<PAGE>
DODGE & COX
FUNDS
Stock Fund
Established 1965
Balanced Fund
Established 1931
Income Fund
Established 1989
Prospectus
May 1, 1999
as supplemented February 1, 2000
The Securities and Exchange Commission
has not approved or disapproved these
securities or passed upon the accuracy or
adequacy of this prospectus.
Any representation to the contrary
is a criminal offense.
<PAGE>
DODGE & COX FUNDS
Stock Fund Balanced Fund Income Fund
Established 1965 Established 1931 Established 1989
The Funds' investment manager, Dodge & Cox, was founded in
1930 and managed over $37 billion for individual and
institutional investors in mutual fund and private accounts as
of December 31, 1998. Dodge & Cox is one of the largest
privately owned investment advisers in the United States.
Prospectus
May 1, 1999
as supplemented February 1, 2000
<TABLE>
<S> <C> <C>
Table of Risk/Return Summary 2
Contents
Investment Objectives, Principal Investment
Strategies and Risks 11
. Investment Restrictions 14
. Investment Risks 15
. Additional Information on Investments 16
How to Purchase Shares 18
How to Redeem or Exchange Shares 20
General Transaction Information 23
Pricing of Shares 24
Income Dividends and Capital Gain Distributions 24
Performance Information 25
Fund Organization and Management 25
Year 2000 26
Portfolio Transactions 26
Expenses 27
Federal Income Taxes 27
Custodian and Transfer Agent 27
Investment Information and Shareholder Services 28
Financial Highlights 29
Officers and Trustees 31
</TABLE>
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other government agency, and are subject to investment risks, including
possible loss of the principal amount invested.
<PAGE>
DODGE & COX FUNDS
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Risk/Return
Summary
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DODGE & COX FUNDS (Trust) is a family of three no-load mutual
funds: Dodge & Cox Stock Fund, Dodge & Cox Balanced Fund and
Dodge & Cox Income Fund (Funds). Each Fund is a diversified
series of the Trust. The Trust is registered with the
Securities and Exchange Commission as an open-end management
investment company.
Dodge & Cox Stock Fund
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Investment The Fund seeks long-term growth of principal and income. A
Goals secondary objective is to achieve a reasonable current income.
Principal The Fund invests primarily in a broadly diversified and
Investment carefully selected portfolio of common stocks. In selecting
Strategies 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.
For details about the Fund's investment program, please see
the Investment Objectives, Principal Investment Strategies and
Risks section.
Principal Risks You could lose money on your investment in the Fund, or the
of Investing Fund could underperform other investments, if any of the
following occurs:
. The stock market goes down.
. The market continues indefinitely to undervalue the stocks
in the Fund's portfolio.
. The stocks in the Fund's portfolio turn out not to be
undervalued after all due to intractable or fundamental
problems that are not yet apparent.
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2
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DODGE & COX FUNDS
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Dodge & Cox Stock Fund (continued)
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Performance The bar chart and table shown below indicate the risks of
Information investing in the Dodge & Cox Stock Fund. The bar chart shows
changes in the performance of the Fund's shares from year to
year over a ten-year period.
The table shows how the Fund's average annual total returns
for one, five and ten years compare to those of the Standard &
Poor's Composite Index/R/ of 500 Stocks (S&P 500). The S&P 500
is a widely recognized, unmanaged index of common stock
prices.
The Fund's past performance does not necessarily indicate how
the Fund will perform in the future.
<TABLE>
<CAPTION>
Dodge & Cox Stock Fund Annual Total Returns 1989-1998
[GRAPH APPEARS HERE]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
26.94% -5.09% 21.48% 10.82% 18.32% 5.16% 33.38% 22.26% 28.41% 5.39%
During the period shown in the bar chart, the highest quarterly return was 15.42%
(quarter ended June 30, 1997) and the lowest quarterly return was -16.04% (quarter
ended September 30, 1990).
--------------------------------------------------------------------------------
Average annual total returns for the periods ended December 31, 1998
--------------------------------------------------------------------------------
Past 1 Year Past 5 Years Past 10 Years
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Stock Fund 5.39% 18.34% 16.11%
S&P 500 28.57 24.05 19.20
--------------------------------------------------------------------------------
</TABLE>
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3
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DODGE & COX FUNDS
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Dodge & Cox Stock Fund (continued)
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Fees and The table describes the fees and expenses that you may pay if
Expenses you buy and hold shares of the Fund.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Shareholder Fees Annual Fund Operating Expenses
(fees paid directly from your investment) (expenses that are deducted from Fund assets)
-------------------------------------------------------------------------------------------------------------
<S> <C>
Sales load imposed on purchases None Management fees .50%
Deferred sales load None Distribution (12b-1) and/or service fees None
Sales load imposed on Other expenses (transfer agent, custodial,
reinvested distributions None accounting, legal, etc.) .07%
Redemption fee None ----
Exchange fee None Total Fund Operating Expenses .57%
Maximum account fee None
-------------------------------------------------------------------------------------------------------------
</TABLE>
Example: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other
mutual funds.
The example assumes that:
. You invest $10,000 in the Fund for the time periods
indicated;
. Your investment has a 5% return each year; and
. The Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these
assumptions your costs would be:
--------------------------------------------------------------
Number of Years 1 3 5 10
--------------------------------------------------------------
$58 $183 $318 $714
--------------------------------------------------------------
This example should not be considered to represent actual
expenses or performance from the past or for the future.
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4
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DODGE & COX FUNDS
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Dodge & Cox Balanced Fund
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Investment The Fund seeks regular income, conservation of principal and
Goals an opportunity for long-term growth of principal and income.
Principal The Fund invests in a diversified portfolio of common stocks,
Investment preferred stocks and bonds. In selecting equity investments,
Strategies the Fund invests in companies that, in Dodge & Cox's opinion,
appear to be temporarily undervalued by the stock market and
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.
Fixed-income investments include investment-grade: U.S.
government obligations, mortgage and asset-backed securities,
corporate bonds, collateralized mortgage obligations (CMOs),
and others. 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 fixed-income securities, Dodge
& Cox will consider many factors, including yield to maturity,
quality, liquidity, current yield and capital appreciation
potential.
While the mix of equity and fixed-income securities will vary
depending on Dodge & Cox's outlook on the markets, no more
than approximately 75% of total assets will be invested in
common stocks and that portion of the value of convertible
securities attributable to the conversion right.
For details about the Fund's investment program, please see
the Investment Objectives, Principal Investment Strategies and
Risks section.
Principal Risks You could lose money on your investment in the Fund, or the
of Investing Fund could underperform other investments, if any of the
following occurs:
Equity Securities
. The stock market goes down.
. The market continues indefinitely to undervalue the stocks
in the Fund's portfolio.
. The stocks in the Fund's portfolio turn out not to be
undervalued after all due to intractable or fundamental
problems that are not yet apparent.
Fixed-Income Securities
. Bond prices decline due to rising interest rates.
. A bond issuer's financial condition deteriorates, or it
fails to repay interest and principal in a timely manner.
. Early repayment of principal of mortgage-related securities
(e.g., prepayment of principal due to sale of the
underlying property, refinancing or foreclosure) exposes
the Fund to a lower rate of return upon reinvestment of
principal. In addition, changes in the rate of prepayment
also affects the price and volatility of a mortgage-related
security.
The Fund's balance between stocks and fixed-income securities
could limit its potential for capital appreciation relative to
an all stock fund.
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5
<PAGE>
DODGE & COX FUNDS
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Dodge & Cox Balanced Fund (continued)
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Performance The bar chart and table shown below indicate the risks of
Information investing in the Dodge & Cox Balanced Fund. The bar chart
shows changes in the performance of the Fund's shares from
year to year over a ten-year period.
The table shows how the Fund's average annual total returns
for one, five and ten years compare to a Combined Index
consisting of 60% of the Standard & Poor's Composite Index/R/
of 500 Stocks (S&P 500) and 40% of the Lehman Brothers
Aggregate Bond Index (LBAG). The S&P 500 and LBAG are widely
recognized, unmanaged indices of common stock prices and U.S.
dollar-denominated, investment-grade fixed-income securities,
respectively.
The Fund's past performance does not necessarily indicate how
the Fund will perform in the future.
<TABLE>
<CAPTION> Dodge & Cox Balanced Fund Annual Total Returns 1989-1998
[GRAPH APEARS HERE]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
23.02% 0.94% 20.72% 10.57% 15.95% 1.99% 28.02% 14.75% 21.21% 6.70%
During the period shown in the bar chart, the highest quarterly return was 10.96%
(quarter ended June 30, 1997) and the lowest quarterly return was -9.26% (quarter
ended September 30, 1990).
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Average annual total returns for the periods ended December 31, 1998
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Past 1 Year Past 5 Years Past 10 Years
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Balanced Fund 6.70% 14.14% 14.05%
Combined Index (60% S&P 500 & 40% LBAG) 20.99 17.32 15.34
S&P 500 28.57 24.05 19.20
LBAG 8.67 7.27 9.26
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</TABLE>
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6
<PAGE>
DODGE & COX FUNDS
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Dodge & Cox Balanced Fund (continued)
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Fees and The table describes the fees and expenses that you may pay if
Expenses you buy and hold shares of the Fund.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Shareholder Fees Annual Fund Operating Expenses
(fees paid directly from your investment) (expenses that are deducted from Fund assets)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales load imposed on purchases None Management fees .50%
Deferred sales load None Distribution (12b-1) and/or service fees None
Sales load imposed on Other expenses (transfer agent, custodial,
reinvested distributions None accounting, legal, etc.) .04%
Redemption fee None ----
Exchange fee None Total Fund Operating Expenses .54%
Maximum account fee None
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</TABLE>
Example: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other
mutual funds.
The example assumes that:
. You invest $10,000 in the Fund for the time periods
indicated;
. Your investment has a 5% return each year; and
. The Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these
assumptions your costs would be:
--------------------------------------------------------------
Number of Years 1 3 5 10
--------------------------------------------------------------
$55 $173 $302 $677
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This example should not be considered to represent actual
expenses or performance from the past or for the future.
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7
<PAGE>
DODGE & COX FUNDS
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Dodge & Cox Income Fund
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Investment The Fund seeks a high and stable rate of current income,
Goals consistent with long-term preservation of capital. A secondary
objective is to take advantage of opportunities to realize
capital appreciation.
Principal The Fund invests in a diversified portfolio consisting
Investment primarily of high-quality bonds and other fixed-income
Strategies 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.
For details about the Fund's investment program, please see
the Investment Objectives, Principal Investment Strategies and
Risks section.
Principal Risks You could lose money on your investment in the Fund, or the
of Investing Fund could underperform other investments, if any of the
following occurs:
. Bond prices decline due to rising interest rates.
. A bond issuer's financial condition deteriorates, or it
fails to repay interest and principal in a timely manner.
. Early repayment of principal of mortgage-related securities
(e.g., prepayment of principal due to sale of the
underlying property, refinancing or foreclosure) exposes
the Fund to a lower rate of return upon reinvestment of
principal. In addition, changes in the rate of prepayment
also affects the price and volatility of a mortgage-related
security.
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8
<PAGE>
DODGE & COX FUNDS
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Dodge & Cox Income Fund (continued)
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Performance The bar chart and table shown below indicate the risks of
Information investing in the Dodge & Cox Income Fund. The bar chart shows
changes in the performance of the Fund's shares over a ten-
year period.
The table shows how the Fund's average annual total returns
for one, five and ten years compare to those of the Lehman
Brothers Aggregate Bond Index (LBAG). The LBAG is a widely
recognized, unmanaged index of U.S. dollar-denominated
investment-grade fixed-income securities.
The Fund's past performance does not necessarily indicate how
the Fund will perform in the future.
<TABLE>
<CAPTION> Dodge & Cox Income Fund Annual Total Returns 1989-1998
[GRAPH APPEARS HERE]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
14.09% 7.42% 17.94% 7.80% 11.35% -2.89% 20.21% 3.62% 10.00% 8.08%
During the period shown in the bar chart, the highest quarterly return was 7.88%
(quarter ended June 30, 1989) and the lowest quarterly return was -2.38% (quarter
ended March 31, 1994).
--------------------------------------------------------------------------------
Average annual total returns for the periods ended December 31, 1998
--------------------------------------------------------------------------------
Past 1 Year Past 5 Years Past 10 Years
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 8.08% 7.54% 9.57%
LBAG 8.67 7.27 9.26
--------------------------------------------------------------------------------
</TABLE>
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9
<PAGE>
DODGE & COX FUNDS
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Dodge & Cox Income Fund (continued)
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Fees and The table describes the fees and expenses that you may pay if
Expenses you buy and hold shares of the Fund.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Shareholder Fees Annual Fund Operating Expenses
(fees paid directly from your investment) (expenses that are deducted from Fund assets)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales load imposed on purchases None Management fees .41%
Deferred sales load None Distribution (12b-1) and/or service fees None
Sales load imposed on Other expenses (transfer agent, custodial,
reinvested distributions None accounting, legal, etc.) .06%
Redemption fee None ----
Exchange fee None Total Fund Operating Expenses .47%
Maximum account fee None
-------------------------------------------------------------------------------------------------------------
</TABLE>
Example: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other
mutual funds.
The example assumes that:
. You invest $10,000 in the Fund for the time periods
indicated;
. Your investment has a 5% return each year; and
. The Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these
assumptions your costs would be:
--------------------------------------------------------------
Number of Years 1 3 5 10
--------------------------------------------------------------
$48 $151 $263 $591
--------------------------------------------------------------
This example should not be considered to represent actual
expenses or performance from the past or for the future.
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10
<PAGE>
DODGE & COX FUNDS
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Investment Objectives, Principal Investment Strategies and Risks
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This section takes a closer look at the investment objectives
of each Fund, their principal investment strategies and
certain risks of investing in the Fund.
Dodge & Cox Stock Fund
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Investment The Fund's primary objective is to provide shareholders with
Objectives an opportunity for long-term growth of principal and income. A
and Principal secondary objective is to achieve a reasonable current income.
Investment These objectives may not be changed without shareholder
Strategies approval. Investors should recognize that the market risks
inherent in investment cannot be avoided, nor is there any
assurance that the investment objectives of the Fund will be
achieved. The Fund seeks to achieve its objective by investing
primarily in a diversified portfolio of common stocks. Under
normal market conditions, the Fund will invest at least 65% of
its total assets in common stocks. The Fund may also purchase
other types of securities, for example, preferred stocks and
debt securities which are convertible into common stock (or
which in the opinion of Dodge & Cox have predominantly common
stock investment characteristics). The Fund may also invest up
to 20% of its total assets in U.S. dollar-denominated
securities of foreign issuers traded in the U.S. (such as
American Depositary Receipts (ADRs)). Further information
about specific investments is provided under Additional
Information on Investments.
Moderate reserves in cash or short-term fixed-income
securities may be held from time to time as Dodge & Cox may
deem advisable. Nevertheless, the long-term emphasis shall be
the maintaining of a fully invested equity fund.
Common stocks selected for the Fund will be predominantly
those which in the view of Dodge & Cox have positive prospects
for long-term growth of principal and income not reflected in
the current price. Prospective earnings and dividends are
major considerations in these stock selections. Individual
securities are selected with an emphasis on financial strength
and sound economic background. The Fund's policies as
described above may be changed without shareholder approval;
however, these policies will not be changed without notice to
shareholders.
In an attempt to minimize unforeseen risks in single
securities, the Fund seeks to provide adequate investment
diversification. Although there is no restriction on the
number of changes in security holdings, purchases are made
with a view to long-term holding and not for short-term
trading purposes. (The Fund's portfolio turnover rates for the
fiscal years ended December 31, 1998, 1997 and 1996 were 19%,
19%, and 10%, respectively.) However, during rapidly changing
economic, market and political conditions, there may
necessarily be more portfolio changes than in a more stable
period. A higher turnover rate might result in increased
transaction expenses and the realization of capital gains and
losses (see Federal Income Taxes). It is the general practice
of the Fund to invest in securities with ready markets, mainly
issues listed on national securities exchanges.
