<PAGE>
D O D G E & C O X D O D G E & C O X
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Stock Fund
Stock Fund
Established 1965
-----------------
-----------------
Investment Managers
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
- -----------------
This report is submitted
for the general information
of the shareholders of the
Fund. The report is not
authorized for distribution
to prospective investors First Quarter Report
in the Fund unless it is March 31, 1999
accompanied by a current
prospectus. 1999
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------------------
------------------
<PAGE>
D o d g e & C o x
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Stock Fund
To Our Shareholders
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As we discussed in some detail in our year-end shareholder letter, stock market
results in 1998 were driven by a relatively small group of very large companies
with high valuations, generating investment returns well in excess of the market
averages. January proved to be a continuation of 1998's dynamics, with the high
valuation "growth stocks" continuing to lead the market. However, change can
occur quickly. In spite of the weak relative performance for January,
improvement in February and March brought the Fund's return nearly even with the
Standard & Poor's 500 Index (S&P 500) for the first quarter. During the quarter
ended March 31, 1999, the Dodge & Cox Stock Fund had a total return of 4.5%,
compared with a 5.0% return for the S&P 500. The Fund's total return for the
twelve months ended March 31 was 0.4%, continuing to reflect the difficult
environment in 1998 for our value-oriented investment approach, while the total
return for the S&P 500 was 18.4%. Longer-term results are listed on page three
of this report. On March 31, total net assets in the Fund were $4.2 billion with
approximately 98% of these assets invested in stocks and 2% invested in cash
equivalents.
Areas of the Fund that contributed strongly to its first quarter return included
consumer durables, retail and transportation stocks. Particularly strong
individual contributors included General Motors, Citigroup, Motorola and Union
Pacific. Four energy stocks in the Fund were each up more than 25% in the
quarter. Stock selection was a major positive factor in the consumer products
area, as the Fund's holdings in this industry (led by Sony) performed much
better than those in the S&P 500 sector. Holdings that were weak performers
included electric/gas utilities, insurance/financial services and capital
equipment stocks.
Risk and Opportunity
We believe that significant risk and opportunity exist side by side in the
current equity market. Results for the S&P 500 in the past few years have been
propelled by the largest growth stock speculation we have ever seen, and therein
lies the danger. Almost 60% of the market capitalization of the S&P 500 now has
an average price-to-earnings (P/E) multiple in excess of 40, which has raised
the overall market P/E to its current level of 34. In comparison, the market's
historical P/E multiple typically has been in the 15 to 20 range, even during
periods of solid economic growth and low inflation such as we are experiencing
now. In addition, these historically high valuations are based on earnings which
themselves are at historic highs, i.e., net profit margins averaging 10% for the
high-valuation companies. In order for these companies to be good investments at
the current valuation multiples, an investor has to assume a continuation of
extremely rapid growth rates for sales and earnings in the coming five to ten
years. Who can reliably forecast that far into the future, particularly in the
current era of rapid technological change and vigorous free-market competition?
Using as an analogy our winding California coast highway at dusk, we sense that
investors in this growth stock mania are "out-driving" their headlights as the
road curves, and fog descends. It will come as no surprise that the Fund's
portfolio includes only a few companies in this high-valuation area. There is no
question that many of these will continue to be very successful companies, but
we believe that at current prices, many have become risky as investments.
In contrast, we believe that investment opportunity lies in a broad swath of
strong companies whose profits are currently depressed due to the weak global
economy, yet which have the potential for earnings recovery in the future. As we
have discussed in previous letters, many companies that appear to us to be
attractive investments can be characterized as industrial or basic materials
companies with broad exposure to the global economy. Due to the near-term
uncertainty of when (and to what degree) profitability will improve, many of
these companies, in our opinion, still possess reasonable valuations (and in
many cases, quite low relative valuations). P/E multiples for many of the
companies in this lower-valuation tier are in a range of 15 to 25. Nearly 80% of
the Fund's portfolio is in this
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1
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D o d g e & C o x
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Stock Fund
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lower tier of the "two-tier" market. In our view, most investors appear to be
focused on the near term, i.e., the difficult operating environment that the
companies currently face, without taking into consideration the potential for
long-term profitability.
While we believe there is opportunity in the above-described industrial with
global growth potential, there are a number of other investment themes at work
in the Fund's portfolio as well. Technology and the declining cost of computing
power continues to drive growth and change across the economic landscape.
Opportunities to harness the power of these technological advances are not
limited to companies in the "technology industry" per se, but are available to
any who can creatively employ technology to better operate their businesses,
distribute or market their products, reduce costs and add value to their
customers. As investors, we continually seek management teams who are creatively
using technology to enhance their profitability and hence, increase shareholder
value. While the "electronics and computer" component of the Fund's portfolio is
reported as 9.8%, that weighting is an understatement of the broad effects of
technological change embedded in the portfolio. The Fund is invested in many
companies--which may be categorized in media (News Corp.), transportation (FDX
Corp.), or banks (Wells Fargo), to name just a few--yet which are all taking
advantage of the opportunity created by technological progress in computers and
communications.
In Closing
In the midst of a market with speculative elements--with equity valuations that,
to our knowledge, have no historical precedent (for example, the internet
stocks)--one has to remain patient. We believe there are significant
opportunities in the current market for the value-oriented investor. Our
investment team and investment approach remain the same--thorough fundamental
analysis, combined with a strong price discipline and a long-term time horizon.
We are holding to the principles that have served our clients well for decades.
We appreciate your continued investment in the Dodge & Cox Stock Fund. As
always, we welcome your comments and questions.
For the Board of Trustees,
/s/ Harry R. Hagey
-------------------------
April 30, 1999 Harry R. Hagey, Chairman
/s/ John A. Gunn
-------------------------
John A. Gunn, President
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2
<PAGE>
D o d g e & C o x
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Stock Fund
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 March 31, 1999
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[LINE GRAPH APPEARS HERE]
STOCK FUND S&P 500
---------- ---------
<S> <C> <C>
04/01/1989 $10,000 $10,000
03/31/1990 $11,807 $11,928
03/31/1991 $12,893 $13,643
03/31/1992 $14,000 $15,149
03/31/1993 $16,543 $17,454
03/31/1994 $18,031 $17,712
03/31/1995 $20,935 $20,467
03/31/1996 $27,064 $27,036
03/31/1997 $31,905 $32,395
03/31/1998 $43,878 $47,936
03/31/1999 $44,040 $56,777
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for
periods ended March 31, 1999 1 Year 5 Years 10 Years 20 Years
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Stock Fund 0.40% 19.55% 15.98% 16.88%
S&P 500 18.44 26.24 18.97 17.62
</TABLE>
The chart covers the period from April 1, 1989 to March 31, 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.
