of
investments, so that investors may compare a Fund's results with those of
indices widely regarded by investors as representative of the security markets
in general, and (ii) the performance of other mutual funds. Unmanaged indices
may assume the reinvestment of income distributions, but generally do not
reflect deductions for administrative and management costs and expenses.
Performance information for a Fund reflects only the performance of
hypothetical investments in the Fund during the particular time periods on which
the calculations are based. Such information should not be considered as
representative of the performance of the Fund in the future because, unlike some
bank deposits or other investments which pay a fixed yield for a stated period
of time for a fixed principal amount, the performance of the Fund will vary
based not only on the current market value of the securities held in its
portfolio, but also on changes in a Fund's expenses and in the asset size of the
Fund. Performance information should be considered in light of a Fund's
investment objectives and policies, the types and quality of a Fund's portfolio
investments, market conditions during the particular time period and operating
expenses. Further information about the performance of a Fund is contained in
each Fund's Annual Report which may be obtained without charge from the Fund.
From time to time, a Fund and Dodge & Cox may also refer to the following
information:
1. Portfolio information, including median market capitalization,
price to earnings ratio, price to book value, average bond
quality, average bond maturity, and effective bond duration.
2. The asset allocation and sector weightings of a Fund's portfolio
and a Fund's top ten holdings.
3. A description of the Dodge & Cox investment management philosophy
and approach.
OFFICERS AND TRUSTEES
- ---------------------
<TABLE>
<CAPTION>
Total 1997
Position(s) Principal Occupation Compensation
Name and Address Age with Trust During Past 5 Years from the Trust**
- --------------------- ----- ---------- -------------------- ----------------
<S> <C> <C> <C> <C>
Harry R. Hagey * 56 Chairman and Chairman and Chief Executive $0
Trustee Officer of Dodge & Cox
John A.Gunn * 54 President and President of Dodge & Cox 0
Trustee
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Total 1997
Position(s) Principal Occupation Compensation
Name and Address Age with Trust During Past 5 Years from the Trust**
- --------------------- ----- ---------- -------------------- ----------------
<S> <C> <C> <C> <C>
A. Horton Shapiro * 58 Executive Senior Vice-President 0
Vice-President of Dodge & Cox
and Trustee
W. Timothy Ryan * 60 Secretary, Senior Vice-President 0
Treasurer and of Dodge & Cox
Trustee
Katherine Herrick 44 Vice-President Vice-President of 0
Drake * and Trustee Dodge & Cox
Dana M. Emery * 36 Vice-President Manager-Fixed Income and 0
and Trustee Senior Vice-President of
Dodge & Cox
Kenneth E. Olivier * 45 Vice-President Senior Vice-President 0
and Trustee of Dodge & Cox
Max Gutierrez, Jr. 67 Trustee Partner in Brobeck, Phleger 12,000
One Market Plaza & Harrison, Attorneys
San Francisco, CA
Frank H. Roberts 78 Trustee Retired Partner in Pillsbury, 12,000
225 Bush Street Madison & Sutro, Attorneys
San Francisco, CA
John B. Taylor 51 Trustee Professor of Economics and 15,000
Department of Director of the Center for
Economics Economic Policy Research,
Stanford University Stanford University
Stanford, CA
Will C. Wood 58 Trustee Principal, Kentwood Associates, 15,000
1550 El Camino Real Financial Advisers; prior to
Menlo Park, CA 1994, Managing Director, IDI
Associates, Financial Advisers
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Total 1997
Position(s) Principal Occupation Compensation
Name and Address Age with Trust During Past 5 Years from the Trust**
- --------------------- ----- ---------- -------------------- ----------------
<S> <C> <C> <C> <C>
Thomas M. Mistele 44 Assistant Vice-President and General 0
Secretary and Counsel of Dodge & Cox;
Assistant formerly Senior Vice
Treasurer President of Templeton Global
Investors, Inc. and Secretary
of the Templeton Mutual Funds
</TABLE>
_______________________
* Each has been an employee of Dodge & Cox, 35th Floor, One Sansome
Street, San Francisco, California for over 11 years in an executive
position and is an "interested person" of the Trust as defined in the
Investment Company Act.
** "Total 1997 Compensation from the Trust" consists of compensation and
fees paid to Trustees by the Trust and their predecessors.
Each of the officers and Trustees above served in similar capacities with
one or more of the Trust's predecessors, Dodge & Cox Stock Fund, Dodge & Cox
Income Fund and Dodge & Cox Balanced Fund.
