<PAGE>
D O D G E & C O X D O D G E & C O X
- ----------------- -----------------
Stock Fund
Stock Fund
Established 1965
Investment Managers -----------------
Dodge & Cox
One Sansome Street -----------------
35th Floor
San Francisco
California 94104-4405
(415) 981-1710
For Fund literature and
information, please visit
the Funds' web site at:
www.dodgeandcox.com
or write or call:
Dodge & Cox Funds
c/o Boston Financial
Data Services
P.O. Box 9051
Boston
Massachusetts 02205-9051
(800) 621-3979
- -----------------
This report is submitted
for the general information
of the shareholders of the
Fund. The report is not
authorized for distribution
to prospective investors 34th Annual Report
in the Fund unless it is December 31, 1998
accompanied by a current -----------------
prospectus. -----------------
- ----------------- -----------------
Printed on recycled paper.
12/98 SF AR
<PAGE>
D O D G E & C O X
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Stock Fund
To Our Shareholders
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The Dodge & Cox Stock Fund had a total return of 5.4% for the twelve months
ended December 31, 1998. This result was below the total return of the
Standard & Poor's 500 Index (S&P 500) of 28.6% for 1998. While the absolute
return of the Fund was positive in 1998, it was the most disappointing one year
period of relative performance in Dodge & Cox's history. Long-term results for
the Fund can be seen on page four of this report. Unfortunately, the weak
returns for 1998 had a large impact on our long-term comparisons, as well.
On December 31, total assets in the Fund were $4.4 billion and net asset value
per share was $90.70. The Fund paid income dividends of $1.56 per share and
distributed net realized short and long-term capital gains of $7.42 per
share, during the year. At year end, the asset allocation of the Fund was 97%
invested in stocks and 3% in cash equivalents.
What happened in 1998?
To an unusual degree, the performance of the broad market was dominated by a
small number of very large, high valuation companies that had extraordinary
returns. The 25 companies that contributed most to the return of the S&P 500
accounted for 65% of the Index's return. These 25 companies had an average
return of 90% in 1998; the other 475 companies in the S&P 500 returned 11%.
This group of top performing companies includes a number of technology firms
like Microsoft, Dell, Cisco and Lucent, as well as a number of retail and
pharmaceutical companies. Our portfolio was not invested in many of these
high-performing stocks, because in our judgment, they had been highly valued
at the beginning of the year, and we believed that there were more attractive
investments elsewhere. Clearly, there was a large penalty for not owning
those companies during this past year.
The performance of our value-oriented approach also significantly lagged the
market during two prior periods: in the early 1990s, amid an economic recession
in the U.S., and in the early 1970s, which was characterized by the emergence
of the "Nifty Fifty" stocks. Both were times when a narrow group of highly
valued securities dominated the return for the Index as a whole. In both
cases, these difficult periods were followed by a number of years of good
relative performance for the Fund. While there can be no assurances, we are
hopeful that post-1998 will prove to be similar, and thus we are committed to
maintaining our value-oriented approach to investing.
A secondary factor affecting the portfolio returns was our investment in energy
and basic industry, which includes chemicals, forest products and metals. The
portfolio included holdings in 15 companies in these industries, comprising
about 20% of the Fund at the beginning of 1998. These companies appeared to
have moderate valuations, particularly in relation to their opportunity for
growth in global markets. However, as 1998 progressed, concerns mounted and
expectations for global growth were cut in half. Demand for industrial goods
weakened and prices for many commodities declined to 20-year lows. We had
emphasized multinational companies across this broad sector and they proved
to be especially vulnerable to the weakened global economy. As share prices
declined, reflecting the weaker macro-environment outside the U.S., our total
portfolio results were hurt.
Why is the Fund maintaining its current investment strategy?
Often, it is in times of uncertainty and pessimism that the best investment
opportunities can be found. As discussed above, there is now considerable
pessimism about companies in energy and basic industry. Yet these companies
produce necessities that are essential components to modern industrial
economies. Although a fall-off in global demand has led to the current
oversupply and weak pricing, many expansion projects are now being postponed
or canceled, and governments have withdrawn from operating (and subsidizing)
production facilities in these industries. At the
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1
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D O D G E & C O X
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Stock Fund
same time that additions are slowing, there are signs that demand is
stabilizing and in some cases, increasing. Meanwhile, industry leaders such as
Alcoa, Chevron, Dow Chemical, Weyerhaeuser and Rio Tinto are continuing to
reduce costs in response to the difficult operating environment. With the
decline in valuations in energy and basic industrial materials during 1998, we
identified seven additional companies which we believe are attractive long-
term investments. This broad area now represents 25% of the Fund.
While we think basic materials and energy provide a compelling investment
opportunity at current prices, 75% of the portfolio is in other areas. We are
well diversified across industries, economic sectors and investment themes. As
an example, reasonably valued technology companies comprise 15% of the
portfolio. We are invested in established, growing franchises like Motorola,
Hewlett-Packard and Electronic Data Systems. We also like companies where
managers are also significant owners, and where they have demonstrated that
they will act in the interests of the long-term shareholder over time.
Examples in the portfolio include Nordstrom, Golden West Financial, News Corp.
and Republic New York. In addition, our team of fifteen analysts is always
looking for unique business franchises where our current investment dollar buys
a great deal of revenues, cash flow, assets or other tangible benefits. Among
our major holdings are FDX (Federal Express), General Motors, Union Pacific,
Kmart and Deere.
How long will the current market environment persist?
Predicting when the environment will change is difficult. Short-term concerns
can obscure the long-term view, especially since one's perspective is heavily
influenced by current experience. Consequently, we believe that a long-term
time frame is critical, particularly in times like the present. Our
experience has taught us that out-of-favor, durable business franchises can
be rewarding investments if one is persistent, disciplined and long-term
oriented. We find that as the business environment deteriorates for a company
or industry, investor expectations are lowered and stock prices decline,
reflecting the expectation of continued poor conditions. However, "necessity
is the mother of invention." Pressure builds to improve results and
management responds. The potential for positive surprise increases.
Our in-depth research, investment discipline and long-term focus give us the
staying power to hold investments in times of uncertainty. We believe that the
current pessimism for energy and basic industrial materials is now providing
investment opportunity similar to that found in the U.S. banking industry in
1990-91. Bank earnings had deteriorated in the late 1980s and by 1991
valuations were extraordinarily low. Our analysis and long-term outlook
enabled us to uncover the opportunity for recovery, and we increased investment
in a number of companies in the bank sector. As industry fundamentals
improved, we saw many of our bank holdings provide attractive returns for
several years. Of course, there can be no assurances that this experience will
be repeated by the companies held in our portfolio, but depressed conditions
can often lead to long-term opportunity.
In Closing
We believe equity investing will offer rewarding opportunities over the long
term. There are many fundamental positives still at work: integrating world
economies and the rise of free market systems, mobility of capital, advances
due to technological change, and the potential of rising demand from the
developing world, where over five billion people are striving to increase their
standard of living. While all these factors provide an attractive backdrop for
equity investors, we do not believe that the unusually high returns for the S&P
500 in the recent period will be replicated over the next few years.
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2
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D O D G E & C O X
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Stock Fund
We believe that our investment approach is viable over the long term, the
recent year notwithstanding. Our long-held investment philosophy--individual
company analysis focused on long-term earnings potential and reasonable
valuation--remains unchanged. Our core investment team remains the same and
we have added several new analysts. Our process--construction of the
portfolio one stock at a time by our Investment Policy Committee (with an
average of 21 years of investment experience at Dodge & Cox), based on the
research of our team of in-house analysts--is the same.
Thank you for your confidence in the Dodge & Cox Stock Fund. As always, we
welcome your comments and questions.
For the Board of Trustees,
/s/ Harry R. Hagey, Chairman /s/ John A. Gunn, President
---------------------------- ---------------------------
Harry R. Hagey, Chairman John A. Gunn, President
January 26, 1999
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3
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D O D G E & C O X
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Stock Fund
Objective The Fund's primary objective is to provide shareholders with an
opportunity for long-term growth of principal and income. A
secondary objective is to achieve a reasonable current income.
Strategy The Fund seeks to achieve these objectives by investing in well-
established companies which, in the view of Dodge & Cox, have
positive earnings prospects not reflected in the current price.
Dodge & Cox makes a conscious effort to maintain representation
in major economic sectors and areas with strong long-term profit
potential. The strategy is based on a long-term investment
horizon and, as a result, portfolio turnover tends to be low.
<TABLE>
<CAPTION>
Ten Years of Investment Performance through December 31, 1998
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[LINE GRAPH APPEARS HERE]
Dodge & Cox S & P 500
Stock Fund Index
---------- ---------
<S> <C> <C>
1/1/1989 $10,000 $10,000
12/31/1989 $12,693 $13,168
12/31/1990 $12,048 $12,758
12/31/1991 $14,632 $16,645
12/31/1992 $16,218 $17,912
12/31/1993 $19,189 $19,717
12/31/1994 $20,178 $19,977
12/31/1995 $26,917 $27,482
12/31/1996 $32,917 $33,790
12/31/1997 $42,276 $45,055
12/31/1998 $44,544 $57,927
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended December 31, 1998 1 Year 5 Years 10 Years 20 Years
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Stock Fund 5.39% 18.28% 16.11% 17.11%
S&P 500 Index 28.57 28.22 19.20 17.74
</TABLE>
The chart covers the period from January 1, 1989 to December 31, 1998. It
compares a $10,000 investment made in the Dodge & Cox Stock Fund to a $10,000
investment made in the Standard & Poor's 500 Stock (S&P 500) Index. The Fund's
total returns include the reinvestment of dividend and capital gain
distributions. The S&P 500 Index is a broad based, unmanaged measure of common
stocks. Index returns include dividends and, unlike Fund returns, do not reflect
fees and expenses. Past performance does not guarantee future results.
Investment return and share price will fluctuate with market conditions, and
investors may have a gain or a loss when shares are sold.
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4
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D O D G E & C O X
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Fund Information December 31, 1998
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<TABLE>
<CAPTION>
General Information
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<S> <C>
Net Asset Value Per Share $90.70
Total Net Assets (millions) $4,355
1998 Expense Ratio 0.57%
1998 Portfolio Turnover 19%
30 Day SEC Yield/1/ 1.67%
Fund Inception Date 1965
</TABLE>
Investment Manager: Dodge & Cox, San Francisco. Managed by
the Investment Policy Committee, whose eight members' average
tenure at Dodge & Cox is 21 years.
<TABLE>
<CAPTION>
Asset Allocation
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[PIE CHART APPEARS HERE]
<S> <C>
Stocks: 97.1%
Short-Term Investments: 2.9%
</TABLE>
<TABLE>
<CAPTION>
Stock Characteristics
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<S> <C>
Number of Stocks 74
Median Market Capitalization $7.3 billion
Price to Earnings Ratio/2/ 21.2x
Price to Book Value 2.9x
Foreign Stocks/3/ (as percentage of Fund) 11%
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Sectors % of Fund
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<S> <C>
Energy 10.1
Electronics & Computer 9.4
Banking 8.4
Transportation 7.3
Consumer Products 7.1
Consumer Durables 6.4
Retail & Distribution 6.3
Insurance & Financial Services 6.1
Capital Equipment 5.1
Electric & Gas Utilities 5.1
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
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<S> <C>
FDX Corp. 3.6
General Motors 3.2
Pharmacia & Upjohn 2.8
Motorola 2.7
Aluminum Co. of America 2.6
Union Pacific 2.5
Kmart 2.4
Citigroup 2.3
Dow Chemical 2.3
R.R. Donnelley & Sons 2.0
</TABLE>
/1/ An annualization of the Fund's total net investment income per share for
the 30-day period ended on the last day of the month.
/2/ Price to earnings ratio is calculated using trailing 12-month earnings and
excludes extraordinary items.
/3/ All U.S. Dollar-denominated.
