DODGE & COX FUNDS, N-30B-2, 1999-11-16

DODGE & COX FUNDS
N-30B-2, 1999-11-16

Previous: VERITAS DGC INC, 424B5, 1999-11-16

Next: DONALDSON LUFKIN & JENRETTE INC /NY/, 424B3, 1999-11-16

<PAGE>

D O D G E & C O X D O D G E & C O X
----------------- -----------------
Stock Fund
Stock Fund
Investment Manager Established 1965
Dodge & Cox
One Sansome Street -----------------
35th Floor -----------------
San Francisco,
California 94104-4443
(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

-------------------
Third Quarter Report
This report is submitted for the general September 30, 1999
information of the shareholders of the Fund.
The report is not authorized for distribution -----------------
to prospective investors in the Fund unless -----------------
it is accompanied by a current prospectus. -----------------

-------------------

9/99 SF QR Printed on recycled paper
<PAGE>

D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Stock Fund

To Our Shareholders
- --------------------------------------------------------------------------------

The Dodge & Cox Stock Fund had a negative total return of -8.4% for the third
quarter of 1999 and a positive return of +11.7% for the first nine months of the
year. These results compare to -6.2% and +5.4% for the Standard & Poor's 500
Index (S&P 500) for the same time periods, respectively. Longer-term results for
the Fund appear on page three of this report. At quarter end, the Fund's $4.3
billion in assets were invested 96% in equities and 4% in cash equivalents.

Investment Returns and Current Strategy

The equity market was negatively affected in the third quarter by growing
concern about the outlook for corporate profits, most noticeably for companies
in the consumer and finance sectors.

Several factors contributed positively to ----------------------------------
the Fund's performance relative to the S&P Constructing the Portfolio
500 during the quarter. While the overall One Stock at a Time
finance sector was quite weak, our stock
selection in banks and insurance was a We generally discuss our strategy
positive. The Fund's low representation and results in terms of the
in healthcare/pharmaceuticals and telecom broad investment themes in our
services was also a positive factor, as portfolio; the themes, however,
these industry groups were weak performers are the result of selecting one
in the S&P 500. The Fund's lack of exposure company at a time.
to large capitalization higher-valuation
technology stocks was a negative factor, We make thoughtful decisions
as a number of these stocks in the S&P 500 whether to become part-owner in a
performed well. company. Purchase or sale is based
on the company's current stock
Our strong price discipline and independent price, compared to our analysis of
research drive our individual stock the earnings opportunities,
selection. While investor expectations, business environment and financial
and hence, stock prices, have changed risks over a three to five-year
considerably during the course of the year, time horizon.
our portfolio structure has remained much ----------------------------------
the same over this recent period. We continue to emphasize the lower-valuation
portion of the technology and industrial materials (chemicals, metals) sectors
in the Fund. Combined holdings in these two broad industries comprise about
one-third of the Fund. Our position in energy stocks is also higher than the
corresponding weight in the S&P 500. The Fund's portfolio continues to be
diversified across economic sectors, with 75 individual holdings.

We continue to have minimal investment in the high-valuation "growth" stocks.
These companies' premium valuations incorporate investor expectations for growth
and profits that we believe may prove to be overly optimistic. Many of these
high-valuation companies are in technology, communications, pharmaceutical,
consumer and various industrial "growth" stocks which together represent a large
percentage of the market capitalization of the S&P 500.

A Value Investor in Silicon Valley

As a firm residing in downtown San Francisco, we are located just north of
"Silicon Valley", or perhaps at the new northern edge of the Valley, since San
Francisco has become an important site for many Internet startup companies.
Driving from San Jose to San Francisco, almost all of the billboards advertise
Somebody.com. The robust local economy has caused our real estate prices to rise
to stratospheric levels. The national media hype has become glaring, with front
cover articles in most business magazines and several books on the best seller
list. While the concept of a "value investor" is not typically viewed as
synonymous with "high-tech investing", we would like to share our thoughts with
you, as we sit in the middle of this boom.

The case for technology...

It is clear to the most casual observer that technological innovation has an
enormous positive impact on the broad economy. Specifically, the effect of the
declining cost of technology--both for computing power and for communications--
means steadily broader and more pervasive usage across even the most established
industries. Technology is increasingly substituted for labor and alternative
capital assets. The bottom-line effect is this: companies which "create" and/or
innovatively "use" technology will continue to represent a growing portion of
our country's GDP. We believe that, as equity investors, we must be certain that
our client's investment dollar is well represented in this important and growing
area. We continue to spend significant time and energy in understanding the
investment prospects of technology, as we have for many years. Currently, about
15% of the Fund's assets are invested in companies which are primary innovators
of computing and communications, and a significantly larger portion invested in
companies which we believe are creative users of technology in their respective
industries.

...the fundamental dilemma...