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3
<PAGE>
D o d g e & C o x
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Stock Fund
Fund Information March 31, 1999
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<TABLE>
<CAPTION>
General Information
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<S> <C>
Net Asset Value Per Share $93.17
Total Net Assets (millions) $4,152
1998 Expense Ratio 0.57%
1998 Portfolio Turnover 19%
30 Day SEC Yield/1/ 1.47%
Fund Inception Date 1965
Investment Manager: Dodge & Cox, San Francisco.
Managed by the Investment Policy Committee,
whose eight members' average tenure at Dodge
& Cox is 21 years.
</TABLE>
<TABLE>
<CAPTION>
Asset Allocation
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<S> <C>
[PIE CHART APPEARS HERE]
Stocks: 98.1%
Short-Term Investments: 1.9%
</TABLE>
<TABLE>
<CAPTION>
Stock Characteristics
- ------------------------------------------------------------------------------
<S> <C>
Number of Stocks 75
Median Market Capitalization $7.3 billion
Price to Earnings Ratio/2/ 20.1x
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>
General Motors 3.2
FDX Corp. 3.1
Union Pacific 3.0
Pharmacia & Upjohn 2.9
Kmart 2.8
Motorola 2.8
Alcoa 2.7
Citigroup 2.6
Dow Chemical 2.2
News Corp. Ltd., ADR 2.2
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Sectors % of Fund
- ------------------------------------------------------------------------------
<S> <C>
Energy 12.3
Electronics & Computer 9.8
Banking 9.0
Consumer Products 7.4
Transportation 7.4
Retail & Distribution 6.2
Consumer Durables 6.1
Insurance & Financial Services 5.4
Capital Equipment 5.2
Metals & Mining 4.8
</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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4
<PAGE>
D o d g e & C o x
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Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1999
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Percentage of Fund
<S> <C>
COMMON STOCKS: 95.9%
CONSUMER: 21.5%
CONSUMER PRODUCTS: 7.4%
Matsushita Electric Industrial Co., Ltd. ADR................ 2.1
Sony Corp. ADR.............................................. 2.1
Fort James Corp............................................. 1.4
Bausch & Lomb, Inc.......................................... 1.1
Dole Food Co., Inc.......................................... 0.7
RETAIL AND DISTRIBUTION: 6.2%
Kmart Corp.................................................. 2.8
Nordstrom, Inc.............................................. 1.4
Genuine Parts Co............................................ 1.1
Dillard's, Inc. Class A..................................... 0.8
Fleming Cos., Inc........................................... 0.1
CONSUMER DURABLES: 6.1%
General Motors Corp......................................... 3.2
Whirlpool Corp.............................................. 1.5
Ford Motor Co............................................... 1.4
MEDIA, PRINTING, AND ENTERTAINMENT: 1.8%
R.R. Donnelley & Sons Co.................................... 1.3
Dow Jones & Co.............................................. 0.5
BASIC INDUSTRY: 14.7%
METALS AND MINING: 4.8%
Alcoa, Inc.................................................. 2.7
Rio Tinto PLC............................................... 2.0
Rio Tinto Ltd............................................... 0.1
PAPER AND FOREST PRODUCTS: 4.5%
Weyerhaeuser Co............................................. 1.6
Champion International Corp................................. 1.5
International Paper Co...................................... 0.9
Boise Cascade Corp.......................................... 0.5
CHEMICALS: 4.5%
Dow Chemical Co............................................. 2.2
Eastman Chemical Co......................................... 0.8
Union Carbide Corp.......................................... 0.6
Nalco Chemical Co........................................... 0.5
Lubrizol Corp............................................... 0.2
NOVA Chemicals Corp......................................... 0.2
GENERAL MANUFACTURING: 0.9%
Archer Daniels Midland Co................................... 0.9
FINANCE: 14.4%
BANKING: 9.0%
Citigroup, Inc.............................................. 2.6
BankAmerica Corp............................................ 1.8
Golden West Financial Corp.................................. 1.7
Republic New York Corp...................................... 1.7
Wells Fargo & Co............................................ 1.2
INSURANCE AND FINANCIAL SERVICES: 5.4%
American Express Co......................................... 1.8
The St. Paul Cos., Inc...................................... 1.4
Loews Corp.................................................. 1.3
Chubb Corp.................................................. 0.9
ENERGY: 12.3%
Amerada Hess Corp........................................... 1.8
Phillips Petroleum Co....................................... 1.6
Chevron Corp................................................ 1.6
Unocal Corp................................................. 1.5
Baker Hughes, Inc........................................... 1.4
Occidental Petroleum Corp................................... 1.4
Union Pacific Resources Group, Inc.......................... 1.1
Royal Dutch Petroleum Co.................................... 1.0
Schlumberger Ltd............................................ 0.9
ELECTRONICS AND COMPUTER: 9.8%
Motorola, Inc............................................... 2.8
NCR Corp.................................................... 1.8
Electronic Data Systems..................................... 1.8
Hewlett-Packard Co.......................................... 1.8
Adobe Systems, Inc.......................................... 0.6
National Semiconductor Corp................................. 0.6
Storage Technology Corp. ................................... 0.2
Sybase, Inc................................................. 0.2
TRANSPORTATION: 7.4%
FDX Corp.................................................... 3.1
Union Pacific Corp.......................................... 3.0
Canadian Pacific Ltd........................................ 1.3
CAPITAL EQUIPMENT: 5.2%
Deere & Co.................................................. 1.9
Lockheed Martin Corp........................................ 1.3
Caterpillar, Inc............................................ 1.2
Fluor Corp.................................................. 0.8
</TABLE>
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5
<PAGE>
D o d g e & C o x
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Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1999
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Percentage of Fund
<S> <C>
COMMON STOCKS (Continued)
ELECTRIC AND GAS UTILITIES: 4.0%
Central & South West Corp....................................... 1.2
Texas Utilities Co.............................................. 0.9
FPL Group, Inc.................................................. 0.8
Wisconsin Energy Corp........................................... 0.8
TransCanada PipeLines Ltd....................................... 0.3
HEALTHCARE AND PHARMACEUTICAL: 3.2%
Pharmacia & Upjohn, Inc......................................... 2.9
First Health Group Corp......................................... 0.3
DIVERSIFIED TECHNOLOGY: 2.9%
Corning, Inc.................................................... 1.0
Xerox Corp...................................................... 1.0
Raychem Corp.................................................... 0.7
Unova, Inc...................................................... 0.2
REAL ESTATE INVESTMENT TRUST: 0.5%
Equity Residential Properties Trust............................. 0.5
PREFERRED STOCKS: 2.2%
CONSUMER: 2.2%
News Corp. Ltd., Limited Voting Ordinary Shares ADR............. 2.2
SHORT-TERM INVESTMENTS: 1.7%
OTHER ASSETS LESS LIABILITIES: 0.2%
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.