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5
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<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1998
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SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CONSUMER: 22.3%
STOCKS: CONSUMER PRODUCTS: 7.1%
95.0% 473,600 Matsushita Electric Industrial Co., Ltd. ADR......................... $ 82,643,200
1,925,000 Fort James Corp...................................................... 77,000,000
954,400 Sony Corp. ADR....................................................... 68,478,200
835,100 Bausch & Lomb, Inc................................................... 50,106,000
1,028,300 Dole Food Co., Inc................................................... 30,849,000
-----------
309,076,400
CONSUMER DURABLES: 6.4%
1,968,000 General Motors Corp.................................................. 140,835,000
1,260,000 Ford Motor Co........................................................ 73,946,250
1,146,300 Whirlpool Corp....................................................... 63,476,362
-----------
278,257,612
RETAIL AND DISTRIBUTION: 6.2%
6,950,000 Kmart Corp.,+........................................................ 106,421,875
2,120,000 Nordstrom, Inc....................................................... 73,537,500
1,524,750 Genuine Parts Co..................................................... 50,983,828
1,330,000 Dillard's, Inc. Class A.............................................. 37,738,750
320,000 Fleming Cos., Inc.................................................... 3,320,000
-----------
272,001,953
MEDIA, PRINTING, AND ENTERTAINMENT: 2.6%
2,030,800 R.R. Donnelley & Sons Co............................................. 88,974,425
504,100 Dow Jones & Co....................................................... 24,259,813
-----------
113,234,238
-----------
972,570,203
BASIC INDUSTRY: 14.6%
PAPER AND FOREST PRODUCTS: 4.8%
1,746,000 Weyerhaeuser Co...................................................... 88,718,625
1,483,000 Champion International Corp.......................................... 60,061,500
863,200 International Paper Co............................................... 38,682,150
718,600 Boise Cascade Corp................................................... 22,276,600
-----------
209,738,875
CHEMICALS: 4.5%
1,094,000 Dow Chemical Co...................................................... 99,485,625
798,100 Eastman Chemical Co.................................................. 35,714,975
580,000 Union Carbide Corp................................................... 24,650,000
744,000 Nalco Chemical Co.................................................... 23,064,000
370,000 Lubrizol Corp........................................................ 9,504,375
378,020 NOVA Corp............................................................ 4,937,886
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197,356,861
METALS AND MINING: 4.3%
1,535,000 Aluminum Co. of America.............................................. 114,453,438
1,518,600 Rio Tinto Plc........................................................ 68,811,563
57,100 Rio Tinto Limited.................................................... 2,711,473
-----------
185,976,474
GENERAL MANUFACTURING: 1.0%
2,520,000 Archer Daniels Midland Co............................................ 43,312,500
-----------
636,384,710
</TABLE>
See accompanying Notes to Financial Statements
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6
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D O D G E & C O X
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<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1998
----------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON FINANCE: 14.5%
STOCKS BANKING: 8.4%
(Continued) 2,042,500 Citigroup, Inc....................................................... $101,103,750
1,546,200 Republic New York Corp............................................... 70,448,738
748,400 Golden West Financial Corp........................................... 68,618,925
1,128,121 BankAmerica Corp..................................................... 67,828,275
1,510,400 Wells Fargo & Company................................................ 60,321,600
-----------
368,321,288
INSURANCE AND FINANCIAL SERVICES: 6.1%
770,100 American Express Co.................................................. 78,742,725
756,100 Loews Corp........................................................... 74,286,825
2,046,000 The St. Paul Cos., Inc............................................... 71,098,500
620,000 Chubb Corp........................................................... 40,222,500
-----------
264,350,550
-----------
632,671,838
ENERGY: 10.1%
1,518,200 Amerada Hess Corp.................................................... 75,530,450
1,531,000 Phillips Petroleum Co................................................ 65,258,875
745,000 Chevron Corp......................................................... 61,788,437
3,245,200 Occidental Petroleum Corp............................................ 54,762,750
1,509,700 Unocal Corp.......................................................... 44,064,369
2,451,700 Baker Hughes, Inc.................................................... 43,364,444
774,000 Royal Dutch Petroleum Co............................................. 37,055,250
3,804,624 Union Pacific Resources Group, Inc................................... 34,479,405
500,000 Schlumberger Ltd..................................................... 23,062,500
-----------
439,366,480
ELECTRONICS AND COMPUTER: 9.4%
1,935,000 Motorola, Inc........................................................ 118,155,937
1,710,000 Electronic Data Systems.............................................. 85,927,500
1,108,000 Hewlett-Packard Co................................................... 75,690,250
1,594,300 NCR Corp.,+.......................................................... 66,562,025
2,430,000 National Semiconductor Corp.,+....................................... 32,805,000
460,000 Adobe Systems, Inc................................................... 21,505,000
1,008,400 Sybase, Inc.,+....................................................... 7,468,463
-----------
408,114,175
TRANSPORTATION: 7.3%
1,779,200 FDX Corp.,+.......................................................... 158,348,800
2,414,200 Union Pacific Corp................................................... 108,789,887
2,733,000 Canadian Pacific Ltd................................................. 51,585,375
-----------
318,724,062
CAPITAL EQUIPMENT: 5.1%
2,101,200 Deere & Co........................................................... 69,602,250
1,170,000 Caterpillar, Inc..................................................... 53,820,000
1,200,000 Fluor Corp........................................................... 51,075,000
550,300 Lockheed Martin Corp................................................. 46,637,925
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221,135,175
</TABLE>
See accompanying Notes to Financial Statements
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D O D G E & C O X
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<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1998
----------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON ELECTRIC AND GAS UTILITIES: 5.1%
STOCKS 2,051,000 Central & South West Corp.......................................... $ 56,274,312
(Continued) 1,050,000 Texas Utilities Co................................................. 49,021,875
761,900 FPL Group, Inc..................................................... 46,952,087
1,264,600 Wisconsin Energy Corp.............................................. 39,755,863
1,890,100 TransCanada PipeLines Ltd.......................................... 27,878,975
--------------
219,883,112
DIVERSIFIED TECHNOLOGY: 3.4%
440,000 Xerox Corp......................................................... 51,920,000
1,125,000 Corning, Inc....................................................... 50,625,000
1,034,300 Raychem Corp....................................................... 33,420,819
775,300 Unova, Inc.,+...................................................... 14,052,312
--------------
150,018,131
HEALTHCARE AND PHARMACEUTICAL: 3.2%
2,170,100 Pharmacia & Upjohn, Inc............................................ 122,881,913
910,000 First Health Group Corp.,+......................................... 15,071,875
--------------
137,953,788
--------------
Total Common Stocks (cost $3,402,199,783)....................... 4,136,821,674
--------------
PREFERRED CONSUMER: 2.1%
STOCKS: 3,500,500 News Corp. Ltd., Limited Voting Ordinary Shares ADR................ 86,418,594
2.1% 64,100 Kmart Financing I, 7 3/4% Trust Convertible Preferred.............. 3,713,794
--------------
Total Preferred Stocks (cost $66,942,080)....................... 90,132,388
--------------
PAR VALUE
SHORT-TERM
INVESTMENTS: $28,073,708 SSGA Prime Money Market Fund....................................... 28,073,708
3.1% 60,000,000 U.S. Treasury Bills, 1/7/1999...................................... 59,949,550
50,000,000 U.S. Treasury Bills, 3/4/1999...................................... 49,623,695
--------------
Total Short-Term Investments (cost $137,646,953)................ 137,646,953
--------------
TOTAL INVESTMENTS (cost $3,606,788,816)........................... 100.2% 4,364,601,015
OTHER ASSETS LESS LIABILITIES..................................... (0.2)% (9,306,596)
----- --------------
TOTAL NET ASSETS.................................................. 100.0% $4,355,294,419
===== ==============
+ Non-income producing
</TABLE>
See accompanying Notes to Financial Statements
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<TABLE>
<CAPTION>
Statement of Assets and Liabilities December 31, 1998
----------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments, at market value (identified cost $3,606,788,816).. $4,364,601,015
Receivable for Fund shares sold................................ 6,879,552
Dividends and interest receivable.............................. 7,570,411
Prepaid expenses............................................... 41,755
--------------
4,379,092,733
--------------
LIABILITIES:
Payable for Fund shares redeemed............................... 21,475,424
Management fees payable........................................ 1,843,172
Accounts payable............................................... 479,718
--------------
23,798,314
--------------
NET ASSETS..................................................... $4,355,294,419
Net asset value ==============
per share $90.70
NET ASSETS CONSIST OF:
Beneficial Paid in capital................................................ $3,539,433,948
shares outstanding Accumulated undistributed net investment income................ 979,836
48,016,735 Accumulated undistributed net realized gain on investments..... 57,068,436
(par value $0.01 each, Net unrealized appreciation on investments..................... 757,812,199
unlimited shares --------------
authorized) $4,355,294,419
==============
</TABLE>
See accompanying Notes to Financial Statements
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<TABLE>
<CAPTION>
Statement of Operations Year Ended December 31, 1998
- -------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends.......................................................... $ 79,325,002
Interest........................................................... 18,308,738
-------------
97,633,740
-------------
EXPENSES:
Management fees (Note 2)........................................... 22,197,066
Custodian and fund accounting fees................................. 256,935
Transfer agent fees................................................ 1,648,097
Audit fees......................................................... 45,358
Legal fees......................................................... 7,550
Shareholder reports................................................ 406,251
Registration fees.................................................. 540,039
Trustees' fees (Note 2)............................................ 14,000
Miscellaneous...................................................... 65,319
-------------
25,180,615
-------------
NET INVESTMENT INCOME.............................................. 72,453,125
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments................................. 324,308,314
Net unrealized depreciation on investments....................... (188,133,334)
-------------
Net realized and unrealized gain on investments................ 136,174,980
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............... $ 208,628,105
=============
</TABLE>
See accompanying Notes to Financial Statements
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<TABLE>
<CAPTION>
Statement of Changes in Net Assets Year Ended December 31,
----------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
OPERATIONS:
Net investment income.................................................. $ 72,453,125 $ 54,270,671
Net realized gain...................................................... 324,308,314 297,643,981
Net unrealized appreciation (depreciation)............................. (188,133,334) 396,146,924
--------------- --------------
Net increase in net assets from operations............................. 208,628,105 748,061,576
--------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (71,742,283) (54,214,363)
Net realized gain...................................................... (337,213,581) (243,063,381)
--------------- --------------
Total distributions.................................................... (408,955,864) (297,277,744)
--------------- --------------
BENEFICIAL SHARE TRANSACTIONS:
Amounts received from sale of shares................................... 1,255,961,170 1,593,775,898
Net asset value of shares issued in reinvestment of distributions...... 373,646,356 274,381,891
Amounts paid for shares redeemed....................................... (1,160,943,436) (484,030,127)
--------------- --------------
Net increase from beneficial share transactions........................ 468,664,090 1,384,127,662
--------------- --------------
Total increase in net assets........................................... 268,336,331 1,834,911,494
NET ASSETS:
Beginning of year...................................................... 4,086,958,088 2,252,046,594
--------------- --------------
End of year (including undistributed net investment income of
$979,836 and $268,994, respectively)................................... $ 4,355,294,419 $4,086,958,088
=============== ==============
Shares sold............................................................ 13,018,690 17,305,613
Shares issued in reinvestment of distributions......................... 4,028,923 2,975,353
Shares redeemed........................................................ (12,248,020) (5,281,734)
--------------- --------------
Net increase in shares outstanding..................................... 4,799,593 14,999,232
=============== ==============
</TABLE>
See accompanying Notes to Financial Statements
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Notes to Financial Statements
-------------------------------------------------------------------------
1 Dodge & Cox Stock Fund (the "Fund") reorganized on April 30, 1998, and
became a separate series of Dodge & Cox Funds (the "Trust"), in
accordance with a plan of reorganization approved by the Fund's
shareholders on January 30, 1998. The Trust is organized as a Delaware
business trust and is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment
company. The Fund consistently follows accounting policies which are in
conformity with generally accepted accounting principles. Significant
accounting policies are as follows: (a) Security valuation: stocks are
valued at the latest quoted sales prices as of the close of the New York
Stock Exchange or, if no sale, then a representative price within the
limits of the bid and ask prices for the day; a security which is listed
or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security;
securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or at the direction
of the Board of Trustees; short-term securities are valued at amortized
cost which approximates current value; all securities held by the Fund
are denominated in U.S. dollars. (b) Security transactions are accounted
for on the trade date in the financial statements. (c) Gains and losses
on securities sold are determined on the basis of identified cost. (d)
Dividend and interest income are recorded on the accrual basis. (e)
Distributions to shareholders of income and capital gains are reflected
in the net asset value per share computation on the ex-dividend date. (f)
No provision for Federal income taxes has been included in the
accompanying financial statements since the Fund intends to distribute
all of its taxable income and otherwise continue to comply with
requirements for regulated investment companies.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Actual results could
differ from those estimates.
2 Under a written agreement, the Fund pays an annual management fee of 1/2
of 1% of the Fund's average daily net asset value to Dodge & Cox,
investment manager of the Fund. The agreement further provides that Dodge
& Cox shall waive its fee to the extent that such fee plus all other
expenses of the Fund exceed 3/4 of 1% of the average daily net asset
value for the year. All officers and seven of the trustees of the Trust
are officers and employees of Dodge & Cox. Those trustees who are not
affiliated with Dodge & Cox receive from the Trust an annual fee plus an
attendance fee for each Board or Committee meeting attended. Payments to
trustees are divided equally among each series of the Trust. The Trust
does not pay any other remuneration to its officers or trustees.
3 For the year ended December 31, 1998, purchases and sales of securities,
other than short-term securities, aggregated $1,160,990,716 and
$772,099,185, respectively. At December 31, 1998, the cost of investments
for Federal income tax purposes was equal to the cost for financial
reporting purposes. Net unrealized appreciation aggregated $757,812,199,
of which $968,864,763 represented appreciated securities and $211,052,564
represented depreciated securities.
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12
<PAGE>
D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Financial Highlights
- -------------------------------------------------------------------------------------------------------------
SELECTED DATA AND RATIOS (for a share outstanding throughout each year)
Year Ended December 31,
------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $94.57 $79.81 $67.83 $53.94 $53.23
Income from investment operations:
Net investment income 1.57 1.48 1.28 1.27 1.15
Net realized and unrealized gain 3.54 20.86 13.67 16.54 1.60
------ ------ ------ ------ ------
Total from investment operations 5.11 22.34 14.95 17.81 2.75
------ ------ ------ ------ ------
Distributions to shareholders from:
Net investment income (1.56) (1.49) (1.29) (1.26) (1.15)
Net realized gain (7.42) (6.09) (1.68) (2.66) (.89)
------ ------ ------ ------ ------
Total distributions (8.98) (7.58) (2.97) (3.92) (2.04)
------ ------ ------ ------ ------
Net asset value, end of year $90.70 $94.57 $79.81 $67.83 $53.94
====== ====== ====== ====== ======
Total return 5.39% 28.41% 22.26% 33.38% 5.16%
Ratios/Supplemental Data:
Net assets, end of year (millions) $4,355 $4,087 $2,252 $1,228 $ 543
Ratio of expenses to average net assets .57% .57% .59% .60% .61%
Ratio of net investment income to average net assets 1.63% 1.67% 1.79% 2.07% 2.16%
Portfolio turnover rate 19% 19% 10% 13% 7%
</TABLE>
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13
<PAGE>
D O D G E & C O X
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Stock Fund
Report of Independent Accountants
-------------------------------------------------------------------
To the Trustees of Dodge & Cox Funds and Shareholders of Dodge &
Cox Stock Fund
In our opinion, the accompanying statement of assets and
liabilities, including the portfolio of investments, and the
related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects,
the financial position of the Dodge & Cox Stock Fund (the "Fund",
one of the series constituting Dodge & Cox Funds) at December 31,
1998, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years
in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is
to express an opinion on these financial statements based on our
audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31,
1998 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 26, 1999
-------------------------------------------------------------------
Special 1998 Tax Information (unaudited)
The following information is provided pursuant to provisions of the
Internal Revenue Code:
The Fund's distributions to shareholders included $310,304,102 from
long-term capital gains, all of which is subject to Federal income
tax at a maximum rate of 20%.
Corporate shareholders should note that for the year ended December
31, 1998, a total of 75% of the Fund's ordinary dividends (as
reported to shareholders in Box 1 of Form 1099-DIV) qualified for
the corporate dividends received deduction.
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14
<PAGE>
D O D G E & C O X
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Stock Fund
General Information
--------------------------------------------------------------
Investment Since 1930, Dodge & Cox has been providing professional
Manager investment management for individuals, trustees, corporations,
pension and profit-sharing funds, and charitable institutions.
Dodge & Cox manages the Dodge & Cox Stock Fund, the Dodge &
Cox Balanced Fund and the Dodge & Cox Income Fund.
No-Load Fund Shares of the Fund are purchased and redeemed at net asset
value. There are no sales, redemption or Rule 12b-1 plan
distribution charges.
Gifts Fund shares provide a convenient method for making gifts to
children and to other family members. Shares may be held by an
adult custodian for the benefit of a minor under a Uniform
Gifts/Transfers to Minors Act. Trustees and guardians may also
hold shares for a minor's benefit.
Automatic Shareholders may make regular monthly or quarterly investments
Investment Plan of $100 or more through automatic deductions from their
bank accounts.
Withdrawal Plan Shareholders owning $10,000 or more of the Fund's shares may
elect to receive periodic monthly or quarterly payments of at
least $50.
Reinvestment Shareholders may direct that dividend and capital gains
Plan distributions be reinvested in additional Fund shares.