Trustees and officers of the Trust affiliated with Dodge & Cox hold a
controlling interest in 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 (or $500 per Fund) for each Board or Committee meeting attended. The
Trust does not pay any other remuneration to its officers or trustees, and has
no bonus, profit-sharing, pension or retirement plan. On March 31, 1998 the
officers and trustees of the Trust and members of their families and relatives
owned less than 1.0% of the outstanding shares of each Fund.
On March 31, 1998, Charles Schwab & Co., 101 Montgomery Street, San
Francisco, California 94104 owned of record 9,129,312 shares (19.6%), 8,984,090
shares (10.6%) and 4,590,872 shares (7.1%) of the outstanding shares of Dodge &
Cox Stock Fund, Dodge & Cox Balanced Fund and Dodge & Cox Income Fund,
respectively; and Donaldson Lufkin & Jenrette-Pershing Division, P.O. Box 2052,
Jersey City, NJ 07303 owned of record 5,663,569 shares (or 8.7% of the
outstanding shares of Dodge & Cox Income Fund). The Trust knows of no other
person who owns beneficially or of record more than 5% of the outstanding shares
of each Fund.
INVESTMENT MANAGER
- ------------------
Dodge & Cox, One Sansome Street, San Francisco, California 94104, a
corporation, is employed by the Trust as manager and investment adviser of the
Funds, subject to the direction of the Board of Trustees. Dodge & Cox is one of
the oldest professional investment management firms in the United States, having
acted continuously as investment managers since 1930 and has served as manager
and investment adviser for the Funds since each Fund's inception. Each Fund's
investments are managed by
16
<PAGE>
Dodge & Cox's Investment Policy Committee (the Bond Strategy Committee for
fixed-income securities), and no one person is primarily responsible for making
investment recommendations to the Committee. The research work of the firm is
organized for comprehensive and continuous appraisal of the economy and of
various industries and companies. Supplemental research facilities are used to
obtain additional coverage of business and financial developments affecting
comparative security values.
Dodge & Cox is not engaged in the brokerage business nor in the business of
dealing in or selling securities. Its activities are devoted to investment
research and the supervision of investment accounts for individuals, trustees,
corporations, pension and profit-sharing funds, and charitable institutions.
Dodge & Cox Stock Fund and Dodge & Cox Balanced Fund each pay Dodge & Cox a
management fee which is payable monthly at the annual rate of 0.50% of the
average daily net asset value of each Fund. Dodge & Cox Income Fund pays Dodge
& Cox a management fee which is payable monthly at the annual rate of 0.50% of
the average daily net asset value of the Fund up to $100 million and 0.40% of
the average daily net asset value of the Fund in excess of $100 million.
However, the investment management agreements with Dodge & Cox Income Fund
and Dodge & Cox Stock Fund provide that Dodge & Cox will waive its fee for any
calendar year to the extent that such fee plus all other ordinary operating
expenses paid by the Fund exceed 1% and 0.75%, respectively, of the average
daily net asset value of the Fund. No waiver of management fee was required for
1997 under the agreements. Investment management fees received by Dodge & Cox
from the Funds for the last three years were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Dodge & Cox Stock Fund $16,194,151 $ 8,541,819 $4,332,369
Dodge & Cox Balanced Fund 23,306,993 13,196,680 6,321,900
Dodge & Cox Income Fund 2,574,712 1,650,053 1,045,074
</TABLE>
The contracts may be terminated at any time without penalty upon 60 days written
notice by action of the Trustees, shareholders or by Dodge & Cox. The contracts
will terminate automatically should there be an assignment thereof. In addition
to Dodge & Cox's fee, each Fund pays other direct expenses, including transfer
agent, custodial, accounting, legal, and audit fees; costs of preparing and
printing prospectuses and reports sent to shareholders; registration fees and
expenses; proxy and shareholder meeting expenses; and Trustee fees and expenses.
In 1997, the ratio of total operating expenses to average net assets of Dodge &
Cox Stock Fund, Dodge & Cox Balanced Fund and Dodge & Cox Income Fund were
0.57%, 0.55% and 0.49%, respectively. Dodge & Cox furnishes personnel and other
facilities necessary for the operation of the Funds for which it receives no
additional compensation. Dodge & Cox supervises the operations of the Funds and
directs the investment and reinvestment of its assets and furnishes all
executive personnel and office space required.
PORTFOLIO TRANSACTIONS
- ----------------------
The Investment Management Agreements provide that Dodge & Cox is
responsible for selecting members of securities exchanges, brokers and dealers
(such members, brokers and dealers being hereinafter referred to as "brokers")
for the execution of a Fund's portfolio transactions and, when applicable, the
negotiation of commissions. All decisions and placements are made in accordance
with the following principles:
1. Purchase and sale orders will usually be placed with brokers who are
selected by Dodge & Cox as able to achieve "best execution" of such orders.