However, there is a complicating factor for a "value buyer"--investors have
become enamored of technology. Even though the technology sector began the year
sporting relatively high valuations, it is one of the strongest performing areas
of the market year-to-date. Nearly one-third of the market capitalization of the
S&P 500 is in computing and communications, and some of the market's highest
single valuations are in this area.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

1
<PAGE>

- --------------------------------------------------------------------------------

The investment dilemma is this: in an industry of extremely rapid change, which
thrives on the dynamics of "creative destruction", it is difficult (if not
impossible) to tell who the ultimate winners will be. A company's success draws
immediate competition and much venture capital investment. With hindsight, one
can see that market positions which once appeared secure, later prove to have
been assailable after all. What will happen in the next three, five or seven
years? The answer is that nobody knows. Two classic errors of forecasting are
overemphasizing recent data and underestimating the range of future outcomes.
We believe that investors often make these errors today. We need to look no
further than the president of Microsoft, Steven Ballmer, who commented last
month: "There's such an overvaluation of tech stocks it's absurd, and I'd put
our company's stock in that category."

Looking back over the path of a previous market favorite, we see the degree to
which both the business environment and investor perceptions can change. At the
end of 1985, IBM was broadly viewed to have core competencies in virtually all
key areas of hardware and software. These strengths, coupled with its dominant
market position built over many decades, established the widely held belief that
the company would be a clear industry winner. At the time, the market
capitalization of that single company represented 6.3% of the S&P 500 and nearly
60% of the technology sector. Yet the fastest industry growth evolved in areas
other than IBM's core strengths, and the company struggled with internal
problems as well. Seven years later IBM hit a low of 0.9% of the S&P 500, and
while results have improved dramatically from the low point in the mid-90's,
even today its value is 2% of the S&P 500 and approximately 9% of the technology
sector.

...our position.

In view of the industry's bright prospects, investors have bid up many
technology stocks to levels which, in our opinion, are overvalued and even
speculatively priced. As a value investor, how can we participate and still
maintain our price discipline? We search for companies with durable business
franchises, strong core competencies and capable management teams, that are
selling at low-to-average valuations relative to the technology sector and to
the market. We take a long-term view; we are thorough in our analysis and
patient in waiting for results. For us, these are the elements of success as a
value investor in the technology industry.

Often, disappointment creates the opportunity. Our task is to evaluate whether
the disappointment is short-lived. There have been a number of "buy
opportunities" during this past year. For example, Motorola, an industry leader
in wireless communications, came under great pressure last year. Sales and
earnings were depressed due to the Asian economic downturn, weakness in
semiconductors and a slow transition to digital products. While we believed the
company's long-term growth opportunities remained intact, the stock price
declined to a valuation significantly below that of the market, and we added to
the Fund's holdings. Another example is National Semiconductor, a holding that
has helped the Fund's performance this year. The company's stock price was
quite depressed in the spring of this year, as results from the firm's highly
profitable business--analog semiconductors--were offset by losses in their
microprocessor segment. The stock price drifted lower as the microprocessor
operation lost more money, hiding the growth and profitability of the analog
business. Management responded to the pressure by disposing of the
disappointing segment. At the same time, growth in wireless communications
markets generated increased demand for National Semi's analog products, creating
significant appreciation in the stock price since that time. More recently,
with the higher stock prices, we have trimmed positions in both of the above-
mentioned companies.

In Closing

The current environment is extraordinary in that a small number of stocks are
having a disproportionate impact on the broad market. Included in this group are
a handful of highly-valued technology firms. We do not believe that this can
persist over the long term. While we are skeptical about the potential returns
from an investment in these stocks, we are very positive on the technology
industry. Looking out over the next three to five years, we believe that the
Fund's diversified portfolio is well positioned; our focus is on reasonably-
valued solid business franchises, and we are optimistic about the potential for
an extended period of growth in the global economy.

Thank you for your continued confidence in the Dodge & Cox Stock Fund. As
always, we welcome your comments and questions.

For the Board of Trustees,

/s/ Harry R. Hagey
---------------------------
October 29, 1999 Harry R. Hagey, Chairman

/s/ John A. Gunn
---------------------------
John A. Gunn, President

2
<PAGE>

Objective The Fund seeks long-term growth of principal and income. A
secondary objective is to achieve a reasonable current income.

Strategy The Fund invests primarily in a broadly diversified and carefully
selected portfolio of common stocks. In selecting investments,
the Fund invests in companies that, in Dodge & Cox's opinion,
appear to be temporarily undervalued by the stock market but have
a favorable outlook for long-term growth. The Fund focuses on the
underlying financial condition and prospects of individual
companies. Future earnings and dividends are major considerations
in selecting companies. Companies are also selected with an
emphasis on financial strength and sound economic background.