The above plans are completely voluntary and involve no
service charge of any kind.
IRA Plan The Fund has a Traditional and Roth Individual Retirement
Account Plan (IRA) available for shareholders of the Fund.
- --------------------------------------------------------------------------------
PREPARING FOR THE YEAR 2000
The Fund's key service providers--Dodge & Cox, the investment manager; Boston
Financial Data Services Inc., the transfer agent; and State Street Bank and
Trust Company, the custodian and fund accountant--are taking steps that each
believes are reasonably designed to address the Year 2000 issue with respect to
the systems that they use. For example, the service providers have established
comprehensive Year 2000 readiness programs to identify, evaluate and resolve
Year 2000 readiness issues. The service providers' Year 2000 efforts are
progressing steadily and considerable progress has been made to date. The Funds
believe these steps will be sufficient to avoid any material adverse impact on
the Funds, although there can be no assurances to that effect. Additional
information on Year 2000 preparations can be found on the Fund's web site at
www.dodgeandcox.com.
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<PAGE>
D O D G E & C O X D O D G E & C O X
- ----------------- -----------------
Balanced Fund
Balanced Fund
Established 1931
Investment Managers -----------------
Dodge & Cox
One Sansome Street -----------------
35th Floor
San Francisco
California 94104-4405
(415) 981-1710
For Fund literature and
information, please
visit the Fund's
web site at:
www.dodgeandcox.com
or write or call:
Dodge & Cox Funds
c/o Boston Financial
Data Services
P.O. Box 9051
Boston
Massachusetts 02205-9051
(800) 621-3979
- -----------------
This report is submitted
for the general information
of the shareholders of the
Fund. The report is not
authorized for distribution
to prospective investors 68th Annual Report
in the Fund unless it is December 31, 1998
accompanied by an effective
prospectus.
- ----------------- -----------------
-----------------
-----------------
Printed on recycled paper.
12/98 BF AR
<PAGE>
D O D G E & C O X
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Balanced Fund
To Our Shareholders
------------------------------------------------------------------------------
Against the backdrop of a volatile global financial environment, the Dodge &
Cox Balanced Fund achieved a total return of 6.7% during 1998. This return
compared to the Combined Index* total return of 21.0% for the year. The fixed-
income portion of the Fund essentially matched the Lehman Brothers Aggregate
Bond Index (LBAG) return for the year. However, the equity portion of the Fund
significantly lagged the Standard & Poor's 500 Index (S&P 500) return. In
fact, it was the most disappointing one-year period of equity performance
relative to the S&P 500 in Dodge & Cox's history. Longer-term results of the
Fund appear on page five of this report. Unfortunately, the weak equity return
in 1998 also had an impact on the Fund's long-term comparisons relative to the
Combined Index.
The Fund's net asset value per share finished the year at $65.22. The Fund paid
income dividends of $2.23 per share and distributed net realized short and
long-term capital gains of $3.74 per share during the year.
At December 31, 1998 the Balanced Fund's total net assets were $5.7 billion.
The Fund was approximately 60.5% invested in stocks, 36.0% in fixed-income
securities and 3.5% in cash equivalents. The amount invested in equities was
up modestly from the third quarter, principally due to a fourth quarter rebound
in stock prices.
Unprecedented Market Volatility and Return Disparities
Last year was characterized by extreme volatility in both the equity and fixed-
income markets in which the Balanced Fund invests. Common stocks started 1998
with strong returns in the first half, but then sold off sharply in the summer
when Russia defaulted on its debt and fears about a global economic slowdown
escalated. In early October, the S&P 500 was actually down for the year. The
environment for equities improved dramatically in the next three months, as
those fears abated following the Federal Reserve Board's three reductions in
short-term interest rates. Remarkably, the S&P 500 finished with another strong
annual gain. However, most stocks did not perform nearly as well as the broad
Index, which was dominated by a short list of very large, high-valuation
companies. This point is perhaps best illustrated by the record gap between the
market-cap weighted (giving more impact to large companies) S&P 500 total
return of 28.6% and an estimated equal-weighted S&P 500 return of 10.8%.
Interest rates declined steadily in the bond market throughout the first nine
months of the year, which was somewhat surprising if one considers that rates
were quite low when the year began, and then rose modestly in the final
quarter. The benchmark thirty-year U.S. Treasury yield fell from 5.92% to
5.09% during the year, while the five-year Treasury yield fell from 5.71% to
4.54%. However, the big event was a dramatic "flight to quality" that took
place during the summer as investors decided to seek the safety of U.S.
Treasury securities. All other sectors of the fixed-income market were left
behind during this period, with non-Treasury bond yield spreads widening to
recession-type levels. During the final months of the year, bond spreads began
to narrow again in response to the above-mentioned Federal Reserve actions. The
LBAG finished the year with a respectable total return of 8.7%.
What happened to the Balanced Fund's equity portfolio in 1998?
To an unusual degree, the performance of the broad stock market was dominated
by a small number of very large, high-valuation companies that had
extraordinary returns. The 25 companies that contributed most to the return of
the S&P 500 accounted for 65% of the Index's return. These 25 companies had an
average return of 90% in 1998; the other 475 companies in the S&P 500 returned
11%. This group of top performing companies includes a number of technology
firms like Microsoft, Dell, Cisco and Lucent, as well as a number of retail and
pharmaceutical companies.
* The Combined Index reflects an unmanaged portfolio of 60% of the S&P 500 and
40% of the Lehman Brothers Aggregate Bond Index (LBAG).
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1
<PAGE>
D O D G E & C O X
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Balanced Fund
------------------------------------------------------------------------------
Our portfolio was not invested in many of the strongest performing stocks,
because in our judgment they were highly valued at the beginning of the year.
We believed that there were much more attractive valuations elsewhere.
Clearly, there was a large penalty for not owning those companies during this
past year.
The performance of Dodge & Cox's value-oriented approach also significantly
lagged the market during two prior periods: in the early 1990s, amid an
economic recession in the U.S., and in the early 1970s, which was characterized
by the emergence of the "Nifty Fifty" stocks. Both were times when a narrow
group of highly valued securities dominated the return for the S&P 500 as a
whole. In both cases, these difficult periods were followed by a number of
years of good relative performance for the Fund's equity portfolio. While there
can be no assurances, we are hopeful that post-1998 will prove to be similar
and thus we are committed to maintaining our value approach to investing.
Why is the Fund maintaining its current equity investment strategy?
Often, it is in times of uncertainty and pessimism that the best investment
opportunities can be found. There is now considerable pessimism about
companies in energy and basic industries such as chemicals, forest products and
metals, following their weak performance in 1998. Yet these companies produce
necessities that are the essential building blocks of industrial economies.
Although a fall-off in global demand has led to current oversupply and weak
pricing, many expansion projects are now being postponed or canceled, and
governments have withdrawn from operating (and subsidizing) production
facilities in these industries. At the same time that capacity additions are
slowing, there are signs that demand is stabilizing and in some cases,
increasing. Meanwhile, industry leaders such as Alcoa, Chevron, Dow Chemical,
Weyerhaeuser and Rio Tinto are continuing to reduce costs in response to the
difficult operating environment. The Balanced Fund's equity portfolio holds
each of these five companies and nineteen others in the energy and basic
industry sectors. We believe that these stocks, which now represent about 25%
of the Fund's equity assets, offer significant value for the long-term
investor.
While we think basic industry and energy provide a compelling investment
opportunity at current prices, 75% of the Fund's equity portfolio is invested
in other areas. The Fund is well diversified across industries, economic
sectors and investment themes, holding a total of 73 companies in the equity
portfolio. As an example, reasonably priced technology companies comprise 15%
of the equity portfolio. The Fund is invested in established, growing
franchises like Motorola, Hewlett-Packard and Electronic Data Systems. We also
like companies where managers are significant owners, and where they have
demonstrated that they will act in the interests of the long-term shareholder
over time. Examples in the portfolio include Nordstrom, Golden West Financial
and News Corp. In addition, our team of fifteen research analysts is always
looking for unique business franchises where our current investment dollar buys
a great deal of revenues, cash flow, assets or other tangible benefits. Among
the Fund's major holdings are FDX (Federal Express), General Motors, Union
Pacific, Kmart and Deere.
How long will the current equity market environment persist?
Predicting when the environment will change is difficult. Short-term concerns
can obscure the long-term view, especially since one's perspective is heavily
influenced by current experience. Consequently, we believe that a long-term
time frame is critical, particularly in times like the present. Our experience
has taught us that out-of-favor, durable business franchises can be rewarding
investments if one is persistent and disciplined, which we distinguish from
stubborn. We find that as the business climate deteriorates for a company or
industry, investor expectations are lowered and stock prices decline,
reflecting the expectation of continued poor conditions. However, "necessity is
the mother of invention." Pressure builds to improve results and management
responds. The potential for positive surprise increases. Our in-depth research,
investment discipline and long-term focus give us the staying power to hold
these investments in times of uncertainty.
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2
<PAGE>
D O D G E & C O X
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Balanced Fund
------------------------------------------------------------------------------
We believe that our investment approach will continue to be successful over the
long-term, the recent year notwithstanding. Our time-tested investment
philosophy--individual company analysis focused on long-term earnings
potential and low valuation--remains unchanged. Our core investment team
remains the same and we have added several new analysts. Our process--
construction of the portfolio one stock at a time by our Investment Policy
Committee (with an average of 21 years of investment experience at Dodge &
Cox), using the research of our team of in-house analysts--is the same.
Fixed-Income Focus on Corporates and Mortgages
Our primary focus as bond managers has always been the utilization of two long-
standing Dodge & Cox hallmarks: independent fundamental research and individual
security selection. Within the fixed-income portion of the Balanced Fund, this
approach has led to a higher percentage of holdings in the corporate and
mortgage sectors compared to the LBAG. We believe that bond investors were
indiscriminate in their reaction to perceived credit risk over the summer. We
continue to have confidence in the type of corporate and mortgage issues we
have invested in for the Fund: non-callable corporates and "seasoned," well-
structured mortgage-related securities, which tend to exhibit relatively more
stable cash flows over a variety of interest rate scenarios. At year-end,
issues in these two bond sectors each represented about 40% of the Fund's
fixed-income portfolio.
In response to the unusual yield premium widening discussed above, we called
upon our in-house research team to actively seek investment opportunities. In
addition to new bond purchases, we also added opportunistically to core
holdings such as Time Warner Entertainment in the fixed-income portion of the
Fund. In the following paragraph, we highlight one of the corporate bond
purchases we made for the Fund during the fourth quarter. This example is
given in order to illustrate our research-intensive approach to fixed-income
security selection, not because we consider it more attractive than the Fund's
other holdings.
Raychem is a diversified materials science company with $1.8 billion in fiscal
1998 revenues generated from two broad industrial business segments. As a
first time issuer in the fixed-income capital markets, Raychem is not well
known in the fixed-income community. This lack of familiarity, coupled with
the volatility in the corporate market during October and the flight to large,
well-known issuers, meant that Raychem faced an unfriendly reception when they
announced a bond deal. Having analyzed Raychem as an equity investment for
many years, Dodge & Cox was attracted to the credit fundamentals of the
company--strong cash flows, low leverage and excellent interest coverage. In
October, we purchased $35,000,000 par value of Raychem debentures which bear a
coupon of 7.20% and a final maturity of October 15, 2008. We purchased these
Baa2/A-rated securities at a yield premium of 270 basis points (2.7%) over the
benchmark 10-year U.S. Treasury. We believe the Raychem notes offer attractive
incremental yield and total return potential for the bond investor with a focus
on fundamental value and a long-term investment horizon.
Caution on Future Inflation
Throughout 1998, we maintained the Fund's fixed-income duration (a measure of
price sensitivity to changes in interest rates) shorter than that of the LBAG
due to the low absolute level of interest rates and our concerns about future
inflation. While the turmoil in Asia and other emerging economies should have a
dampening effect on global economic growth potential, we remain concerned about
the possibility of modestly rising inflation in the United States. A
continuation of the dramatic reduction in energy prices, which has fueled the
most recent drop in inflation, appears highly unlikely. Without this benefit,
price inflation remains above 2% and could move higher. This fact, coupled with
U.S. Treasury rates, which are at 4.5% in short maturities and slightly above
5% in long bonds, does not leave much cushion for bond investors. At year-end,
the fixed-income portion of the Fund had a duration statistic of 4.45 years,
slightly shorter than the LBAG.
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3
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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Balanced Fund
------------------------------------------------------------------------------
Although we have become more concerned about the possibility of higher U.S.
inflation, we continue to believe that the use of fixed-income securities adds
relative stability to a long-term balanced investment strategy. With this in
mind, we will continue to focus on individual security selection through our
fundamental research, with the goal of identifying issuers and fixed-income
sectors where we believe that other investors underestimate creditworthiness
and total return potential. We will also maintain the Fund's high average
credit quality and diversification, while striving to attain a higher-than-
market yield in the fixed-income portion of the Fund.
Closing Thoughts
We believe that equity investing will offer rewarding opportunities over the
long term. There are many fundamental positives still at work: an integrating
global economy and the rise of free market systems, mobility of capital,
advances due to technological change, and the potential of rising demand from
the developing world. While all these factors provide an attractive backdrop
for equity investors, we do not believe that the unusually high returns for the
S&P 500 in the recent period will be replicated over the next few years.
Thank you for your confidence in the Dodge & Cox Balanced Fund. As always, we
welcome your comments and questions.
For the Board of Trustees,
/s/ Harry R. Hagey, Chairman
-----------------------------------
January 26, 1999 Harry R. Hagey, Chairman
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4
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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Balanced Fund
Objective The Fund's objectives are to provide shareholders with regular
income, conservation of principal and an opportunity for long-term
growth of principal and income.
Strategy The Fund seeks to achieve these objectives by investing in a
diversified portfolio of common stocks, preferred stocks and bonds.
Stocks: The Fund invests in well-established companies which, in
the view of Dodge & Cox, have positive earnings prospects not
reflected in the current price. Dodge & Cox makes a conscious
effort to maintain representation in major economic sectors and
areas with strong long-term profit potential. The Fund will hold no
more than 75% of its total assets in stocks.
Bonds: Dodge & Cox constructs a diversified portfolio of high-
quality bonds, while striving to maintain the fixed-income yield
higher than that of the broad bond market. Fixed-income securities
in the Fund will generally include U.S. Government, mortgage-
related and corporate issues.