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6
<PAGE>
D o d g e & C o x
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Stock Fund
Officers and Trustees
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Harry R. Hagey, Chairman & Trustee
Chairman & CEO, Dodge & Cox
John A. Gunn, President & Trustee
President, Dodge & Cox
A. Horton Shapiro, Executive Vice President & Trustee
Senior Vice President, Dodge & Cox
W. Timothy Ryan, Treasurer, Secretary & Trustee
Senior Vice President,Dodge & Cox
Katherine Herrick Drake, Vice President & Trustee
Vice President, Dodge & Cox
Dana M. Emery, Vice President & Trustee
Senior Vice President, Dodge & Cox
Kenneth E. Olivier, Vice President & Trustee
Senior Vice President, Dodge & Cox
Max Gutierrez, Jr., Trustee
Partner, Brobeck, Phleger & Harrison, Attorneys
Frank H. Roberts, Trustee
Retired Partner, Pillsbury, Madison & Sutro, Attorneys
John B. Taylor, Trustee
Professor of Economics, Stanford University
Will C. Wood, Trustee
Principal, Kentwood Associates, Financial Advisers
Thomas M. Mistele, Asst. Secretary & Asst. Treasurer
Vice President & General Counsel, Dodge & Cox
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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. The Fund's service providers have made significant
progress in their inventory, analysis, correction and Year 2000 testing efforts
across areas of operation. Industry wide tests, also known as "street tests"
have enabled certain service providers to execute transactions in a Year 2000
simulation with industry service providers, such as Depository Trust Company
(DTC) and the Federal Reserve. 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 94104-4443
(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
- -----------------
This report is submitted
for the general information
of the shareholders of the
Fund. The report is not
authorized for distribution
to prospective investors First Quarter Report
in the Fund unless it is March 31, 1999
accompanied by a current
prospectus. 1999
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D o d g e & C o x
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Balanced Fund
To Our Shareholders
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The Dodge & Cox Balanced Fund had a total return of 2.8% in the first three
months of 1999. This return was virtually identical to that of the Combined
Index* for the quarter. Over the past twelve months, the Balanced Fund's total
return was 3.0%, which compared to 14.2% for the Combined Index. As we discussed
in some detail in our year-end shareholder letter, 1998 stock market results
were driven by a relatively small group of very large companies with high
valuations, generating investment returns well in excess of the market averages.
The comparison of the one-year performance for the Fund continues to reflect the
difficult environment in 1998 for our value-oriented equity investment approach.
Longer-term results for the Fund appear on page three of this report.
At quarter-end, the Fund's $5.5 billion in assets were invested approximately
61% in common stocks, 37% in fixed-income securities and 2% in cash. This asset
allocation mix was little changed from year-end 1998 and, as the name of the
Fund implies, represents a "balance" between dual objectives of capital
appreciation and reasonable current income. We believe that preservation of
purchasing power of capital is an important goal in a long-term investment
program.
Discussion of Performance
The Fund's equity portfolio performed in line with the Standard & Poor's 500
Index (S&P 500) during the quarter (5.0% total return for both, before
expenses). Sectors of the portfolio which contributed strongly to the first
quarter return included energy, consumer durables, retail and transportation
stocks. Particularly strong individual contributors included General Motors,
Citigroup, Motorola and Union Pacific. Four energy stocks in the Fund were each
up more than 25% in the quarter. Stock selection was a major positive factor in
the consumer products area, as the Fund's holdings in this industry (led by
Sony) performed much better than those in the S&P 500 sector. Equity holdings
that were weak performers included electric utilities, insurance/financial
services and capital equipment stocks.
Fixed-income returns were slightly negative for the quarter due to rising
interest rates. The decreases in overall bond prices were only partially offset
by interest income. The fixed-income portion of the Fund performed modestly
better than the Lehman Brothers Aggregate Bond Index (LBAG) in the quarter (-
0.1% and -0.5% total returns, respectively, before expenses). The best
performing area of the fixed-income portfolio during the quarter was mortgage-
related securities, which we have used defensively as substitutes for short and
intermediate-term U.S. Treasuries. Another area of relative strength was in
long-term corporate securities. Improved investor confidence in corporate
earnings and in the stability of cash flows from mortgage-backed securities set
the stage for a significant first quarter narrowing of yield premiums for both
mortgage-related and corporate securities. The Fund's emphasis in these sectors
helped relative performance.
Equity Market Risk and Opportunity
We believe that significant risk and opportunity exist side by side in the
current equity market. Results for the S&P 500 in the past few years have been
propelled by the largest growth stock speculation we have ever seen, and therein
lies the danger. Almost 60% of the market capitalization of the S&P 500 now has
an average price-to-earnings (P/E) multiple in excess of 40, which has raised
the overall market P/E to its current level of 34. In comparison, the broad
market's historical P/E multiple typically has been in the 15 to 20 range, even
during periods of solid economic growth and low inflation such as we are
experiencing now. In addition, these historically high valuations are based on
earnings which themselves are at historic highs, i.e., net profit margins
averaging 10% for the high-valuation companies. In order for these companies to
be good investments at current valuation multiples, an investor has to assume a
continuation of extremely rapid growth rates for sales and earnings for the next
five to ten years. There is no question that many of these will continue to be
very successful companies, but we believe that at current prices, many have
become risky as investments.