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11
<PAGE>
DODGE & COX FUNDS
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Dodge & Cox Balanced Fund
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Investment The Fund's objectives are to provide shareholders with regular
Objectives income, conservation of principal and an opportunity for long-
and Principal term growth of principal and income. These objectives may not
Investment be changed without shareholder approval. Investors should
Strategies recognize that the market risks inherent in investment cannot
be avoided, nor is there any assurance that the investment
objectives of the Fund will be achieved. Reasonable
appreciation in favorable periods and conservation of
principal in adverse times are objectives that require
flexibility in managing the assets of the Fund under
constantly changing investment conditions. Therefore, the
proportions held in common and preferred stocks and bonds are
revised by Dodge & Cox when considered advisable in light of
its appraisal of business and investment prospects.
Under normal market conditions, it is the policy of the Fund
to maintain no more than approximately 75% of its total assets
in common stocks and that portion of the value of convertible
securities attributable to the conversion right. Fixed-income
securities are held for their relative stability of principal
and income as well as for a reserve which can be used to take
advantage of investment opportunities. The Fund may also
invest up to 20% of its total assets in U.S. dollar-
denominated securities of foreign issuers traded in the U.S.
(such as American Depositary Receipts (ADRs) and Yankee
bonds). Moderate reserves in cash or short-term fixed-income
securities may be held from time to time as Dodge & Cox may
deem advisable. Further information about specific investments
is provided under Additional Information on Investments.
It is the Fund's policy to invest in investment-grade debt
securities rated in the top four rating categories by either
Moody's Investors Service (Moody's)(Aaa, Aa, A, Baa) or
Standard & Poor's Ratings Group (S&P)(AAA, AA, A, BBB).
Securities rated Baa or BBB have speculative characteristics.
Securities that are downgraded below Baa or BBB subsequent to
purchase may continue to be held by the Fund, if Dodge & Cox
believes it advantageous to do so. Unrated debt securities may
be purchased if they are, in the opinion of Dodge & Cox, of
equivalent quality to debt securities rated at least A by
Moody's and S&P. An explanation of Moody's and S&P's rating
groups is included in the Appendix to the Statement of
Additional Information (SAI).
A substantial position will be maintained in common stocks
which in the view of Dodge & Cox have positive prospects for
long-term growth of principal and income not reflected in the
current price. Prospective earnings and dividends are major
considerations in these stock selections. The level of
security prices and the trend of business activity are
considered in determining the total investment position of the
Fund in equities at any time. Individual securities are
selected with an emphasis on financial strength and a sound
economic background. The Fund's policies as described above
may be changed without shareholder approval; however, these
policies will not be changed without notice to
shareholders.
The proportions held in the various fixed-income securities
will be revised as appropriate in light of Dodge & Cox's
appraisal of the economy, the relative yields of securities in
the various market sectors, the investment prospects for
issuers and other factors. In making investment decisions,
Dodge & Cox will take many factors into consideration
including yield to maturity, quality, liquidity, current yield
and capital appreciation potential.
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12
<PAGE>
DODGE & COX FUNDS
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Dodge & Cox Balanced Fund (continued)
--------------------------------------------------------------
In an attempt to minimize unforeseen risks in single
securities, the Fund seeks to provide adequate investment
diversification. Although there is no restriction on the
number of changes in security holdings, purchases are made
with a view to long-term holding and not for short-term
trading purposes. (The Fund's portfolio turnover rates for the
fiscal years ended December 31, 1998, 1997 and 1996 were 26%,
32% and 17%, respectively.) However, during rapidly changing
economic, market and political conditions, there may
necessarily be more portfolio changes than in a more stable
period. A higher turnover rate might result in increased
transaction expenses and the realization of capital gains and
losses (see Federal Income Taxes). It is the general practice
of the Fund to invest mainly in equity securities listed on
national securities exchanges and securities with ready
markets.
Dodge & Cox Income Fund
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Investment The Fund's primary objective is to provide shareholders with a
Objectives high and stable rate of current income consistent with long-
and Principal term preservation of capital. A secondary objective is to take
Investment advantage of opportunities to realize capital appreciation.
Strategies These objectives may not be changed without shareholder
approval. Investors should recognize that the market risks
inherent in investment cannot be avoided, nor is there any
assurance that the investment objectives of the Fund will be
achieved.
The Fund seeks to achieve its objectives by investing in a
diversified portfolio of fixed-income securities. It is the
policy of the Fund to invest at least 80% of the market value
of its total assets in the following: (1) debt obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; (2) investment-grade debt securities,
including U.S. dollar-denominated foreign issues and
supranational agencies, rated in the top four rating
categories by either Moody's (Aaa, Aa, A, Baa) or S&P (AAA,
AA, A, BBB); (3) unrated securities if deemed to be of
investment-grade quality by Dodge & Cox; and (4) bankers'
acceptances, bank certificates of deposit, repurchase
agreements and commercial paper. At least 65% of the market
value of the portfolio will be invested in category (1)
securities and in category (2) securities rated in the top
three rating categories. In addition, the Fund will invest no
more than 25% of its total assets in U.S. dollar-denominated
securities of foreign issuers. Further information about
specific investments is provided under Additional Information
on Investments.
No more than 20% of the Fund may be invested in other fixed-
income instruments including: debt obligations rated below
investment grade if, in the opinion of Dodge & Cox, they are
of suitable quality, provide attractive investment
opportunities and have a minimum rating of B by Moody's and/or
S&P at the time of investment; preferred stock; corporate
bonds convertible into common stocks or carrying warrants to
purchase common stock. The Fund will invest in unrated
securities only if deemed to be of investment-grade quality by
Dodge & Cox. It should be noted that securities rated Baa or
BBB or below have speculative characteristics. Securities
rated B may yield a higher level of current income than higher
quality securities but generally have less liquidity, greater
market risk and more price fluctuation. An explanation of
Moody's and S&P's rating categories is included in the
Appendix to the SAI.
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13
<PAGE>
DODGE & COX FUNDS
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Dodge & Cox Income Fund (continued)
--------------------------------------------------------------
The proportions held in the various fixed-income securities
will be revised as appropriate in light of Dodge & Cox's
appraisal of the economy, the relative yields of securities in
the various market sectors, the investment prospects for
issuers and other factors. In making investment decisions,
Dodge & Cox will take many factors into consideration
including yield to maturity, quality, liquidity, current yield
and capital appreciation potential.
The Fund attempts to achieve its secondary objective of
capital appreciation through such techniques as fundamental
research (i.e., seeking a security or group of securities
which Dodge & Cox believes to be undervalued), purchasing
securities at a discount from their maturity or call value and
making gradual adjustments in the average maturity of the
Fund's portfolio.
The average maturity of the Fund's portfolio at any given time
depends, in part, on Dodge & Cox's assessment of economic and
market conditions, the future level of inflation and interest
rates, and on the relative yields of securities in the
marketplace. Dodge & Cox normally invests in an array of
securities with short, intermediate and long maturities in
varying proportions.
Purchases and sales of securities are generally made for long-
term fundamental investment reasons rather than for short-term
trading purposes. Nevertheless, Dodge & Cox may sell any of
the securities in the Fund, regardless of the length of time
held, in seeking to achieve the objectives of the Fund.
In seeking to achieve the objectives of the Fund, Dodge & Cox
may purchase securities on a when-issued basis, purchase or
sell securities for delayed delivery and lend portfolio
securities. The Fund's investment policies as set forth above
may be changed without shareholder approval; however, these
policies will not be changed without notice to
shareholders.
Dodge & Cox maintains a long-term investment orientation and
therefore anticipates a relatively low turnover rate. (The
Fund's portfolio turnover rates for the fiscal years ended
December 31, 1998, 1997, and 1996 were 35%, 28%, and 37%,
respectively.) However, during rapidly changing economic,
political and market environments, there may be more portfolio
changes than in a more stable period. A higher turnover rate
might result in increased transaction expenses and the
realization of capital gains and losses (see Federal Income
Taxes).
- --------------------------------------------------------------------------------
Investment The Funds have adopted certain restrictions designed to
Restrictions achieve diversification of investment and to reduce investment
risk. Each Fund may not: (a) invest more than 5% of the value
of its total assets in the securities of any one issuer except
the U.S. Government, nor acquire more than 10% of the voting
securities of any one issuer; (b) concentrate investments of
more than 25% of the value of its total assets in any one
industry, except that the restriction does not apply to
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities (or related repurchase
agreements); (c) borrow money except as a temporary measure
for extraordinary or emergency purposes; (d) make loans to
other persons, except this shall not exclude the purchase of
publicly issued debt securities of a type purchased by
institutional investors. The investment restrictions described
in this paragraph and in the SAI may be changed only with the
approval of that Fund's shareholders.
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14
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DODGE & COX FUNDS
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Investment You should understand that all investments involve risks, and
Risks there can be no guarantee against loss resulting from an
investment in the Funds, nor can there be any assurance that a
Fund's investment objectives will be attained. There are
further risk factors described elsewhere in this prospectus
and in the SAI.
Investments in common stock in general are subject to market
risks that cause their prices to fluctuate over time, i.e.,
the possibility that stock prices will decline over short or
even extended periods. Prices of bonds are sensitive to
changes in the market level of interest rates. In general, as
interest rates rise, the prices of fixed-income securities
fall, and conversely, as interest rates fall, the prices of
these securities rise. Yields on short, intermediate and long-
term securities are dependent on a variety of factors,
including the general conditions of the money and bond
markets, the size of a particular offering, the maturity of
the obligation, and the credit quality and rating of the
issue. Debt securities with longer maturities tend to have
higher yields and are generally subject to potentially greater
capital appreciation and depreciation than obligations with
shorter maturities and lower yields. Furthermore, because
yield levels on securities vary with changing interest rates,
no specific yield on shares of a Fund can be guaranteed. Since
the Dodge & Cox Income Fund and the bond portion of the Dodge
& Cox Balanced Fund portfolio will be invested primarily in
higher quality debt securities, the Funds may not yield as
high a level of current income as funds that invest primarily
in lower quality debt securities which generally have less
liquidity, greater market risk and greater price fluctuation.
The value of stocks and bonds may also be affected by changes
in the financial condition of, and other events affecting,
specific issuers. Fluctuations in the value of the securities
in which a Fund invests will cause the Fund's share price to
fluctuate. An investment in the Funds, therefore, may be more
suitable for long-term investors who can bear the risk of
short and long-term fluctuations in a Fund's share price.
Foreign securities involve some special risks such as exposure
to potentially adverse local political and economic
developments; nationalization and exchange controls;
potentially lower liquidity and higher volatility; possible
problems arising from accounting, disclosure, settlement and
regulatory practices that differ from U.S. standards; foreign
taxes; and the risk that fluctuations in foreign exchange
rates will decrease the investment's value (although favorable
changes can increase its value).
The Dodge & Cox Balanced Fund, with its mixture of investments
in common stocks and bonds, may entail less investment risk
(and a potentially lower return) than a mutual fund investing
only in common stocks.
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15
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DODGE & COX FUNDS
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Additional COMMON STOCKS (DODGE & COX STOCK FUND and DODGE & COX BALANCED
Information FUND) Stocks represent shares of ownership in a company. After
on Investments other claims are satisfied, common stockholders participate in
company profits on a pro rata basis; profits may be paid out
in dividends or reinvested in the company to help it grow.
Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the
greatest appreciation and depreciation potential of all
corporate securities.
PREFERRED STOCKS Each Fund may invest in preferred stocks.
Generally, preferred stock has a specified dividend and ranks
after bonds but before common stocks in its claim on income
for dividend payments and on assets should the company be
liquidated.
CONVERTIBLE SECURITIES Each Fund may invest in debt or
preferred equity securities convertible into or exchangeable
for equity securities. Traditionally, convertible securities
have paid dividends or interest at rates higher than common
stocks but lower than nonconvertible securities. They
generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a
lesser degree. In recent years, convertibles have been
developed which combine higher or lower current income with
other features.
FOREIGN SECURITIES Each Fund may invest in U.S. dollar-
denominated securities of foreign issuers traded in the U.S.
Such investments increase a portfolio's diversification and
may enhance return, but they also involve some special risks.
U.S. GOVERNMENT OBLIGATIONS A portion of each Fund may be
invested in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Some of the
obligations purchased by a Fund are backed by the full faith
and credit of the U.S. Government and are guaranteed as to
both principal and interest by the U.S. Treasury. Examples of
these include direct obligations of the U.S. Treasury, such as
U.S. Treasury bills, notes and bonds, or indirect obligations
of the U.S. Treasury, such as obligations of the Government
National Mortgage Association, the Maritime Administration,
the Farmers Home Administration and the Department of Veterans
Affairs.
While the obligations of many of the agencies and
instrumentalities of the U.S. Government are not direct
obligations of the U.S. Treasury, they are generally backed
indirectly by the U.S. Government. Some of the agencies are
indirectly backed by their right to borrow from the U.S.
Government, such as the Federal Financing Bank, the Federal
Home Loan Banks and the U.S. Postal Service. Others are
supported solely by the credit of the agency or
instrumentality itself, but are given additional support due
to the U.S. Treasury's authority to purchase their outstanding
debt obligations. These agencies include the Federal Farm
Credit Banks, the Federal Home Loan Mortgage Corporation and
the Federal National Mortgage Association. No assurance can be
given that the U.S. Government would provide financial support
to U.S. Government-established or sponsored agencies.
Furthermore, with respect to the U.S. Government securities
purchased by the Fund, guarantees as to the timely payment of
principal and interest do not extend to the value or yield of
these securities nor do they extend to the value of a Fund's
shares. A Fund may invest in these securities if it believes
they offer an expected return commensurate with the risks
assumed.
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16
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DODGE & COX FUNDS
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MORTGAGE PASS-THROUGH SECURITIES (DODGE & COX BALANCED FUND
and DODGE & COX INCOME FUND) Mortgage pass-through securities
are guaranteed by an agency of the U.S. Government or are
issued by a private entity. These securities represent
ownership in "pools" of mortgage loans and are called "pass-
throughs" because principal and interest payments are passed
through to security holders monthly. The security holder may
also receive unscheduled principal payments representing
prepayments of the underlying mortgage loans. When a Fund
reinvests the principal and interest payments, it may receive
a rate of interest which is either higher or lower than the
rate on the existing mortgage.
During periods of declining interest rates there is increased
likelihood that mortgage securities may be prepaid more
quickly than expected. Such prepayment would most likely be
reinvested at lower rates. On the other hand, if the pass-
through securities had been purchased at a discount, then such
prepayment of principal may benefit the portfolio. Conversely,
in a rising interest rate environment, mortgage securities may
be prepaid at a rate slower than expected. In this case, the
current cash flow of the bond generally decreases. A slower
prepayment rate effectively lengthens the time period the
security will be outstanding and may adversely affect the
price and volatility of the security.
COLLATERALIZED MORTGAGE OBLIGATIONS (DODGE & COX BALANCED FUND
and DODGE & COX INCOME FUND) Collateralized Mortgage
Obligations (CMOs) are private entity or U.S. Government
agency-issued multi-class bonds that are collateralized by
U.S. agency-guaranteed mortgage pass-through securities. The
issuer typically issues several classes, or "tranches", of
bonds, the debt service of which is provided by the principal
and interest payments from the mortgage pass-through
securities in the trust. Each of these tranches is valued and
traded separately based on its distinct cash flow
characteristics. Dodge & Cox will purchase a tranche with the
weighted-average life and cash flow characteristics that it
believes will contribute to achieving the objectives of a
Fund.
All CMOs purchased by a Fund will be issued or guaranteed by
an agency of the U.S. government or have a AA rating by either
S&P or Moody's, the major rating services. To qualify for this
rating, a CMO is structured so that even under conservative
prepayment and reinvestment assumptions, the principal and
interest payments from the collateral are expected to meet or
exceed the cash flow obligations of all the tranches of the
CMO. However, there are risks associated with CMOs which
relate to the risks of the underlying mortgage pass-through
securities (i.e., a decrease or increase in prepayment rates,
resulting from a decrease or increase in mortgage interest
rates, will affect the yield, average life and price of CMOs).
In a falling interest rate environment, the mortgage
securities may be prepaid faster than the assumed rate. In
this scenario, the prepayments of principal will generally be
reinvested at a rate which is lower than the rate that the
security holder is currently receiving. Conversely, in a
rising interest rate environment, the mortgage collateral may
be prepaid at a rate which is slower than the assumed rate. In
this case, the current cash flow of the bond generally
decreases. A reduced prepayment rate effectively lengthens the
time period the security will be outstanding and may adversely
affect the price and volatility of the security.