<TABLE>
<CAPTION>
Ten Years of Investment Performance through December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Dodge & Cox S&P 500
LBAG Index Combined Index Balanced Fund Index
---------- -------------- ------------- -------
<S> <C> <C> <C> <C>
1/1/1989 $10,000 $10,000 $10,000 $10,000
12/31/1989 11,455 12,473 12,303 13,168
12/31/1990 12,482 12,701 12,416 12,758
12/31/1991 14,479 15,849 14,991 16,645
12/31/1992 15,550 17,048 16,577 17,912
12/31/1993 17,067 18,752 19,224 19,717
12/31/1994 16,568 18,690 19,607 19,977
12/31/1995 19,630 24,229 25,100 27,482
12/31/1996 20,339 27,854 28,801 33,790
12/31/1997 22,308 34,434 34,910 45,055
12/31/1998 24,244 41,663 37,251 57,927
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended December 31, 1998 1 Year 5 Years 10 Years 20 Years
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 6.70% 14.14% 14.05% 14.33%
Combined Index 20.99 17.32 15.34 14.96
S&P 500 Index 28.57 24.05 19.20 17.74
Lehman Brothers Aggregate Bond Index 8.67 7.27 9.26 10.19
</TABLE>
The chart covers the period from January 1, 1989 to December 31, 1998. It
compares a $10,000 investment made in the Dodge & Cox Balanced Fund to $10,000
investments made in the Standard & Poor's 500 Stock (S&P 500) Index, the Lehman
Brothers Aggregate Bond (LBAG) Index and a Combined Index. The Fund's total
returns include the reinvestment of dividend and capital gain distributions. The
S&P 500 Index is a broad-based, unmanaged measure of common stocks. The LBAG
Index is a broad-based, unmanaged measure of investment grade-rated corporate
and U.S. Government fixed-income securities. The Combined Index reflects an
unmanaged portfolio of 60% of the S&P 500 Index and 40% of the LBAG Index. The
Fund may, however, invest up to 75% of its total assets in stocks. Index returns
include dividends and/or interest income, and unlike Fund returns, do not
reflect fees or expenses. Past performance does not guarantee future results.
Investment return and share price will fluctuate with market conditions, and
investors may have a gain or loss when shares are sold.
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5
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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Balanced Fund
<TABLE>
<CAPTION>
Fund Information December 31, 1998
- --------------------------------------------------------------------------------
General Information
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $65.22
Total Net Assets (millions) $5,693
30 Day SEC Yield/1/ 3.22%
1998 Expense Ratio 0.54%
1998 Portfolio Turnover 26%
Fund Inception Date 1931
</TABLE>
Investment Manager: Dodge & Cox, San Francisco. Managed by the Investment
Policy Committee, whose eight members' average tenure at Dodge & Cox is
21 years, and by the Fixed-Income Strategy Committee, whose ten members'
average tenure is 13 years.
<TABLE>
<CAPTION>
Asset Allocation
- --------------------------------------------------------------------------------
<S> <C>
[PIE CHART APPEARS HERE]
Bonds: 36.0%
Stocks: 60.5%
Short-Term Investments: 3.5%
</TABLE>
<TABLE>
<CAPTION>
Stock Portfolio (60.5% of Fund)
- --------------------------------------------------------------------------------
<S> <C>
Number of Stocks 75
Median Market Capitalization $7.6 billion
Price to Earnings Ratio/2/ 21.2x
Price to Book Value 2.9x
Foreign Stocks/3/ (as percentage of Fund) 7%
</TABLE>
<TABLE>
<CAPTION>
Five Largest Sectors % of Fund
- --------------------------------------------------------------------------------
<S> <C>
Energy 6.3
Electronics & Computer 6.0
Banking 5.5
Transportation 4.6
Consumer Products 4.5
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
FDX Corp. 2.3
General Motors 2.0
Pharmacia & Upjohn 1.7
Motorola 1.7
Aluminum Co. of America 1.6
Union Pacific 1.6
Citigroup 1.5
Kmart 1.5
Dow Chemical 1.4
Weyerhaeuser 1.3
</TABLE>
<TABLE>
<CAPTION>
Bond Portfolio (36.0% of Fund)
- --------------------------------------------------------------------------------
<S> <C>
Number of Bonds 123
Average Quality AA
Average Maturity 9.6 years
Effective Duration 4.45 years
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's Quality Ratings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 21.4
Aaa/AAA 1.5
Aa/AA 0.0
A/A 7.9
Baa/BBB 5.2
Ba/BB 0.0
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 7.1
Federal Agency CMO and REMIC+ 8.6
Federal Agency Mortgage Pass-Through 5.7
Asset-Backed 1.0
Corporate 11.8
Foreign (U.S. Dollar-denominated) 1.8
+Collateralized Mortgage Obligation and
Real Estate Mortgage Investment Conduit
</TABLE>
/1/ An annualization of the Fund's total net investment income per share for the
30-day period ended on the last day of the month.
/2/ Price to earnings ratio is calculated using trailing 12-month earnings and
excludes extraordinary items.
/3/ All U.S. Dollar-denominated.
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6
<PAGE>
D O D G E & C O X
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1998
----------------------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CONSUMER: 13.8%
STOCKS: CONSUMER PRODUCTS: 4.5%
59.2% 376,200 Matsushita Electric Industrial Co., Ltd. ADR.................................... $ 65,646,900
880,000 Sony Corp. ADR.................................................................. 63,140,000
1,490,000 Fort James Corp................................................................. 59,600,000
732,100 Bausch & Lomb, Inc.............................................................. 43,926,000
750,100 Dole Food Co., Inc.............................................................. 22,503,000
------------
254,815,900
CONSUMER DURABLES: 3.9%
1,610,000 General Motors Corp............................................................. 115,215,625
998,000 Ford Motor Co................................................................... 58,570,125
928,500 Whirlpool Corp.................................................................. 51,415,687
------------
225,201,437
RETAIL AND DISTRIBUTION: 3.8%
5,408,000 Kmart Corp., +.................................................................. 82,810,000
1,684,000 Nordstrom, Inc.................................................................. 58,413,750
1,161,000 Genuine Parts Co................................................................ 38,820,938
1,180,000 Dillard's, Inc. Class A........................................................ 33,482,500
287,000 Fleming Cos., Inc............................................................... 2,977,625
------------
216,504,813
MEDIA, PRINTING, AND ENTERTAINMENT: 1.6%
1,594,000 R.R. Donnelley & Sons Co........................................................ 69,837,125
415,550 Dow Jones & Co.................................................................. 19,998,344
------------
89,835,469
------------
786,357,619
FINANCE: 9.4%
BANKING: 5.5%
1,792,500 Citigroup, Inc.................................................................. 88,728,750
660,000 Golden West Financial Corp...................................................... 60,513,750
1,303,400 Republic New York Corp.......................................................... 59,386,163
922,434 BankAmerica Corp................................................................ 55,461,344
1,251,600 Wells Fargo & Company........................................................... 49,985,775
------------
314,075,782
INSURANCE AND FINANCIAL SERVICES: 3.9%
643,000 American Express Co............................................................. 65,746,750
643,100 Loews Corp...................................................................... 63,184,575
1,679,000 The St. Paul Cos., Inc.......................................................... 58,345,250
509,000 Chubb Corp...................................................................... 33,021,375
------------
220,297,950
------------
534,373,732
BASIC INDUSTRY: 9.1%
PAPER AND FOREST PRODUCTS: 3.1%
1,430,000 Weyerhaeuser Co................................................................. 72,661,875
1,280,000 Champion International Corp..................................................... 51,840,000
783,200 International Paper Co.......................................................... 35,097,150
566,000 Boise Cascade Corp.............................................................. 17,546,000
------------
177,145,025
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
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7
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1998
----------------------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CHEMICALS: 2.8%
STOCKS 850,000 Dow Chemical Co................................................................ $ 77,296,875
(Continued) 596,700 Eastman Chemical Co............................................................ 26,702,325
667,700 Nalco Chemical Co.............................................................. 20,698,700
475,000 Union Carbide Corp............................................................. 20,187,500
274,000 Lubrizol Corp.................................................................. 7,038,375
277,620 NOVA Corp...................................................................... 3,626,411
------------
155,550,186
METALS AND MINING: 2.6%
1,227,000 Aluminum Co. of America........................................................ 91,488,187
1,215,900 Rio Tinto Plc.................................................................. 55,095,469
42,900 Rio Tinto Limited.............................................................. 2,037,167
------------
148,620,823
GENERAL MANUFACTURING: 0.6%
1,984,500 Archer Daniels Midland Co...................................................... 34,108,594
------------
515,424,628
ENERGY: 6.3%
1,220,200 Amerada Hess Corp.............................................................. 60,704,950
1,130,200 Phillips Petroleum Co.......................................................... 48,174,775
557,000 Chevron Corp................................................................... 46,196,187
2,500,000 Occidental Petroleum Corp...................................................... 42,187,500
2,076,650 Baker Hughes, Inc.............................................................. 36,730,747
1,219,700 Unocal Corp.................................................................... 35,599,994
578,000 Royal Dutch Petroleum Co....................................................... 27,671,750
2,842,185 Union Pacific Resources Group, Inc............................................. 25,757,302
292,000 Amoco Corp..................................................................... 17,228,000
370,000 Schlumberger Ltd............................................................... 17,066,250
------------
357,317,455
ELECTRONICS AND COMPUTER: 6.0%
1,570,000 Motorola, Inc.................................................................. 95,868,125
1,375,400 Electronic Data Systems........................................................ 69,113,850
937,000 Hewlett-Packard Co............................................................. 64,008,813
1,325,500 NCR Corp., +................................................................... 55,339,625
2,310,000 National Semiconductor Corp., +................................................ 31,185,000
370,000 Adobe Systems, Inc............................................................. 17,297,500
901,800 Sybase, Inc., +................................................................ 6,678,956
------------
339,491,869
TRANSPORTATION: 4.6%
1,440,300 FDX Corp., +................................................................... 128,186,700
2,010,800 Union Pacific Corp............................................................. 90,611,675
2,195,000 Canadian Pacific Ltd........................................................... 41,430,625
------------
260,229,000
CAPITAL EQUIPMENT: 3.1%
1,924,000 Deere & Co..................................................................... 63,732,500
914,000 Caterpillar, Inc............................................................... 42,044,000
905,500 Fluor Corp..................................................................... 38,540,344
414,100 Lockheed Martin Corp........................................................... 35,094,975
------------
179,411,819
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
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8
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1998
----------------------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON
STOCKS ELECTRIC AND GAS UTILITIES: 2.9%
(Continued) 1,772,200 Central & South West Corp...................................................... $ 48,624,737
827,000 Texas Utilities Co............................................................. 38,610,562
502,800 FPL Group, Inc................................................................. 30,985,050
933,000 Wisconsin Energy Corp.......................................................... 29,331,188
1,388,100 TransCanada PipeLines Ltd...................................................... 20,474,475
--------------
168,026,012
DIVERSIFIED TECHNOLOGY: 2.1%
320,000 Xerox Corp..................................................................... 37,760,000
810,000 Corning, Inc................................................................... 36,450,000
1,010,400 Raychem Corp................................................................... 32,648,550
632,100 Unova, Inc., +................................................................. 11,456,812
--------------
118,315,362
HEALTHCARE AND PHARMACEUTICAL: 1.9%
1,719,200 Pharmacia & Upjohn, Inc........................................................ 97,349,700
754,000 First Health Group Corp., +.................................................... 12,488,125
--------------
109,837,825
--------------
Total Common Stocks (cost $2,773,456,311)................................. 3,368,785,321
PREFERRED CONSUMER: 1.3%
STOCKS: 2,878,000 News Corp. Ltd., Limited Voting Ordinary Shares ADR............................ 71,050,625
1.3% 57,500 Kmart Financing I, 7 3/4% Trust Convertible Preferred.......................... 3,331,406
--------------
Total Preferred Stocks (cost $55,138,959)................................. 74,382,031
PAR VALUE
BONDS: U.S. TREASURY AND GOVERNMENT AGENCY: 7.1%
36.0% U.S. TREASURY: 5.9%
$ 97,225,000 U.S. Treasury Notes, 5.875%, 11/15/1999........................................ 98,227,390
105,000,000 U.S. Treasury Notes, 5.375%, 1/31/2000......................................... 105,787,500
70,850,000 U.S. Treasury Notes, 7.125%, 2/29/2000......................................... 72,753,739
40,000,000 U.S. Treasury Notes, 6.75%, 4/30/2000.......................................... 41,050,000
13,000,000 U.S. Treasury Notes, 5.625%, 11/30/2000........................................ 13,231,530
3,200,000 U.S. Treasury Notes, 6.25%, 2/15/2003.......................................... 3,384,000
--------------
334,434,159
GOVERNMENT AGENCY: 1.2%
5,000,000 Arkansas Dev. Fin. Auth. GNMA Guaranteed Bonds, 9.75%, 11/15/2014.............. 6,475,750
15,710,460 Govt. Small Business Admin. 504 Series 97-20F, 7.20%, 6/1/2017................. 16,831,715
18,154,841 Govt. Small Business Admin. 504 Series 97-20I, 6.90%, 9/1/2017................. 19,207,459
19,314,626 Govt. Small Business Admin. 504 Series 98-20D, 6.15%, 4/1/2018................. 19,698,022
10,000,000 Govt. Small Business Admin. 504 Series 98-20I, 6.00%, 9/1/2018................. 10,172,200
--------------
72,385,146
--------------
406,819,305
FEDERAL AGENCY CMO* AND REMIC**: 8.6%
15,345,763 Federal Home Loan Mtge. Corp., 7.00%, 3/15/2005................................ 15,393,641
15,000,000 Federal Home Loan Mtge. Corp., 7.00%, 1/15/2006................................ 15,201,450
15,000,000 Federal Home Loan Mtge. Corp., 7.00%, 10/15/2006............................... 15,192,150
24,396,217 Federal Home Loan Mtge. Corp., 6.75%, 11/15/2006............................... 24,556,256
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
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9
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1998
----------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
FEDERAL AGENCY CMO* AND REMIC** (continued)
BONDS $ 5,934,000 Federal Home Loan Mtge. Corp., 6.00%, 1/15/2007................................. $ 5,939,519
(Continued) 21,500,000 Federal Home Loan Mtge. Corp., 6.50%, 10/15/2007................................ 21,889,580
12,609,000 Federal Home Loan Mtge. Corp., 7.00%, 1/15/2008................................. 12,959,656
10,000,000 Federal Home Loan Mtge. Corp., 6.50%, 5/15/2008................................. 10,193,700
14,750,000 Federal Home Loan Mtge. Corp., 6.50%, 5/15/2008................................. 15,118,750
16,474,350 Federal Home Loan Mtge. Corp., 6.50%, 8/15/2008................................. 16,875,830
26,000,000 Federal Home Loan Mtge. Corp., 6.00%, 12/15/2008................................ 26,178,620
14,704,116 Federal Home Loan Mtge. Corp., 7.00%, 5/17/2020................................. 14,851,157
22,799,837 Federal Home Loan Mtge. Corp., 6.50%, 5/15/2021................................. 22,778,405
25,000,000 Federal Home Loan Mtge. Corp., 6.75%, 8/15/2021................................. 25,343,750
27,780,000 Federal Home Loan Mtge. Corp., 6.25%, 9/15/2022................................. 28,240,037
28,000,000 Federal Home Loan Mtge. Corp., 7.00%, 8/25/2023................................. 28,910,000
2,769,917 Federal Natl. Mtge. Assn., 5.00%, 12/25/2004.................................... 2,755,181
16,140,292 Federal Natl. Mtge. Assn., 6.00%, 9/18/2005..................................... 16,109,948
6,692,655 Federal Natl. Mtge. Assn., 5.00%, 1/1/2006...................................... 6,579,683
21,840,000 Federal Natl. Mtge. Assn., 7.50%, 2/25/2007..................................... 22,331,400
21,674,800 Federal Natl. Mtge. Assn., 6.50%, 8/25/2008..................................... 21,986,267
15,475,000 Federal Natl. Mtge. Assn., 6.00%, 3/25/2009..................................... 15,479,797
849,150 Federal Natl. Mtge. Assn., 6.50%, 4/1/2009...................................... 860,291
7,947,118 Federal Natl. Mtge. Assn., 5.70%, 8/25/2016..................................... 7,914,773
13,730,000 Federal Natl. Mtge. Assn., 7.00%, 6/17/2022..................................... 14,304,875
7,180,735 Veterans Affairs Vendee Mtge. Trust, 6.50%, 11/15/2009.......................... 7,178,437
15,929,940 Veterans Affairs Vendee Mtge. Trust, 6.75%, 8/15/2014........................... 16,153,915
27,000,000 Veterans Affairs Vendee Mtge. Trust, 6.75%, 9/15/2014........................... 27,396,360