In contrast, we believe that investment opportunity lies in a broad swath of
strong companies whose profits are currently depressed due to the weak global
economy, yet which have the potential for significant earnings recovery in the
future. As we have discussed in previous letters, many companies which appear
to us to be attractive investments can be characterized as industrial or basic
materials companies with broad exposure to the global economy. Due to the near-
term uncertainty of
* The Combined Index reflects an unmanaged portfolio of 60% of the S&P 500 and
40% of the LBAG.
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1
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D o d g e & C o x
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Balanced Fund
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when (and to what degree) profitability will improve, many of these companies,
in our opinion, still possess reasonable valuations (and in many cases, quite
low relative valuations). P/E multiples for many of the companies in this
lower-valuation tier are in a range of 15 to 25. Nearly 80% of Fund's equity
portfolio is invested this lower tier of the "two-tier" market. In our view,
most investors appear to be focused on the near term, i.e., the difficult
operating environment that the companies currently face, without taking into
consideration the potential for long-term profitability.
New Securities in the Fixed-Income Portfolio
In January and February, we purchased U.S. Treasury Inflation Protection
Securities (TIPS) maturing in 2009 and 2028. We purchased these securities at
real (inflation-adjusted) yields ranging from 3.71% to 3.90%. The combined
purchases represented a 4.0% position in the fixed-income portion of the Fund as
of quarter-end.
The U.S. Treasury began issuing TIPS in 1997 to provide an investment vehicle
protected against the value-eroding effect of inflation. TIPS investors receive
inflation protection through an adjustment to the principal amount they hold;
this adjustment is equal to inflation as measured by changes in the consumer
price index (CPI). For example, if the level of the CPI increased by 2.0%, an
investor holding $1,000 par value at the beginning of the year would hold $1,020
at the end of the year. Interest payments would remain a fixed percentage of
principal (3.875% for example) but the dollar amount of each interest payment
would increase to reflect the higher principal amount. If the CPI were to fall
(i.e., the general level of consumer prices were to decline), the par value and
the interest payment would also fall; however, to protect TIPS investors from
"deflation," the Treasury guarantees a payment of at least par at maturity.**
Applying these principal adjustments at present yields, annual inflation need
only exceed 0.8% for 30-year TIPS to provide a better return than 1-year
Treasury Bills. We believe that certain factors that held inflation to a low
1.6% for 1998, such as the significant drop in oil and other commodity prices,
are not likely to be repeated, suggesting the possibility of higher inflation in
1999 and beyond.
We believe that the real yield currently offered on TIPS is attractive relative
to historical real yields earned by holding Treasury Bills, which, as our
analysis shows, provide an appropriate comparison. The range of real yields at
which we purchased TIPS for the Fund is, with the exception of the early 1980's,
higher than annual inflation- adjusted returns for Treasury Bills in each of the
past fifty years. We believe that TIPS' real yields are currently high due to
the limited depth of the market (trading occurs infrequently compared to
conventional Treasuries) and a general hesitancy to enter a nascent market where
performance has suffered due to rising real yields.
In Closing
In the midst of a stock market that has speculative elements-equity valuations
that, to our knowledge, have no historical parallel-one has to remain patient.
We believe there are significant opportunities in the current market for the
value- oriented stock and bond investor. Our team and investment approach
remain the same-thorough fundamental analysis, combined with a strong price
discipline and a long-term time horizon. We are holding to the principles that
have served our clients well for decades.
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
------------------------
April 30, 1999 Harry R. Hagey, Chairman
** The Fund's yield and share price are not guaranteed and may vary with market
conditions.
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2
<PAGE>
D o d g e & C o x
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Balanced Fund
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.
<TABLE>
<CAPTION>
Ten Years of Investment Performance through March 31, 1999
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
COMBINED BALANCED
S&P 500 LBAG INDEX FUND
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
04/01/1989 $10,000 $10,000 $10,000 $10,000
03/31/1990 $11,928 $11,233 $11,665 $11,619
03/31/1991 $13,643 $12,685 $13,309 $13,026
03/31/1992 $15,149 $14,130 $14,826 $14,431
03/31/1993 $17,454 $16,009 $16,975 $16,904
03/31/1994 $17,712 $16,386 $17,293 $18,156
03/31/1995 $20,467 $17,204 $19,241 $20,230
03/31/1996 $27,036 $19,058 $23,699 $24,747
03/31/1997 $32,395 $19,992 $26,967 $27,859
03/31/1998 $47,936 $22,391 $35,798 $35,585
03/31/1999 $56,777 $23,840 $40,873 $36,637
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for
periods ended March 31, 1999 1 Year 5 Years 10 Years 20 Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 2.97% 15.07% 13.86% 14.09%
Combined Index 14.18 18.78 15.13 14.82
S&P 500 18.44 26.24 18.97 17.62
Lehman Brothers Aggregate Bond Index (LBAG) 6.48 7.79 9.08 10.03
</TABLE>
The chart covers the period from April 1, 1989 to March 31, 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.
