<PAGE>
D O D G E & C O X D O D G E & C O X
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Stock Fund
Stock Fund
Established 1965
Investment Manager ----------------
Dodge & Cox
One Sansome Street ----------------
35th Floor
San Francisco
California 94104-4443
(415) 981-1710
For Fund literature and
information, please visit
the Funds' web site at:
www.dodgeandcox.com
or write or call:
Dodge & Cox Funds
c/o Boston Financial
Data Services
P.O. Box 9051
Boston
Massachusetts 02205-9051
(800) 621-3979
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This report is submitted
for the general information
of the shareholders of the
Fund. The report is not 35th Annual Report
authorized for distribution December 31, 1999
to prospective investors
in the Fund unless it is
accompanied by a current -----------------
prospectus. -----------------
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Printed on recycled paper
12/99 SF AR
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D O D G E & C O X
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Stock Fund
To Our Shareholders
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The Dodge & Cox Stock Fund had a total return of 20.2% in 1999, compared to
21.1% for the Standard & Poor's 500 Index (S&P 500) for the same time period.
Longer-term results for the Fund appear on page five of this report. At
December 31, 1999 the Fund's $4.6 billion in assets were invested 94% in
equities and 6% in cash equivalents.
The Fund's net asset value per share finished the year at $100.52. The Fund
paid income dividends of $1.48 per share and distributed net realized short and
long-term capital gains of $6.70 per share during the year.
These are extraordinary times for U.S. equity investors. The market average (as
measured by the S&P 500) increased approximately 21% in value during 1999,
marking its fifth consecutive year of greater than 20% annual gains. Similar to
returns for 1998, the "market average" for 1999 was comprised of sectors and
companies with dramatically dissimilar returns. Last year, returns for the
technology sector (including communications) was an impressive 75%. Excluding
that group from the "average," the S&P 500 would have returned a lackluster 3%.
Current Valuation of the U.S. Equity Market
In our view, it is no exaggeration to say that we are in the midst of the
greatest growth stock boom we have ever experienced. This can be seen from a
number of standpoints:
. Valuation/1/: Absolute levels of valuation are far higher than any prior
recorded period. For fifty years, from 1946 to 1996, the price-to-sales
ratio of the S&P Industrial Index ranged between 0.4 times sales and 1.25
times sales. The average over the long term has been about 0.8 times sales;
that is, on average, an equity investor pays about $0.80 for each $1.00 of a
company's sales. The price-to-sales ratio for the Industrials is now 2.25
times sales, nearly twice the previous high. However, as we pointed out
above, "averages" do not tell the whole story. Twenty-seven percent of the
equity market, or $3.6 trillion of market capitalization, is in a group of
195 technology, communication and internet stocks, each selling for more
than 7.0 times sales. The price-to-sales for this group in aggregate is (a
breathtaking) 20.5 times! Looking back at another period which appears
similar to the present, the "Nifty Fifty" era in the early 1970s, the top
fifty stocks then sold at 5.0 times sales at their peak, with the highest
value for a single company of 11.5 times sales.
. Market capitalization of the high-valuation segment: Another view of the
exuberance of investors for technology is to measure the size of the
technology sector as a proportion of the market's total capitalization.
There are always a number of companies--often smaller, fast-growing
companies--which are priced at high valuations, reflecting investors' view
of greatly superior growth potential. The striking aspect of the current
equity market, however, is how large a proportion of the market these high-
priced stocks represent. In 1995, the technology and communication sector
represented 14% of the S&P 500. By December 1999, the percentage had doubled
to nearly 30%.
. Valuation "gap" between high and low-valuation sectors: Given the
extraordinary valuations, it is not surprising that the premium of the high-
priced over the low-priced sectors is the largest we have ever seen. In
sharp contrast to the 20 times price-to-sales commanded by the high-value
technology sector, a broad swath of the economic landscape is valued at a
price-to-sales less than one times--more in line with the historical norm
for the overall market. Contrary to what one might expect, this group is not
made up of unattractive companies in dying industries with no growth
prospects. This low-valuation group includes the entire energy, industrial
commodity, electric utility and transportation sectors. Many of the
companies in this segment are market leaders with solid profitability and
reasonable, though not spectacular, growth prospects.
/1/ We use a price-to-sales ratio for this purpose, rather than the more
commonly quoted price-to-earnings. This ratio measures a company's price
relative to its sales revenues, rather than to reported earnings, and tends
to be a more stable valuation measure over time.