<TABLE>
<CAPTION>
Ten Years of Investment Performance through September 30, 1999
- --------------------------------------------------------------------------------

[LINE GRAPH APPEARS HERE]

DODGE & COX
STOCK FUND S&P 500
---------- ----------
<S> <C> <C>
10/1/1989 $10,000 $10,000
9/30/1990 $ 8,843 $ 9,075
9/30/1991 $11,442 $11,904
9/30/1992 $12,352 $13,221
9/30/1993 $15,315 $14,938
9/30/1994 $16,342 $15,488
9/30/1995 $20,955 $20,096
9/30/1996 $24,419 $24,180
9/30/1997 $34,665 $33,953
9/30/1998 $31,770 $37,030
9/30/1999 $40,190 $47,318
</TABLE>
<TABLE>
Average annual total return for
periods ended September 30, 1999 1 Year 5 Years 10 Years 20 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Stock Fund 26.51% 19.72% 14.93% 16.70%
S&P 500 27.79 25.03 16.81 17.05
</TABLE>

The chart covers the period from October 1, 1989 to September 30, 1999. It
compares a $10,000 investment made in the Dodge & Cox Stock Fund to a $10,000
investment made in the S&P 500 Index. The S&P 500 is a widely recognized,
unmanaged index of common stock prices. The Fund's total returns include the
reinvestment of dividend and capital gain distributions. 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.

3
<PAGE>

Fund Information September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $98.90
Total Net Assets (millions) $4,347
1998 Expense Ratio 0.57%
1998 Portfolio Turnover 19%
30 Day SEC Yield/1/ 1.50%
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
- --------------------------------------------------------------------------------

[PIE CHART APPEARS HERE]
<S> <C>
Stocks: 95.9%
Short-Term Investments: 4.1%
</TABLE>

<TABLE>
<CAPTION>
Stock Characteristics
- --------------------------------------------------------------------------------
<S> <C>
Number of Stocks 75
Median Market Capitalization $7.6 billion
Price to Earnings Ratio/2/ 21.5x
Price to Book Value 2.3x
Foreign Stocks/3/ (as percentage of Fund) 12%
</TABLE>

<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
Alcoa 3.1
Sony ADR 2.8
Motorola 2.7
Dow Chemical 2.4
Kmart 2.4
FDX Corp. 2.4
Union Pacific 2.3
Golden West Financial 2.3
Rio Tinto PLC 2.2
General Motors 2.2
</TABLE>

<TABLE>
<CAPTION>
Ten Largest Sectors % of Fund
- --------------------------------------------------------------------------------
<S> <C>
Energy 12.8
Electronics & Computer 11.1
Insurance & Financial Services 7.0
Banking 6.9
Transportation 6.1
Consumer Durables 5.7
General Industrial 5.6
Metals & Mining 5.3
Chemicals 5.2
Retail & Distribution 5.0
</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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

4
<PAGE>

Portfolio of Investments September 30, 1999
- --------------------------------------------------------------------------------
Percentage of Fund
<S> <C>
COMMON STOCKS: 93.9%

CONSUMER: 18.8%
CONSUMER DURABLES: 5.7%
General Motors Corp................................................ 2.2
Whirlpool Corp..................................................... 1.5
Ford Motor Co...................................................... 1.2
Delphi Automotive Systems Corp..................................... 0.8

RETAIL AND DISTRIBUTION: 5.0%
Kmart Corp......................................................... 2.4
Genuine Parts Co................................................... 1.1
Nordstrom, Inc..................................................... 0.9
Dillard's, Inc. Class A............................................ 0.6

HEALTHCARE AND PHARMACEUTICAL: 4.9%
Pharmacia & Upjohn, Inc............................................ 2.0
Becton, Dickinson & Co............................................. 1.0
Bausch & Lomb, Inc................................................. 1.0
First Health Group Corp............................................ 0.5
WellPoint Health Networks, Inc..................................... 0.4

CONSUMER PRODUCTS: 2.0%
Fort James Corp.................................................... 1.0
Dole Food Co., Inc................................................. 0.5
Mattel, Inc........................................................ 0.5

MEDIA AND LEISURE: 1.2%
R.R. Donnelley & Sons Co........................................... 1.2

INDUSTRIAL COMMODITIES: 15.9%
METALS AND MINING: 5.3%
Alcoa, Inc......................................................... 3.1
Rio Tinto PLC...................................................... 2.2

CHEMICALS: 5.2%
Dow Chemical Co.................................................... 2.4
Nalco Chemical Co.................................................. 0.9
Union Carbide Corp................................................. 0.8
Eastman Chemical Co................................................ 0.7
Lubrizol Corp...................................................... 0.2
NOVA Chemicals Corp................................................ 0.2

PAPER AND FOREST PRODUCTS: 4.4%
Weyerhaeuser Co.................................................... 1.6
Champion International Corp........................................ 1.5
International Paper Co............................................. 0.7
Boise Cascade Corp................................................. 0.6

GENERAL MANUFACTURING: 1.0%
Archer Daniels Midland Co.......................................... 1.0

TECHNOLOGY: 15.8%
ELECTRONICS & COMPUTER: 11.1%
Motorola, Inc...................................................... 2.7
Hewlett-Packard Co................................................. 1.9
Electronic Data Systems............................................ 1.7
National Semiconductor Corp........................................ 1.1
NCR Corp........................................................... 1.1
Storage Technology Corp............................................ 0.9
Xerox Corp......................................................... 0.7
Thermo Electron Corp............................................... 0.7
Sybase, Inc........................................................ 0.3

CONSUMER ELECTRONICS: 4.7%
Sony Corp. ADR..................................................... 2.8
Matsushita Electric Industrial Co., Ltd. ADR....................... 1.9