- --------------------------------------------------------------------------------
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3
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
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Balanced Fund
Fund Information March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $65.81
Total Net Assets (millions) $5,476
30 Day SEC Yield/1/ 3.13%
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
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
<S> <C>
Bonds: 36.7%
Stocks: 60.8%
Short-Term Investments: 2.5%
</TABLE>
<TABLE>
<CAPTION>
Stock Portfolio (60.8% of Fund)
- --------------------------------------------------------------------------------
<S> <C>
Number of Stocks 76
Median Market Capitalization $7.6 billion
Price to Earnings Ratio/2/ 20.1x
Price to Book Value 2.3x
Foreign Stocks/3/ (as percentage of Fund) 8%
</TABLE>
<TABLE>
<CAPTION>
Five Largest Sectors % of Fund
- --------------------------------------------------------------------------------
<S> <C>
Energy 7.5
Electronics & Computer 6.3
Banking 5.7
Consumer Products 4.5
Transportation 4.5
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
General Motors 2.0
FDX Corp. 1.9
Union Pacific 1.8
Pharmacia & Upjohn 1.8
Alcoa 1.7
Motorola 1.7
Kmart 1.7
Citigroup 1.6
News Corp. Ltd., ADR 1.4
Dow Chemical 1.4
</TABLE>
<TABLE>
<CAPTION>
Bond Portfolio (36.7% of Fund)
- --------------------------------------------------------------------------------
<S> <C>
Number of Bonds 126
Average Quality AA+
Average Maturity 10.1 years
Effective Duration 4.38 years
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's Quality Ratings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 22.0
Aaa/AAA 1.5
Aa/AA 0.1
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 8.1
Federal Agency CMO and REMIC 8.5
Federal Agency Mortgage Pass-Through 5.4
Asset-Backed 1.1
Corporate 11.9
Foreign (U.S. Dollar-denominated) 1.7
+ 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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4
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1999
- --------------------------------------------------------------------------------
Percentage of Fund
<S> <C>
COMMON STOCKS: 59.4%
CONSUMER: 13.2%
CONSUMER PRODUCTS: 4.5%
Matsushita Electric Industrial Co., Ltd. ADR................... 1.3
Sony Corp. ADR................................................. 1.3
Fort James Corp................................................ 0.8
Bausch & Lomb, Inc............................................. 0.7
Dole Food Co., Inc............................................. 0.4
CONSUMER DURABLES: 3.8%
General Motors Corp............................................ 2.0
Whirlpool Corp................................................. 0.9
Ford Motor Co.................................................. 0.9
RETAIL AND DISTRIBUTION: 3.7%
Kmart Corp..................................................... 1.7
Nordstrom, Inc................................................. 0.9
Genuine Parts Co............................................... 0.6
Dillard's, Inc. Class A........................................ 0.5
Fleming Cos., Inc.............................................. 0.0
MEDIA, PRINTING, AND ENTERTAINMENT: 1.2%
R.R. Donnelley & Sons Co....................................... 0.8
Dow Jones & Co................................................. 0.4
FINANCE: 9.1%
BANKING: 5.7%
Citigroup, Inc................................................. 1.6
Golden West Financial Corp..................................... 1.1
Republic New York Corp......................................... 1.1
BankAmerica Corp............................................... 1.1
Wells Fargo & Co............................................... 0.8
INSURANCE AND FINANCIAL SERVICES: 3.4%
American Express Co............................................ 1.1
The St. Paul Cos., Inc......................................... 0.9
Loews Corp..................................................... 0.9
Chubb Corp..................................................... 0.5
BASIC INDUSTRY: 9.1%
METALS AND MINING: 3.0%
Alcoa, Inc..................................................... 1.7
Rio Tinto PLC.................................................. 1.2
Rio Tinto Ltd.................................................. 0.1
PAPER AND FOREST PRODUCTS: 2.8%
Weyerhaeuser Co................................................ 1.1
Champion International Corp.................................... 0.9
International Paper Co......................................... 0.5
Boise Cascade Corp............................................. 0.3
CHEMICALS: 2.8%
Dow Chemical Co................................................ 1.4
Eastman Chemical Co............................................ 0.5
Union Carbide Corp............................................. 0.4
Nalco Chemical Co.............................................. 0.3
Lubrizol Corp.................................................. 0.1
NOVA Chemicals Corp............................................ 0.1
GENERAL MANUFACTURING: 0.5%
Archer Daniels Midland Co...................................... 0.5
ENERGY: 7.5%
Amerada Hess Corp.............................................. 1.1
Phillips Petroleum Co.......................................... 1.0
Baker Hughes, Inc.............................................. 0.9
Chevron Corp................................................... 0.9
Occidental Petroleum Corp...................................... 0.8
Unocal Corp.................................................... 0.8
Union Pacific Resources Group, Inc............................. 0.6
Royal Dutch Petroleum Co....................................... 0.6
Schlumberger Ltd............................................... 0.5
BP Amoco PLC ADR............................................... 0.3
ELECTRONICS AND COMPUTER: 6.3%
Motorola, Inc.................................................. 1.7
NCR Corp....................................................... 1.2
Electronic Data Systems........................................ 1.2
Hewlett-Packard Co............................................. 1.2
National Semiconductor Corp.................................... 0.4
Adobe Systems, Inc............................................. 0.4
Sybase, Inc.................................................... 0.1
Storage Technology Corp........................................ 0.1
TRANSPORTATION: 4.5%
FDX Corp....................................................... 1.9
Union Pacific Corp............................................. 1.8
Canadian Pacific Ltd........................................... 0.8
CAPITAL EQUIPMENT: 3.2%
Deere & Co..................................................... 1.2
Caterpillar, Inc............................................... 0.8
Lockheed Martin Corp........................................... 0.8
Fluor Corp..................................................... 0.4
</TABLE>
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5
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1999
- --------------------------------------------------------------------------------
Percentage of Fund
<S> <C>
COMMON STOCKS (Continued)
ELECTRIC AND GAS UTILITIES: 2.4%
Central & South West Corp..................................... 0.7
Texas Utilities Co............................................ 0.6
FPL Group, Inc................................................ 0.5
Wisconsin Energy Corp......................................... 0.4
TransCanada PipeLines Ltd..................................... 0.2
HEALTHCARE AND PHARMACEUTICAL: 2.0%