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17
<PAGE>
DODGE & COX FUNDS
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How to If the Fund's transfer agent, Boston Financial Data Services
Purchase Inc. (Boston Financial Data Services), receives your request
Shares in good order before the close of trading on the New York
Stock Exchange (generally 4 p.m. Eastern time (ET)), your
transactions will be priced at that day's net asset value
(NAV). If your request is received after 4 p.m., it will be
priced at the next business day's NAV. The Funds are offered
on a no-load basis. You do not pay sales commissions or 12b-1
marketing fees.
<TABLE>
<CAPTION>
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TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
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MINIMUM INVESTMENT $2,500 (regular account); $100
$1,000 (IRAs)
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<S> <C> <C>
BY MAIL Complete and sign the Mail your check with
Regular Mail: Account Application an Invest-By-Mail form
Dodge & Cox Funds (Adoption Agreement detached from your
c/o Boston Financial for an IRA). confirmation statement.
Data Services
P.O. Box 9051 Call 1-800-621-3979
Boston, MA 02205-9051 or visit the Funds'
web site at
Express, Certified or www.dodgeandcox.com
Registered Mail: to receive the
Dodge & Cox Funds appropriate forms.
c/o Boston Financial
Data Services Make your check payable to Dodge & Cox Funds.
66 Brooks Drive, Suite 1 All purchases must be made in U.S. dollars,
Braintree, MA 02184-3839 and checks must be drawn on U.S. banks.
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IMPORTANT NOTE: To prevent check fraud, the Funds will not accept third party checks.
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BY TELEPHONE You may not use telephone Complete
1-800-621-3979 transactions for initial "Investment/Redemption
Client Services purchases of a Fund's Options" in the Account
shares. Application to transfer
assets from your bank
Business Hours: Call Client Services account.
Monday-Friday during business hours
9 a.m.-8 p.m. ET to exchange from another Call Client Services
Dodge & Cox Fund account during business hours to
with the same registration make subsequent investments
(name, address, taxpayer directly from your bank
I.D. and account type). account or exchange from
another Dodge & Cox Fund
account with the same
registration (name, address,
taxpayer I.D. and account type).
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IMPORTANT NOTE: Only bank accounts held at domestic financial institutions that are Automated
Clearing House (ACH) members may be used for telephone transactions. This option will become
effective approximately 15 business days after the Account Application is received by Boston
Financial Data Services. The price paid for shares of a Fund will be the next determined NAV
after Boston Financial Data Services receives your investment instructions. Your order may be
canceled if payment is not received by the third business day after your order is placed.
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</TABLE>
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18
<PAGE>
DODGE & COX FUNDS
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<TABLE>
<CAPTION>
How to -------------------------------------------------------------------
Purchase Shares TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
(continued) --------------------------------------------------------------------------------------------------
<S> <C> <C>
BY WIRE Call Client Services Call Client Services
Wire to: (1-800-621-3979) to (1-800-621-3979) to
State Street Bank notify the Fund of notify the Fund of your
and Trust Company your wire transaction. wire transaction.
Boston, MA
ABA 0110 0002 8 After making initial Wire transactions are not
Deposit DDA 9905-351-4 investments by wire, you available for IRA accounts,
FFC Dodge & Cox must promptly complete an except for asset transfers
(Fund Name) Fund Account Application and mail and direct rollovers.
Fund #/ Account # it to the Fund, c/o Boston
Account Registration Financial Data Services, at
either of the addresses listed
above. No account services will
be established until the completed
Account Application has been
received by the Fund.
Wire transactions are not available
for IRA accounts, except for asset
transfers and direct rollovers.
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AUTOMATICALLY The Funds offer ways to invest automatically. Call Client Services
or visit the Funds' website at www.dodgeandcox.com and request the
Account Options Form (IRA Account Options Form for IRA Accounts) to
establish this service. See Automatic Investment Plan.
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IMPORTANT NOTES:
* If Boston Financial Data Services receives your call before 4:00 p.m. ET and receives the
wired funds the same day, the Fund will credit the purchase to your account that day. If we
receive your call after 4:00 p.m. or the bank receives the wire after 6:00 p.m., we will
credit the purchase to your account the following business day.
* If you buy Fund shares through a registered broker/dealer, financial institution or investment
adviser, the broker/dealer or adviser may charge you a service fee.
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</TABLE>
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19
<PAGE>
DODGE & COX FUNDS
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Additional All subscriptions are subject to acceptance by the Fund, and
Information the price of the shares will be the NAV which is next
About computed after receipt by Boston Financial Data Services, or
Purchases other authorized agent or sub-agent, of the subscription in
proper form (see Pricing of Shares). If your payment is not
received or you pay with a check or ACH transfer that does not
clear, your purchase will be canceled. You will be responsible
for any losses or expenses (including a $20 fee) incurred by a
Fund or Boston Financial Data Services, and a Fund can redeem
shares you own in this or another identically registered Dodge
& Cox Fund account as reimbursement. The Funds and their
agents have the right to reject or cancel any purchase,
exchange or redemption due to nonpayment. All subscriptions
will be invested in full and fractional shares, and you will
receive a confirmation statement.
Certificates (for full shares only) are not issued unless
requested by you.
A Social Security or Taxpayer Identification Number must be
supplied and certified on the Account Application before an
account can be established. If you fail to furnish a Fund with
your correct Social Security or Taxpayer Identification
Number, the Fund may be required to withhold Federal income
tax at a rate of 31% ("backup withholding") from dividends,
capital gain distributions and redemptions.
The Funds and their agents reserve the right to accept initial
purchases by telephone; to cancel or rescind any purchase or
exchange (for example, if an account has been restricted due
to excessive trading or fraud) upon notice to the shareholder
within five business days of the trade; to freeze any account
and temporarily suspend services on the account when notice
has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a
fraudulent transaction may occur; to otherwise modify the
conditions of purchase and any services at any time; or to act
on instructions believed to be genuine.
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How to You may withdraw any part of your account by selling shares.
Redeem or The sale price of your shares will be the Fund's next-
Exchange determined NAV after Boston Financial Data Services receives
Shares all required documents in good order.
Good order means that the request includes:
* Fund name and account number.
* Amount of the transaction (in dollars or shares).
* Signatures of all owners exactly as registered on the
account.
* Signature guarantees (if required).
* Any supporting legal documentation that may be required.
* Any certificates you are holding for the account.
Sale or exchange requests received after the close of trading
on the New York Stock Exchange (generally 4 p.m. ET) are
processed at the next business day's NAV. No interest will
accrue on amounts represented by uncashed redemption
checks.
The Funds reserve the right to close any non-IRA account in
which the balance falls below the minimum initial investment.
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DODGE & COX FUNDS
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<TABLE>
<CAPTION>
How to
Redeem or
Exchange ----------------------------------------------------------
Shares ACCOUNT TYPE
(continued) --------------------------------------------------------------------------------------
<S> <C>
BY TELEPHONE ALL TYPES EXCEPT IRA ACCOUNTS
1-800-621-3979 Call Client Services during business hours to
Client Services sell or exchange shares. You can exchange shares
from a Fund to open an account in another Fund or
Business Hours: to add to an existing account with an identical
Monday-Friday registraton.
9 a.m.-8 p.m. ET
IRA ACCOUNTS
You can sell and exchange shares by calling
Client Services. You must complete the
"Telephone Redemption Option" on the Adoption
Agreement to authorize the telephone
redemption service.
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BY MAIL ALL TYPES EXCEPT IRA ACCOUNTS
Regular Mail: Send a letter of instruction signed by all registered
Dodge & Cox Funds account holders. Include the Fund name and account
c/o Boston Financial number and (if you are selling) a dollar amount or
Data Services number of shares OR (if you are exchanging) the name
P.O. Box 9051 of the Fund you want to exchange into and a dollar
Boston, MA 02205-9051 amount or number of shares. To exchange into an account
with a different registration (including a different name,
Express, Certified or address, or taxpayer identification number), you must
Registered Mail: provide Boston Financial Data Services with written
Dodge & Cox Funds instructions that include the guaranteed signatures of
c/o Boston Financial all current account owners. See Signature Guarantees.
Data Services
66 Brooks Drive, Suite 1 IRA ACCOUNTS
Braintree, MA 02184-3839 To make a distribution from your IRA, call Client
Services or visit the Funds' website at
www.dodgeandcox.com and request an IRA Distribution Form.
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AUTOMATICALLY The Funds offer ways to sell shares automatically. Call
Client Services or visit the Funds' website at
www.dodgeandcox.com and request the Account Options Form
(or IRA Distribution Form for IRA accounts) to establish
this service. See Systematic Withdrawal Plan.
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</TABLE>
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DODGE & COX FUNDS
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REDEMPTION PAYMENTS MAY BE MADE BY CHECK,
WIRE OR ACH
BY CHECK Checks will be made payable to you and will be sent
to your address of record. If the proceeds of the redemption
are requested to be sent to other than the address of record
or if the address of record has been changed within 30 days of
the redemption request, the request must be in writing with
your signature(s) guaranteed.
BY WIRE The Fund will wire redemption proceeds only to the
bank account designated on the Account Application or in
written instructions--with signature guarantee--received with
the redemption order.
BY ACH Redemption proceeds can be sent to your bank account by
ACH transfer. You can elect this option by completing the
appropriate section of the Account Application. There is a
$100 minimum per ACH transfer. ACH transfers for IRA accounts
are only available for Systematic Withdrawal Plans.
SIGNATURE GUARANTEES You may need to have your signature
guaranteed in certain situations, such as:
* Written requests to wire redemption proceeds (if not
previously authorized on the Account Application).
* Sending redemption proceeds to any person, address or bank
account not on record.
* Transferring redemption proceeds to a Dodge & Cox account
with a different registration (name/ownership) from yours.
* Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings
institutions, broker-dealers and other guarantors acceptable
to the Funds. A Fund cannot accept guarantees from notaries
public or organizations that do not provide reimbursement in
the case of fraud.
REDEMPTIONS-IN-KIND The Funds reserve the right, if conditions
exist which make cash payments undesirable, to honor any
request for redemption by making payment in whole or in part
in readily marketable securities chosen by a Fund and valued
as they are for purposes of computing a Fund's NAV (a
redemption-in-kind). If payment is made in securities, a
shareholder may incur transaction expenses in converting these
securities to cash. The Funds have elected, however, to be
governed by Rule 18f-1 under the Investment Company Act, as a
result of which a Fund is obligated to redeem shares, with
respect to any one shareholder during any 90-day period,
solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund at the beginning of the period.
IRA ACCOUNTS Redemption requests for IRA accounts must include
instructions regarding Federal income tax withholding. Unless
you have elected otherwise, your redemptions will be subject
to income tax withholding.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS Under certain
circumstances, Boston Financial Data Services may require
additional documents, including stock powers with signatures
guaranteed, trust instruments, death certificates,
appointments as executor and certificates of corporate
authority. If certificates have been issued for any of the
shares to be redeemed, such certificates must be endorsed with
signatures guaranteed and delivered to Boston Financial Data
Services. For any questions regarding documentation or
signature requirements for trusts, estates, corporations,
etc., please call Client Services (1-800-621-3979).
The redemption price will be the NAV which is next computed
after receipt of a redemption request in good order (see
Pricing of Shares) by Boston Financial Data Services or other
authorized agent or sub-agent. The redemption price may be
more or less than your cost, depending upon the market value
of a Fund's investments at the time of redemption. Redemption
payments are made as soon as practicable, generally within two
business days, but no later than the seventh day after the
effective date for
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22
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DODGE & COX FUNDS
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redemption, or within such shorter period as may legally be
required. If shares are redeemed within two weeks of purchase,
a Fund may delay payment of the redemption proceeds until your
purchase check has cleared, which may take up to 15 days.
There is no such delay when shares being redeemed were
purchased by wiring Federal funds. The Funds may suspend your
redemption right or postpone payment at times when the New
York Stock Exchange is closed or under any emergency
circumstances as determined by the SEC. If the Post Office
cannot deliver your check, or if your check remains uncashed
for six months, the Funds reserve the right to reinvest your
redemption proceeds in your account at the then current NAV.
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General EXCHANGING SHARES An exchange is treated as a redemption and a
Transaction purchase; and, therefore, you may realize a taxable gain or
Information loss. You should read the current prospectus of the Fund into
which the exchange is being made.
There is a $1,000 minimum for all exchanges. If a new account
is being opened by exchange, the minimum investment
requirements must be met. After the exchange, the account from
which the exchange is made must have a remaining balance of at
least $2,500 ($1,000 for an IRA account) in order to remain
open. The Funds reserve the right to terminate or materially
modify the exchange privilege upon 60 days advance notice to
shareholders.
TELEPHONE TRANSACTIONS By using telephone purchase, redemption
and/or exchange options, you agree to hold the Trust, Dodge &
Cox, Boston Financial Data Services and each of their
respective directors, trustees, officers, employees and agents
harmless from any losses, expenses, costs or liability
(including attorney fees) which may be incurred in connection
with the exercise of these privileges. Generally, all
shareholders are automatically eligible to use these options.
However, you may elect to decline these options in the Account
Application or by writing Boston Financial Data Services. (You
may also reinstate them at any time by writing Boston
Financial Data Services.) If a Fund does not employ reasonable
procedures to confirm that the instructions received from any
person with appropriate account information are genuine, the
Fund may be liable for losses due to unauthorized or
fraudulent instructions. If you are unable to reach a Fund by
telephone because of technical difficulties, market
conditions, or a natural disaster, you should make purchase,
redemption and exchange requests by regular or express mail.
If an account has multiple owners, a Fund may rely on the
instructions of any one account owner. You should note that
purchase and sales orders will not be canceled or modified
once received in good order.
Purchases and sales should be made for long-term investment
purposes only. Because excessive trading may be
disadvantageous to a Fund, each Fund reserves the right to
limit purchase and sale transactions, including exchanges,
when a pattern of frequent trading appears evident.
TRANSACTIONS THROUGH PROCESSING ORGANIZATIONS You may purchase
or sell Fund shares through a broker-dealer, bank or other
financial institution, or an organization that provides
recordkeeping and consulting services to 401(k) plans or other
employee benefit plans (Processing Organization). Processing
Organizations may charge you a fee for this service and may
require different minimum initial and subsequent investments
than the Funds. Processing Organizations may also impose other
charges or restrictions different from those applicable to
shareholders who invest in the Funds directly. A Processing
Organization, rather than its customers, may be the
shareholder of record of your shares. The Funds are not
responsible for the
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23
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DODGE & COX FUNDS
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failure of any Processing Organization to carry out its
obligations to its customers. Certain Processing Organizations
may receive compensation from Dodge & Cox for shareholder
recordkeeping and similar services.
TRANSFER OF SHARES Changes in account registrations--such as
changing the name(s) on your account or transferring shares to
another person or legal entity--must be submitted in writing
and require a signature guarantee. Please call Client Services
(1-800-621-3979) for full instructions.
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Pricing of The share price (also called "net asset value per share" or
Shares "NAV") for a Fund is calculated at 4:00 p.m. ET each day the
New York Stock Exchange is open for business. To calculate the
NAV, a Fund's assets are valued and totaled, liabilities are
subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
If a Fund, or its authorized agent or sub-agent receives your
request in good order by 4 p.m. ET, your transactions will be
priced at that day's NAV.
If your request is received after 4 p.m., it will be priced at
the next business day's NAV.
A Fund cannot accept orders that request a particular day or
price for your transaction or any other special conditions.
The time at which transactions and shares are priced and the
time until which orders are accepted may be changed in case of
an emergency or if the New York Stock Exchange closes at a
time other than 4 p.m. ET.
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Income Dividend and capital gain distributions are reinvested in
Dividends additional Fund shares in your account unless you select
and another option on your Account Application. The advantage of
Capital Gain reinvesting distributions arises from compounding; that is,
Distributions you receive income dividends and capital gain distributions on
an increasing number of shares.
--------------------------------------------------------------
IMPORTANT TAX NOTE: The Funds' distributions, whether received
in cash or reinvested in additional shares of the Fund, may be
subject to Federal and state income tax.