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1
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D O D G E & C O X
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Will the current investment boom in technology end?
Some investors allege that we are in a "new paradigm" and that historical
precedent and traditional valuation methods no longer apply. We disagree. We
think four of the most dangerous words in investing are "this time is
different." We offer two examples of previous periods of extreme investor
enthusiasm for a particular economic sector.
. Enthusiasm for personal computer companies dominated the last technology
boom in the early 1980s. In its aftermath, many personal computer companies
disappeared, and the entire technology sector underperformed the S&P 500 by
50% from 1983 to 1990.
. At the end of 1980, the energy stocks had risen sharply, and the sector
represented approximately 30% of the S&P 500. Oil prices at $40 per barrel
and expectations for future price increases had propelled the group upwards.
Yet at the same time, oil demand was dropping, as oil was used more
efficiently and substitutes (such as coal) were used. Global supply came
back into balance with global demand, and by the late 1980's the energy
sector declined to be less than 10% of the S&P 500.
The application of technology has led to enormous changes in the way we work
and live. In the long term we expect the technology sector will continue to be
one of the faster growing areas of the economy. We believe, however, that the
current boom in technology investing will subside. Our reasons include:
. Capital Allocation. The stock market is a large signaling device for the
real economy, guiding the allocation of capital. Extremely high valuations
indicate areas of substantial growth and attract both human and investment
capital. Venture capital has soared from $4 billion invested annually in the
mid-1990s to roughly $40 billion this past year. The IPO (initial public
offering) market raised additional capital estimated at $60 to $70 billion,
most of which was allocated to technology companies. Finally, established
firms are investing large amounts of capital to compete in these growth
areas. Eventually, as investment capital floods into an industry, return on
capital (profitability) is eroded.
. Technological Innovation. The irony is that, the more one believes that the
internet is a profound once-in-a-lifetime change, the less an investor
should be willing to pay, since the rapid rate and extreme degree of change
creates instability and unpredictability. It becomes nearly impossible to
forecast earnings and revenue growth, let alone to predict who the survivors
will be over time! Some technology observers believe that the internet will
make it more difficult to develop and sustain proprietary computer or
communications products. If so, this would make forecasting even more
difficult and erode profit margins further.
. Economic Cycles. Technology spending is capital spending. The technology
component of capital spending is growing rapidly. The increase in technology
spending alone boosted the growth rate for the entire U.S. economy from 3.3%
to 4.3% last year. Could technology capital spending peak in the next 12 to
24 months? We are not forecasting that, but it certainly is possible. The
pace of technological innovation is so rapid that, from time to time, it can
exceed the population's ability to assimilate it. Imagine what might happen
to the valuation of $3.6 trillion of technology stocks, now priced at 20
times sales, if (or when) sales growth slows.
Dodge & Cox's Response
The elements of our investment approach are unchanged. Using a long-term (three
to five year) investment horizon, we seek to identify and invest in high-
quality business franchises with reasonable valuations. We now view
approximately half of the equity market as unattractively priced. We become
very cautious when investor exuberance causes wide valuation disparities in the
equity market, and especially when the high-valuation segment grows
increasingly concentrated in a single economic area. Avoiding the high-
valuation area means we have the remaining half of the domestic equity market
(plus some non-U.S. companies) as the universe from which to build a
diversified portfolio.
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D O D G E & C O X
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Where are we finding investment value in the current market?
. Industrial Commodities: Approximately 16% of the Fund is invested in a broad
array of companies in the chemical, metals and forest products industries.
We have selected companies which appear moderately valued and which we
believe should show improving earnings in the coming years. A number of
these holdings were among the Fund's strongest contributors to investment
returns in 1999.
. Energy: About 11% of the portfolio is invested in energy, also a sector
which contributed positively to the Fund's 1999 results. In our view, global
economic growth should drive rising demand for oil, gas and oil services. We
believe the Fund's energy holdings offer the opportunity for growth of
earnings and cash flow in the coming years. We view this industry as
attractively valued in comparison with its growth prospects and also in
relation to other investment alternatives.
. Technology: After the preceding commentary about high valuations in the
technology sector, it is important to state that roughly 15% of the Fund's
holdings are in companies participating directly in the technology industry.