"Best execution" means prompt and reliable
17
<PAGE>
execution at the most favorable securities price, taking into account the other
provisions hereinafter set forth. The determination of what may constitute best
execution and price in the execution of a securities transaction by a broker
involves a number of considerations, including without limitation, the overall
direct net economic result to a Fund (involving both price paid or received and
any commissions and other costs paid), the efficiency with which the transaction
is effected, the ability to effect the transaction at all where a large block is
involved, availability of the broker to stand ready to execute possibly
difficult transactions in the future, and the financial strength and stability
of the broker. Such considerations are judgmental and are weighed by Dodge & Cox
in determining the overall reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, Dodge & Cox takes into
account its past experience as to brokers qualified to achieve best execution,
including brokers who specialize in any foreign securities held by a Fund.
3. Dodge & Cox is authorized to allocate brokerage business to brokers who
have provided brokerage and research services, as such services are defined in
Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act"), for a
Fund and/or other accounts, if any, for which Dodge & Cox exercises investment
discretion (as defined in Section 3(a)(35) of the 1934 Act) and, as to
transactions as to which fixed minimum commission rates are not applicable.
Such allocation may cause a Fund to pay a commission for effecting a securities
transaction in excess of the amount another broker would have charged for
effecting that transaction, if Dodge & Cox determines in good faith that such
amount of commission is reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms of either that
particular transaction or with Dodge & Cox's overall responsibilities with
respect to a Fund and the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, Dodge & Cox is not
required to place or attempt to place a specific dollar value on the research or
execution services of a broker or on the portion of any commission reflecting
brokerage or research services. In demonstrating that such determinations were
made in good faith, Dodge & Cox will be prepared to show that all commissions
were allocated and paid for purposes contemplated by a Fund's brokerage policy;
that commissions were paid only for products or services which provide lawful
and appropriate assistance to Dodge & Cox in the performance of its investment
decision-making responsibilities; and that the commissions paid were within a
reasonable range. The determination that commissions were within a reasonable
range will be based on any available information as to the level of commissions
known to be charged by other brokers on comparable transactions, but there will
also be taken into account a Fund's policies that (i) obtaining a low commission
is deemed secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to a Fund to obtain a favorable
price than to pay the lowest commission; and (ii) the quality, comprehensiveness
and frequency of research studies which are provided for Dodge & Cox are useful
to Dodge & Cox in performing its advisory services under its Investment
Management Agreement with a Fund. Research services provided by brokers to
Dodge & Cox are considered to be in addition to, and not in lieu of, services
required to be performed by Dodge & Cox under its Investment Management
Agreement. Research furnished by brokers through whom a Fund effects securities
transactions may be used by Dodge & Cox for any of its accounts, and not all
such research may be used by Dodge & Cox for the Funds.
4. Purchases and sales of portfolio securities within the United States other
than on a securities exchange will be executed with primary market makers acting
as principal except where, in the
18
<PAGE>
judgment of Dodge & Cox, better prices and execution may be obtained on a
commission basis or from other sources.
Insofar as known to management, no Trustee or officer of the Trust, nor
Dodge & Cox or any person affiliated with any of them, has any material direct
or indirect interest in any broker employed by or on behalf of a Fund. There is
no fixed method used in determining which broker-dealers receive which order or
how many orders.
Periodically Dodge & Cox reviews the current commission rates and discusses
the execution capabilities and the services provided by the various broker-
dealers Dodge & Cox is utilizing in the execution of orders. Research services
furnished by the brokers through whom Dodge & Cox effects security transactions
for a Fund may be used in servicing some or all of Dodge & Cox's accounts,
however, all such services may not be used by Dodge & Cox in connection with a
Fund. Aggregate brokerage commissions paid by Dodge & Cox Stock Fund and Dodge
& Cox Balanced Fund during the last three years were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Dodge & Cox Stock Fund $2,419,305 $1,109,157 $790,822
Dodge & Cox Balanced Fund 1,835,589 1,131,834 763,087
</TABLE>
Securities transactions totaling $311,344,686 and $133,826,493 in 1997 were
allocated to brokers based on arrangements to provide research services to Dodge
& Cox Stock Fund and Dodge & Cox Balanced Fund, respectively and $323,575 and
$226,570, respectively, in brokerage commissions were paid on such transactions.
Except as indicated above, Dodge & Cox does not intend to place portfolio
transactions with any particular broker-dealers.
Investment decisions for a Fund are made independently from those of the
other Funds and other accounts managed by Dodge & Cox. It may frequently
develop that the same investment decision is made for more than one account.