8,000,000 Veterans Affairs Vendee Mtge. Trust, 6.75%, 5/15/2019........................... 8,150,000
23,000,000 Veterans Affairs Vendee Mtge. Trust, 7.00%, 6/15/2019........................... 23,553,380
---------------
490,376,808
FEDERAL AGENCY MORTGAGE PASS-THROUGH: 5.7%
606,033 Federal Home Loan Mtge. Corp., 6.50%, 2/1/2006.................................. 612,736
546,570 Federal Home Loan Mtge. Corp., 7.50%, 7/1/2006.................................. 554,862
146,111 Federal Home Loan Mtge. Corp., 7.00%, 9/1/2006.................................. 148,182
364,677 Federal Home Loan Mtge. Corp., 7.25%, 1/1/2008.................................. 370,027
200,472 Federal Home Loan Mtge. Corp., 7.50%, 2/1/2008.................................. 203,513
932,358 Federal Home Loan Mtge. Corp., 8.00%, 2/1/2008.................................. 963,061
164,919 Federal Home Loan Mtge. Corp., 7.25%, 4/1/2008.................................. 167,937
23,218,269 Federal Home Loan Mtge. Corp., 7.00%, 5/1/2008.................................. 23,682,634
34,685,178 Federal Home Loan Mtge. Corp., 7.00%, 12/1/2008................................. 35,378,882
8,883,814 Federal Home Loan Mtge. Corp., 6.50%, 2/1/2009.................................. 9,022,846
19,299,214 Federal Home Loan Mtge. Corp., 6.00%, 9/1/2009.................................. 19,401,500
924,087 Federal Home Loan Mtge. Corp., 8.75%, 5/1/2010.................................. 966,012
14,295,145 Federal Home Loan Mtge. Corp., 7.50%, 8/1/2010.................................. 14,712,707
5,444,083 Federal Home Loan Mtge. Corp., 8.00%, 11/1/2010................................. 5,623,356
309,942 Federal Home Loan Mtge. Corp., 7.75%, 1/1/2012.................................. 316,816
961,053 Federal Home Loan Mtge. Corp., 8.25%, 2/1/2017.................................. 996,891
8,039,464 Federal Home Loan Mtge. Corp., 8.50%, 1/1/2023.................................. 8,442,885
496,066 Federal Natl. Mtge. Assn., 6.50%, 1/1/2004...................................... 499,062
2,609,677 Federal Natl. Mtge. Assn., 7.50%, 12/1/2006..................................... 2,684,679
4,653,088 Federal Natl. Mtge. Assn., 7.50%, 9/1/2007...................................... 4,822,460
8,085,001 Federal Natl. Mtge. Assn., 7.00%, 12/1/2007..................................... 8,318,172
15,857,925 Federal Natl. Mtge. Assn., 7.00%, 12/1/2007..................................... 16,166,521
8,743,341 Federal Natl. Mtge. Assn., 6.50%, 5/1/2008...................................... 8,870,207
14,315,532 Federal Natl. Mtge. Assn., 8.00%, 6/1/2008...................................... 14,744,998
22,335,753 Federal Natl. Mtge. Assn., 6.50%, 11/1/2008..................................... 22,659,845
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
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10
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1998
----------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS FEDERAL AGENCY MORTGAGE PASS-THROUGH (continued)
(CONTINUED) $ 9,637,369 Federal Natl. Mtge. Assn., 6.00%, 1/1/2009...................................... $ 9,691,531
4,383,416 Federal Natl. Mtge. Assn., 8.00%, 1/1/2009...................................... 4,497,253
1,211,198 Federal Natl. Mtge. Assn., 7.50%, 8/1/2010...................................... 1,254,910
4,001,418 Federal Natl. Mtge. Assn., 7.50%, 7/1/2019...................................... 4,126,622
15,389,028 Govt. Natl. Mtge. Assn., 7.50%, 7/15/2007....................................... 15,899,021
18,781,643 Govt. Natl. Mtge. Assn., 7.50%, 1/15/2008....................................... 19,476,376
9,036,338 Govt. Natl. Mtge. Assn., 8.00%, 12/15/2008...................................... 9,341,314
33,199,428 Govt. Natl. Mtge. Assn., 6.50%, 7/15/2009....................................... 33,804,322
9,266,712 Veterans Affairs Vendee Mtge. Trust, 5.634%, 2/15/2024.......................... 9,066,829
6,904,026 Veterans Affairs Vendee Mtge. Trust, 7.21%, 2/15/2025........................... 7,169,348
8,047,770 Veterans Affairs Vendee Mtge. Trust, 8.793%, 6/15/2025.......................... 8,653,848
--------------
323,312,165
ASSET-BACKED SECURITIES: 1.0%
37,625,000 CA Infrastructure and Econ. Dev. Bank SP Trust PGE-1 Rate Reduction
Ctf. 1997- A-5, 6.25%, 6/25/2004................................................ 38,524,614
18,000,000 CA Infrastructure and Econ. Dev. Bank SP Trust SCE-1 Rate Reduction
Cft. 1997- A-6, 6.38%, 9/25/2008................................................ 18,658,620
--------------
57,183,234
CORPORATE: 11.8%
INDUSTRIAL: 6.2%
12,500,000 Dayton Hudson Corp., 9.35%, 6/16/2020........................................... 16,694,750
7,500,000 Dayton Hudson Corp., 9.875%, 7/1/2020........................................... 10,474,275
8,450,000 Dayton Hudson Corp., 9.70%, 6/15/2021........................................... 11,694,124
45,000,000 J.E. Seagram & Sons, Inc., 6.80%, 12/15/2008.................................... 44,838,450
25,000,000 Lockheed Martin Corp., 7.65%, 5/1/2016.......................................... 27,842,000
30,000,000 Lockheed Martin Corp., 7.75%, 5/1/2026.......................................... 34,198,800
5,975,000 May Department Stores, 7.625%, 8/15/2013........................................ 6,847,469
14,000,000 May Department Stores, 8.125%, 8/15/2035, Callable 2015......................... 16,371,880
10,700,000 May Department Stores, 7.875%, 8/15/2036, Callable 2016......................... 12,225,392
35,000,000 Raychem Corp., 7.20%, 10/15/2008................................................ 36,363,250
28,325,000 Raytheon Co., 6.75%, 8/15/2007.................................................. 29,987,961
20,000,000 Raytheon Co., 6.75%, 3/15/2018.................................................. 20,516,800
17,500,000 Raytheon Co., 7.20%, 8/15/2027.................................................. 18,775,575
32,000,000 Time Warner Entertainment, 8.375%, 7/15/2033.................................... 39,217,280
3,450,000 Union Camp Corp., 9.25%, 2/1/2011............................................... 4,233,116
20,000,000 Walt Disney Co., 7.55%, 7/15/2093, Callable 2023................................ 23,269,000
--------------
353,550,122
FINANCE: 4.3%
19,775,000 BankAmerica Capital II, 8.00%, 12/15/2026, Callable 2006++...................... 21,814,791
2,000,000 Barclays No. American Capital, 9.75%, 5/15/2021, Callable 2001..... ............ 2,255,460
1,800,000 CIGNA Corp., 7.65%, 3/1/2023.................................................... 1,877,904
4,400,000 CIGNA Corp., 8.30%, 1/15/2033................................................... 4,823,984
18,680,000 Citicorp Capital Trust I, 7.933%, 2/15/2027, Callable 2007++.................... 20,580,503
5,000,000 First Nationwide Bank, 10.00%, 10/1/2006........................................ 6,024,000
30,000,000 GMAC Put Notes, 8.875%, 6/1/2010, Putable 2000/2005............................. 37,546,800
22,500,000 GMAC Senior Notes, 5.75%, 11/10/2003............................................ 22,674,600
5,000,000 Golden West Financial, 7.875%, 1/15/2002........................................ 5,289,750
10,000,000 Golden West Financial, 6.70%, 7/1/2002.......................................... 10,282,100
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
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11
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1998
----------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS FINANCE (continued)
(Continued) $24,100,000 Golden West Financial, 6.00%, 10/1/2003........................................ $ 24,225,320
6,000,000 Hartford Financial Services Group, 8.30%, 12/1/2001............................ 6,426,900
10,000,000 Hartford Financial Services Group, 6.375%, 11/1/2002........................... 10,233,600
25,160,000 J.P. Morgan Capital Trust I, 7.54%, 1/15/2027, Callable 2007++................. 26,364,913
14,400,000 Norwest Corp., 6.20%, 12/1/2005................................................ 14,783,184
7,500,000 Norwest Corp., 6.875%, 8/8/2006................................................ 7,999,875
7,500,000 Norwest Corp., 6.55%, 12/1/2006................................................ 7,900,800
14,175,000 Safeco Corp., 6.875%, 7/15/2007................................................ 14,849,021
--------------
245,953,505
TRANSPORTATION: 1.3%
7,615,567 Consolidated Rail Corp., 6.76%, 5/25/2015...................................... 7,853,782
12,550,000 Consolidated Rail Corp., 9.75%, 6/15/2020...................................... 16,622,224
49,426,000 Union Pacific Corp., 6.33%, 1/2/2020........................................... 49,151,191
--------------
73,627,197
UTILITIES: 0.0%
750,000 Idaho Power Co. 1st Mtge. Bonds, 9.50%, 1/1/2021, Callable 2001................ 828,015
--------------
673,958,839
FOREIGN (U.S. DOLLAR-DENOMINATED): 1.8%
CANADIAN CORPORATE: 1.3%
10,000,000 Canadian National Railway Co., 6.80%, 7/15/2018................................ 10,337,800
8,750,000 Canadian Pacific Ltd., 9.45%, 8/1/2021......................................... 11,294,238
12,000,000 Hydro-Quebec, 7.50%, 4/1/2016.................................................. 13,482,960
30,000,000 Hydro-Quebec, 8.40%, 1/15/2022................................................. 37,318,800
--------------
72,433,798
INTERNATIONAL AGENCY: 0.5%
7,200,000 European Investment Bank, 10.125%, 10/1/2000................................... 7,812,144
17,765,000 Inter-American Development Bank, 7.125%, 3/15/2023, Callable 2003.............. 18,834,275
--------------
26,646,419
--------------
99,080,217
--------------
Total Bonds (cost $1,969,609,450).................................... 2,050,730,568
SHORT-TERM 24,000,000 American Express Credit Corp., Comm. Paper, 6.007%, 1/4/1999................... 24,000,000
INVESTMENTS: 11,237,182 SSgA Prime Money Market Fund................................................... 11,237,182
3.2% 50,000,000 U.S. Treasury Bills, 1/7/1999.................................................. 49,958,250
50,000,000 U.S. Treasury Bills, 2/18/1999................................................. 49,707,333
50,000,000 U.S. Treasury Bills, 3/4/1999.................................................. 49,623,695
--------------
Total Short-Term Investments (cost $184,526,460)..................... 184,526,460
--------------
TOTAL INVESTMENTS (cost $4,982,731,180)...................... 99.7% 5,678,424,380
OTHER ASSETS LESS LIABILITIES................................ 0.3% 14,555,091
------ --------------
TOTAL NET ASSETS............................................. 100.0% $5,692,979,471
====== ==============
</TABLE>
+ Non-income producing
++ Cumulative Capital Securities
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
See accompanying Notes to Financial Statements
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12
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities December 31, 1998
---------------------------------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments, at market value (identified cost $4,982,731,180)............................ $5,678,424,380
Receivable for Fund shares sold.......................................................... 12,174,869
Dividends and interest receivable........................................................ 30,902,343
Receivable for paydowns on mortgage-backed securities.................................... 225,391
Prepaid expenses......................................................................... 53,704
--------------
5,721,780,687
--------------
LIABILITIES:
Payable for investments purchased........................................................ 319,479
Payable for Fund shares redeemed......................................................... 25,679,940
Management fees payable.................................................................. 2,411,185
Accounts payable......................................................................... 390,612
--------------
28,801,216
--------------
Net asset value
per share $65.22 NET ASSETS.............................................................. $5,692,979,471
==============
Beneficial NET ASSETS CONSIST OF:
shares outstanding Paid in capital.......................................................................... $4,935,446,675
87,286,592 Accumulated undistributed net investment income.......................................... 1,792,706
(par value $0.01 each, Accumulated undistributed net realized gain on investments............................... 60,046,890
unlimited shares Net unrealized appreciation on investments............................................... 695,693,200
authorized) --------------
$5,692,979,471
==============
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
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13
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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Balanced Fund
<TABLE>
<CAPTION>
Statement of Operations Year Ended December 31, 1998
---------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends................................................................................ $ 62,877,456
Interest................................................................................. 155,703,411
--------------
218,580,867
--------------
EXPENSES:
Management fees (Note 2)................................................................. 28,533,113
Custodian and fund accounting fees....................................................... 353,343
Transfer agent fees...................................................................... 1,344,834
Audit fees............................................................................... 40,558
Legal fees............................................................................... 5,712
Shareholder reports...................................................................... 276,668
Registration fees........................................................................ 395,616
Trustees' fees (Note 2).................................................................. 14,000
Miscellaneous............................................................................ 87,549
--------------
31,051,393
--------------
NET INVESTMENT INCOME.................................................................... 187,529,474
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments....................................................... 304,796,545
Net unrealized depreciation on investments............................................. (134,003,289)
--------------
Net realized and unrealized gain on investments...................................... 170,793,256
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................................... $ 358,322,730
==============
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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14
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Year Ended December 31,
----------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
OPERATIONS:
Net investment income..................................................... $ 187,529,474 $ 158,266,475
Net realized gain......................................................... 304,796,545 379,070,080
Net unrealized appreciation (depreciation)................................ (134,003,289) 339,758,917
--------------- ---------------
Net increase in net assets from operations................................ 358,322,730 877,095,472
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................................... (186,617,482) (157,975,729)
Net realized gain......................................................... (313,107,429) (235,404,704)
--------------- ---------------
Total distributions....................................................... (499,724,911) (393,380,433)
--------------- ---------------
BENEFICIAL SHARE TRANSACTIONS:
Amounts received from sale of shares...................................... 1,852,918,636 1,861,495,378
Net asset value of shares issued in reinvestment of distributions......... 483,582,782 380,304,596
Amounts paid for shares redeemed.......................................... (1,578,717,026) (1,278,744,642)
--------------- ---------------
Net increase from beneficial share transactions........................... 757,784,392 963,055,332
--------------- ---------------
Total increase in net assets.............................................. 616,382,211 1,446,770,371
NET ASSETS:
Beginning of year......................................................... 5,076,597,260 3,629,826,889
--------------- ---------------
End of year (including undistributed net investment income of
$1,792,706 and $880,714, respectively).................................. $ 5,692,979,471 $ 5,076,597,260
=============== ===============
Shares sold............................................................... 27,407,254 28,547,791
Shares issued in reinvestment of distributions............................ 7,297,276 5,794,316
Shares redeemed........................................................... (23,440,423) (19,001,153)
--------------- ---------------
Net increase in shares outstanding........................................ 11,264,107 15,340,954
=============== ===============
</TABLE>
See accompanying Notes to Financial Statements
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15
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Balanced Fund
Notes to Financial Statements
---------------------------------------------------------------------------
1 Dodge & Cox Balanced Fund (the "Fund") reorganized on April 30, 1998, and
became a separate series of Dodge & Cox Funds (the "Trust"), in accordance
with a plan or reorganization approved by the Fund's shareholders on
January 30, 1998. The Trust is organized as a Delaware business trust and
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund consistently
follows accounting policies which are in conformity with generally accepted
accounting principles. Significant accounting policies are as follows: (a)
Security valuation: stocks are valued at the latest quoted sales prices as
of the close of the New York Stock Exchange or, if no sale, then a
representative price within the limits of the bid and ask prices for the
day; a security which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market
for such security; long-term debt securities are priced on the basis of
valuations furnished by pricing services which utilize both dealer-supplied
valuations and electronic data processing techniques; securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees;
short-term securities are valued at amortized cost which approximates
current value; all securities held by the Fund are denominated in U.S.