We continue to push ourselves to find ways for the Fund to participate in
technology opportunities at reasonable valuations. We have recently been
trimming holdings in this area. (For additional description of our strategy
in technology, see last quarter's shareholder letter.)
. Electric Utilities and Real Estate Investment Trusts (REITs): While not a
large weighting in the portfolio (5.7%), we have been increasing investment
in equities offering stable to increasing cash flow and attractive yields,
such as electric utilities and REITs. We view these holdings as defensive,
and would expect their prices to be relatively less volatile, should
valuations decline across the entire equity market.
A Final Note
At the outset of the Year 2000, we are struck by the enormous disparity of
valuations within the equity market. We believe that equity investors are
simultaneously faced with the opportunity for reasonable long-term returns, as
well as substantial investment risk. Importantly, the success of our portfolio
strategy does not depend on the decline of the high-valuation sector. That
group rose to new highs by the end of 1999, and we had avoided investments in
those areas, yet the Fund's annual return very nearly kept pace with the S&P
500, lagging it by less than one percent.
On January 15, 2000, the New York Times announced on the front page: "Investing
in the stock market for the long term, the strategy that has made the most
sense and made the most money for people over the years, is all but dead."
[italics ours] The article went on to say that last year "investors held stocks
for just over eight months on average." In contrast, the Fund's turnover
continues to be low. In 1999 turnover was 18%, which indicates an average
holding period of about five years. In this environment, we believe our
investment approach--stock selection with a long-term time horizon, emphasizing
not only economic fundamentals but also low-to-reasonable stock price
valuations--is especially attractive. Long-term investing is not dead at Dodge
& Cox.
W. Timothy Ryan retired from Dodge & Cox on December 31, 1999 after 36 years of
employment. He served as a Trustee/Director of the Stock Fund for 27 years.
Frank H. Roberts retired after ten years as an independent Trustee of the Stock
Fund. We greatly appreciate their wise counsel and many years of hard work on
behalf of the Fund, and we wish them well. We are pleased to welcome L. Dale
Crandall, Executive Vice President & CFO, Kaiser Foundation Health Plan and
Hospitals, as a new independent Trustee of the Dodge & Cox Funds.
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3
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D O D G E & C O X
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Stock Fund
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Our web site (www.dodgeandcox.com) provides additional information on the Fund
as well as answers to frequently asked questions. Thank you for your confidence
in the Dodge & Cox Stock Fund. As always, we welcome your comments and
questions.
For the Board of Trustees,
/s/ Harry R. Hagey, Chairman /s/ John A. Gunn, President
---------------------------- ---------------------------
Harry R. Hagey, Chairman John A. Gunn, President
January 26, 2000
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4
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D O D G E & C O X
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Stock Fund
Objective The Fund seeks long-term growth of principal and income. A
secondary objective is to achieve a reasonable current income.
Strategy The Fund invests primarily in a broadly diversified and carefully
selected portfolio of common stocks. In selecting investments,
the Fund invests in companies that, in Dodge & Cox's opinion,
appear to be temporarily undervalued by the stock market but have
a favorable outlook for long-term growth. The Fund focuses on the
underlying financial condition and prospects of individual
companies. Future earnings and dividends are major considerations
in selecting companies. Companies are also selected with an
emphasis on financial strength and sound economic background.
<TABLE>
<CAPTION>
Ten Years of Investment Performance through December 31, 1999
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[LINE GRAPH APPEARS HERE]
Dodge & Cox S&P 500
Stock Fund Index
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<S> <C> <C>
1/1/1990 $10,000 $10,000
12/31/1990 $ 9,493 $ 9,688
12/31/1991 $11,531 $12,641
12/31/1992 $12,782 $13,602
12/31/1993 $15,123 $14,971
12/31/1994 $15,900 $15,165
12/31/1995 $21,211 $20,863
12/31/1996 $25,938 $25,651
12/31/1997 $33,310 $34,202
12/31/1998 $35,096 $43,973
12/31/1999 $42,189 $53,230
Average annual total return for periods ended December 31, 1999 1 Year 5 Years 10 Years 20 Years
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Stock Fund 20.20% 21.55% 15.48% 17.08%
S&P 500 21.06 28.55 18.21 17.86
</TABLE>
The chart covers the period from January 1, 1990 to December 31, 1999. It
compares a $10,000 investment made in the Dodge & Cox Stock Fund to a $10,000
investment made in the S&P 500. The S&P 500 is a widely recognized, unmanaged
index of common stock prices. The Fund's total returns include the reinvestment
of dividend and capital gain distributions. Index returns include dividends and,
unlike Fund returns, do not reflect fees and expenses. Past performance does not
guarantee future results. Investment return and share price will fluctuate with
market conditions, and investors may have a gain or a loss when shares are sold.