FINANCE: 15.1%
INSURANCE AND FINANCIAL SERVICES: 7.0%
Citigroup, Inc..................................................... 1.9
American Express Co................................................ 1.8
Loews Corp......................................................... 1.3
The St. Paul Cos., Inc............................................. 1.3
Chubb Corp......................................................... 0.7

BANKING: 6.9%
Golden West Financial Corp......................................... 2.3
Republic New York Corp............................................. 2.0
Wells Fargo & Co................................................... 1.3
Bank of America Corp............................................... 1.3

REAL ESTATE INVESTMENT TRUST: 1.2%
Equity Residential Properties Trust................................ 0.8
Equity Office Properties Trust..................................... 0.4

ENERGY: 12.8%
Occidental Petroleum Corp.......................................... 1.7
Amerada Hess Corp.................................................. 1.7
Unocal Corp........................................................ 1.6
Phillips Petroleum Co.............................................. 1.5
Baker Hughes, Inc.................................................. 1.5
Chevron Corp....................................................... 1.5
Union Pacific Resources Group, Inc................................. 1.4
Royal Dutch Petroleum Co........................................... 1.0
Schlumberger Ltd................................................... 0.9
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

5
<PAGE>

Portfolio of Investments September 30, 1999
- --------------------------------------------------------------------------------
Percentage of Fund
<S> <C>
COMMON STOCKS (Continued)

TRANSPORTATION: 6.1%
FDX Corp.......................................................... 2.4
Union Pacific Corp................................................ 2.3
Canadian Pacific Ltd.............................................. 1.4

GENERAL INDUSTRIAL: 5.6%
Deere & Co........................................................ 1.6
Lockheed Martin Corp.............................................. 1.3
Fluor Corp........................................................ 1.3
Caterpillar, Inc.................................................. 1.2
Unova, Inc........................................................ 0.2

ELECTRIC AND GAS UTILITIES: 3.8%
Central & South West Corp......................................... 1.0
Texas Utilities Co................................................ 0.8
FPL Group, Inc.................................................... 0.7
Wisconsin Energy Corp............................................. 0.7
Ameren Corp....................................................... 0.6

PREFERRED STOCKS: 2.0%

CONSUMER: 2.0%
News Corp. Ltd., Limited Voting Ordinary Shares ADR............... 2.0

SHORT-TERM INVESTMENTS: 4.4%

OTHER ASSETS LESS LIABILITIES: (0.3)%

TOTAL NET ASSETS: 100.0%
</TABLE>

The financial information has been taken from the records of the Fund and has
not been audited by our independent accountants who do not express an opinion
thereof. The financial statements of the Fund will be subject to audit by our
independent accountants as of the close of the calendar year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

6
<PAGE>

Officers and Trustees
- --------------------------------------------------------------------------------
Harry R. Hagey, Chairman & Trustee
Chairman & CEO, Dodge & Cox

John A. Gunn, President & Trustee
President, Dodge & Cox

A. Horton Shapiro, Executive Vice President & Trustee
Senior Vice President, Dodge & Cox

W. Timothy Ryan, Treasurer, Secretary & Trustee
Senior Vice President, Dodge & Cox

Katherine Herrick Drake, Vice President & Trustee
Vice President, Dodge & Cox

Dana M. Emery, Vice President & Trustee
Senior Vice President, Dodge & Cox

Kenneth E. Olivier, Vice President & Trustee
Senior Vice President, Dodge & Cox

L. Dale Crandall, Trustee
Executive Vice President & CFO, Kaiser Foundation Health Plan and Hospitals

Max Gutierrez, Jr., Trustee
Partner, Brobeck, Phleger & Harrison, Attorneys

John B. Taylor, Trustee
Professor of Economics, Stanford University

Will C. Wood, Trustee
Principal, Kentwood Associates, Financial Advisers

Thomas M. Mistele, Asst. Secretary & Asst. Treasurer
Vice President & General Counsel, Dodge & Cox

D O D G E & C O X D O D G E & C O X
----------------- -----------------
Balanced Fund
Balanced Fund
Investment Manager Established 1931
Dodge & Cox
One Sansome Street -----------------
35th Floor -----------------
San Francisco,
California 94104-4443
(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

-------------------

9/99 BF QR Printed on recycled paper
<PAGE>

To Our Shareholders
- --------------------------------------------------------------------------------

The Dodge & Cox Balanced Fund had a negative total return of -5.3% for the third
quarter of 1999 and a positive return of +7.0% for the first nine months of the
year. These results compare to -3.5% and +3.0% for the Combined Index* for the
same time periods, respectively. Longer-term results for the Fund appear on
page three of this report. The Fund ended the third quarter with total net
assets of $5.2 billion; 60.7% of assets were invested in equities, 37.9% were
invested in fixed-income securities and 1.4% in cash equivalents.