--------------------------------------------------------------
Distributions not reinvested are paid by check or transmitted
to your bank account via electronic transfer using the
ACH network. If the Post Office cannot deliver your check, or
if your check remains uncashed for six months, the Funds
reserve the right to reinvest your distribution check in your
account at your Fund's then current NAV and to reinvest all
subsequent distributions in shares of the Fund.
INCOME DIVIDENDS Each Fund declares and pays dividends (if
any) quarterly in March, June, September and December.
CAPITAL GAIN DISTRIBUTIONS A capital gain or loss is the
difference between the purchase and sale price of a security.
If a Fund has net capital gains for the year (after
subtracting any capital losses), they are usually declared and
paid in December to shareholders of record on a specified date
that month. If a second distribution is necessary, it is
usually declared and paid in March.
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BUYING A DISTRIBUTION: Unless you are investing through a tax-
deferred retirement account (such as an IRA or 401(k) plan),
it may not be to your advantage to buy shares of a Fund
shortly before the Fund makes a distribution. This is known as
"buying a distribution." Buying a distribution can cost you
money in taxes as you will receive, in the form of a taxable
distribution, a portion of the money you just invested. To
avoid buying a distribution, check the Fund's distribution
schedule before you invest.
--------------------------------------------------------------
In January, you will be sent Form 1099-DIV indicating the tax
status of any dividend and capital gain distributions made to
you during the previous year. This information will also be
reported to the IRS.
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24
<PAGE>
DODGE & COX FUNDS
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Performance A Fund may include figures indicating its total return and/or
Information yield in advertisements or reports to shareholders or
prospective investors and, as appropriate, performance
information for a Fund may be compared, in reports and
promotional literature to: (i) the Standard & Poor's 500/R/
Stock Index, the Dow Jones Industrial Average, the Lehman
Brothers Aggregate Bond Index, or various other unmanaged
indices of the performance of various types of investments, so
that investors may compare a Fund's results with those of
indices widely regarded by investors as representative of the
security markets in general, and (ii) the performance of other
mutual funds. Unmanaged indices may assume the reinvestment of
income distributions, but generally do not reflect deductions
for administrative and management costs and expenses.
Performance information for a Fund reflects only the
performance of hypothetical investments in the Fund during the
particular time periods on which the calculations are based.
Such information should not be considered as representative of
the performance of a Fund in the future because, unlike some
bank deposits or other investments which pay a fixed yield for
a stated period of time for a fixed principal amount, the
performance of a Fund will vary based not only on the current
market value of the securities held in its portfolio, but also
on changes in a Fund's expenses and in the asset size of the
Fund. Performance information should be considered in light of
a Fund's investment objectives and policies, the types and
quality of a Fund's portfolio investments, market conditions
during the particular time period and operating expenses. For
a description of the methods used to determine a Fund's total
return and yield, see Performance Information in the SAI.
Further information about Fund performance is contained in
each Fund's Annual Report which may be obtained without charge
from the Fund.
- --------------------------------------------------------------------------------
Fund FUND ORGANIZATION AND VOTING RIGHTS The Trust, organized as a
Organization Delaware business trust in 1998, has three classes of
and beneficial shares and each share evidences an equal beneficial
Management ownership in a Fund. The three series of the Trust are
successors to Dodge & Cox Stock Fund established in 1965,
Dodge & Cox Balanced Fund established in 1931 and Dodge & Cox
Income Fund established in 1989.
INVESTMENT MANAGER Dodge & Cox, a California corporation, has
served as investment manager to the Funds and their
predecessors since inception. Dodge & Cox is one of the oldest
professional investment management firms in the United States,
having acted continuously as investment managers since 1930.
The Funds' investments are managed by Dodge & Cox's Investment
Policy Committee (the Fixed-Income Strategy Committee for
fixed-income securities), and no one person is primarily
responsible for making investment recommendations to the
Committees. Dodge & Cox is located at One Sansome Street, 35th
Floor, San Francisco, California 94104-4443.
Dodge & Cox's activities are devoted to investment research
and the supervision of investment accounts for individuals and
institutions. Dodge & Cox Balanced Fund and Dodge & Cox Stock
Fund each pay Dodge & Cox a management fee which is payable
monthly at the annual rate of 0.50% of the average daily net
asset value of the Fund. Dodge & Cox Income Fund pays Dodge &
Cox a management fee which is payable monthly at the annual
rate of 0.50% of the average daily net asset value of the Fund
up to $100 million and 0.40% of the average daily net asset
value of the Fund in excess of $100 million.
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25
<PAGE>
DODGE & COX FUNDS
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The investment management agreements with Dodge & Cox Income
Fund and Dodge & Cox Stock Fund provide that Dodge & Cox will
waive its fee for any calendar year to the extent that such
fee plus all other ordinary operating expenses paid by the
Fund exceed 1% and 0.75%, respectively, of the average daily
net asset value of the Fund. No waiver of management fee was
required for 1998 under the agreements.
Dodge & Cox has adopted a Code of Ethics that restricts
personal investing practices by its employees. Among other
provisions, the Code of Ethics requires that employees with
access to information about the purchase or sale of securities
in a Fund's portfolio obtain preclearance before executing
certain personal trades. The Code of Ethics is designed to
ensure that the interests of the Funds' shareholders come
before the interests of the people who manage the Funds.
- --------------------------------------------------------------------------------
Year 2000 The services provided to the Funds by Dodge & Cox and the
Funds' other key service providers (Boston Financial Data
Services, transfer agent, and State Street Bank and Trust
Company, custodian and Fund accountant) are dependent on those
service providers' computer software and hardware systems. The
common practice in computer software and hardware systems of
using just two digits to identify a year has resulted in the
Year 2000 challenge throughout the information technology
industry. If unchanged, many computer applications and systems
could misinterpret dates occurring after December 31, 1999,
leading to errors or failure.
Preparing for the Year 2000 is a high priority for Dodge & Cox
and the Funds' other service providers, and they are taking
steps that each believes are reasonably designed to address
the Year 2000 issue with respect to the systems that they use.
For example, the service providers have established
comprehensive Year 2000 readiness programs to identify,
evaluate and resolve Year 2000 readiness issues. The 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.
Despite Dodge & Cox's and the Funds' other service providers'
efforts and planning, noncompliant systems could have a
material adverse effect on the Funds' business, operations, or
financial condition. Additionally, the Funds' performance
could be hurt if a computer-system failure at a company,
financial market or governmental unit causes disruptions in
securities markets or clearance and settlement systems
generally or adversely affects the price of individual
securities the Funds own.
For further information on Year 2000 readiness, please contact
Client Services or visit the Year 2000 page on the Funds' web
site at www.dodgeandcox.com.
- --------------------------------------------------------------------------------
Portfolio Orders for a Fund's portfolio securities transactions are
Transactions placed by Dodge & Cox, which seeks to obtain the best
available prices, taking into account the costs and quality of
executions. In the over-the-counter market, purchases and
sales are transacted directly with principal market-makers
except in those circumstances where it appears better prices
and executions are available elsewhere.
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26
<PAGE>
DODGE & COX FUNDS
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Subject to the above policy, when two or more brokers are in a
position to offer comparable prices and executions, preference
may be given to brokers that have provided investment
research, statistical and other related services for the
benefit of a Fund and/or accounts over which Dodge & Cox
exercises investment and brokerage discretion.
- --------------------------------------------------------------------------------
Expenses In addition to Dodge & Cox's management fee, each Fund pays
other direct expenses, including custodian, transfer agent,
legal, accounting and audit fees; costs of preparing and
printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and shareholder meeting
expenses (if any); and trustees fees and expenses. In 1998,
the ratios of total operating expenses to average net assets
of Dodge & Cox Stock Fund, Dodge & Cox Balanced Fund and Dodge
& Cox Income Fund were 0.57%, 0.54% and 0.47%, respectively.
Dodge & Cox furnishes personnel and other facilities necessary
for the operation of the Funds for which it receives no
additional compensation.
- --------------------------------------------------------------------------------
Federal Each Fund intends to qualify each year as a regulated
Income investment company under the Internal Revenue Code. A
Taxes regulated investment company that distributes for the year all
of its ordinary income and capital gains pays no tax on its
ordinary income or capital gains. A regulated investment
company that fails to distribute all of its ordinary income
and capital gains must pay tax on the undistributed amounts at
a maximum rate of 35%. If the company does not distribute at
least 98% of its ordinary income and capital gains, it must
pay an additional 4% excise tax on the amount by which the 98%
requirements exceed actual distributions.
Distributions designated as long-term capital gain
distributions are taxed to a shareholder as though they were
long-term capital gains realized by the shareholder whether
received in cash or shares of a Fund and regardless of the
period of time shares of a Fund have been held. All taxable
distributions, except for long-term capital gain
distributions, are taxed to a shareholder as ordinary income
dividends whether received in cash or shares of a Fund. Part
of Dodge & Cox Stock and Balanced Funds' ordinary dividends
may be eligible for the 70% deduction for dividends received
by corporations. State taxation of distributions to
shareholders varies from state to state. You should consult
your own tax adviser about the Federal, state and local tax
consequences of an investment in a Fund.
- --------------------------------------------------------------------------------
Custodian and State Street Bank and Trust Company, P.O. Box 9051, Boston, MA
Transfer Agent 02205-9051 (1-800-621-3979), acts as custodian of all cash
and securities of the Funds and receives and disburses cash
and securities for the account of the Funds. Boston Financial
Data Services, P.O. Box 9051, Boston, MA 02205-9051 (1-800-
621-3979), acts as transfer and dividend disbursing agent for
the Funds.
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27
<PAGE>
DODGE & COX FUNDS
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Investment --------------------------------------------------------------
Information and STATEMENTS AND REPORTS As a shareholder of the Fund you will
Shareholder receive the following statements and reports:
Services --------------------------------------------------------------
CONFIRMATION STATEMENT Sent each time you buy, sell or
exchange shares; confirms the
trade date and the amount of
your transaction. Purchases
through the Automatic Investment
Plan will be confirmed at least
quarterly, unless otherwise
requested.
--------------------------------------------------------------
ACCOUNT STATEMENT Mailed quarterly; shows the
market value of your account at
the close of the statement
period, as well as
distributions, purchases, sales,
and exchanges for the current
calendar year.
--------------------------------------------------------------
FUND FINANCIAL REPORTS Mailed in February, May, August
and November. NOTE: To reduce
Fund expenses, the Funds attempt
to identify related shareholders
within a household and send only
one copy of a shareholder
report. Call 1-800-621-3979 or
visit the Funds' web site at
www.dodgeandcox.com if you would
like an additional free copy of
a Fund's report.
--------------------------------------------------------------
TAX STATEMENTS Mailed in January; reports
previous year's dividend
distributions, proceeds from the
sale of shares, and
distributions from IRAs.
--------------------------------------------------------------
AVERAGE COST STATEMENT Mailed annually in February for
most taxable accounts for which
shares were redeemed; shows the
average cost of shares that you
redeemed during the calendar
year, using the average cost
single category method.
--------------------------------------------------------------
The Funds offer you the following services: (Please call
Client Services at 1-800-621-3979, write or visit the Funds'
web site at www.dodgeandcox.com for applications and
additional information.)
AUTOMATED TELEPHONE SERVICES 24-hour service, seven days a
week, via toll-free access to Fund and account information.
The system provides total returns, share prices and price
changes for the Funds and gives you account balances and
history (e.g., last transaction, latest dividend
distribution).
COMPUTER ACCESS Information on the Funds is available via
personal computer on the Funds' web site at
www.dodgeandcox.com.
On the site you can: learn more about Dodge & Cox's approach
to investing; review the objectives, strategies,
characteristics and risks of the Funds; review the biographies
of the Funds' portfolio managers; review the Funds' daily
prices and performance; and download or order the Funds'
prospectus and Account Application, shareholder reports, IRA
plans and other forms.
AUTOMATIC INVESTMENT PLAN You may make regular monthly or
quarterly investments of $100 or more through automatic
deductions from your bank account.
SYSTEMATIC WITHDRAWAL PLAN If you own $10,000 or more of a
Fund's shares, you may receive regular monthly or quarterly
payments of $50 or more. Shares will be redeemed automatically
at NAV to make the withdrawal payments.
REINVESTMENT PLAN You may direct that dividend and capital
gain distributions be reinvested in additional Fund shares.
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28
<PAGE>
DODGE & COX FUNDS
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INDIVIDUAL RETIREMENT ACCOUNT (IRA) If you have earned income
or are entitled to certain distributions from eligible
retirement plans, you may make or authorize contributions to
your own Individual Retirement Account. The Funds have
Traditional IRA and Roth IRA Plans available for shareholders
of the Funds.
--------------------------------------------------------------
IMPORTANT NOTE: The services described may not be available
through some retirement plans or accounts held by investment
dealers. If you are investing in such a manner, you should
contact your plan administrator/trustee, financial institution
or dealer about what services are available and with questions
about your account.
--------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you
understand the Fund's financial performance for the past five
years. Certain information reflects financial results for a
single Fund share. The total returns in the table represent
the rate that an investor would have earned on an investment
in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the
Fund's financial statements, are included in the annual
report, which is available upon request.
<TABLE>
<CAPTION>
Dodge & Cox Stock Fund
- -------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $94.57 $79.81 $67.83 $53.94 $ 53.23
Income from investment operations:
Net investment income 1.57 1.48 1.28 1.27 1.15
Net realized and unrealized gain 3.54 20.86 13.67 16.54 1.60
-------------------------------------------
Total from investment operations 5.11 22.34 14.95 17.81 2.75
-------------------------------------------
Distributions to shareholders from:
Net investment income (1.56) (1.49) (1.29) (1.26) (1.15)
Net realized gain (7.42) (6.09) (1.68) (2.66) (.89)
-------------------------------------------
Total distributions (8.98) (7.58) (2.97) (3.92) (2.04)
-------------------------------------------
Net asset value, end of year $90.70 $94.57 $79.81 $67.83 $ 53.94
===========================================
Total return 5.39% 28.41% 22.26% 33.38% 5.16%
Ratios/supplemental data:
Net assets, end of year (millions) $4,355 $4,087 $2,252 $1,228 $ 543
Ratio of expenses to average net assets .57% .57% .59% .60% .61%
Ratio of net investment income to
average net assets 1.63% 1.67% 1.79% 2.07% 2.16%
Portfolio turnover rate 19% 19% 10% 13% 7%
</TABLE>
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29
<PAGE>
DODGE & COX FUNDS
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<TABLE>
<CAPTION>
Dodge & Cox Balanced Fund
- -------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $66.78 $59.82 $54.60 $45.21 $ 46.40
Income from investment operations:
Net investment income 2.24 2.21 1.98 1.90 1.76
Net realized and unrealized gain (loss) 2.17 10.24 5.92 10.58 (.83)
-------------------------------------------
Total from investment operations 4.41 12.45 7.90 12.48 .93
-------------------------------------------
Distributions to shareholders from:
Net investment income (2.23) (2.22) (1.99) (1.90) (1.76)
Net realized gain (3.74) (3.27) (.69) (1.19) (.36)
-------------------------------------------
Total distributions (5.97) (5.49) (2.68) (3.09) (2.12)
-------------------------------------------
Net asset value, end of year $65.22 $66.78 $59.82 $54.60 $ 45.21
===========================================
Total return 6.70% 21.21% 14.75% 28.02% 1.99%
Ratios/supplemental data:
Net assets, end of year (millions) $5,693 $5,077 $3,630 $1,800 $ 725
Ratio of expenses to average net assets .54% .55% .56% .57% .58%
Ratio of net investment income to
average net assets 3.29% 3.39% 3.60% 3.85% 3.94%
Portfolio turnover rate 26% 32% 17% 20% 20%
</TABLE>
<TABLE>
<CAPTION>
Dodge & Cox Income Fund
- -------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.08 $11.68 $12.02 $10.74 $ 11.89
Income from investment operations:
Net investment income .72 .73 .74 .78 .77
Net realized and unrealized gain (loss) .23 .40 (.34) 1.34 (1.11)
-------------------------------------------
Total from investment operations .95 1.13 .40 2.12 (.34)
-------------------------------------------
Distributions to shareholders from:
Net investment income (.72) (.73) (.74) (.78) (.76)
Net realized gain (.06) - - (.06) (.05)
-------------------------------------------
Total distributions (.78) (.73) (.74) (.84) (.81)
-------------------------------------------
Net asset value, end of year $12.25 $12.08 $11.68 $12.02 $ 10.74
===========================================
Total return 8.08% 10.00% 3.62% 20.21% (2.89)%
Ratios/supplemental data:
Net assets, end of year (millions) $ 952 $ 705 $ 533 $ 303 $ 195
Ratio of expenses to average net assets .47% .49% .50% .54% .54%
Ratio of net investment income to
average net assets 6.00% 6.32% 6.65% 6.85% 6.90%
Portfolio turnover rate 35% 28% 37% 53% 55%
</TABLE>
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30
<PAGE>
DODGE & COX FUNDS
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Officers and Harry R. Hagey, Chairman & Trustee
Trustees Chairman & CEO, Dodge & Cox
John A. Gunn, President & Trustee
President, Dodge & Cox
A. Horton Shapiro, Executive Vice President & 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
John M. Loll, Treasurer & Asst. Secretary
Vice President & Treasurer, Dodge & Cox
Thomas M. Mistele, Secretary & Asst. Treasurer
Vice President, Secretary & General Counsel, Dodge & Cox
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31
<PAGE>
DODGE & COX FUNDS
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For More Information: For investors who want more information about the Funds,
the following documents are available free upon request:
Annual/Semi-Annual Reports: Additional information about the Funds' investments
is available in the Funds' annual and semi-annual reports to shareholders. In
each Fund's annual report, you will find a discussion of the market conditions
and investment strategies that significantly affected the Fund's performance
during its last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Funds and is incorporated by reference into (and thus is
legally a part of) this prospectus.