dollars. (b) Security transactions are accounted for on the trade date in
the financial statements. (c) Gains and losses on securities sold are
determined on the basis of identified cost. (d) Dividend and interest
income are recorded on the accrual basis. Premiums and discounts on debt
securities purchased are amortized and accreted, respectively, to interest
income over the lives of the respective securities. (e) Distributions to
shareholders of income and capital gains are reflected in the net asset
value per share computation on the ex-dividend date. (f) No provision for
Federal income taxes has been included in the accompanying financial
statements since the Fund intends to distribute all of its taxable income
and otherwise continue to comply with requirements for regulated investment
companies.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Actual results could
differ from those estimates.
2 Under a written agreement, the Fund pays an annual management fee of 1/2 of
1% of the Fund's average daily net asset value to Dodge & Cox, investment
manager of the Fund. All officers and seven of the trustees of the Trust
are officers and employees of Dodge & Cox. Those trustees who are not
affiliated with Dodge & Cox receive from the Trust an annual fee plus an
attendance fee for each Board or Committee meeting attended. Payments to
trustees are divided equally among each series of the Trust. The Trust does
not pay any other remuneration to its officers or trustees.
3 For the year ended December 31, 1998, purchases and sales of securities,
other than short-term securities, aggregated $1,826,453,050 and
$1,396,170,913, respectively, of which U.S. government obligations
aggregated $484,555,551 and $489,280,844, respectively. At December 31,
1998, the cost of investments for Federal income tax purposes was equal to
the cost for financial reporting purposes. Net unrealized appreciation
aggregated $695,693,200, of which $863,909,689 represented appreciated
securities and $168,216,489 represented depreciated securities.
- --------------------------------------------------------------------------------
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16
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Financial Highlights
- -------------------------------------------------------------------------------
SELECTED DATA AND RATIOS (for a share outstanding throughout each year)
Year Ended December 31,
------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $66.78 $59.82 $54.60 $45.21 $46.40
Income from investment operations:
Net investment income 2.24 2.21 1.98 1.90 1.76
Net realized and unrealized gain (loss) 2.17 10.24 5.92 10.58 (.83)
------ ------ ------ ------ ------
Total from investment operations 4.41 12.45 7.90 12.48 .93
------ ------ ------ ------ ------
Distributions to shareholders from:
Net investment income (2.23) (2.22) (1.99) (1.90) (1.76)
Net realized gain (3.74) (3.27) (.69) (1.19) (.36)
------ ------ ------ ------ ------
Total distributions (5.97) (5.49) (2.68) (3.09) (2.12)
------ ------ ------ ------ ------
Net asset value, end of year $65.22 $66.78 $59.82 $54.60 $45.21
====== ====== ====== ====== ======
Total return 6.70% 21.21% 14.75% 28.02% 1.99%
Ratios/Supplemental data
Net assets, end of year (millions) $5,693 $5,077 $3,630 $1,800 $ 725
Ratio of expenses to average net assets .54% .55% .56% .57% .58%
Ratio of net investment income to average net assets 3.29% 3.39% 3.60% 3.85% 3.94%
Portfolio turnover rate 26% 32% 17% 20% 20%
</TABLE>
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17
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Balanced Fund
Report of Independent Accountants
-------------------------------------------------------------------
To the Trustees of Dodge & Cox Funds and Shareholders of Dodge &
Cox Balanced Fund
In our opinion, the accompanying statement of assets and
liabilities, including the portfolio of investments, and the
related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects,
the financial position of the Dodge & Cox Balanced Fund (the
"Fund", one of the series constituting Dodge & Cox Funds) at
December 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the
five years in the period then ended, in conformity with generally
accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31,
1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 26, 1999
-------------------------------------------------------------------
Special 1998 Tax Information (unaudited)
The following information is provided pursuant to provisions of the
Internal Revenue Code:
The Fund's distributions to shareholders included $289,427,272 from
long-term capital gains, all of which was subject to Federal income
tax at a maximum rate of 20%.
Corporate shareholders should note that for the year ended December
31, 1998, a total of 28% of the Fund's ordinary dividends (as
reported to shareholders in Box 1 of Form 1099-DIV) qualified for
the corporate dividends received deduction.
See accompanying Notes to Financial Statements
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18
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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Balanced Fund
General Information
-------------------------------------------------------------
Investment Since 1930, Dodge & Cox has been providing professional
Manager investment management for individuals, trustees,
corporations, pension and profit-sharing funds, and
charitable institutions. Dodge & Cox manages the Dodge & Cox
Balanced Fund, the Dodge & Cox Stock Fund and the Dodge & Cox
Income Fund.
No-Load Fund Shares of the Fund are purchased and redeemed at net asset
value. There are no sales, redemption or Rule 12b-1 plan
distribution charges.
Gifts Fund shares provide a convenient method for making gifts to
children and to other family members. Shares may be held by
an adult custodian for the benefit of a minor under a Uniform
Gifts/Transfers to Minors Act. Trustees and guardians may
also hold shares for a minor's benefit.
Automatic Shareholders may make regular monthly or quarterly
Investment Plan investments of $100 or more through automatic deductions
from their bank accounts.
Withdrawal Plan Shareholders owning $10,000 or more of the Fund's shares may
elect to receive periodic monthly or quarterly payments of at
least $50.
Reinvestment Shareholders may direct that dividend and capital gains
Plan distributions be reinvested in additional Fund shares.
The above plans are completely voluntary and involve no
service charge of any kind.
IRA Plan The Fund has a Traditional and Roth Individual Retirement
Account Plan (IRA) available for shareholders of the Fund.
- --------------------------------------------------------------------------------
PREPARING FOR THE YEAR 2000
The Fund's key service providers--Dodge & Cox, the investment manager; Boston
Financial Data Services Inc., the transfer agent; and State Street Bank and
Trust Company, the custodian and fund accountant--are taking steps that each
believes are reasonably designed to address the Year 2000 issue with respect to
the systems that they use. For example, the service providers have established
comprehensive Year 2000 readiness programs to identify, evaluate and resolve
Year 2000 readiness issues. The service providers' Year 2000 efforts are
progressing steadily and considerable progress has been made to date. The Funds
believe these steps will be sufficient to avoid any material adverse impact on
the Funds, although there can be no assurances to that effect. Additional
information on Year 2000 preparations can be found on the Fund's web site at
www.dodgeandcox.com.
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<PAGE>
D O D G E & C O X D O D G E & C O X
- ----------------- -----------------
Income Fund
Income Fund
Established 1989
Investment Managers -----------------
Dodge & Cox
One Sansome Street -----------------
35th Floor
San Francisco
California 94104-4405
(415) 981-1710
For Fund literature and
information, please visit
the Funds' web site at:
www.dodgeandcox.com
or write or call:
Dodge & Cox Funds
c/o Boston Financial
Data Services
P.O. Box 9051
Boston
Massachusetts 02205-9051
(800) 621-3979
- -----------------
This report is submitted
for the general information
of the shareholders of the
Fund. The report is not
authorized for distribution
to prospective investors 10th Annual Report
in the Fund unless it is December 31, 1998
accompanied by an effective
prospectus.
- ----------------- -----------------
-----------------
-----------------
Printed on recycled paper.
12/98 IF AR
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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Income Fund
To Our Shareholders
- --------------------------------------------------------------------------------
The Dodge & Cox Income Fund provided a total return of 8.1% for 1998,
underperforming the 8.7% total return of the Lehman Brothers Aggregate Bond
Index (LBAG), a broad-based index composed of investment grade bonds which
serves as a proxy for the U.S. bond market. Average annual total returns for
longer periods are listed on page three of this report.
The net asset value of the Fund rose from $12.08 at the end of 1997 to $12.25 as
of December 31, 1998. In addition, the Fund paid income dividends of $0.72 per
share and distributed net realized short and long-term capital gains of $0.06
per share. At year-end, the Fund's total net assets were $952 million.
Interest Rates Fall; Sector Performances Diverge
U.S. Treasury yields declined significantly in 1998, fueled by continued low
inflation and expectations for slower growth in the global economy. The
benchmark 30-year U.S. Treasury rate fell from 5.92% to 5.09%, while the five-
year Treasury fell from 5.71% to 4.54%. As interest rates fell, prices of most
fixed-income securities rose, supplementing the income on the portfolio's
securities. This resulted in an attractive 8.1% total return for the year.
Most of the Treasury yield declines occurred in the months of August and
September, following Russia's default on its debt. This unexpected event sparked
a "flight-to-quality" and strong demand for the safety and liquidity of U.S.
Treasury securities. As U.S. Treasury prices rose, other fixed-income sectors
lagged dramatically, resulting in a broad divergence in third quarter
performance between market sectors. For example, long Treasuries returned 7.9%
for the quarter while long investment-grade corporates returned only 3.6%.
Mortgage-backed securities fared no better; intermediate Treasuries had a 4.9%
total return while the mortgage-backed sector returned only 2.6%.
Three rate cuts by the Federal Reserve between September and November, and
continued signs of strong growth in the domestic economy, gave many investors
the confidence to return to the riskier corporate and mortgage-backed sectors in
the fourth quarter. This restored liquidity and demand for these sectors and
their fourth quarter returns outpaced comparable U.S. Treasury securities.
Nevertheless, corporate and mortgage-backed securities underperformed for the
year despite their higher initial yields and the fourth quarter rebound.
Weak Relative Performance
There were two primary contributors to the Fund's underperformance this year:
. Overweight positions in the corporate and mortgage-related sectors: The
Fund had a higher percentage of holdings in both the corporate and
mortgage sectors than the LBAG. The year-over-year increase in yield
premiums on these securities meant smaller price gains for these
securities than U.S. Treasuries, and detracted from the portfolio's
relative total returns.
. Shorter than market duration: Compared to the LBAG, a moderately higher
percentage of the Fund's portfolio was in shorter duration bonds. This
led to a slightly shorter portfolio duration (a measure of a portfolio's
price sensitivity to changes in interest rates) for the Fund and
relatively less exposure to changes in interest rates. As a result, the
decline in interest rates contributed less to the price appreciation of
the Fund's portfolio than that of the overall market.
Opportunities Emerge in the Third and Fourth Quarters--Sticking to our Guns
Despite the dislocations in the fixed-income markets in the third and fourth
quarters, we continued with our long-term strategy of emphasizing carefully
chosen and well-researched corporate and mortgage-related issues. This fall,
with yield premiums on many corporate securities as high or higher than during
the 1990-91 recession, we concluded that these levels were unjustified by credit
fundamentals and began to actively target new purchases in this area of the
market.
- --------------------------------------------------------------------------------
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1
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
In October we purchased $20,000,000 par value, or a 2.2% position, of ten-year
Raychem notes at a yield premium of 270 basis points (1 basis point = 1/100 of a
percentage point). In December we purchased $20,000,000 par value of twenty-year
debentures from J.E. Seagram & Sons, Inc., at a yield premium of 240 basis
points to comparable U.S. Treasuries. Throughout this period of uncertainty we
were also able to add selectively to other corporate holdings such as Time
Warner, Ford Motor Credit, Citicorp, and Union Pacific equipment trust
certificates. Finally, we purchased a 1% position in asset-backed securities,
specifically Rate Reduction bonds issued through a special purpose trust created
by Commonwealth Edison. When the dust had settled, we had increased the Fund's
corporate allocation, including Yankees and asset-backed securities, from 35% at
the beginning of the quarter to 40% by quarter end. This was done in an effort
to take advantage of the short-term dislocation and improve long-term
performance prospects.
Looking Ahead
As we indicated above, overweight positions in the corporate and mortgage-backed
sectors contributed to the Fund's underperformance this year. Nevertheless, we
remain steadfast in our belief that a relatively high-yielding portfolio
featuring carefully selected corporate and mortgage-backed securities is
critical to achieving above-average relative performance over the long term.