Equity Investment Returns and Current Strategy

The performance of the Fund's equity portfolio was modestly behind the S&P 500's
- -6.2% return during the third quarter. The equity market was negatively affected
by concern about the outlook for corporate profits, most noticeably for
companies in the consumer and finance sectors. While the overall finance sector
was weak, our stock selection in banks and insurance had a positive impact on
relative returns. The Fund's low representation in healthcare/pharmaceuticals
and telecom services was also a positive factor, as these industry groups were
weak performers. Large capitalization higher-valuation technology stocks
performed well; the Fund's lack of exposure hurt performance relative to the S&P
500.

While investor expectations, and hence, stock prices, have changed considerably
during the course of the year, our portfolio structure has remained much the
same over this recent period. We continue to emphasize the lower-valuation
portion of the technology and industrial materials (chemicals, metals) sectors
in the Fund. The Fund's position in energy stocks is also higher than the
corresponding weight in the S&P 500. We continue to have minimal investment in
the high-valuation "growth" stocks. The companies' premium valuations
incorporate investor expectations for growth and profits that we believe may
prove to be overly optimistic. Many of these high-valuation companies are in
technology, communications, pharmaceutical, consumer and various industrial
"growth" stocks which together represent a large percentage of the market
capitalization of the S&P 500.

A Value Investor in Silicon Valley

As a firm residing in downtown San Francisco, we are located just north of
"Silicon Valley," or perhaps at the new northern edge of the Valley, since San
Francisco has become an important site for many Internet startup companies. The
national media hype has become glaring, with front cover articles in most
business magazines and several books on the best seller list. While the concept
of a "value investor" is not typically viewed as synonymous with "high-tech
investing," we would like to share our thoughts with you, as we sit in the
middle of this boom.

The case for technology...

It is clear to the most casual observer that technological innovation has an
enormous positive impact on the broad economy. Specifically, the effect of the
declining cost of technology--both for computing power and for communications--
means steadily broader and more pervasive usage across even the most established
industries. The bottom line effect is this: companies that "create" and/or
innovatively "use" technology will continue to represent a growing portion of
our country's GNP. We believe that, as equity investors, we must be certain
that our client's investment dollar is well represented in this important and
growing area. Currently, about 15% of the Fund's equity assets are invested in
companies which are primary innovators of computing and communications, with a
significantly larger portion invested in companies which we believe are creative
users of technology in their respective industries.

...our position.

Often, disappointment creates the opportunity. Our task is to evaluate whether
the disappointment is short-lived. For example, Motorola, an industry leader
in wireless communications, came under great pressure last year. Sales and
earnings were depressed due to the Asian economic downturn, weakness in
semiconductors and a slow transition to digital products. While we believed
the company's long-term growth opportunities remained intact, the stock price
declined to a valuation significantly below that of the market, and we added
to the Fund's holdings. More recently, Motorola's share price has risen, and
we have trimmed our position.

* The Combined Index reflects an unmanaged portfolio of 60% Standard & Poor's
500 Index (S&P 500) and 40% Lehman Brothers Aggregate Bond Index (LBAG).

1
<PAGE>

- --------------------------------------------------------------------------------

Recent Fixed-Income Results

Interest rates rose slightly in the third quarter, with the yield on the
benchmark two-year and thirty-year U.S. Treasuries each rising 8 basis points
(one basis point is equal to 1/100 of 1%), ending the quarter at 5.60% and 6.05%
respectively. The relatively modest shift in Treasury yields accompanied the
general view that, despite persistent strength in the economy, further
productivity growth may allow economic strength to coexist with price stability.
Real gross domestic product increased at a 1.6% annualized rate in the second
quarter, following a 4.3% annualized increase in the first quarter; meanwhile,
unemployment remained at an almost three-decade low of 4.2%. The Federal Reserve
left interest rates unchanged in the first week of October, citing productivity
gains as a major factor.

Total return for the Fund's fixed-income portfolio was positive, but slightly
behind the Lehman Brothers Aggregate Bond Index's (LBAG) +0.7% return during
the third quarter. The general rise in interest rates caused prices of fixed-
income securities to decline. Due to a lower sensitivity to interest rate
changes, as measured by effective duration, the fixed-income portion of the
Fund experienced less of a price decline from rising rates than did the LBAG.
Our overweight position in the corporate area and focus on longer-duration
corporate securities had a negative impact on relative performance, as yield
premiums widened in the corporate sector. The Fund's fixed-income portfolio
benefited from an overweight position in mortgage-backed securities and a
slightly higher yield than the LBAG.

Anticipating Higher Inflation

Despite the rise in Treasury yields since December 31, 1998, we continue to
maintain a shorter duration than that of the broad bond market as measured by
the LBAG. In making this decision, we look at various economic factors to
develop a range of inflation forecasts. We then simulate portfolio returns over
three to five years under a wide range of interest rate and inflation scenarios.
These simulations illustrate the probability of producing positive real returns
with portfolios of varying duration. This analysis is the primary input in our
determination of the portfolio duration. While seeking the most attractive
securities to hold, we target this level of interest rate exposure for the total
portfolio. Due to our concerns about higher future inflation and its potential
impact on the real return of fixed-income securities, we continue to maintain
the Fund's duration below that of the LBAG.