- --------------------------------------------------------------------------------
You can get free copies of reports and the SAI, request other information and
discuss your questions about the Funds by contacting the Funds at:
Dodge & Cox Funds
c/o Boston Financial Data Services
P.O. Box 9051
Boston, MA 02205-9051
Telephone: 1-800-621-3979
Internet: www.dodgeandcox.com
- --------------------------------------------------------------------------------
You can review the Funds' reports and SAI at the Public Reference Room of the
Securities and Exchange Commission (SEC). You may order text only copies for a
fee by writing to the Public Reference Room of the SEC, Washington D.C. 20549-
6009 or calling 1-800-SEC-0330.
You may obtain the SAI free of charge from the SEC's web site at www.sec.gov.
Funds' Investment Company Act file no. 811-173
2/00 PR
[LOGO OF RECYCLED PAPER]
Printed on recycled paper
<PAGE>
DODGE & COX FUNDS
Dodge & Cox Stock Fund
Dodge & Cox Balanced Fund
Dodge & Cox Income Fund
c/o Boston Financial Data Services Inc.
P.O. Box 9051
Boston, Massachusetts 02205-9051
(800) 621-3979
www.dodgeandcox.com
STATEMENT OF ADDITIONAL INFORMATION
Dated May 1, 1999 as supplemented February 1, 2000
This Statement of Additional Information (SAI) pertains to the Dodge & Cox
Funds (Trust), a family of three no-load mutual funds, Dodge & Cox Stock Fund,
Dodge & Cox Balanced Fund and Dodge & Cox Income Fund (Funds). Each Fund is a
series of the Trust.
This Statement of Additional Information is not the Funds' Prospectus, but
provides additional information which should be read in conjunction with the
Prospectus dated May 1, 1999 as supplemented February 1, 2000, which is
incorporated by reference into this SAI. The Funds' Prospectus and most recent
annual financial statements may be obtained from the Funds at no charge by
writing, visiting our web site, or contacting the Funds at the address, web
site, or telephone number shown above. This SAI contains additional and more
detailed information about the Funds' operations and activities than the
Prospectus.
____________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CLASSIFICATION, INVESTMENT RESTRICTIONS,
INVESTMENT STRATEGIES AND RISKS...................................... 1
Classification..................................................... 1
Investment Restrictions............................................ 1
Investment Strategies.............................................. 2
Characteristics and Risks of Securities and Investment Techniques.. 6
MANAGEMENT OF THE FUND............................................... 13
Officers and Trustees.............................................. 13
Investment Manager................................................. 15
Other Service Providers............................................ 16
BROKERAGE ALLOCATION AND OTHER PRACTICES............................. 16
CAPITAL STOCK........................................................ 19
PURCHASE, REDEMPTION AND PRICING OF SHARES........................... 19
TAXATION OF THE FUND................................................. 20
PRINCIPAL UNDERWRITER................................................ 21
PERFORMANCE INFORMATION.............................................. 21
FINANCIAL STATEMENTS................................................. 22
APPENDIX: RATINGS.................................................... 23
____________________________
</TABLE>
<PAGE>
CLASSIFICATION, INVESTMENT RESTRICTIONS, INVESTMENT STRATEGIES
- --------------------------------------------------------------
AND RISKS
- ---------
Classification
The Funds are open-end management investment companies. The Investment
Company Act of 1940, as amended (1940 Act) classifies investment companies as
either diversified or nondiversified, and each of the Funds is deemed to be a
diversified fund.
Investment Restrictions
Each Fund has adopted the following restrictions. These restrictions, as
well as a Fund's investment objectives, cannot be changed without the approval
of the holders of a majority of a Fund's outstanding shares. The 1940 Act
defines a majority as the lesser of (1) 67% or more of the voting shares present
at a meeting if the holders of more than 50% of the outstanding voting shares
are present or represented by proxy, or (2) more than 50% of the outstanding
voting shares of a Fund. As applicable, each Fund may not:
Dodge & Cox Balanced Fund, Dodge & Cox Income Fund and Dodge & Cox Stock
------------------------------------------------------------------------
Fund
----
1. Invest more than 5% of the value of its total assets in the securities
of any one issuer, except the obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or issues backed
or collateralized by such obligations, nor acquire more than 10% of
the voting securities of any one issuer.
2. Invest in any company for the purpose of exercising control or
management.
3. Underwrite securities of other issuers, except insofar as a Fund may
be deemed an underwriter under the Securities Act of 1933, as amended,
in selling portfolio securities.
4. Purchase securities on margin or sell short.
5. Invest in a security if, as a result of such investment, more than 25%
of its total assets would be invested in the securities of issuers in
any particular industry, except that the restriction does not apply to
securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities (or repurchase agreements with respect thereto).
6. Purchase any security if as a result a Fund would then have more than
15%, (10%, Dodge & Cox Income Fund) of its total assets invested in
securities which are illiquid, including repurchase agreements not
maturing in seven days or less and securities restricted as to
disposition under Federal securities laws.
7. Purchase interests in oil, gas and mineral leases or other mineral
exploration or development programs, although a Fund may invest in
stocks or debt instruments of companies which invest in or sponsor
such programs.
8. Purchase or sell commodities, commodity contracts or real estate
(although a Fund may invest in marketable securities secured by real
estate or interests therein or issued by companies or investment
trusts which invest in real estate or interests therein).
Dodge & Cox Balanced Fund and Dodge & Cox Stock Fund
----------------------------------------------------
9. Issue senior securities.
1
<PAGE>
10. Borrow money except as a temporary measure for extraordinary or
emergency purposes and not for the purchase of investment securities
and then only from banks. The amount borrowed shall not exceed 10% of
the Fund's total assets at cost or 5% of the value of total assets,
whichever is less, provided that such borrowings shall have an asset
coverage of 300%.
11. Make loans to other persons except this shall not exclude the purchase
of publicly issued debt securities of a type purchased by
institutional investors.
Dodge & Cox Income Fund
-----------------------
12. Issue senior securities, as defined in the 1940 Act, or mortgage,
pledge, hypothecate or in any manner transfer, as security for
indebtedness, any securities owned or held by the Fund except as may
be necessary in connection with borrowing, and then such mortgaging,
pledging or hypothecating may not exceed 10% of the Fund's total
assets, taken at the lesser of cost or market value.
13. Borrow money, except the Fund may borrow money from banks as a
temporary measure for extraordinary or emergency purposes. Such
temporary borrowing may not exceed 5% of the value of the Fund's total
assets at the time the loan is made. The Fund may pledge up to 10% of
the lesser of the cost or market value of its total assets to secure
temporary borrowings. The Fund will not borrow for investment
purposes. Immediately after any borrowing, the Fund will maintain an
asset coverage of not less than 300% with respect to all borrowings.
14. Make loans of money, except by the purchase of debt securities or by
entering into repurchase agreements, as permitted by the Fund's other
investment policies and restrictions. Although there is no present
intention of doing so in the foreseeable future, the Fund reserves the
authority to make loans of its portfolio securities in an aggregate
amount not exceeding 20% of its total assets. Such loans will only be
made upon approval of, and subject to any conditions imposed by, the
Fund's Board of Trustees.
15. Write put or call options.
Whenever any investment policy or investment restriction states a maximum
percentage of a Fund's assets which may be invested in any security or other
instrument, it is intended that such maximum percentage limitation be determined
immediately after and as a result of the Fund's acquisition of such security or
instrument. Industries are determined by reference to the classifications of
industries set forth in a Fund's semi-annual and annual report.
Investment Strategies
Dodge & Cox Stock Fund
----------------------
The Fund's primary objective is to provide shareholders with an opportunity
for long-term growth of principal and income. A secondary objective is to
achieve a reasonable current income. These objectives may not be changed
without shareholder approval. It should be recognized that the market risks
inherent in investment cannot be avoided, nor is there any assurance that the
Fund will achieve its investment objectives.
Under normal circumstances, the Fund will invest at least 65% of total
assets in common stocks. The Fund may also purchase other types of securities,
for example, preferred stocks and debt securities which are convertible into
common stock (or which in the opinion of the Fund's investment manager,
2
<PAGE>
Dodge & Cox, have predominantly common stock investment characteristics). The
Fund may invest up to 20% of its total assets in U.S. dollar-denominated
securities of foreign issuers (such as ADRs).
Moderate reserves in cash or fixed-income securities may be held from time
to time as Dodge & Cox may deem advisable. Nevertheless, the long-term emphasis
shall be the maintaining of a fully invested equity fund.
Common stocks selected for the Fund will be predominantly those which, in
the view of Dodge & Cox, have positive prospects for long-term growth of
principal and income not reflected in the current price. Prospective earnings
and dividends are major considerations in these stock selections. Individual
securities are selected with an emphasis on financial strength and a sound
economic background. The Fund's policies as described above may be changed
without shareholder approval; however, these policies will not be changed
without notice to shareholders.
In an attempt to reduce unforeseen risks in single securities, the Fund
seeks to provide adequate investment diversification. To that end, the Fund will
not concentrate its investments in any particular industry or group of
industries, but will diversify investments among different industries as well as
among individual companies. The amount invested in any particular industry will
vary from time to time in accordance with the judgment of Dodge & Cox.
Although there is no restriction on the number of changes in security
holdings, purchases are made with a view to long-term holding and not for short-
term trading purposes. During rapidly changing economic and political
conditions, there may necessarily be more portfolio changes than in a more
stable period. A higher turnover rate might result in increased transaction
expenses and the realization of capital gains and losses.
It is the general practice of the Fund to invest in securities with ready
markets, mainly issues listed on national securities exchanges.
The Fund has no present intention of making investments in securities which
are restricted as to resale under Federal securities laws. The Fund does not
write put and call options and has no present intention of writing such options.
Dodge & Cox Balanced Fund
-------------------------
The Fund's objectives are to provide shareholders with regular income,
conservation of principal and an opportunity for long-term growth of principal
and income. These objectives may not be changed without shareholder approval.
It should be recognized that the market risks inherent in investment cannot be
avoided, nor is there any assurance that the Fund will achieve its investment
objectives. Reasonable appreciation in favorable periods and conservation of
principal in adverse times are objectives that require flexibility in managing
the assets of the Fund under constantly changing investment conditions.
Therefore, the proportions of the Fund's portfolio invested in common and
preferred stocks and bonds are revised by the Fund's manager, Dodge & Cox, when
considered advisable in light of Dodge & Cox's appraisal of business and
investment prospects. Under normal market conditions, the Fund seeks to
maintain no more than approximately 75% of its total assets in common stocks and
that portion of the value of convertible securities attributable to the
conversion right.
Fixed-income securities are held for their relative stability of principal
and income as well as for a reserve which can be used to take advantage of
investment opportunities. The Fund may invest up to 20% of its total assets in
U.S. dollar-denominated securities of foreign issuers traded in the U.S. (such
as
3
<PAGE>
ADRs and Yankee bonds). Moderate reserves in cash or short-term fixed-income
securities may be held from time to time as Dodge & Cox may deem advisable.
It is the policy to invest in investment-grade bonds rated in the top four
rating categories by either Moody's Investors Service ("Moody's") (Aaa, Aa, A,
Baa) or Standard & Poor's Ratings Group ("S&P") (AAA, AA, A, BBB). Securities
rated Baa or BBB have speculative characteristics. Securities that are
downgraded below Baa or BBB subsequent to purchase may continue to be held by
the Fund, if Dodge & Cox believes it advantageous to do so. Unrated bonds may
be purchased if such securities are, in the opinion of Dodge & Cox, of
equivalent quality to bonds rated at least A by Moody's and S&P. An explanation
of the Moody's and S&P ratings groups is included in the Appendix.
The Fund will maintain a substantial position in common stocks which, in
the view of Dodge & Cox, have positive prospects for long-term growth of
principal and income not reflected in the current price. Prospective earnings
and dividends are major considerations in these stock selections. The level of
security prices and the trend of business activity are given weight in
determining the total investment position of the Fund in equities at any time.
Individual securities are selected with an emphasis on financial strength and a
sound economic background. The Fund's investment policies as set forth above may
be changed without shareholder approval; however, these policies will not be
changed without notice to shareholders.
The proportions held in the various fixed-income securities will be revised
as appropriate in light of Dodge & Cox's appraisal of the economy, the relative
yields of securities in the various market sectors, the investment prospects for
issuers and other factors. In making investment decisions, Dodge & Cox will
take many factors into consideration including yield to maturity, quality,
liquidity, current yield and capital appreciation potential.
In an attempt to reduce unforeseen risks in single securities, the Fund
seeks to achieve adequate investment diversification. The Fund does not
concentrate its investments in any particular industry or group of industries
but seeks instead to diversify investments among different industries as well as
among individual companies. The amount invested in any particular industry will
vary from time to time in accordance with the judgment of Dodge & Cox.
Although there is no restriction on the number of changes in security
holdings, purchases are made with a view to long-term holding and not for short-
term trading purposes. During rapidly changing economic and political
conditions, there may necessarily be more portfolio changes than in a more
stable period. A higher turnover rate might result in increased transaction
expenses and the realization of capital gains and losses.
It is the general practice of the Fund to invest in equity securities
mainly listed on national securities exchanges and securities with ready
markets. The Fund does not write put and call options and has no present
intention of writing such options.
Dodge & Cox Income Fund
-----------------------
The Fund's primary objective is to provide shareholders with a high and
stable rate of current income consistent with long-term preservation of capital.
A secondary objective is to take advantage of opportunities to realize capital
appreciation. These objectives may not be changed without shareholder approval.
It should be recognized that the market risks inherent in investment cannot be
avoided nor is there any assurance that the Fund will achieve its investment
objectives.
The Fund seeks to achieve these objectives by investing in a diversified
portfolio of fixed-income securities. It is the policy of the Fund to invest at
least 80% of the market value of its total assets in the following: (1) debt
obligations issued or guaranteed by the U.S. government, its agencies or
4
<PAGE>
instrumentalities; (2) investment-grade debt securities, including U.S. dollar-
denominated foreign issues, rated in the top four rating categories by either
Moody's (Aaa, Aa, A, Baa) or S&P (AAA, AA, A, BBB); (3) unrated securities if
deemed to be of investment-grade quality by Dodge & Cox; and (4) cash
equivalents, bankers' acceptances, bank certificates of deposit, repurchase
agreements and commercial paper. At least 65% of the market value of the
portfolio will be invested in category (1) securities and in category (2)
securities rated in the top three rating categories. Further information about
specific investments is provided below.
No more than 20% of the Fund may be invested in other fixed-income
instruments including: debt obligations rated below investment grade, if, in the
opinion of Dodge & Cox, they are of suitable quality, provide attractive
investment opportunities and have a minimum rating of B by Moody's and/or S&P at
the time of investment; preferred stock; and corporate bonds convertible into
common stocks or carrying warrants to purchase common stock. The Fund will
invest in unrated securities only if deemed to be of investment-grade quality by
Dodge & Cox. It should be noted that securities rated Baa or BBB and those
securities rated below investment grade have speculative characteristics.