Pharmacia & Upjohn, Inc....................................... 1.8
First Health Group Corp....................................... 0.2
DIVERSIFIED TECHNOLOGY: 1.8%
Corning, Inc.................................................. 0.6
Xerox Corp.................................................... 0.6
Raychem Corp.................................................. 0.4
Unova, Inc.................................................... 0.2
REAL ESTATE INVESTMENT TRUST: 0.3%
Equity Residential Properties Trust........................... 0.3
PREFERRED STOCKS: 1.4%
CONSUMER: 1.4%
News Corp. Ltd., Limited Voting Ordinary Shares ADR........... 1.4
BONDS: 36.7%
U.S. TREASURY AND GOV'T AGENCY: 8.1%
FEDERAL AGENCY CMO* AND REMIC**: 8.5%
FEDERAL AGENCY MTG. PASS-THROUGH: 5.4%
ASSET-BACKED SECURITIES: 1.1%
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
CORPORATE: 11.9%
INDUSTRIAL: 6.2%
Raytheon Co., various securities.............................. 1.2
Lockheed Martin Corp., various securities..................... 1.1
J.E. Seagram & Sons, Inc. 6.80%, 12/15/2008................... 0.8
Time Warner Entertainment 8.375%, 7/15/2033................... 0.7
Dayton Hudson Corp., various securities....................... 0.7
Raychem Corp. 7.20%, 10/15/2008............................... 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: 4.4%
GMAC, various securities...................................... 1.1
Golden West Financial, various securities..................... 0.7
Norwest Corp., various securities............................. 0.5
J.P. Morgan Capital Trust I 7.54%, 1/15/2027.................. 0.5
BankAmerica Capital II 8.00%, 12/15/2026...................... 0.4
Citicorp Capital Trust I 7.933%, 2/15/2027.................... 0.4
Hartford Financial Services Group, various securities......... 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 Mtg. 9.50%, 1/1/2021...................... 0.0
FOREIGN (U.S. DOLLAR-DENOMINATED): 1.7%
CANADIAN CORPORATE: 1.3%
Hydro-Quebec, various securities.............................. 0.9
Canadian Pacific Ltd. 9.45%, 8/1/2021......................... 0.2
Canadian National Railway Co. 6.80%, 7/15/2018................ 0.2
INTERNATIONAL AGENCY: 0.4%
Inter-American Development Bank 7.125%, 3/15/2023............. 0.3
European Investment Bank 10.125%, 10/1/2000................... 0.1
SHORT-TERM INVESTMENTS: 3.7%
OTHER ASSETS LESS LIABILITIES: (1.2)%
TOTAL NET ASSETS: 100.0 %
* CMO: Collaterized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
</TABLE>
- --------------------------------------------------------------------------------
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6
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Balanced Fund
Officers & Trustees
- --------------------------------------------------------------------------------
Harry R. Hagey, Chairman & Trustee
Chairman & CEO, Dodge & Cox
John A. Gunn, President & Trustee
President, Dodge & Cox
A. Horton Shapiro, Executive Vice President & Trustee
Senior Vice President, Dodge & Cox
W. Timothy Ryan, Treasurer, Secretary & Trustee
Senior Vice President, Dodge & Cox
Katherine Herrick Drake, Vice President & Trustee
Vice President, Dodge & Cox
Dana M. Emery, Vice President & Trustee
Senior Vice President, Dodge & Cox
Kenneth E. Olivier, Vice President & Trustee
Senior Vice President, Dodge & Cox
Max Gutierrez, Jr., Trustee
Partner, Brobeck, Phleger & Harrison, Attorneys
Frank H. Roberts, Trustee
Retired Partner, Pillsbury, Madison & Sutro, Attorneys
John B. Taylor, Trustee
Professor of Economics, Stanford University
Will C. Wood, Trustee
Principal, Kentwood Associates, Financial Advisers
Thomas M. Mistele, Asst. Secretary & Asst. Treasurer
Vice President & General Counsel, Dodge & Cox
- --------------------------------------------------------------------------------
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. The Fund's service providers have made significant
progress in their inventory, analysis, correction and Year 2000 testing efforts
across areas of operation. Industry-wide tests, also known as "street tests"
have enabled certain service providers to execute transactions in a Year 2000
simulation with industry service providers, such as Depository Trust Company
(DTC) and the Federal Reserve. 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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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 94104-4443
(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
- -----------------
This report is submitted
for the general information
of the shareholders of the
Fund. The report is not
authorized for distribution
to prospective investors First Quarter Report
in the Fund unless it is March 31, 1999
accompanied by a current
prospectus. 1999
- ---------------- -----------------
-----------------
-----------------
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
To Our Shareholders
- --------------------------------------------------------------------------------
The Dodge & Cox Income Fund produced a total return of -0.3% for the quarter
ended March 31, 1999 compared to a total return of -0.5% for the Lehman Brothers
Aggregate Bond Index (LBAG), a broad-based, unmanaged index composed of
investment-grade fixed-income securities. Average annual returns for longer time
periods are summarized on page three of this report.
Interest Rates Rise on Signs of Continued Economic Strength
Interest rates rose in the first quarter, with intermediate and long-term U.S.
Treasuries experiencing higher yield increases than shorter maturities. The
yield on the benchmark 30-year U.S. Treasury rose 53 basis points to 5.62% (one
basis point is equal to 1/100 of 1%). Yields on benchmark two-year and five-year
U.S. Treasuries rose 44 and 56 basis points, respectively, ending the quarter at
4.98% and 5.10%. The rise in rates followed reports of continued strong growth
in the U.S. economy, despite third and fourth quarter turbulence in foreign
markets. A revised report for gross domestic product, released in February,
showed a fourth quarter annualized increase of 6.1%; meanwhile, unemployment, at
4.3%, remained at a 29-year low.
Price declines due to higher yields offset income earned to produce slightly
negative total returns for the first quarter; nevertheless, the Fund moderately
outperformed the LBAG for the period. The Fund's slightly lower sensitivity to
interest rate changes, as measured by its effective duration relative to the
LBAG, contributed to the outperformance. The Fund also benefited from a
moderately higher yield than the Index. Finally, improved investor confidence in
corporate earnings and mortgage cash flow stability set the stage for a
significant first quarter narrowing of yield premiums for both mortgage-related
and corporate securities. The Fund's emphasis in these sectors benefited
relative performance.
Yield Premiums Narrow as Fears of Domestic Slowdown Recede
In our previous letter we highlighted the purchase of J.E. Seagram & Sons 20-
year debentures in early December. These securities were purchased at a yield
premium of 240 basis points to comparable U.S. Treasuries. We believed that the
yield premium, in line with highs from the previous recession, was inconsistent
with strong company fundamentals. We purchased these securities for the Fund
after a careful review of the creditworthiness of the issuer and the structure
of the security. As general anxiety over corporate earnings subsided amidst
signs of persistent economic growth, this yield premium fell from 225 at year-
end to 164 basis points by the end of the first quarter.