Also in response to these concerns, we continue to invest a portion of the
Fund in Treasury Inflation Protection Securities (TIPS). TIPS investors
receive inflation protection through an adjustment to the principal amount
that they hold. The principal value of TIPS is adjusted by an amount equal to
inflation as measured by the consumer price index (CPI). For example, an
investor holding $1,000 par at the beginning of the year would hold $1,020 at
the end of the year if the level of the CPI were to increase by 2.0%. The
coupon remains a fixed percentage (3.875% for example), but the dollar amount
of each coupon payment would increase in this example to reflect the higher
principal amount. If the CPI falls (the general level of prices declines) the
par value and the dollar amount of the coupon payment would also fall;
however, to protect investors from the negative effects of "deflation", the
Treasury guarantees* at least the original face amount at maturity. These
securities trade at a real (inflation-adjusted) yield of 4.07% as of September
30, 1999 for both ten-year and thirty-year maturities. We believe that this
real yield is very attractive relative to the historical real total return an
investor would have achieved by investing in short-duration U.S. Treasury
securities.

In Closing

Thorough, fundamental research remains a hallmark of our investment philosophy.
We believe that our long-term, focused and disciplined approach to security
selection in both the equity and fixed-income markets will prove beneficial to
our shareholders in a variety of market environments.

Thank you for your continued confidence in the Dodge & Cox Balanced Fund. As
always, we welcome your comments and questions.

For the Board of Trustees,

/s/ Harry R. Hagey
-------------------------
Harry R. Hagey, Chairman

October 29, 1999

* The Fund's yield and share price are not guaranteed and may vary with market
conditions.

2
<PAGE>

Objective The Fund seeks regular income, conservation of principal and an
opportunity for long-term growth of principal and income.

Strategy The Fund invests in a diversified portfolio of common stocks,
preferred stocks and bonds.

Stocks: The Fund invests in well-established companies that, in
Dodge & Cox's opinion, appear to be temporarily undervalued by
the stock market but have a favorable outlook for long-term
growth. The Fund focuses on the underlying financial condition
and prospects of individual companies. 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
investments include investment-grade: U.S. government
obligations, mortgage and asset-backed securities, corporate
bonds, collateralized mortgage obligations (CMOs) and others.

Ten Years of Investment Performance through September 30, 1999
- --------------------------------------------------------------------------------

[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
COMBINED DODGE & COX
S&P 500 INDEX BALANCED FUND LBAG
---------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
10/1/1989 $10,000 $10,000 $10,000 $10,000
9/30/1990 $ 9,075 $ 9,737 $ 9,632 $10,755
9/30/1991 $11,904 $12,179 $12,015 $12,476
9/30/1992 $13,221 $13,614 $13,382 $14,042
9/30/1993 $14,938 $15,225 $15,889 $15,443
9/30/1994 $15,488 $15,365 $16,416 $14,945
9/30/1995 $20,096 $18,942 $20,171 $17,048
9/30/1996 $24,180 $21,593 $22,607 $17,879
9/30/1997 $33,953 $27,538 $29,177 $19,621
9/30/1998 $37,030 $30,467 $28,738 $21,880
9/30/1999 $47,318 $35,338 $33,371 $21,797
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for
periods ended September 30, 1999 1 Year 5 Years 10 Years 20 Years
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 16.14% 15.25% 12.80% 13.93%
Combined Index 15.99 18.13 13.46 14.42
S&P 500 27.79 25.03 16.81 17.05
Lehman Brothers Aggregate Bond Index (LBAG) -0.37 7.84 8.10 9.87
</TABLE>

The chart covers the period from October 1, 1989 to September 30, 1999. It
compares a $10,000 investment made in the Dodge & Cox Balanced Fund to $10,000
investments made in the S&P 500, the LBAG and the Combined Index. The S&P 500
and LBAG are widely recognized, unmanaged indices of common stock and U.S.
dollar-denominated, investment-grade fixed-income securities, respectively. The
Combined Index reflects an unmanaged portfolio of 60% of the S&P 500 and 40% of
the LBAG. The Fund may, however, invest up to 75% of its total assets in stocks.
The Fund's total returns include the reinvestment of dividend and capital gain
distributions. Index returns include dividends and/or interest income, and
unlike Fund returns, do not reflect fees or expenses. Past performance does not
guarantee future results. Investment return and share price will fluctuate with
market conditions, and investors may have a gain or loss when shares are sold.

3
<PAGE>

Fund Information September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $67.45
Total Net Assets (millions) $5,218
30 Day SEC Yield/1/ 3.44%
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 11 years.