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5
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D O D G E & C O X
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Stock Fund
Fund Information December 31, 1999
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<TABLE>
<CAPTION>
General Information
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<S> <C>
Net Asset Value Per Share $100.52
Total Net Assets (millions) $ 4,625
1999 Expense Ratio 0.55%
1999 Portfolio Turnover 18%
30 Day SEC Yield/1/ 1.65%
Fund Inception Date 1965
</TABLE>
Investment Manager: Dodge & Cox, San Francisco. Managed by
the Investment Policy Committee, whose eight members' average
tenure at Dodge & Cox is 22 years.
<TABLE>
<CAPTION>
Asset Allocation
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[PIE CHART APPEARS HERE]
<S> <C>
Stocks: 94.3%
Short-Term Investments: 5.7%
</TABLE>
<TABLE>
<CAPTION>
Stock Characteristics
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<S> <C>
Number of Stocks 77
Median Market Capitalization $7.5 billion
Price-to-Earnings Ratio/2/ 20.9x
Price-to-Book Value 2.2x
Foreign Stocks/3/ (as percentage of Fund) 12%
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
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<S> <C>
Alcoa 3.1
Dow Chemical 2.7
Matsushita Ltd. ADR 2.3
FDX Corp. 2.3
News Corp. Ltd. ADR 2.3
Rio Tinto PLC ADR 2.2
Citigroup 2.2
Golden West Financial 2.2
Hewlett-Packard 2.1
Sony ADR 2.1
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Sectors % of Fund
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<S> <C>
Energy 11.1
Electronics & Computer 10.3
Insurance & Financial Services 7.5
Banking 7.0
Consumer Durables 6.1
Transportation 5.6
General Industrial 5.6
Metals & Mining 5.3
Healthcare & Pharmaceutical 4.9
Chemicals 4.8
</TABLE>
/1/ An annualization of the Fund's total net investment income per share for
the 30-day period ended on the last day of the month.
/2/ Price-to-earnings ratio is calculated using trailing 12-month earnings and
excludes extraordinary items.
/3/ All U.S. dollar-denominated.
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D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
---------------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CONSUMER: 19.0%
STOCKS: CONSUMER DURABLES: 6.1%
92.0% 1,300,200 General Motors Corp.................................................... $ 94,508,288
1,041,300 Whirlpool Corp......................................................... 67,749,581
1,030,000 Ford Motor Co.......................................................... 55,040,625
2,530,500 Delphi Automotive Systems Corp......................................... 39,855,375
800,000 Dana Corp.............................................................. 23,950,000
--------------
281,103,869
HEALTHCARE AND PHARMACEUTICAL: 4.9%
1,770,000 Pharmacia & Upjohn, Inc................................................ 79,650,000
638,800 Bausch & Lomb, Inc..................................................... 43,717,875
1,565,000 Becton, Dickinson & Co................................................. 41,863,750
523,900 WellPoint Health Networks, Inc.,+...................................... 34,544,656
910,000 First Health Group Corp.,+............................................. 24,456,250
--------------
224,232,531
RETAIL AND DISTRIBUTION: 4.4%
8,818,000 Kmart Corp.,+.......................................................... 88,731,125
2,133,150 Genuine Parts Co....................................................... 52,928,784
1,402,100 Nordstrom, Inc......................................................... 36,717,494
1,330,000 Dillard's, Inc. Class A................................................ 26,849,375
--------------
205,226,778
CONSUMER PRODUCTS: 2.4%
1,645,700 Fort James Corp........................................................ 45,051,037
2,479,000 Mattel, Inc............................................................ 32,536,875
1,213,300 Dole Food Co., Inc..................................................... 19,716,125
440,800 VF Corp................................................................ 13,224,000
--------------
110,528,037
MEDIA & LEISURE: 1.2%
2,325,100 R.R. Donnelley & Sons, Co.............................................. 57,691,544
--------------
878,782,759
INDUSTRIAL COMMODITIES: 15.8%
METALS AND MINING: 5.3%
1,704,400 Alcoa, Inc............................................................. 141,465,200
1,097,000 Rio Tinto PLC ADR...................................................... 103,940,750
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245,405,950
CHEMICALS: 4.8%
918,300 Dow Chemical Co........................................................ 122,707,838
876,700 Eastman Chemical Co.................................................... 41,807,631
580,000 Union Carbide Corp..................................................... 38,715,000
370,000 Lubrizol Corp.......................................................... 11,423,750
378,020 NOVA Chemicals Corp.................................................... 7,300,511
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221,954,730
PAPER AND FOREST PRODUCTS: 4.5%
1,192,900 Weyerhaeuser Co........................................................ 85,665,131
1,266,400 Champion International Corp............................................ 78,437,650
718,600 Boise Cascade Corp..................................................... 29,103,300