Simultaneous transactions may often occur when the same security is suitable for
the investment objective of more than one account. When two or more accounts
are simultaneously engaged in the purchase or sale of the same security, the
transactions are averaged as to price and allocated as to amount in accordance
with a formula equitable to each account. It is recognized that in some cases
this system could have a detrimental effect on the price or availability of the
security as far as a Fund is concerned. In other cases, however, it is believed
that the ability of a Fund to participate in volume transactions will produce
better executions for the Fund.
ADDITIONAL TAX CONSIDERATIONS
- -----------------------------
You need to be aware of the possible tax consequences when:
o You sell Fund shares, including an exchange from one Fund to another.
o A Fund makes a distribution to your account.
TAXES ON FUND REDEMPTIONS. When you sell shares in a Fund, you may realize
a gain or loss. An exchange from one Fund to another is a sale for tax
purposes.
In January, you will be sent Form 1099-B, indicating the amount of sales
made in a Fund during the prior year. This information will also be reported to
the IRS. For certain accounts opened after September 30, 1987, the Funds will
provide you with the average cost of the shares sold during the year,
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based on the "average cost" method. This information is not reported to the IRS,
and you do not have to use it. You may calculate the cost basis using other
methods acceptable to the IRS, such as "specific identification".
To help you maintain accurate records, you will be sent a confirmation
immediately following each transaction (except for systematic purchases) and
quarterly and year-end statements detailing all transactions in your account
during the year.
TAXES ON FUND DISTRIBUTIONS. The following summary does not apply to
retirement accounts, such as IRAs, which are tax-deferred until shareholders
withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
distributions paid to you during the prior year. This information will also be
reported to the IRS. All distributions made by a Fund are taxable to you for
the year in which they were paid.
Short-term capital gain distributions are taxable as ordinary income and
long-term capital gain distributions are taxable at the applicable long-term
capital gain rate. If you realize a capital loss on the sale or exchange of
Fund shares held six months or less, your short-term capital loss is
reclassified to long-term to the extent of any long-term capital gain
distribution received with respect to such Fund shares.
TAX EFFECT OF BUYING SHARES BEFORE A CAPITAL GAIN OR INCOME DISTRIBUTION.
If you buy shares shortly before or on the "record date" for a Fund distribution
- -- the date that establishes you as the person to receive the upcoming
distribution -- you will receive, in the form of a taxable distribution, a
portion of the money you just invested. Therefore, you may wish to find out a
Fund's record date before investing. Of course, a Fund's share price may, at
any time, reflect undistributed capital gains or income and unrealized
appreciation. When these amounts are eventually distributed, they are taxable.
The discussion above and in the Funds' Prospectus regarding the Federal
income tax consequences of investing in a Fund have been prepared by Dodge & Cox
and do not purport to be complete descriptions of all tax implications of an
investment in a Fund. You are advised to consult with your own tax adviser
concerning the application of Federal, state and local taxes to an investment in
a Fund. The Trust's legal counsel has expressed no opinion in respect thereof.
INDEPENDENT ACCOUNTANTS
- -----------------------
Price Waterhouse LLP, 555 California Street, San Francisco, California
94104, are independent accountants to the Funds, subject to annual appointment
by the Board of Trustees. Price Waterhouse conducts an annual audit of the
accounts and records of each Fund, reports on the Fund's annual financial
statements and performs tax and accounting advisory services.
FINANCIAL STATEMENTS
- --------------------
Please refer to each Fund's Financial Statements consisting of the
financial statements of the Fund and the notes thereto, and the report of
independent accountants contained in the Fund's 1997 Annual Report to
Shareholders. The Financial Statements and the report of independent
accountants (but no other material from the Annual Report) are incorporated
herein by reference. Additional copies of the Annual Report may be obtained
from a Fund at no charge by writing or telephoning the Fund.
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APPENDIX: RATINGS
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A debt obligation rating by Moody's or S&P reflects their current assessment
of the creditworthiness of an obligor with respect to a specific obligation. The
purpose of the rating systems is to provide investors with a simple system of
gradation by which the relative investment qualities of bonds may be noted. A
rating is not a recommendation as to investment value, inasmuch as it does not
comment as to market price or suitability for a particular investor.
The ratings are based on current information furnished by the issuer or from
other sources that the rating agencies deem reliable. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The following is a description of the characteristics of ratings as
published by Moody's and S&P.
RATINGS BY MOODY'S (MOODY'S INVESTORS SERVICE)
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
NOTE: Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modification 1 indicates that the security ranks in the higher end of its
generic rating group; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
group.
RATINGS BY S&P (STANDARD & POOR'S RATINGS GROUP)
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
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AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated groups.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this group than in higher rated groups.
BB, B Debt rated BB and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
PLUS (+) OR MINUS (-): The ratings from AA to B may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
groups.
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