Securities rated B by the major rating agencies may yield a higher level of
current income than higher quality securities but generally have less liquidity,
greater market risk and more price fluctuation. An explanation of the Moody's
and S&P rating categories is included in the Appendix.
Under normal market conditions, the Fund will invest no more than 25% of
its total assets in U.S. dollar-denominated securities of foreign issuers.
The proportions held in the various financial instruments will be revised
as appropriate in light of Dodge & Cox's appraisal of the economy, the relative
yields of securities in the various market sectors, the investment prospects for
issuers, and other factors. In making investment decisions, Dodge & Cox will
take many factors into consideration, including yield to maturity, quality,
liquidity, current yield, and capital appreciation potential.
The Fund attempts to achieve its secondary objective of capital
appreciation through such techniques as fundamental research (i.e., seeking a
security or group of securities which Dodge & Cox believes to be undervalued),
purchasing securities at a discount to their maturity or call value and making
gradual adjustments in the average maturity of the Fund's portfolio.
The average maturity of the Fund's portfolio at any given time depends, in
part, on Dodge & Cox's assessment of economic and market conditions, the future
level of inflation and interest rates, and on the relative yields of securities
in the marketplace. Dodge & Cox normally invests in an array of securities with
short, intermediate and long maturities in varying proportions.
Purchases and sales of securities in the Fund are generally made for long-
term fundamental investment reasons rather than for short-term trading purposes.
Nevertheless, Dodge & Cox may sell any of the securities in the Fund, regardless
of the length of time held, in seeking to achieve the objectives of the Fund.
In seeking to achieve the objectives of the Fund, Dodge & Cox may purchase
securities on a when-issued basis, purchase or sell securities for delayed
delivery and lend portfolio securities. The Fund's investment policies as set
forth above may be changed without shareholder approval; however, these policies
will not be changed without notice to shareholders.
Dodge & Cox maintains a long-term investment orientation and therefore
anticipates a relatively low turnover rate, which, under normal circumstances,
should not exceed 50% on an annual basis. However, during rapidly changing
economic, political, and market environments, there may be more portfolio
changes than in a more stable period. A higher turnover rate might result in
increased transaction expenses and the realization of capital gains and losses.
5
<PAGE>
Characteristics and Risks of Securities and Investment Techniques
In seeking to meet its investment objectives, each Fund will invest in
securities or instruments whose investment characteristics are consistent with
the Fund's investment program. The following further describes the principal
types of portfolio securities and investment management practices of the Funds.
Common Stocks (Dodge & Cox Balanced Fund and Dodge & Cox Stock Fund).
---------------------------------------------------------------------
Stocks represent shares of ownership in a company. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to help
it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest appreciation
and depreciation potential of all corporate securities.
Preferred Stocks. Each Fund may invest in preferred stocks. Generally,
-----------------
preferred stock has a specified dividend and ranks after bonds but before common
stocks in its claim on income for dividend payments and on assets should the
company be liquidated.
Convertible Securities and Warrants. The Funds may invest in debt or
------------------------------------
preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stock dividend rates but lower than
nonconvertible securities. They generally participate in the appreciation or
depreciation of the underlying stock into which they are convertible, but to a
lesser degree. In recent years, convertibles have been developed which combine
higher or lower current income with other features. Warrants are options to buy
a stated number of shares of common stock at a specified price anytime during
the life of the warrants (generally two or more years).
Foreign Securities. The Funds may invest in U.S. dollar-denominated
-------------------
securities of foreign issuers traded in the U.S. There are special risks in
foreign investing. Many of the risks are more pronounced for investments in
developing or emerging countries, such as many of the countries of Southeast
Asia, Latin America, Eastern Europe, and the Middle East. Each Fund has no
present intention of investing in developing or emerging countries.
Political and economic factors. Individual foreign economies of
certain countries may differ favorably or unfavorably from the United States'
economy in such matters as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency, and balance of payments
position. The internal politics of certain foreign countries are not as stable
as in the United States. In addition, significant external political risks
currently affect some foreign countries.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and are
accordingly affected by protective trade barriers and economic conditions of
their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon the
securities markets of such countries.
Currency fluctuations. Although a Fund will invest in U.S. dollar-
denominated foreign securities, the underlying securities will be denominated in
various currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of a Fund's assets. Such changes will also affect a Fund's income.
Generally, when a given currency appreciates against the dollar (the dollar
weakens), the value of securities
6
<PAGE>
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens), the value of securities denominated
in that currency would be expected to decline.
Investment and repatriation restrictions. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may limit at times and preclude investment
in certain of such countries and may increase the cost and expenses of a Fund.
Investments by foreign investors are subject to a variety of restrictions.
These restrictions may take the form of prior governmental approval, limits on
the amount or type of securities held by foreigners, and limits on the types of
companies in which foreigners may invest. Additional or different restrictions
may be imposed at any time by these or other countries in which a Fund invests.
In addition, the repatriation of both investment income and capital from some
foreign countries is restricted and controlled under certain regulations,
including in some cases the need to obtain certain government consents.
Market characteristics. Foreign markets are generally not as
developed or efficient as, and may be more volatile than, those in the United
States. While growing in volume, they usually have substantially less volume
than U.S. markets and a Fund's portfolio securities may be less liquid and
subject to more rapid and erratic price movements than securities of comparable
U.S. companies. Equity securities may trade at price/earnings multiples higher
than comparable United States securities and such levels may not be sustainable.
Fixed commissions on foreign exchanges are generally higher than negotiated
commissions on United States exchanges. There is generally less government
supervision and regulation of foreign exchanges, brokers and listed companies
than in the United States. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets. Such
differences may include delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of payment, which
increase the likelihood of a "failed settlement." Failed settlements can result
in losses to a Fund.
Information and supervision. There is generally less publicly
available information about foreign companies comparable to reports and ratings
that are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to United States companies. It also may be more difficult to keep currently
informed of corporate actions which affect the prices of portfolio securities.
Taxes. The dividends and interest payable on certain of a Fund's
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to a Fund's
shareholders.
Other. With respect to certain foreign countries, there is the
possibility of adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets of a Fund, political or social instability, or diplomatic
developments which could affect investments by U.S. persons in those countries.
U.S. Government Obligations. A portion of each Fund may be invested in
----------------------------
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Some of the obligations purchased by a Fund are backed by
the full faith and credit of the U.S. government and are guaranteed as to both
principal and interest by the U.S. Treasury. Examples of these include direct
obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and bonds,
or indirect obligations of the U.S. Treasury, such as obligations of the
Government National Mortgage Association, the Maritime Administration, the
Farmers Home Administration, the Veterans Administration, the Federal Housing
Administration and the Export-Import Bank.
7
<PAGE>
While the obligations of many of the agencies and instrumentalities of the
U.S. government are not direct obligations of the U.S. Treasury, they are
generally backed indirectly by the U.S. government. Some of the agencies are
indirectly backed by their right to borrow from the U.S. government, such as the
Federal Financing Bank, the Federal Home Loan Banks and the U.S. Postal Service.
Others are supported solely by the credit of the agency or instrumentality
itself, but are given additional support due to the U.S. Treasury's authority to
purchase their outstanding debt obligations. These agencies include the Federal
Farm Credit Banks, the Federal National Mortgage Association, the Federal Home
Loan Mortgage Corporation, and the Student Loan Marketing Association. No
assurance can be given that the U.S. government would provide financial support
to U.S. government established or sponsored agencies. Furthermore, with respect
to the U.S. government securities purchased by a Fund, guarantees as to the
timely payment of principal and interest do not extend to the value or yield of
these securities nor do they extend to the value of a Fund's shares. A Fund may
invest in these securities if it believes they offer an expected return
commensurate with the risks assumed.
Mortgage Pass-Through Securities (Dodge & Cox Balanced Fund and Dodge & Cox
---------------------------------------------------------------------------
Income Fund). Each Fund may invest a portion of its assets in mortgage pass-
- -------------
through securities which are guaranteed by an agency of the U.S. government or
are issued by a private entity. These securities represent ownership in "pools"
of mortgage loans and are called "pass-throughs" because principal and interest
payments are passed through to security holders monthly. The security holder
may also receive unscheduled principal payments representing prepayments of the
underlying mortgage loans. When a Fund reinvests the principal and interest
payments, it may receive a rate of interest which is either higher or lower than
the rate on the existing mortgage.
During periods of declining interest rates there is increased likelihood
that mortgage securities may be prepaid more quickly than expected. Such
prepayment would most likely be reinvested at lower rates. On the other hand, if
the pass-through securities had been purchased at a discount, then such
prepayments of principal would benefit the portfolio.
Conversely, in a rising interest rate environment, mortgage securities may
be prepaid at a rate slower than expected. In this case, the current cash flow
of the bond generally decreases. A slower prepayment rate effectively lengthens
the time period the security will be outstanding and may adversely affect the
price and volatility of the security.
Collateralized Mortgage Obligations (Dodge & Cox Balanced Fund and Dodge &
--------------------------------------------------------------------------
Cox Income Fund). Collateralized Mortgage Obligations ("CMOs") are private
- -----------------
entity or U.S. government agency-issued multi-class bonds that are
collateralized by U.S. agency-guaranteed mortgage pass-through securities. A CMO
is created when the issuer purchases a collection of mortgage pass-through
securities ("the collateral") and places these securities in a trust, which is
administered by an independent trustee. Next, the issuer typically issues
several classes, or "tranches" of bonds, the debt service of which is provided
by the principal and interest payments from the mortgage pass-through securities
in the trust. Each of these tranches is valued and traded separately based on
its distinct cash flow characteristics.
Although the mortgage pass-through collateral typically has monthly
payments of principal and interest, CMO bonds will generally have semiannual or
quarterly payments of principal and interest. Payments received from the
collateral are reinvested in short-term debt securities by the trustee between
payment dates on the CMO. On the CMO payment dates, the principal and interest
payments received from the collateral plus reinvestment income, are applied
first to pay interest on the bonds and then to repay principal. Generally, the
bonds are retired sequentially; the first payments of principal are applied to
retire the first tranche, while all other tranches receive interest only. Only
after the first tranche is retired do principal payments commence on the second
tranche. The process continues in this sequence until all tranches are retired.
8
<PAGE>
At issuance, each CMO tranche has a stated final maturity date. The stated
final maturity date is the date by which the bonds would be completely retired
assuming standard amortization of principal but no prepayments of principal on
the underlying collateral. However, since it is likely that the collateral will
have principal prepayments, the CMO bonds are actually valued on the basis of an
assumed prepayment rate. The assumed prepayment rate is used in the calculation
of the securities' weighted-average life, a measure of the securities' cash flow
characteristics. Dodge & Cox will purchase the tranche with the weighted-
average life and cash flow characteristics that it believes will contribute to
achieving the objectives of a Fund.
All CMOs purchased by a Fund will be issued or guaranteed by an agency of
the U.S. government or have a AA rating by either S&P or Moody's. To qualify for
this rating, a CMO is structured so that even under conservative prepayment and
reinvestment assumptions, the principal and interest payments from the
collateral are expected to meet or exceed the cash flow obligations of all the
tranches of the CMO. However, there are risks associated with CMOs, which relate
to the risks of the underlying mortgage pass-through securities. In a falling
interest rate environment, the mortgage securities may be prepaid faster than
the assumed rate. In this scenario, the prepayments of principal will generally
be reinvested at a rate which is lower than the rate that the security holder is
currently receiving. Conversely, in a rising interest rate environment, the
mortgage collateral may be prepaid at a rate which is slower than the assumed
rate. In this case, the current cash flow of the bond generally decreases. A
reduced prepayment rate effectively lengthens the time period the security will
be outstanding and may adversely affect the price and volatility of the
security.
Restricted Securities (Dodge & Cox Balanced Fund and Dodge & Cox Income
-----------------------------------------------------------------------
Fund). The Fund may invest in restricted securities (privately-placed debt and
- ------
preferred equity securities) and other securities without readily available
market quotations, but will not acquire such securities or other illiquid
securities, including repurchase agreements maturing in more than seven days, if
as a result they would comprise more than 15% of the value of the Fund's total
assets (10% for Dodge & Cox Income Fund).
Restricted securities may be sold only in privately-negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933. Where registration is required, a Fund
may be obligated to pay all or a part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, a Fund might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities will be priced at fair value as
determined in good faith by the Trust's Board of Trustees.
Structured Investments (Dodge & Cox Balanced Fund and Dodge & Cox Income
------------------------------------------------------------------------
Fund). Included among the issuers of debt securities in which a Fund may invest
- ------
are entities organized and operated solely for the purpose of restructuring the
investment characteristics of various securities. These entities are typically
organized by investment banking firms which receive fees in connection with
establishing each entity and arranging for the placement of its securities.
This type of restructuring involves the deposit with or purchases by an entity,
such as a corporation or trust, of specified instruments and the issuance by
that entity of one or more classes of securities (structured investments) backed
by, or representing interests in, the underlying instruments. The cash flow on
the underlying instruments may be apportioned among the newly issued structured
investments to create securities with different investment characteristics such
as varying maturities, payment priorities or interest rate provisions; the
extent of the payments made with respect to structured investments is dependent
on the extent of the cash flow on the underlying instruments.
Each Fund is permitted to invest in a class of structured investments that
is either subordinated or unsubordinated to the right of payment of another
class. Subordinated structured investments typically
9
<PAGE>
have higher yields and present greater risks than unsubordinated structured
investments. Although a Fund's purchase of subordinated structured investments
would have a similar economic effect to that of borrowing against the underlying
securities, the purchase will not be deemed to be leverage for purposes of the
limitations placed on the extent of a Fund's assets that may be used for
borrowing activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a Fund's investment in
these structured investments may be limited by the restrictions contained in the
1940 Act.
Inflation-Indexed Bonds (Dodge & Cox Balanced Fund and Dodge & Cox Income
-------------------------------------------------------------------------
Fund). Inflation-indexed bonds are fixed-income securities whose principal
- ------
value is periodically adjusted according to the rate of inflation. The interest
rate on these bonds is fixed at issuance at a rate generally lower than typical
bonds. Over the life of an inflation-indexed bond, however, interest will be
paid based on a principal value which is adjusted for inflation as measured by
changes in the Consumer Price Index (CPI). The securities will pay interest on
a semi-annual basis, equal to a fixed percentage of the inflation-adjusted
principal amount.
If the value of the CPI falls, the principal value of inflation-indexed
bonds will be adjusted downward, and consequently the interest payable on these
securities (calculated with respect to a smaller principal amount) will be
reduced. Repayment of the originally issued principal amount upon maturity is
guaranteed by the U.S. Treasury. However, the current market value of the bonds
is not guaranteed, and will fluctuate. The Fund may also invest in other
inflation-related bonds which may or may not provide a similar guarantee. If
such a guarantee of principal is not provided, the adjusted principal value of
the bond repaid at maturity may be less than the original principal.
The U.S. Treasury began issuing inflation-indexed bonds in 1997. As such,
there is no trading history of these securities, and there can be no assurance
that a liquid market in these instruments will continue. Lack of a liquid
market may impose the risk of higher transaction costs and the possibility that
a Fund may be forced to liquidate positions when it would not be advantageous to
do so. There also can be no assurance that the U.S. Treasury will issue any
particular amount of inflation-indexed bonds.
The CPI is calculated monthly by the U.S. Bureau of Labor Statistics. The
CPI is a measurement of changes in the cost of living, made up of components
such as housing, food, transportation and energy. There can be no assurance that
the CPI will accurately measure the real rate of inflation in the prices of
goods and services.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
When-Issued Or Delayed-Delivery Securities (Dodge & Cox Balanced Fund and
-------------------------------------------------------------------------
Dodge & Cox Income Fund). Each Fund may purchase securities on a when-issued or
- -------------------------
a delayed-delivery basis, that is, for payment and delivery on a date later than
normal settlement, but generally within 30 days.