320,200 International Paper Co................................................. 18,071,288
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211,277,369
</TABLE>
See accompanying Notes to Financial Statements
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7
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D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
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SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON GENERAL MANUFACTURING: 1.2%
STOCKS: 4,441,000 Archer Daniels Midland Co.............................................. $ 54,124,687
(Continued) --------------
732,762,736
FINANCE: 15.6%
INSURANCE AND FINANCIAL SERVICES: 7.5%
1,846,700 Citigroup, Inc......................................................... 102,607,269
1,183,200 Loews Corp............................................................. 71,805,450
2,022,850 The St. Paul Cos., Inc................................................. 68,144,759
408,200 American Express Co.................................................... 67,863,250
620,000 Chubb Corp............................................................. 34,913,750
--------------
345,334,478
BANKING: 7.0%
2,995,200 Golden West Financial Corp............................................. 100,339,200
1,950,000 Bank One Corp.......................................................... 62,521,875
1,480,400 Wells Fargo & Co....................................................... 59,863,675
998,121 Bank of America Corp................................................... 50,093,198
689,650 Republic New York Corp................................................. 49,654,800
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322,472,748
REAL ESTATE INVESTMENT TRUST: 1.1%
805,000 Equity Residential Properties Trust.................................... 34,363,437
738,100 Equity Office Properties Trust......................................... 18,175,713
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52,539,150
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720,346,376
TECHNOLOGY: 14.7%
ELECTRONICS & COMPUTER: 10.3%
857,400 Hewlett-Packard Co..................................................... 97,690,012
566,600 Motorola, Inc.......................................................... 83,431,850
1,122,700 Electronic Data Systems................................................ 75,150,731
1,540,500 NCR Corp.,+............................................................ 58,346,438
1,940,000 Xerox Corp............................................................. 44,013,750
981,400 National Semiconductor Corp.,+......................................... 42,016,188
2,585,000 Thermo Electron Corp.,+................................................ 38,775,000
1,962,400 Storage Technology Corp.,+............................................. 36,181,750
--------------
475,605,719
CONSUMER ELECTRONICS: 4.4%
389,400 Matsushita Electric Industrial Co., Ltd. ADR........................... 108,642,600
334,500 Sony Corp. ADR......................................................... 95,248,875
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203,891,475
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679,497,194
ENERGY: 11.1%
3,245,200 Occidental Petroleum Corp.............................................. 70,177,450
2,029,700 Unocal Corp............................................................ 68,121,806
1,177,700 Amerada Hess Corp...................................................... 66,834,475
1,361,000 Phillips Petroleum Co.................................................. 63,967,000
715,000 Chevron Corp........................................................... 61,936,875
3,804,624 Union Pacific Resources Group, Inc..................................... 48,508,956
</TABLE>
See accompanying Notes to Financial Statements
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D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
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SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON ENERGY (continued)
STOCKS: 2,251,700 Baker Hughes, Inc...................................................... $ 47,426,431
(Continued) 774,000 Royal Dutch Petroleum Co............................................... 46,778,625
610,000 Schlumberger Ltd....................................................... 34,312,500
118,096 Transocean Sedco Forex, Inc............................................ 3,978,359
--------------
512,042,477
TRANSPORTATION: 5.6%
2,626,800 FDX Corp.,+............................................................ 107,534,625
2,116,100 Union Pacific Corp..................................................... 92,314,862
2,733,000 Canadian Pacific Ltd................................................... 58,930,313
--------------
258,779,800
GENERAL INDUSTRIAL: 5.6%
1,793,600 Deere & Co............................................................. 77,797,400
2,870,600 Lockheed Martin Corp................................................... 62,794,375
1,350,000 Fluor Corp............................................................. 61,931,250
970,000 Caterpillar, Inc....................................................... 45,650,625
775,300 Unova, Inc.,+.......................................................... 10,078,900
--------------
258,252,550
ELECTRIC AND GAS UTILITIES: 4.6%
2,471,000 Central & South West Corp.............................................. 49,420,000
1,123,000 FPL Group, Inc......................................................... 48,078,438