<TABLE>
<CAPTION>
Asset Allocation
- --------------------------------------------------------------------------------
<S> <C>
[PIE CHART APPEARS HERE]
Bonds: 37.9%
Stocks: 60.7%
Short-Term Investments: 1.4%
</TABLE>

<TABLE>
<CAPTION>
Stock Portfolio (60.7% of Fund)
- --------------------------------------------------------------------------------
<S> <C>
Number of Stocks 75
Median Market Capitalization $7.6 billion
Price to Earnings Ratio/2/ 21.3x
Price to Book Value 2.2x
Foreign Stocks/3/ (as percentage of Fund) 8%
</TABLE>

<TABLE>
<CAPTION>
Five Largest Sectors % of Fund
- --------------------------------------------------------------------------------
<S> <C>
Energy 8.1
Electronics & Computer 6.8
Banking 4.5
Insurance & Financial Services 4.4
Transportation 3.9
</TABLE>

<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
Alcoa 2.0
Sony ADR 1.7
Motorola 1.7
Union Pacific 1.5
FDX Corp. 1.5
Dow Chemical 1.5
Kmart 1.5
Golden West Financial 1.4
General Motors 1.4
Republic New York 1.4
</TABLE>

<TABLE>
<CAPTION>
Bond Portfolio (37.9% of Fund)
- --------------------------------------------------------------------------------
<S> <C>
Number of Bonds 137
Average Quality AA
Average Maturity 10.7 years
Effective Duration 4.50 years
</TABLE>

<TABLE>
<CAPTION>
Moody's/Standard & Poor's Quality Ratings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 22.1
Aaa/AAA 1.8
Aa/AA 0.0
A/A 8.0
Baa/BBB 6.0
</TABLE>

<TABLE>
<CAPTION>
Sector Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 7.2
Federal Agency CMO and REMIC+ 9.1
Federal Agency Mortgage Pass-Through 5.7
Asset-Backed 1.4
Corporate 12.2
Foreign (U.S. dollar-denominated) 2.3

+ 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.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

4
<PAGE>

D O D G E & C O X
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Balanced Fund

<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1999
- -------------------------------------------------------------------------------
Percentage of Fund
<S> <C>
COMMON STOCKS: 59.4%

CONSUMER: 12.0%
CONSUMER DURABLES: 3.5%
General Motors Corp........................................... 1.4
Whirlpool Corp................................................ 0.9
Ford Motor Co................................................. 0.7
Delphi Automotive Systems Corp................................ 0.5

RETAIL AND DISTRIBUTION: 3.3%
Kmart Corp.................................................... 1.5
Genuine Parts Co.............................................. 0.7
Nordstrom, Inc................................................ 0.6
Dillard's, Inc. Class A....................................... 0.5

HEALTHCARE AND PHARMACEUTICAL: 3.2%
Pharmacia & Upjohn, Inc....................................... 1.3
Becton, Dickinson & Co........................................ 0.7
Bausch & Lomb, Inc............................................ 0.6
First Health Group Corp....................................... 0.3
WellPoint Health Networks, Inc................................ 0.3

CONSUMER PRODUCTS: 1.2%
Fort James Corp............................................... 0.6
Dole Food Co., Inc............................................ 0.3
Mattel, Inc................................................... 0.3

MEDIA AND LEISURE: 0.8%
R.R. Donnelley & Sons Co...................................... 0.8

INDUSTRIAL COMMODITIES: 10.0%
CHEMICALS: 3.3%
Dow Chemical Co............................................... 1.5
Nalco Chemical Co............................................. 0.6
Union Carbide Corp............................................ 0.5
Eastman Chemical Co........................................... 0.5
Lubrizol Corp................................................. 0.1
NOVA Chemicals Corp........................................... 0.1

METALS AND MINING: 3.3%
Alcoa, Inc.................................................... 2.0
Rio Tinto PLC................................................. 1.3

PAPER AND FOREST PRODUCTS: 2.7%
Weyerhaeuser Co............................................... 1.0
Champion International Corp................................... 0.9
International Paper Co........................................ 0.4
Boise Cascade Corp............................................ 0.4

GENERAL MANUFACTURING: 0.7%
Archer Daniels Midland Co..................................... 0.7

TECHNOLOGY: 9.7%
ELECTRONICS & COMPUTER: 6.8%
Motorola, Inc................................................. 1.7
Hewlett-Packard Co............................................ 1.2
Electronic Data Systems....................................... 1.0
NCR Corp...................................................... 0.7
National Semiconductor Corp................................... 0.6
Storage Technology Corp....................................... 0.6
Xerox Corp.................................................... 0.4
Thermo Electron Corp.......................................... 0.4
Sybase, Inc................................................... 0.2

CONSUMER ELECTRONICS: 2.9%
Sony Corp. ADR................................................ 1.7
Matsushita Electric Industrial Co., Ltd. ADR.................. 1.2

FINANCE: 9.6%
BANKING: 4.5%
Golden West Financial Corp.................................... 1.4
Republic New York Corp........................................ 1.4
Wells Fargo & Co.............................................. 0.9
Bank of America Corp.......................................... 0.8

INSURANCE AND FINANCIAL SERVICES: 4.4%
Citigroup, Inc................................................ 1.1
American Express Co........................................... 1.0
The St. Paul Cos., Inc........................................ 0.9
Loews Corp.................................................... 0.9
Chubb Corp.................................................... 0.5

REAL ESTATE INVESTMENT TRUST: 0.7%
Equity Residential Properties Trust........................... 0.5
Equity Office Properties Trust................................ 0.2