The purchase price and yield on these securities are generally set at the
time of purchase. On the date that a security is purchased on a when-issued
basis, a Fund reserves liquid assets with a value at least as great as the
purchase price of the security, in a segregated account at the custodian bank,
as long as the obligation to purchase continues. The value of the delayed-
delivery security is reflected in a Fund's net asset value as of the purchase
date, however, no income accrues to a Fund from these securities prior to their
delivery to the Fund. A Fund makes such purchases for long-term investment
reasons, but may actually sell the securities prior to settlement date if Dodge
& Cox deems it advisable in seeking to achieve the objectives of the Fund. The
purchase of these types of securities may increase a Fund's overall investment
exposure and involves a risk of loss if the value of the securities declines
prior to the settlement date. Unsettled securities purchased on a when-issued or
delayed-delivery basis will not exceed 5% of a Fund's total assets at any one
time.
10
<PAGE>
Cash Position. Each Fund will hold a certain portion of its assets in U.S.
--------------
dollar-denominated money market securities, including repurchase agreements,
commercial paper, and bank obligations in the two highest rating categories
maturing in one year or less. For temporary, defensive purposes, a Fund may
invest without limitation in such securities. This reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new investments
and serves as a short-term defense during periods of unusual market volatility.
Bank Obligations. Certificates of deposit, bankers' acceptances, and
other short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn on
a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. A Fund may invest in U.S. banks, foreign branches of U.S. banks, U.S.
branches of foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (such as bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates.
Commercial Paper. Short-term promissory notes issued by corporations
primarily to finance short-term credit needs. Certain notes may have floating
or variable rates.
Repurchase Agreements. A Fund may enter into a repurchase agreement
through which an investor (such as a Fund) purchases a security (known as the
"underlying security") from a well-established securities dealer or bank that is
a member of the Federal Reserve System. Any such dealer or bank will be on Dodge
& Cox's approved list and have a credit rating with respect to its short-term
debt of at least A1 by S&P, P1 by Moody's, or the equivalent rating by Dodge &
Cox. At that time, the bank or securities dealer agrees to repurchase the
underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will be
treated as illiquid securities. A Fund will only enter into repurchase
agreements where (i) the underlying securities are issued by the U.S.
government, its agencies and instrumentalities, (ii) the market value of the
underlying security, including interest accrued, will be at all times equal to
or exceed the value of the repurchase agreement, and (iii) payment for the
underlying security is made only upon physical delivery or evidence of book-
entry transfer to the account of the custodian or a bank acting as agent. In the
event of a bankruptcy or other default of a seller of a repurchase agreement, a
Fund could experience both delays in liquidating the underlying security and
losses, including: (a) possible decline in the value of the underlying security
during the period which the Fund seeks to enforce its rights thereto; (b)
possible subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights.
Borrowing Money. The Funds can borrow money from banks as a temporary
----------------
measure for emergency purposes or to facilitate redemption requests. Such
borrowing may be collateralized with Fund assets, subject to restrictions.
Lending Of Portfolio Securities (Dodge & Cox Income Fund). The Fund has
----------------------------------------------------------
reserved the right to lend its securities to qualified broker-dealers, banks or
other financial institutions. By lending its portfolio securities, the Fund
would attempt to increase its income by receiving a fixed fee or a percentage of
the collateral, in addition to continuing to receive the interest or dividends
on the securities loaned. The terms, structure and the aggregate amount of such
loans would be consistent with the 1940 Act. The borrower would be required to
secure any such loan with collateral in cash or cash equivalents maintained
11
<PAGE>
on a current basis in an amount at least equal to the total market value and
accrued interest of the securities loaned by the Fund. The Fund does not
presently intend to lend portfolio securities.
Investment Companies. The Funds can purchase the securities of other
---------------------
investment companies as permitted by the 1940 Act.
Additional Risks
----------------
General. Because of its investment policy, each Fund may not be
suitable or appropriate for all investors. The Funds are not money market funds
and are not appropriate investments for those whose primary objective is
principal stability. A Fund's assets will be subject to all of the risks of
investing in the financial markets. There is risk in all investment. The value
of the portfolio securities of a Fund will fluctuate based upon market
conditions. Although a Fund seeks to reduce risk by investing in a diversified
portfolio, such diversification does not eliminate all risk. There can be no
assurance that a Fund will achieve its investment objectives.
Debt Obligations. A Fund will invest in debt securities which hold
the prospect of contributing to the achievement of a Fund's objectives. Yields
on short, intermediate, and long-term securities are dependent on a variety of
factors, including the general conditions of the money and bond markets, the
size of a particular offering, the maturity of the obligation, and the credit
quality and rating of the issue. Debt securities with longer maturities tend to
have higher yields and are generally subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities and lower
yields. The market prices of debt securities usually vary, depending upon
available yields. An increase in interest rates will generally reduce the value
of portfolio investments, and a decline in interest rates will generally
increase the value of portfolio investments. The ability of a Fund to achieve
its investment objectives is also dependent on the continuing ability of the
issuers of the debt securities in which a Fund invests to meet their obligations
for the payment of interest and principal when due. As discussed below, each
Fund's investment program permits it to hold investment-grade securities that
have been downgraded. In addition, the Dodge & Cox Income Fund may invest in
lower quality securities. Since investors generally perceive that there are
greater risks associated with investment in lower quality securities, the yields
from such securities normally exceed those obtainable from higher quality
securities. However, the principal value of lower-rated securities generally
will fluctuate more widely than higher quality securities. Lower quality
investments entail a higher risk of default--that is, the nonpayment of interest
and principal by the issuer--than higher quality investments. Such securities
are also subject to special risks, discussed below. Although a Fund seeks to
reduce risk by portfolio diversification, credit analysis, and attention to
trends in the economy, industries and financial markets, these efforts will not
eliminate all risk.
After purchase by a Fund, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by a Fund.
Neither event will require a sale of such security by the Fund. However, Dodge
& Cox will consider such event in its determination of whether a Fund should
continue to hold the security. To the extent that the ratings given by Moody's
or S&P may change as a result of changes in such organizations or their rating
systems, a Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in the
Prospectus.
Special Risks of High Yield Investing. As described above, under
limited circumstances, a Fund may hold low quality bonds commonly referred to as
"junk bonds". Junk bonds are regarded as predominantly speculative with respect
to the issuer's continuing ability to meet principal and interest payments.
Because investment in low and lower-medium quality bonds involves greater
investment risk, to the extent a Fund holds such bonds, achievement of its
investment objective will be more dependent on Dodge & Cox's credit analysis
than would be the case if a Fund was
12
<PAGE>
investing in higher quality bonds. High yield bonds may be more susceptible to
real or perceived adverse economic conditions than investment grade bonds. A
projection of an economic downturn, or higher interest rates, for example, could
cause a decline in high yield bond prices because the advent of such events
could lessen the ability of highly leveraged issuers to make principal and
interest payments on their debt securities. In addition, the secondary trading
market for high yield bonds may be less liquid than the market for higher grade
bonds, which can adversely affect the ability of a Fund to dispose of its
portfolio securities. Bonds for which there is only a "thin" market can be more
difficult to value inasmuch as objective pricing data may be less available and
judgment may play a greater role in the valuation process.
MANAGEMENT OF THE FUND
- ----------------------
Officers and Trustees
The Trust is organized as a Delaware business trust. The Trust's Board of
Trustees supervises the Trust operations and performs duties required by
applicable state and Federal law.
<TABLE>
<CAPTION>
Total 1998
Position(s) Principal Occupation Compensation
Name and Address Age with Trust During Past 5 Years from the Trust**
- --------------------- ----- --------------- --------------------------------- ------------------
<S> <C> <C> <C> <C>
Harry R. Hagey * 58 Chairman and Chairman and Chief Executive $0
Trustee Officer of Dodge & Cox
John A. Gunn * 55 President and President of Dodge & Cox 0
Trustee
A. Horton Shapiro * 59 Executive Senior Vice-President of Dodge & 0
Vice-President Cox
and Trustee
Katherine Herrick 45 Vice-President Vice-President of Dodge & Cox 0
Drake * and Trustee
Dana M. Emery * 37 Vice-President Manager-Fixed Income and Senior 0
and Trustee Vice-President of Dodge & Cox
Kenneth E. Olivier * 47 Vice-President Senior Vice-President of Dodge & 0
and Trustee Cox
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Total 1998
Position(s) Principal Occupation Compensation
Name and Address Age with Trust During Past 5 Years from the Trust**
- --------------------- ----- --------------- --------------------------------- ------------------
<S> <C> <C> <C> <C>
L. Dale Crandall 58 Trustee Executive Vice President, $ 0
One Kaiser Plaza Finance and Administration and
Oakland, CA Chief Financial Officer, Kaiser
Foundation Health Plan, Inc. and
Kaiser Foundation Hospitals
(1998-present); Executive Vice
President & CFO, APL Limited
(shipping) (1995-1998); Managing
Partner, Price Waterhouse LLP
(Southern California) (1990-1995)
Max Gutierrez, Jr. 68 Trustee Partner in Brobeck, Phleger & 9,000
One Market Plaza Harrison, Attorneys
San Francisco, CA
John B. Taylor 52 Trustee Professor of Economics and 12,000
Department of Director of the Center for
Economics Economic Policy Research,
Stanford University Stanford University
Stanford, CA
Will C. Wood 59 Trustee Principal, Kentwood Associates, 12,000
1550 El Camino Real Financial Advisers; Director,
Menlo Park, CA Banco Latinoamericano de Exportaciones S.A.
(April 1999-Present) (Latin American
Foreign Trade Bank); prior to 1994,
Managing Director, IDI Associates,
Financial Advisers; Director,
Dover Investment Corp. (1992-
present) (Real Estate Development)
John M. Loll 33 Treasurer and Vice President and Treasurer of 0
Assistant Dodge & Cox; prior to 2000,
Secretary Fund Administration and
Accounting Manager, Dodge & Cox
Thomas M. Mistele 45 Secretary and Vice-President, Secretary and General 0
Assistant Counsel of Dodge & Cox; prior to 1996,
Treasurer Senior Vice President of
Templeton Global Investors, Inc.
and Secretary/General Counsel of
the Templeton Mutual Funds
</TABLE>
14
<PAGE>
_______________________
* Each has been an employee of Dodge & Cox, 35th Floor, One Sansome
Street, San Francisco, California for over 12 years in an executive
position and is an "interested person" of the Trust as defined in the
1940 Act.
** "Total 1998 Compensation from the Trust" consists of compensation and
fees paid to Trustees by the Trust.
Trustees and officers of the Trust affiliated with Dodge & Cox hold a
controlling interest in Dodge & Cox. Those Trustees who are not affiliated with
Dodge & Cox receive from the Trust an annual fee of $4,500 and an attendance fee
of $2,250 (or $750 per Fund) for each Board or Committee meeting attended. The
Trust does not pay any other remuneration to its officers or Trustees, and has
no bonus, profit-sharing, pension or retirement plan. On March 31, 1999 the
officers and Trustees of the Trust and members of their families and relatives
owned less than 1.0% of the outstanding shares of each Fund.
On March 31, 1999, Charles Schwab & Co., 101 Montgomery Street, San
Francisco, CA 94104-4122 owned of record 8,096,118 shares (18.2%), 8,491,328
shares (10.0%) and 6,386,229 shares (8.0%) of the outstanding shares of Dodge &
Cox Stock Fund, Dodge & Cox Balanced Fund and Dodge & Cox Income Fund,
respectively; and Donaldson Lufkin & Jenrette-Pershing Division, P.O. Box 2052,
Jersey City, NJ 07303-2052 and National Financial Services Inc., Church Street
Station, P.O. Box 3908, New York, NY 10008-3908 owned of record 6,750,478 shares
(8.5%) and 5,139,017 shares (6.5%) of the outstanding shares of Dodge & Cox
Income Fund, respectively. The Trust knows of no other person who owns
beneficially or of record more than 5% of the outstanding shares of each Fund.
Investment Manager
Dodge & Cox, One Sansome Street, San Francisco, California 94104, a
corporation, is employed by the Trust as manager and investment adviser of the
Funds, subject to the direction of the Board of Trustees. Dodge & Cox is one of
the oldest professional investment management firms in the United States, having
acted continuously as investment managers since 1930 and has served as manager
and investment adviser for the Funds since each Fund's inception. Each Fund's
investments are managed by Dodge & Cox's Investment Policy Committee (the Fixed-
Income Strategy Committee for fixed-income securities), and no one person is
primarily responsible for making investment recommendations to the Committee.
The research work of the firm is organized for comprehensive and continuous
appraisal of the economy and of various industries and companies. Supplemental
research facilities are used to obtain additional coverage of business and
financial developments affecting comparative security values.
Dodge & Cox is not engaged in the brokerage business nor in the business of
dealing in or selling securities. Its activities are devoted to investment
research and the supervision of investment accounts for individuals, trustees,
corporations, pension and profit-sharing funds, and charitable institutions.
Dodge & Cox Stock Fund and Dodge & Cox Balanced Fund each pay Dodge & Cox a
management fee which is payable monthly at the annual rate of 0.50% of the
average daily net asset value of each Fund. Dodge & Cox Income Fund pays Dodge
& Cox a management fee which is payable monthly at the annual rate of 0.50% of
the average daily net asset value of the Fund up to $100 million and 0.40% of
the average daily net asset value of the Fund in excess of $100 million.
The investment management agreements with Dodge & Cox Income Fund and Dodge
& Cox Stock Fund provide that Dodge & Cox will waive its fee for any calendar
year to the extent that such fee
15
<PAGE>
plus all other ordinary operating expenses paid by the Fund exceed 1% and 0.75%,
respectively, of the average daily net asset value of the Fund. No waiver of
management fee was required for 1998 under the agreements. Investment management
fees received by Dodge & Cox from the Funds for the last three years were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Dodge & Cox Stock Fund $22,197,066 $16,194,151 $ 8,541,819
Dodge & Cox Balanced Fund 28,533,113 23,306,993 13,196,680
Dodge & Cox Income Fund 3,467,781 2,574,712 1,650,053
</TABLE>
The contracts may be terminated at any time without penalty upon 60 days written
notice by action of the Trustees, shareholders or by Dodge & Cox. The contracts
will terminate automatically should there be an assignment thereof. In addition
to Dodge & Cox's fee, each Fund pays other direct expenses, including transfer
agent, custodial, accounting, legal, and audit fees; costs of preparing and
printing prospectuses and reports sent to shareholders; registration fees and
expenses; proxy and shareholder meeting expenses; and Trustee fees and expenses.
In 1998, the ratio of total operating expenses to average net assets of Dodge &
Cox Stock Fund, Dodge & Cox Balanced Fund and Dodge & Cox Income Fund were
0.57%, 0.54% and 0.47%, respectively. Dodge & Cox furnishes personnel and other
facilities necessary for the operation of the Funds for which it receives no
additional compensation. Dodge & Cox supervises the operations of the Funds and
directs the investment and reinvestment of its assets and furnishes all
executive personnel and office space required.
Other Service Providers
Custodian and Transfer Agent
----------------------------
State Street Bank and Trust Company, P.O. Box 9051, Boston, Massachusetts
02205-9051 (1-800-621-3979), acts as custodian of all cash and securities of the
Funds and serves as fund accountant for the Funds. Boston Financial Data
Services, P.O. Box 9051, Boston, Massachusetts 02205-9051 (1-800-621-3979) acts
as transfer and dividend disbursing agent for the Funds.
Independent Accountant
----------------------
PricewaterhouseCoopers LLP, 333 Market Street, San Francisco,
California 94105, are independent accountants to the Funds, subject to annual
appointment by the Board of Trustees. PricewaterhouseCoopers LLP conducts an
annual audit of the accounts and records of each Fund, reports on the Fund's
annual financial statements and performs tax and accounting advisory services.
BROKERAGE ALLOCATION AND OTHER PRACTICES
- ----------------------------------------
The Investment Management Agreements provide that Dodge & Cox is
responsible for selecting members of securities exchanges, brokers and dealers
(such members, brokers and dealers being hereinafter referred to as "brokers")
for the execution of a Fund's portfolio transactions and, when applicable, the
negotiation of commissions. All decisions and placements are made in accordance
with the following principles:
1. Purchase and sale orders will usually be placed with brokers who are
selected by Dodge & Cox as able to achieve "best execution" of such orders.