Yield premiums also fell dramatically in the mortgage sector. In December we
purchased a 4.2% position in FHLMC Series 2102 Class TK at a yield premium of
128 basis points to comparable U.S. Treasuries. This security is a Federal
agency-guaranteed* collateralized mortgage obligation (CMO) backed by 6.6%-rate
mortgages and is structured to provide stable cash flows within a range of
borrower prepayment speeds. As mortgage rates appeared to stabilize, investors
perceived greater certainty in the timing of mortgage cash flows. The March 31,
1999 valuation for these securities was at a yield premium of 85 basis points to
comparable U.S. Treasuries.
New Securities in the Portfolio
In January and February we purchased two U.S. Treasury Inflation Protection
Securities (TIPS) maturing in 2009 and 2028. We purchased these securities at
real (inflation-adjusted) yields ranging from 3.71% to 3.90%. The combined
purchases represented a 4.0% position in the Fund as of quarter-end.
The U.S. Treasury began issuing TIPS in 1997 to provide an investment vehicle
protected against the value-eroding effect of inflation. TIPS investors
receive inflation protection through an adjustment to the principal amount they
- --------------------------------------------------------------------------------
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1
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Income Fund
hold; this adjustment is equal to inflation as measured by changes in the
consumer price index (CPI). For example, if the level of the CPI increased by
2.0%, an investor holding $1,000 par value at the beginning of the year would
hold $1,020 at the end of the year. Interest payments would remain a fixed
percentage of principal (3.875% for example) but the dollar amount of each
interest payment would increase to reflect the higher principal amount. If the
CPI were to fall (the general level of consumer prices were to decline), the par
value and the interest payment would also fall; however, to protect TIPS
investors from "deflation," the Treasury guarantees a payment of at least par at
maturity.* Applying these principal adjustments at present yields, annual
inflation need only exceed 0.8% for 30-year TIPS to provide a better return than
1-year Treasury Bills. We believe that certain factors that held inflation to a
low 1.6% for 1998, such as the significant drop in oil and other commodity
prices, are not likely to be repeated, suggesting the possibility of higher
inflation in 1999 and beyond.
We believe that the real yield currently offered on TIPS is attractive relative
to historical real yields earned by holding Treasury Bills, which, as our
analysis shows, provide an appropriate comparison. The range of real yields at
which we purchased TIPS for the Fund is, with the exception of the early 1980's,
higher than annual inflation-adjusted returns for Treasury Bills in each of the
past fifty years. We believe that TIPS' real yields are currently high due to
the limited depth of the market (trading occurs infrequently compared to
conventional Treasuries) and a general hesitancy to enter a nascent market where
performance has suffered due to rising real yields.
In Closing
Our fixed-income portfolio team works together on a continual basis to formulate
investment strategy and make specific investment decisions based on fundamental
and relative value analysis. This ongoing process is applied to new types of
fixed-income securities as well. We will continue to employ thorough fundamental
research of investment ideas in our efforts to identify investment opportunities
with attractive long-term total return potential.
Thank you for your continued confidence in the Dodge & Cox Income Fund. As
always, we welcome your comments and questions.
For the Board of Trustees,
/s/ Harry R. Hagey
-----------------------------
April 30, 1999 Harry R. Hagey, Chairman
/s/ A. Horton Shapiro
-----------------------------
A. Horton Shapiro, Executive Vice President
* The Fund's yield and share price are not guaranteed and may vary with market
conditions.
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2
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
Objective The Fund seeks a high and stable rate of current income,
consistent with long-term preservation of capital. A secondary
objective is to take advantage of opportunities to realize capital
appreciation.
Strategy The Fund invests in a diversified portfolio consisting primarily
of high-quality bonds and other fixed-income securities, including
U.S. government obligations, mortgage and asset-backed securities,
corporate bonds, collateralized mortgage obligations (CMOs) and
others rated A or better by either S&P or Moody's.
The proportions held in the various fixed-income securities will
be revised in light of Dodge & Cox's appraisal of the economy, the
relative yields of securities in the various market sectors, the
investment prospects for issuers and other factors. In selecting
securities, Dodge & Cox will consider many factors, including
yield to maturity, quality, liquidity, current yield and capital
appreciation potential.
<TABLE>
<CAPTION>
Ten Years of Investment Performance through March 31, 1999
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
INCOME
LBAG FUND
-------- --------
<S> <C> <C>
04/01/1989 $10,000 $10,000
03/31/1990 $11,233 $11,048
03/31/1991 $12,685 $12,447
03/31/1992 $14,130 $13,978
03/31/1993 $16,009 $16,044
03/31/1994 $16,386 $16,649
03/31/1995 $17,204 $17,472
03/31/1996 $19,058 $19,499
03/31/1997 $19,992 $20,474
03/31/1998 $22,391 $23,020
03/31/1999 $23,840 $24,455
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for
periods ended March 31, 1999 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 6.23% 7.98% 9.35%
Lehman Brothers Aggregate Bond Index (LBAG) 6.48 7.79 9.08
</TABLE>
The chart covers the period from April 1, 1989 to March 31, 1999. It compares a
$10,000 investment made in the Dodge & Cox Income Fund to a $10,000 investment
made in the LBAG. The LBAG is a widely recognized, unmanaged index of U.S.
dollar-denominated investment grade fixed-income securities. The Fund's total
returns include the reinvestment of dividend and capital gain distributions.
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 March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $12.00
Total Net Assets (millions) $ 954
30 Day SEC Yield* 5.97%
1998 Expense Ratio 0.47%
1998 Portfolio Turnover 35%
Fund Inception Date 1989
Investment Manager: Dodge & Cox, San Francisco.
Managed by the Fixed-Income Strategy Committee, whose
ten members' average tenure at Dodge & Cox is 13 years,
and by the Investment Policy Committee, whose eight members'
average tenure at Dodge & Cox is 21 years.