ENERGY: 8.1%
Occidental Petroleum Corp..................................... 1.1
Phillips Petroleum Co......................................... 1.1
Amerada Hess Corp............................................. 1.0
Unocal Corp................................................... 1.0
Baker Hughes, Inc............................................. 0.9
Chevron Corp.................................................. 0.9
Union Pacific Resources Group, Inc............................ 0.9
Royal Dutch Petroleum Co...................................... 0.6
Schlumberger Ltd.............................................. 0.6
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

5
<PAGE>

D O D G E & C O X
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Balanced Fund

<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1999
- -------------------------------------------------------------------------------
Percentage of Fund
<S> <C>
COMMON STOCKS (Continued)

TRANSPORTATION: 3.9%
Union Pacific Corp............................................ 1.5
FDX Corp...................................................... 1.5
Canadian Pacific Ltd.......................................... 0.9

GENERAL INDUSTRIAL: 3.5%
Deere & Co.................................................... 1.0
Lockheed Martin Corp.......................................... 0.8
Caterpillar, Inc.............................................. 0.8
Fluor Corp.................................................... 0.7
Unova, Inc.................................................... 0.2

ELECTRIC AND GAS UTILITIES: 2.6%
Central & South West Corp..................................... 0.7
Texas Utilities Co............................................ 0.6
FPL Group, Inc................................................ 0.5
Wisconsin Energy Corp......................................... 0.4
Ameren Corp................................................... 0.4

PREFERRED STOCKS: 1.3%

CONSUMER: 1.3%
News Corp. Ltd., Limited Voting Ordinary Shares ADR........... 1.3

BONDS: 37.9%

U.S. TREASURY AND GOV'T AGENCY: 7.2%

FEDERAL AGENCY CMO* AND REMIC**: 9.1%

FEDERAL AGENCY MTG. PASS-THROUGH: 5.7%

ASSET-BACKED SECURITIES: 1.4%
CA Infrastructure and Econ. Dev. Bank SP Trust PGE-1
Rate Reduction Ctf. 1997-1 A-5 6.25%, 6/25/2004.............. 0.7
CA Infrastructure and Econ. Dev. Bank SP Trust SCE-1
Rate Reduction Ctf. 1997-1 A-6 6.38%, 9/25/2008.............. 0.4
PP&L Transition Bond Series 1999-1 A-2 6.41%, 12/25/2003...... 0.3

CORPORATE: 12.2%
INDUSTRIAL: 6.9%
Raytheon Co., various securities.............................. 1.2
Lockheed Martin Corp., various securities..................... 1.1
J.E. Seagram & Sons, Inc. 6.80%, 12/15/2008................... 0.9
Dayton Hudson Corp., various securities....................... 0.7
Raychem Corp. 7.20%, 10/15/2008............................... 0.7
Time Warner Entertainment 8.375%, 7/15/2033................... 0.6
Union Carbide Corp. 6.70%, 4/1/2009........................... 0.6
May Department Stores, various securities..................... 0.6
Walt Disney Co. 7.55%, 7/15/2093.............................. 0.4
Union Camp Corp. 9.25%, 2/1/2011.............................. 0.1

FINANCE: 4.0%
GMAC, various securities...................................... 1.1
Golden West Financial, various securities..................... 0.7
J.P. Morgan Capital Trust I 7.54%, 1/15/2027.................. 0.4
BankAmerica Capital II 8.00%, 12/15/2026...................... 0.4
Citicorp Capital Trust I 7.933%, 2/15/2027.................... 0.3
Hartford Financial Services Group, various securities......... 0.3
Republic New York Corp. 7.20%, 7/15/2097...................... 0.3
Safeco Corp. 6.875%, 7/15/2007................................ 0.3
CIGNA Corp., various securities............................... 0.1
First Nationwide Bank 10.00%, 10/1/2006....................... 0.1
Barclays No. American Capital 9.75%, 5/15/2021................ 0.0

TRANSPORTATION: 1.3%
Union Pacific Corp. 6.33%, 1/2/2020........................... 0.9
Consolidated Rail Corp., various securities................... 0.4

UTILITIES: 0.0%
Idaho Power Co. 1st Mtge. 9.50%, 1/1/2021..................... 0.0

FOREIGN (U.S. DOLLAR-DENOMINATED): 2.3%
CANADIAN: 1.2%
Hydro-Quebec, various securities.............................. 0.8
Canadian Pacific Ltd. 9.45%, 8/1/2021......................... 0.2
Canadian National Railway Co. 6.80%, 7/15/2018................ 0.2

CORPORATE: 0.6%
HSBC Holdings PLC 7.50%, 7/15/2009............................ 0.6

INTERNATIONAL AGENCY: 0.5%
Inter-American Development Bank 7.125%, 3/15/2023............. 0.3
European Investment Bank 10.125%, 10/1/2000................... 0.2

SHORT-TERM INVESTMENTS: 2.4%

OTHER ASSETS LESS LIABILITIES: (1.0)%

TOTAL NET ASSETS: 100.0%
</TABLE>

* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

6
<PAGE>

D O D G E & C O X
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Balanced Fund

Officers & Trustees
- -------------------------------------------------------------------------------

Harry R. Hagey, Chairman & Trustee
Chairman & CEO, Dodge & Cox