Though the yield premiums of these sectors have declined somewhat from their
peaks, we believe they continue to offer attractive total return potential
relative to U.S. Treasury alternatives.
We continue to maintain the Fund's duration shorter than that of the benchmark
due to the level of nominal interest rates and our concerns about future
inflation. While the turmoil in Russia, Brazil and other emerging economies
should have a dampening effect on global economic growth, we remain concerned
about the possibility of increasing inflation in the United States. A
continuation of the dramatic reduction in energy prices, which has fueled the
most recent drop in inflation, appears unlikely. We also see potential for
rising inflation from tight labor markets, above-trend GDP growth, fast money
supply growth, and a buoyant consumer sector. This inflation concern, coupled
with low U.S. Treasury rates which are around 4.5% on short maturities and
slightly above 5% on long bonds, leads us to maintain a slightly below-market
level of interest rate exposure in the Fund.
The low absolute level of interest rates has important ramifications. For one,
expectations for future returns should be tempered, certainly relative to the
fairly robust bond market returns of recent history. Secondly, we believe that
our focus on research and security selection is particularly appropriate in the
current environment. With this in mind, we will continue our strategy of
emphasizing those issuers and sectors whose long-term total return potential, in
our view, is underestimated by the market. We will also maintain the Fund's high
average quality and diversification, while striving to attain a higher-than-
market yield. Finally, we will continue to invest with a focus on total return
potential over the long term.
Thank you for your confidence in the Dodge & Cox Income Fund. As always, we
welcome your comments and questions.
For the Board of Trustees,
/s/ Harry R. Hagey, Chairman /s/ A. Horton Shapiro, Executive Vice President
- ---------------------------- -----------------------------------------------
Harry R. Hagey, Chairman A. Horton Shapiro, Executive Vice President
January 26, 1999
- --------------------------------------------------------------------------------
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2
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
Objective The Fund's primary objective is to provide shareholders with a high
and stable rate of current income, consistent with long-term
preservation of capital. A secondary objective is to take advantage
of opportunities to realize capital appreciation.
Strategy The Fund seeks to achieve these objectives by investing in a
diversified portfolio of primarily high-quality bonds and other
fixed-income securities, while striving to maintain the Fund's
yield higher than that of the broad bond market. Dodge & Cox
conducts thorough fundamental research on each of the Fund's
investments, taking many factors into consideration including
creditworthiness and structural characteristics. Fixed-income
securities in the Fund will generally include U.S. Government,
mortgage-related and corporate issues.
<TABLE>
<CAPTION>
Ten Years of Investment Performance through December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Dodge & Cox LBAG
Income Fund Index
----------- ---------
<S> <C> <C>
1/1/1989 $10,000 $10,000
12/31/1989 $11,411 $11,455
12/31/1990 $12,256 $12,482
12/31/1991 $14,451 $14,479
12/31/1992 $15,581 $15,550
12/31/1993 $17,350 $17,067
12/31/1994 $16,848 $16,568
12/31/1995 $20,252 $19,630
12/31/1996 $20,988 $20,339
12/31/1997 $23,088 $22,308
12/31/1998 $24,953 $24,244
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended December 31, 1998 1 Year 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 8.08% 7.54% 9.57%
Lehman Brothers Aggregate Bond Index 8.67 7.27 9.26
</TABLE>
The chart covers the period from January 1, 1989 to December 31, 1998. It
compares a $10,000 investment made in the Dodge & Cox Income Fund to a $10,000
investment made in the Lehman Brothers Aggregate Bond (LBAG) Index. The Fund's
total returns include the reinvestment of dividend and capital gain
distributions. The LBAG Index is a broad-based unmanaged measure of investment
grade-rated corporate and U.S. Government fixed-income securities. Index returns
include interest income and, unlike Fund returns, do not reflect fees or
expenses. Past performance does not guarantee future results. Investment return
and share price will fluctuate with market conditions, and investors may have a
gain or loss when shares are sold.
- --------------------------------------------------------------------------------
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3
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
Fund Information December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $12.25
Total Net Assets (millions) $952
1998 Expense Ratio 0.47%
1998 Portfolio Turnover 35%
30 Day SEC Yield* 5.68%
Fund Inception Date 1989
</TABLE>
Investment Manager: Dodge & Cox, San Francisco. Managed by
the Fixed Income Strategy Committee, whose ten members' average
tenure at Dodge & Cox is 13 years, and by the Investment Policy
Committee, whose eight members' average tenure at Dodge & Cox
is 21 years.
<TABLE>
<CAPTION>
Asset Allocation
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
<S> <C>
Bonds: 97.4%
Short-Term Investments: 2.6%
</TABLE>
<TABLE>
<CAPTION>
Bond Characteristics
- --------------------------------------------------------------------------------
<S> <C>
Number of Bonds 99
Average Quality AA+
Average Maturity 10.2 years
Effective Duration 4.40 years
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 17.4
Federal Agency CMO and REMIC+ 23.3
Federal Agency Mortgage Pass-Through 17.0
Asset-Backed 3.3
Corporate 31.9
Foreign (U.S. Dollar-denominated) 4.5
Short-Term Investments 2.6
+ Collateralized Mortgage Obligation and Real Estate Mortgage Investment Conduit
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's
Quality Ratings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 57.7
Aaa/AAA 4.8
Aa/AA 0.2
A/A 21.3
Baa/BBB 13.4
Ba/BB 0.0
Short-Term Investments 2.6
</TABLE>
<TABLE>
<CAPTION>
Maturity Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
0-1 Years to Maturity 8.4
1-5 43.3
5-10 21.3
10-15 5.4
15-20 4.6
20-25 7.6
25 and Over 9.4
</TABLE>
* An annualization of the Fund's total net investment income per share for the
30-day period ended on the last day of the month.
- --------------------------------------------------------------------------------
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4
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1998
-------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS: U.S. TREASURY AND GOVERNMENT AGENCY: 17.4%
97.4% U.S. TREASURY: 14.6%
$45,000,000 U.S. Treasury Notes, 5.875%, 11/15/1999............................. $ 45,463,950
50,000,000 U.S. Treasury Notes, 6.375%, 1/15/2000.............................. 50,843,500
25,000,000 U.S. Treasury Notes, 6.75%, 4/30/2000............................... 25,656,250
10,000,000 U.S. Treasury Notes, 5.625%, 2/28/2001.............................. 10,200,000
6,000,000 U.S. Treasury Notes, 6.25%, 2/15/2003............................... 6,345,000
------------------
138,508,700
GOVERNMENT AGENCY: 2.8%
6,089,379 Govt. Small Business Admin. 504 Series 97-20E, 7.30%, 5/1/2017...... 6,557,896
6,524,582 Govt. Small Business Admin. 504 Series 97-20J, 6.55%, 10/1/2017..... 6,790,394
6,233,714 Govt. Small Business Admin. 504 Series 98-20C, 6.35%, 3/1/2018...... 6,434,066
7,000,000 Govt. Small Business Admin. 504 Series 98-20H, 6.15%, 8/1/2018...... 7,164,010
------------------
26,946,366
------------------
165,455,066
FEDERAL AGENCY CMO* AND REMIC**: 23.3%
255,608 FBC Mtge. Sec. Trust IV-A2, 8.30%, 8/1/2018......................... 258,003
21,000,000 Federal Home Loan Mtge. Corp., 7.10%, 11/15/2006.................... 21,262,500
10,569,811 Federal Home Loan Mtge. Corp., 8.00%, 4/15/2007..................... 10,883,523
13,000,000 Federal Home Loan Mtge. Corp., 7.00%, 9/15/2007..................... 13,373,750
13,284,798 Federal Home Loan Mtge. Corp., 6.00%, 8/15/2008..................... 13,371,946
14,100,000 Federal Home Loan Mtge. Corp., 6.00%, 10/15/2008.................... 14,188,125
40,000,000 Federal Home Loan Mtge. Corp., 6.00%, 11/15/2008.................... 40,331,200
20,000,000 Federal Home Loan Mtge. Corp., 6.50%, 4/15/2022..................... 20,468,600
10,000,000 Federal Home Loan Mtge. Corp., 6.00%, 6/17/2022..................... 9,987,500
3,000,000 Federal Natl. Mtge. Assn., 7.00%, 2/25/2007......................... 3,030,000
10,000,000 Federal Natl. Mtge. Assn., 7.00%, 7/17/2015......................... 10,165,600
17,000,000 Federal Natl. Mtge. Assn., 6.25%, 3/25/2023......................... 17,138,040
9,000,000 Federal Natl. Mtge. Assn., 6.00%, 6/25/2023......................... 9,008,370
12,616,000 Veterans Affairs Vendee Mtge. Trust, 7.00%, 6/15/2010............... 12,915,630
14,877,000 Veterans Affairs Vendee Mtge. Trust, 7.25%, 7/15/2016............... 15,095,394
10,000,000 Veterans Affairs Vendee Mtge. Trust, 8.00%, 7/15/2018............... 10,231,200
------------------
221,709,381
FEDERAL AGENCY MORTGAGE PASS-THROUGH: 17.0%
22,143 Federal Home Loan Mtge. Corp., 7.00%, 1/1/2003...................... 22,276
3,645 Federal Home Loan Mtge. Corp., 6.00%, 10/1/2003..................... 3,643
1,532,171 Federal Home Loan Mtge. Corp., 8.00%, 12/1/2003..................... 1,564,393
27,766 Federal Home Loan Mtge. Corp., 7.00%, 3/1/2006...................... 28,160
154,998 Federal Home Loan Mtge. Corp., 7.00%, 9/1/2006...................... 157,194
406,118 Federal Home Loan Mtge. Corp., 7.25%, 1/1/2008...................... 412,076
251,474 Federal Home Loan Mtge. Corp., 8.00%, 1/1/2008...................... 256,762
338,235 Federal Home Loan Mtge. Corp., 8.00%, 1/1/2008...................... 349,373
156,435 Federal Home Loan Mtge. Corp., 7.50%, 10/1/2008..................... 160,828
5,168,239 Federal Home Loan Mtge. Corp., 7.00%, 11/1/2008..................... 5,271,604
274,866 Federal Home Loan Mtge. Corp., 8.00%, 5/1/2009...................... 283,917
124,153 Federal Home Loan Mtge. Corp., 8.25%, 5/1/2009...................... 127,773
521,715 Federal Home Loan Mtge. Corp., 8.00%, 8/1/2009...................... 537,064
66,894 Federal Home Loan Mtge. Corp., 6.50%, 6/1/2012...................... 67,388
</TABLE>
See accompanying Notes to Financial Statements
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5
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D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1998
-------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS FEDERAL AGENCY MORTGAGE PASS-THROUGH (continued)
(Continued) $ 5,172,808 Federal Natl. Mtge. Assn., 7.50%, 9/1/2007.......................... $ 5,361,098
1,999,330 Federal Natl. Mtge. Assn., 6.25%, 12/1/2007......................... 2,006,248
13,873,901 Federal Natl. Mtge. Assn., 7.00%, 7/1/2008.......................... 14,143,887
12,668,726 Federal Natl. Mtge. Assn., 6.50%, 12/1/2008......................... 12,852,549
19,608,360 Federal Natl. Mtge. Assn., 5.50%, 6/1/2009.......................... 19,467,180
10,287,193 Federal Natl. Mtge. Assn., 6.50%, 7/1/2009.......................... 10,436,460
6,419,195 Federal Natl. Mtge. Assn., 8.00%, 8/1/2010.......................... 6,590,588
566,627 Federal Natl. Mtge. Assn., 7.50%, 2/1/2011.......................... 582,107
1,460,067 Federal Natl. Mtge. Assn., 8.00%, 1/1/2012.......................... 1,523,039
311,204 Federal Natl. Mtge. Assn., 6.50%, 1/1/2013.......................... 315,063
1,771,347 Federal Natl. Mtge. Assn., 8.00%, 8/1/2022.......................... 1,847,727
4,869,904 Govt. Natl. Mtge. Assn., 7.25%, 2/15/2006........................... 5,005,384
6,155,611 Govt. Natl. Mtge. Assn., 7.50%, 7/15/2007........................... 6,359,608
17,924,319 Govt. Natl. Mtge. Assn., 7.00%, 4/15/2009........................... 18,380,672
16,909,270 Govt. Natl. Mtge. Assn., 6.50%, 7/15/2009........................... 17,217,357
8,528,214 Govt. Natl. Mtge. Assn., 7.50%, 9/15/2017........................... 8,916,077
5,743,784 Veterans Affairs Vendee Mtge. Trust, 9.293%, 5/15/2025.............. 6,179,910
14,058,183 Veterans Affairs Vendee Mtge. Trust, 8.095%, 10/15/2027............. 14,993,895
------------------
161,421,300
ASSET-BACKED SECURITIES: 3.3%
10,000,000 CA Infrastructure and Econ. Dev. Bank SP Trust PGE-1 Rate Reduction
Cft. 1997-A-7, 6.42%, 9/25/2008................................... 10,403,100
7,876,000 CA Infrastructure and Econ. Dev. Bank SP Trust SCE-1 Rate Reduction
Cft. 1997-A-2, 6.14%, 3/25/2002................................... 7,906,952
13,300,000 ComEd Transitional Funding Trust Notes Series 1998 Class A-2,
5.29%, 6/25/2003.................................................. 13,283,375
------------------
31,593,427
CORPORATE: 31.9%
INDUSTRIAL: 16.0%
8,250,000 Dayton Hudson Corp., 9.00%, 10/1/2021............................... 10,750,658
20,000,000 J.E. Seagram & Sons, Inc., 7.50%, 12/15/2018........................ 20,118,200
9,750,000 Lockheed Martin Corp., 7.65%, 5/1/2016.............................. 10,858,380
10,000,000 Lockheed Martin Corp., 7.75%, 5/1/2026.............................. 11,399,600
5,000,000 May Department Stores, 7.625%, 8/15/2013............................ 5,730,100
7,500,000 May Department Stores, 7.875%, 8/15/2036, Callable 2016............. 8,569,200
20,000,000 Raychem Corp., 7.20%, 10/15/2008.................................... 20,779,000
10,000,000 Raytheon Co., 6.75%, 8/15/2007...................................... 10,587,100
12,500,000 Raytheon Co., 6.75%, 3/15/2018...................................... 12,823,000
16,600,000 Time Warner Entertainment, 8.375%, 7/15/2033........................ 20,343,964
2,500,000 Union Camp Corp., 9.25%, 2/1/2011................................... 3,067,475
15,034,000 Walt Disney Co., 7.55%, 7/15/2093, Callable 2023.................... 17,491,307
------------------
152,517,984
FINANCE: 11.9%
6,000,000 BankAmerica Capital II, 8.00%, 12/15/2026, Callable 2006++.......... 6,618,900
1,450,000 Barclays No. American Capital, 9.75%, 5/15/2021, Callable 2001...... 1,635,209
1,000,000 CIGNA Corp., 7.65%, 3/1/2023........................................ 1,043,280
5,430,000 Citicorp Capital Trust I, 7.933%, 2/15/2027, Callable 2007++........ 5,982,448
</TABLE>
See accompanying Notes to Financial Statements
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6
<PAGE>
D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1998
-------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS $ 3,065,000 Citicorp Capital Trust II, 8.015%, 2/15/2027, Callable 2007++......... $ 3,387,132
(Continued) 4,000,000 First Nationwide Bank, 10.00%, 10/1/2006.............................. 4,819,200
20,000,000 Ford Motor Credit Co., 7.20%, 6/15/2007............................... 22,034,400
13,500,000 GMAC Put Notes, 8.875%, 6/1/2010, PUTABLE 2000/2005................... 16,896,060
10,000,000 GMAC Senior Notes, 5.75%, 11/10/2003.................................. 10,077,600
4,500,000 Hartford Financial Services Group, 8.30%, 12/1/2001................... 4,820,175
10,000,000 Hartford Financial Services Group, 6.375%, 11/1/2002.................. 10,233,600
6,800,000 J.P. Morgan Capital Trust I, 7.54%, 1/15/2027, CALLABLE 2007++........ 7,125,652
5,000,000 Norwest Corp., 5.75%, 2/1/2003........................................ 5,033,400
3,375,000 Norwest Corp., 6.50%, 6/1/2005........................................ 3,513,037
5,200,000 Norwest Corp., 6.20%, 12/1/2005....................................... 5,338,372
5,000,000 Norwest Corp., 6.875%, 8/8/2006....................................... 5,333,250
----------------
113,891,715
TRANSPORTATION: 3.8%
5,630,000 Consolidated Rail Corp., 9.75%, 6/15/2020............................. 7,456,822
400,000 Norfolk & Western Railroad Equip. Tr., 10.125%, 7/1/2000.............. 426,356
1,000,000 Seaboard Coast Line Railroad Equip. Tr., 11.25%, 3/1/1999............. 1,008,810
6,450,000 Union Pacific Corp., 6.85%, 1/2/2019.................................. 6,739,283
19,903,348 Union Pacific Corp., 6.70%, 2/23/2019................................. 20,604,941
----------------
36,236,212
UTILITIES: 0.2%