"Best execution" means prompt and reliable execution at the most favorable
securities price, taking into account the other
16
<PAGE>
provisions hereinafter set forth. The determination of what may constitute
best execution and price in the execution of a securities transaction by a
broker involves a number of considerations, including without limitation,
the overall direct net economic result to a Fund (involving both price paid
or received and any commissions and other costs paid), the efficiency with
which the transaction is effected, the ability to effect the transaction at
all where a large block is involved, availability of the broker to stand
ready to execute possibly difficult transactions in the future, and the
financial strength and stability of the broker. Such considerations are
judgmental and are weighed by Dodge & Cox in determining the overall
reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, Dodge & Cox takes into
account its past experience as to brokers qualified to achieve best
execution, including brokers who specialize in any foreign securities held
by a Fund.
3. Dodge & Cox is authorized to allocate brokerage business to brokers who
have provided brokerage and research services, as such services are defined
in Section 28(e) of the Securities Exchange Act of 1934 (1934 Act), for a
Fund and/or other accounts, if any, for which Dodge & Cox exercises
investment discretion (as defined in Section 3(a)(35) of the 1934 Act) and,
as to transactions as to which fixed minimum commission rates are not
applicable. Such allocation may cause a Fund to pay a commission for
effecting a securities transaction in excess of the amount another broker
would have charged for effecting that transaction, if Dodge & Cox
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by
such broker, viewed in terms of either that particular transaction or with
Dodge & Cox's overall responsibilities with respect to a Fund and the other
accounts, if any, as to which it exercises investment discretion. In
reaching such determination, Dodge & Cox is not required to place or
attempt to place a specific dollar value on the research or execution
services of a broker or on the portion of any commission reflecting
brokerage or research services. In demonstrating that such determinations
were made in good faith, Dodge & Cox will be prepared to show that all
commissions were allocated and paid for purposes contemplated by a Fund's
brokerage policy; that commissions were paid only for products or services
which provide lawful and appropriate assistance to Dodge & Cox in the
performance of its investment decision-making responsibilities; and that
the commissions paid were within a reasonable range. The determination that
commissions were within a reasonable range will be based on any available
information as to the level of commissions known to be charged by other
brokers on comparable transactions, but there will also be taken into
account a Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is recognized
that usually it is more beneficial to a Fund to obtain a favorable price
than to pay the lowest commission; and (ii) the quality, comprehensiveness
and frequency of research studies which are provided for Dodge & Cox are
useful to Dodge & Cox in performing its advisory services under its
Investment Management Agreement with a Fund. Research services provided by
brokers to Dodge & Cox are considered to be in addition to, and not in lieu
of, services required to be performed by Dodge & Cox under its Investment
Management Agreement. Research furnished by brokers through whom a Fund
effects securities transactions may be used by Dodge & Cox for any of its
accounts, and not all such research may be used by Dodge & Cox for the
Funds.
The receipt of investment research and information and related services
permits Dodge & Cox to supplement its own research and analysis and makes
available to Dodge & Cox the views and information of individuals and
research staffs of other firms. The views and information include such
matters as communications with persons having special expertise on certain
17
<PAGE>
companies, industries, areas of economy or market factors and written
materials on these and other areas which might affect the economy or
securities prices.
Research services may also include information on the economy, industries,
groups of securities and individual companies; statistical information and
databases; accounting and tax law interpretations; political developments;
legal developments affecting portfolio securities; pricing and appraisal
services; issuer disclosure services; credit, risk measurement and
performance analysis; and analysis of corporate responsibility issues.
Research services are subject to internal analysis before being
incorporated into Dodge & Cox's investment process.
4. Purchases and sales of portfolio securities within the United States other
than on a securities exchange will be executed with primary market makers
acting as principal except where, in the judgment of Dodge & Cox, better
prices and execution may be obtained on a commission basis or from other
sources.
Insofar as known to management, no Trustee or officer of the Trust,
nor Dodge & Cox or any person affiliated with any of them, has any material
direct or indirect interest in any broker employed by or on behalf of a Fund.
There is no fixed method used in determining which broker-dealers receive which
order or how many orders.
Periodically Dodge & Cox reviews the current commission rates and discusses
the execution capabilities and the services provided by the various broker-
dealers Dodge & Cox is utilizing in the execution of orders. Research services
furnished by the brokers through whom Dodge & Cox effects security transactions
for a Fund may be used in servicing some or all of Dodge & Cox's accounts,
however, all such services may not be used by Dodge & Cox in connection with a
Fund. Aggregate brokerage commissions paid by Dodge & Cox Stock Fund and Dodge
& Cox Balanced Fund during the last three years were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Dodge & Cox Stock Fund $2,033,477 $2,419,305 $1,109,157
Dodge & Cox Balanced Fund 1,781,992 1,835,589 1,131,834
</TABLE>
In 1998 securities transactions allocated to brokers based on arrangements
to provide research services to Dodge & Cox Stock Fund and Dodge & Cox Balanced
Fund totaled $166,136,977 and $167,811,970, respectively, and brokerage
commissions paid on such transactions amounted to $230,565 and $219,975,
respectively. Except as indicated above, Dodge & Cox does not intend to place
portfolio transactions with any particular broker-dealers.
Investment decisions for a Fund are made independently from those of the
other Funds and other accounts managed by Dodge & Cox. It may frequently
develop that the same investment decision is made for more than one account.
Simultaneous transactions may often occur when the same security is suitable for
the investment objective of more than one account. When two or more accounts
are simultaneously engaged in the purchase or sale of the same security, the
transactions are averaged as to price and allocated as to amount in accordance
with a formula equitable to each account. It is recognized that in some cases
this system could have a detrimental effect on the price or availability of the
security as far as a Fund is concerned. In other cases, however, it is believed
that the ability of a Fund to participate in volume transactions will produce
better executions for the Fund.
18
<PAGE>
CAPITAL STOCK
- -------------
The Trust has three classes of beneficial shares and each share evidences
an equal beneficial ownership in a Fund and there is no limit to the number of
shares that may be issued. The three series of the Trust are successors to
Dodge & Cox Stock Fund established in 1965, Dodge & Cox Balanced Fund
established in 1931 and Dodge & Cox Income Fund established in 1989. All shares
have the same rights as to redemption, dividends, and in liquidation. All
shares issued are fully paid and non-assessable, are transferable, and are
redeemable at net asset value upon demand of the shareholder. Shares have no
preemptive or conversion rights. The Trust is not required to hold annual
meetings of shareholders.
PURCHASE, REDEMPTION, AND PRICING OF SHARES
- -------------------------------------------
The procedures for purchasing and redeeming shares of a Fund are described
in the Funds' Prospectus, which is incorporated herein by reference.
Net Asset Value per Share. The purchase and redemption price of a Fund's
shares is equal to a Fund's net asset value per share or share price. A Fund
determines its net asset value per share by subtracting a Fund's total
liabilities (including accrued expenses and dividends payable) from its total
assets (the market value of the securities a Fund holds plus cash and other
assets, including income accrued but not yet received) and dividing the result
by the total number of shares outstanding. The net asset value per share of a
Fund is normally calculated as of the close of trading on the New York Stock
Exchange ("NYSE") every day the NYSE is open for trading. The NYSE is closed on
the following days: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
Determination of net asset value (and the offering, sale redemption and
repurchase of shares) for a Fund may be suspended when (a) the NYSE is closed,
other than customary weekend and holiday closings, (b) trading on the NYSE is
restricted, (c) an emergency exists as a result of which disposal by a Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for a Fund to fairly determine the value of its net assets, or (d) a
governmental body having jurisdiction over a Fund may by order permit such a
suspension for the protection of a Fund's shareholders; provided that applicable
rules and regulations of the Securities and Exchange Commission (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b), (c), or (d) exist.
In determining total net asset value of a Fund, stocks are valued at
market, using as a price the last sale of the day at the close of the New York
Stock Exchange or, if no sale, it will be valued at the mean between the bid and
ask prices for the day. Fixed-income securities, including listed issues, are
priced on the basis of valuations furnished by pricing services which utilize
both dealer-supplied valuations and electronic data processing techniques.
These values take into account appropriate factors such as institutional-size
trading markets in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data and do
not rely exclusively upon exchange or over-the-counter listed prices. Use of
the pricing service has been approved by the Board of Trustees. A security
which is listed or traded on more than one exchange is valued at the quotation
on the exchange determined to be the primary market for such security.
Securities for which market quotations are not readily available and all other
assets are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees.
Redemptions in Kind. The Funds reserve the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption by making
payment in whole or in part in readily marketable securities chosen by a Fund
and valued as they are for purposes of computing a
19
<PAGE>
Fund's NAV (a redemption-in-kind). If payment is made in securities, a
shareholder may incur transaction expenses in converting these securities to
cash. The Funds have elected, however, to be governed by Rule 18f-1 under the
1940 Act, as a result of which a Fund is obligated to redeem shares, with
respect to any one shareholder during any 90-day period, solely in cash up to
the lesser of $250,000 or 1% of the net asset value of the Fund at the beginning
of the period.
TAXATION OF THE FUND
- --------------------
Each Fund intends to qualify each year as a regulated investment company
under the Internal Revenue Code. A regulated investment company that distributes
for the year all of its ordinary income and capital gains pays no tax on its
ordinary income or capital gains. A regulated investment company that fails to
distribute all of its ordinary income and capital gains must pay tax on the
undistributed amounts at a maximum rate of 35%.
You need to be aware of the possible tax consequences when:
. You sell Fund shares, including an exchange from one Fund to another.
. A Fund makes a distribution to your account.
Taxes on Fund redemptions. When you sell shares in a Fund, you may realize
a gain or loss. An exchange from one Fund to another is a sale for tax
purposes.
In January, you will be sent Form 1099-B, indicating the amount of sales
made in a Fund during the prior year. This information will also be reported to
the IRS. For certain accounts opened after September 30, 1987, the Funds will
provide you with the average cost of the shares sold during the year, based on
the "average cost single category" method. This information is not reported to
the IRS, and you do not have to use it. You may calculate the cost basis using
other methods acceptable to the IRS, such as the "specific identification"
method.
To help you maintain accurate records, you will be sent a confirmation
immediately following each transaction (except for systematic purchases) and
quarterly and year-end statements detailing all transactions in your account
during the year.
Taxes on Fund distributions. The following summary does not apply to
retirement accounts, such as IRAs, which are tax-deferred until shareholders
withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
distributions paid to you during the prior year. This information will also be
reported to the IRS. All distributions made by a Fund are taxable to you for
the year in which they were paid.
Short-term capital gain distributions are taxable as ordinary income and
long-term capital gain distributions are taxable at the applicable long-term
capital gain rate. If you realize a capital loss on the sale or exchange of
Fund shares held six months or less, your short-term capital loss is
reclassified to long-term to the extent of any long-term capital gain
distribution received with respect to such Fund shares.
Tax effect of buying shares before a capital gain or income distribution.
If you buy shares shortly before or on the "record date" for a Fund distribution
- -- the date that establishes you as the person to receive the upcoming
distribution -- you will receive, in the form of a taxable distribution, a
portion of the money you just invested. Therefore, you may wish to find out a
Fund's record date before investing. Of course, a Fund's share price may, at
any time, reflect undistributed capital gains or income and unrealized
appreciation. When these amounts are eventually distributed, they are taxable.
20
<PAGE>
The discussion above and in the Funds' Prospectus regarding the Federal
income tax consequences of investing in a Fund have been prepared by Dodge & Cox
and do not purport to be complete descriptions of all tax implications of an
investment in a Fund. You are advised to consult with your own tax adviser
concerning the application of Federal, state and local taxes to an investment in
a Fund. The Trust's legal counsel has expressed no opinion in respect thereof.
PRINCIPAL UNDERWRITER
- ---------------------
The Trust is the sole and principal underwriter of the shares of the Funds.
PERFORMANCE INFORMATION
- -----------------------
Each Fund may include figures indicating its total return or yield in
advertisements or reports to shareholders or prospective investors. Quotations
of a Fund's average annual total rate of return will be expressed in terms of
the average annual compounded rate of return on a hypothetical investment in the
Fund over periods of one, five and ten years, will reflect the deduction of a
proportional share of Fund expenses (on an annual basis), will assume that all
dividends and capital gains distributions are reinvested when paid, and will be
calculated pursuant to the following formula:
<TABLE>
<CAPTION>
P (1 + T)/n/ = ERV
<S> <C> <C>
where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years,
ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.
</TABLE>
The average annual total returns of the Funds for the one, five and
ten-year periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------- -------- ---------
<S> <C> <C> <C>
Dodge & Cox Stock Fund 5.39% 18.34% 16.11%
Dodge & Cox Balanced Fund 6.70 14.14 14.05
Dodge & Cox Income Fund 8.08 7.54 9.57
</TABLE>
Total return indicates the positive or negative rate of return that an
investor would have earned from reinvested dividends and distributions and
changes in net asset value per share during the period.
Quotations of yield, as defined by the Securities and Exchange
Commission, will be based on net investment income per share earned during a
given thirty-day period and will be computed by dividing this net investment
income by the net asset value per share on the last day of the period and
annualizing the results according to the following formula:
<TABLE>
<CAPTION>
<S> <C>
YIELD = 2[(a-b+1)/6/ -1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements or waivers),
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the period.
</TABLE>
The Funds' current yields for the thirty days ended December 31, 1998
were as follows:
Dodge & Cox Stock Fund 1.67%
Dodge & Cox Balanced Fund 3.22%
Dodge & Cox Income Fund 5.68%
Yield does not directly reflect changes in net asset value per share which
occurred during the period. As appropriate, performance information for a Fund
may be compared in reports and promotional literature to: (i) the Standard &
Poor's 500/(R)/ Stock Index, the Dow Jones Industrial Average, the Lehman
Brothers Aggregate Bond Index, or various other unmanaged indices of the
performance of various types of investments, so that investors may compare a
Fund's results with those of indices widely regarded by investors as
representative of the security markets in general, and (ii) the performance of
other mutual funds. Unmanaged indices may assume the reinvestment of income
distributions, but generally do not reflect deductions for administrative and
management costs and expenses.
Performance information for a Fund reflects only the performance of
hypothetical investments in the Fund during the particular time periods on which
the calculations are based. Such information should not be considered as
representative of the performance of the Fund in the future because, unlike some
bank deposits or other investments which pay a fixed yield for a stated period
of time for a fixed principal amount, the performance of the Fund will vary
based not only on the current market value of the securities held in its
portfolio, but also on changes in a Fund's expenses and in the asset size of the
Fund. Performance information should be considered in light of a Fund's
investment objectives and policies, the types and quality of a Fund's portfolio
investments, market conditions during the particular time period and operating
expenses. Further information about the performance of a Fund is contained in
each Fund's Annual Report which may be obtained without charge from the Fund. A
Fund and Dodge & Cox may also refer to the following information:
1. Portfolio information, including median market capitalization, price to
earnings ratio, price to book value, average bond quality, average bond
maturity, and effective bond duration.
2. The asset allocation and sector weightings of a Fund's portfolio and a
Fund's top ten holdings.
3. A description of the Dodge & Cox investment management philosophy and
approach.
FINANCIAL STATEMENTS
- --------------------
Please refer to each Fund's Financial Statements consisting of the
financial statements of the Fund and the notes thereto, and the report of
independent accountants contained in the Fund's 1998 Annual Report to
Shareholders. The Financial Statements and the report of independent accountants
(but no other material from the Annual Report) are incorporated herein by
reference. Additional copies of the Annual Report may be obtained from a Fund at
no charge by writing, visiting our web site at www.dodgeandcox.com, or
telephoning the Fund.
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APPENDIX: RATINGS
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A debt obligation rating by Moody's or S&P reflects their current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. The purpose of the rating systems is to provide investors with a
simple system of gradation by which the relative investment qualities of bonds
may be noted. A rating is not a recommendation as to investment value, inasmuch
as it does not comment as to market price or suitability for a particular
investor.
The ratings are based on current information furnished by the issuer or
from other sources that the rating agencies deem reliable. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The following is a description of the characteristics of ratings as
published by Moody's and S&P.
RATINGS BY MOODY'S (MOODY'S INVESTORS SERVICE)
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modification 1 indicates that the security ranks in the higher end of its
generic rating group; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
group.
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RATINGS BY S&P (STANDARD & POOR'S RATINGS GROUP)
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated groups.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this group than in higher rated groups.
BB,B Debt rated BB and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from AA to B may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
groups.
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