</TABLE>
<TABLE>
<CAPTION>
Asset Allocation
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
<S> <C>
Bonds: 96.7%
Short-Term Investments: 3.3%
</TABLE>
<TABLE>
<CAPTION>
Bond Characteristics
- --------------------------------------------------------------------------------
<S> <C>
Number of Bonds 100
Average Quality AA+
Average Maturity 10.5 years
Effective Duration 4.27 years
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's
Quality Ratings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 58.7
Aaa/AAA 4.5
Aa/AA 0.2
A/A 20.3
Baa/BBB 13.0
Ba/BB 0.0
Short-Term Investments 3.3
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 19.1
Federal Agency CMO and REMIC+ 22.9
Federal Agency Mortgage Pass-Through 16.7
Asset-Backed 3.1
Corporate 30.6
Foreign (U.S. Dollar-denominated) 4.3
Short-Term Investments 3.3
</TABLE>
+Collateralized Mortgage Obligation and Real Estate Mortgage Investment Conduit
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Maturity Breakdown % of Fund
- -------------------------------------------------------------------------------
<S> <C>
0-1 Years to Maturity 11.6
1-5 36.3
5-10 22.3
10-15 7.2
15-20 6.6
20-25 4.1
25 and Over 11.9
</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
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D o d g e & C o x
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1999
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Percentage of Fund
<S> <C>
BONDS: 96.7%
U.S. TREASURY AND GOV'T AGENCY: 19.1%
FEDERAL AGENCY CMO* AND REMIC**: 22.9%
FEDERAL AGENCY MTG. PASS-THROUGH: 16.7%
ASSET-BACKED SECURITIES: 3.1%
ComEd Transitional Funding TrustNotes Series 1998
Class A-2 5.29%, 6/25/2003.................................. 1.4
CA Infrastructure and Econ. Dev. Bank SP Trust PGE-1
Rate Reduction Ctf. 1997-1 A-7 6.42%, 9/25/2008............. 1.1
CA Infrastructure and Econ. Dev. Bank SP Trust SCE-1
Rate Reduction Ctf. 1997-1 A-2 6.14%, 3/25/2002............. 0.6
CORPORATE: 30.6%
INDUSTRIAL: 15.3%
Raytheon Co., various securities............................ 2.4
Lockheed Martin Corp., various securities................... 2.2
J.E. Seagram & Sons, Inc. 7.50%, 12/15/2018................. 2.1
Raychem Corp. 7.20%, 10/15/2008............................. 2.1
Time Warner Entertainment Sr. Debentures 8.375%, 7/15/2033.. 2.0
Walt Disney Co. Debentures 7.55%, 7/15/2093................. 1.7
May Department Stores, various securities................... 1.4
Dayton Hudson Corp., 9.00%, 10/1/2021....................... 1.1
Union Camp Corp. Debentures 9.25%, 2/1/2011................. 0.3
FINANCE: 11.5%
GMAC, various securities.................................... 2.7
Ford Motor Credit Co. 7.20%, 6/15/2007...................... 2.2
Norwest Corp., various securities........................... 2.0
Hartford Financial Services Group, various securities....... 1.6
J.P. Morgan Capital Trust I 7.54%, 1/15/2027................ 0.7
BankAmerica Capital II 8.00%, 12/15/2026.................... 0.6
Citicorp Capital Trust I 7.933%, 2/15/2027.................. 0.6
First Nationwide Bank 10.00%, 10/1/2006..................... 0.5
Citicorp Capital Trust II 8.015%, 2/15/2027................. 0.3
Barclays No. American Capital 9.75%, 5/15/2021.............. 0.2
CIGNA Corp. 7.65%, 3/1/2023................................. 0.1
TRANSPORTATION: 3.6%
Union Pacific Corp., various securities..................... 2.8
Consolidated Rail Corp. 9.75%, 6/15/2020.................... 0.8
Norfolk & Western Railroad Equip. Tr. 10.125%, 7/1/2000..... 0.0
UTILITIES: 0.2%
Idaho Power Co. 1st Mtg. Bonds 9.50%, 1/1/2021............... 0.2
FOREIGN (U.S. DOLLAR-DENOMINATED): 4.3%
CANADIAN CORPORATE: 2.9%
Hydro-Quebec, various securities............................ 2.0
Canadian Pacific Ltd. 9.45%, 8/1/2021....................... 0.9
INTERNATIONAL AGENCY: 1.4%
Inter-American Development Bank 7.125%, 3/15/2023........... 0.9
European Investment Bank 10.125%, 10/1/2000................. 0.5
SHORT-TERM INVESTMENTS: 2.1%
OTHER ASSETS LESS LIABILITIES: 1.2%
TOTAL NET ASSETS: 100.0%
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
The financial information has been taken from the records of the Fund and has
not been audited by our independent accountants who do not express an opinion
thereon. The financial statements of the Fund will be subject to audit by our
independent accountants as of the close of the calendar year.
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5
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D o d g e & C o x
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Income Fund
THIS PAGE INTENTIONALLY LEFT BLANK
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6
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D o d g e & C o x
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Income Fund
Officers and Trustees
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Harry R. Hagey, Chairman & Trustee
Chairman & CEO, Dodge & Cox
John A. Gunn, President & Trustee
President, Dodge & Cox
A. Horton Shapiro, Executive Vice President & Trustee
Senior Vice President, Dodge & Cox
W. Timothy Ryan, Treasurer, Secretary & Trustee
Senior Vice President,Dodge & Cox
Katherine Herrick Drake, Vice President & Trustee
Vice President, Dodge & Cox
Dana M. Emery, Vice President & Trustee
Senior Vice President, Dodge & Cox
Kenneth E. Olivier, Vice President & Trustee
Senior Vice President, Dodge & Cox
Max Gutierrez, Jr., Trustee
Partner, Brobeck, Phleger & Harrison, Attorneys
Frank H. Roberts, Trustee
Retired Partner, Pillsbury, Madison & Sutro, Attorneys
John B. Taylor, Trustee
Professor of Economics, Stanford University
Will C. Wood, Trustee
Principal, Kentwood Associates, Financial Advisers
Thomas M. Mistele, Asst. Secretary & Asst. Treasurer
Vice President & General Counsel, Dodge & Cox
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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. The Fund's service providers have made significant
progress in their inventory, analysis, correction and Year 2000 testing efforts
across areas of operation. Industry-wide tests, also known as "street tests"
have enabled certain service providers to execute transactions in a Year 2000
simulation with industry service providers, such as Depository Trust Company
(DTC) and the Federal Reserve. 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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