1,500,000 Idaho Power Co. 1st Mtge., 9.50%, 1/1/2021, Callable 2001............. 1,656,030
----------------
304,301,941
FOREIGN (U.S. DOLLAR-DENOMINATED): 4.5%
CANADIAN CORPORATE: 3.0%
7,062,000 Canadian Pacific Ltd., 9.45%, 8/1/2021................................ 9,115,418
9,000,000 Hydro-Quebec, 8.40%, 1/15/2022........................................ 11,195,640
6,000,000 Hydro-Quebec, 9.50%, 11/15/2030....................................... 8,495,520
----------------
28,806,578
INTERNATIONAL AGENCY: 1.5%
4,150,000 European Investment Bank, 10.125%, 10/1/2000.......................... 4,502,833
8,750,000 Inter-American Development Bank, 7.125%, 3/15/2023, Callable 2003..... 9,276,662
----------------
13,779,495
----------------
42,586,073
----------------
Total Bonds (cost $889,758,618).................................. 927,067,188
----------------
SHORT-TERM 18,654,031 SSgA Prime Money Market Fund.......................................... 18,654,031
INVESTMENTS: 9,323,716 SSgA United States Treasury Money Market Fund......................... 9,323,716
2.9% ----------------
Total Short-Term Investments (cost $27,977,747).................. $27,977,747
----------------
TOTAL INVESTMENTS (cost $917,736,365)................................ 100.3% 955,044,935
OTHER ASSETS LESS LIABILITIES........................................ (0.3)% (3,085,296)
----------- ----------------
TOTAL NET ASSETS..................................................... 100.0% $951,959,639
=========== ================
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
++ Cumulative Capital Securities
</TABLE>
See accompanying Notes to Financial Statements
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7
<PAGE>
D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities December 31, 1998
-------------------------------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments, at market value (identified cost $917,736,365)......................... $955,044,935
Receivable for Fund shares sold..................................................... 235,407
Dividends and interest receivable................................................... 11,267,724
Receivable for paydowns on mortgage-backed securities............................... 137,133
Prepaid expenses.................................................................... 7,230
----------------
966,692,429
----------------
LIABILITIES:
Payable for Fund shares redeemed.................................................... 14,364,640
Management fees payable............................................................. 336,445
Accounts payable.................................................................... 31,705
----------------
14,732,790
Net asset value ----------------
per share $12.25 NET ASSETS.......................................................................... $951,959,639
================
Beneficial NET ASSETS CONSIST OF:
shares Paid in capital..................................................................... $911,333,761
outstanding Accumulated undistributed net investment income..................................... 333,313
77,720,031 Accumulated undistributed net realized gain on investments.......................... 2,983,995
(par value $0.01 Net unrealized appreciation on investments.......................................... 37,308,570
each, unlimited ----------------
shares authorized) $951,959,639
================
</TABLE>
See accompanying Notes to Financial Statements
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D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Statement of Operations Year Ended December 31, 1998
-------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest............................................................................. $54,475,080
---------------
EXPENSES:
Management fees (Note 2)............................................................. 3,467,781
Custodian and fund accounting fees................................................... 70,992
Transfer agent fees.................................................................. 113,088
Audit fees........................................................................... 39,833
Legal fees........................................................................... 7,578
Shareholder reports.................................................................. 70,861
Registration fees.................................................................... 117,742
Trustees' fees (Note 2).............................................................. 14,000
Miscellaneous........................................................................ 29,980
---------------
3,931,855
---------------
NET INVESTMENT INCOME................................................................ 50,543,225
---------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments................................................... 4,766,489
Net unrealized appreciation on investments......................................... 10,871,148
---------------
Net realized and unrealized gain on investments.................................. 15,637,637
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................. $66,180,862
===============
</TABLE>
See accompanying Notes to Financial Statements
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9
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D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Year Ended December 31, 1998
-------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
OPERATIONS:
Net investment income................................................. $ 50,543,225 $ 39,076,534
Net realized gain..................................................... 4,766,489 2,852,710
Net unrealized appreciation........................................... 10,871,148 19,007,311
------------- -------------
Net increase in net assets from operations............................ 66,180,862 60,936,555
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................. (50,793,711) (38,884,448)
Net realized gain..................................................... (4,501,063) (4,666)
------------- -------------
Total distributions................................................... (55,294,774) (38,889,114)
------------- -------------
BENEFICIAL SHARE TRANSACTIONS:
Amounts received from sale of shares.................................. 454,714,046 261,691,475
Net asset value of shares issued in reinvestment of distributions..... 35,771,573 23,196,538
Amounts paid for shares redeemed...................................... (254,862,156) (134,325,526)
------------- -------------
Net increase from beneficial share transactions....................... 235,623,463 150,562,487
------------- -------------
Total increase in net assets.......................................... 246,509,551 172,609,928
NET ASSETS:
Beginning of year..................................................... 705,450,088 532,840,160
------------- -------------
End of year (including undistributed net investment income of
$333,313 and $583,799, respectively).................................. $ 951,959,639 $ 705,450,088
============= =============
Shares sold........................................................... 37,288,086 22,208,423
Shares issued in reinvestment of distributions........................ 2,942,520 1,972,984
Shares redeemed....................................................... (20,919,560) (11,387,493)
------------- -------------
Net increase in shares outstanding.................................... 19,311,046 12,793,914
============= =============
</TABLE>
See accompanying Notes to Financial Statements
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D O D G E & C O X
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Income Fund
Notes to Financial Statements
------------------------------------------------------------------
1 Dodge & Cox Income Fund (the "Fund") reorganized on April 30, 1998,
and became a separate series of Dodge & Cox Funds (the "Trust"), in
accordance with a plan of reorganization approved by the Fund's
shareholders on January 30, 1998. The Trust is organized as a
Delaware business trust and is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund consistently follows
accounting policies which are in conformity with generally accepted
accounting principles. Significant accounting policies are as
follows: (a) Security valuation: long-term debt securities are
priced on the basis of valuations furnished by pricing services
which utilize both dealer-supplied valuations and electronic data
processing techniques; securities for which market quotations are
not readily available are valued at fair value as determined in
good faith by or at the direction of the Board of Trustees; short-
term securities are valued at amortized cost which approximates
current value; all securities held by the Fund are denominated in
U.S. dollars. (b) Security transactions are accounted for on the
trade date in the financial statements. (c) Gains and losses on
securities sold are determined on the basis of identified cost. (d)
Interest income is recorded on the accrual basis. Premiums and
discounts on debt securities purchased are amortized and accreted,
respectively, to interest income over the lives of the respective
securities. (e) Distributions to shareholders of income and capital
gains are reflected in the net asset value per share computation on
the ex-dividend date. (f) No provision for Federal income taxes has
been included in the accompanying financial statements since the
Fund intends to distribute all of its taxable income and otherwise
continue to comply with requirements for regulated investment
companies.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
2 Under a written agreement, the Fund pays an annual management fee
of 5/10 of 1% of the Fund's average daily net asset value up to
$100 million and 4/10 of 1% of the Fund's average daily net asset
value in excess of $100 million to Dodge & Cox, investment manager
of the Fund. The agreement further provides that Dodge & Cox shall
waive its fee to the extent that such fee plus all other ordinary
operating expenses of the Fund exceed 1% of the average daily net
asset value for the year. All officers and seven of the trustees of
the Trust are officers and employees of Dodge & Cox. Those trustees
who are not affiliated with Dodge & Cox receive from the Trust an
annual fee plus an attendance fee for each Board or Committee
meeting attended. Payments to trustees are divided equally among
each series of the Trust. The Trust does not pay any other
remuneration to its officers or trustees.
3 For the year ended December 31, 1998, purchases and sales of
securities, other than short-term securities, aggregated
$526,024,387 and $281,969,228, respectively, of which U.S.
government obligations aggregated $375,270,333 and $220,730,288,
respectively. At December 31, 1998, the cost of investments for
Federal income tax purposes was equal to the cost for financial
reporting purposes. Net unrealized appreciation aggregated
$37,308,570, of which $37,646,790 represented appreciated
securities and $338,220 represented depreciated securities.
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D O D G E & C O X
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Income Fund
Financial Highlights
------------------------------------------------------------------------
SELECTED DATA AND RATIOS (For a Share Outstanding Throughout Each Year)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.08 $11.68 $12.02 $10.74 $11.89
Income from investment operations:
Net investment income .72 .73 .74 .78 .77
Net realized and unrealized gain (loss) .23 .40 (.34) 1.34 (1.11)
------ ------ ------ ------ ------
Total from investment operations .95 1.13 .40 2.12 (.34)
------ ------ ------ ------ ------
Distributions to shareholders from:
Net investment income (.72) (.73) (.74) (.78) (.76)
Net realized gain (.06) -- -- (.06) (.05)
------ ------ ------ ------ ------
Total distributions (.78) (.73) (.74) (.84) (.81)
------ ------ ------ ------ ------
Net asset value, end of year $12.25 $12.08 $11.68 $12.02 $10.74
====== ====== ====== ====== ======
Total return 8.08% 10.00% 3.62% 20.21% (2.89)%
Ratios/supplemental data:
Net assets, end of year (millions) $ 952 $ 705 $ 533 $ 303 $ 195
Ratio of expenses to average net assets .47% .49% .50% .54% .54%
Ratio of net investment income to average net assets 6.00% 6.32% 6.65% 6.85% 6.90%
Portfolio turnover rate 35% 28% 37% 53% 55%
</TABLE>
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D O D G E & C O X
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Income Fund
Report of Independent Accountants
------------------------------------------------------------------
To the Trustees of Dodge & Cox Funds and Shareholders of Dodge &
Cox Income Fund
In our opinion, the accompanying statement of assets and
liabilities, including the portfolio of investments, and the
related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects,
the financial position of the Dodge & Cox Income Fund (the "Fund",
one of the series constituting Dodge & Cox Funds) at December 31,
1998, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years
in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is
to express an opinion on these financial statements based on our
audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31,
1998 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 26, 1999
-----------------------------------------------------------------
Special 1998 Tax Information (unaudited)
The following information is provided pursuant to provisions of the
Internal Revenue Code:
The Fund's distributions to shareholders included $1,134,730 from
long-term capital gains, all of which was subject to Federal income
tax at a maximum rate of 20%.
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D O D G E & C O X
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Income Fund
General Information
-----------------------------------------------------------------
Investment Since 1930, Dodge & Cox has been providing professional
Manager investment management for individuals, trustees, corporations,
pension and profit-sharing funds, and charitable institutions.
Dodge & Cox manages the Dodge & Cox Income Fund, the Dodge & Cox
Balanced Fund and the Dodge & Cox Stock Fund.
No-Load Fund Shares of the Fund are purchased and redeemed at net asset value.
There are no sales, redemption or rule 12b-1 plan distribution
charges.
Gifts Fund shares provide a convenient method for making gifts to
children and to other family members. Shares may be held by an
adult custodian for the benefit of a minor under a Uniform
Gifts/Transfers to Minors Act. Trustees and guardians may also
hold shares for a minor's benefit.
Automatic Shareholders may make regular monthly or quarterly investments of
Investment $100 or more through automatic deductions from their bank
Plan accounts.
Withdrawal Shareholders owning $10,000 or more of the Fund's shares may
Plan elect to receive periodic monthly or quarterly payments of at
least $50.
Reinvestment Shareholders may direct that dividend and capital gains
Plan distributions be reinvested in additional Fund shares.
The above plans are completely voluntary and involve no service
charge of any kind.
IRA Plan The Fund has a Traditional and Roth Individual Retirement Account
Plan (IRA) available for shareholders of the Fund.
- --------------------------------------------------------------------------------
PREPARING FOR THE YEAR 2000
The Fund's key service providers--Dodge & Cox, the investment manager; Boston
Financial Data Services Inc., the transfer agent; and State Street Bank and
Trust Company, the custodian and fund accountant--are taking steps that each
believes are reasonably designed to address the Year 2000 issue with respect to
the systems that they use. For example, the service providers have established
comprehensive Year 2000 readiness programs to identify, evaluate and resolve
Year 2000 readiness issues. The service providers' Year 2000 efforts are
progressing steadily and considerable progress has been made to date. The Funds
believe these steps will be sufficient to avoid any material adverse impact on
the Funds, although there can be no assurances to that effect. Additional
information on Year 2000 preparations can be found on the Fund's web site at
www.dodgeandcox.com.
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