1,230,000 Texas Utilities Co..................................................... 43,741,875
1,285,000 Ameren Corp............................................................ 42,083,750
1,494,600 Wisconsin Energy Corp.................................................. 28,771,050
--------------
212,095,113
--------------
Total Common Stocks (Cost $3,269,315,578)........................... 4,252,559,005
--------------
PREFERRED CONSUMER: 2.3%
STOCKS: 3,190,000 News Corp. Ltd., Limited Voting Ordinary Shares ADR.................... 106,665,625
2.3% --------------
Total Preferred Stocks (Cost $56,955,711)........................... 106,665,625
--------------
PAR VALUE
SHORT-TERM $ 59,787,606 SSgA Prime Money Market Fund........................................... 59,787,606
INVESTMENTS: 40,000,000 SSgA United States Treasury Money Market Fund.......................... 40,000,000
6.1% 133,000,000 State Street Repurchase Agreement, 2.50%, dated 12/31/99 due
1/3/2000, (collateralized by U.S. Treasury Notes, value $135,670,281).. 133,000,000
50,000,000 U.S. Treasury Bills, 2/17/2000......................................... 49,668,715
--------------
Total Short-Term Investments (Cost $282,456,321).................... 282,456,321
--------------
TOTAL INVESTMENTS (Cost $3,608,727,610).................... 100.4 % 4,641,680,951
OTHER ASSETS LESS LIABILITIES.............................. (0.4)% (17,142,855)
------ --------------
TOTAL NET ASSETS........................................... 100.0 % $4,624,538,096
====== ==============
+ Non-income producing securities
</TABLE>
See accompanying Notes to Financial Statements
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D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities December 31, 1999
----------------------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments, at market value (identified cost $3,608,727,610)............... $4,641,680,951
Receivable for Fund shares sold............................................. 3,129,602
Dividends and interest receivable........................................... 8,197,613
Prepaid expenses............................................................ 46,253
--------------
4,653,054,419
--------------
LIABILITIES:
Payable for Fund shares redeemed............................................ 26,130,553
Management fees payable..................................................... 1,919,713
Accounts payable............................................................ 466,057
--------------
28,516,323
--------------
NET ASSETS.................................................................. $4,624,538,096
Net asset value ==============
per share $100.52
NET ASSETS CONSIST OF:
Beneficial Paid in capital............................................................. $3,369,690,433
shares outstanding Accumulated undistributed net investment income............................. 1,584,302
46,005,060 Accumulated undistributed net realized gain on investments.................. 220,310,020
(par value $0.01 each, Net unrealized appreciation on investments.................................. 1,032,953,341
unlimited shares --------------
authorized) $4,624,538,096
==============
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations Year Ended December 31, 1999
----------------------------------------------------------------------------------------------
<C> <S> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes of $722,197)................................ $ 80,982,966
Interest.................................................................... 8,594,002
--------------
89,576,968
--------------
EXPENSES:
Management fees (Note 2).................................................... 22,300,846
Custodian and fund accounting fees.......................................... 185,618
Transfer agent fees......................................................... 1,308,120
Professional fees........................................................... 47,064
Shareholder reports......................................................... 264,378
Registration fees........................................................... 175,561
Trustees' fees (Note 2)..................................................... 18,500
Miscellaneous............................................................... 68,564
--------------
24,368,651
--------------
NET INVESTMENT INCOME....................................................... 65,208,317
--------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments.......................................... 457,870,396
Net unrealized appreciation on investments................................ 275,141,142
--------------
Net realized and unrealized gain on investments......................... 733,011,538
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $ 798,219,855
==============
</TABLE>
See accompanying Notes to Financial Statements
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10
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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Stock Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Year Ended December 31,
---------------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
OPERATIONS:
Net investment income.................................................. $ 65,208,317 $ 72,453,125
Net realized gain...................................................... 457,870,396 324,308,314
Net unrealized appreciation (depreciation)............................. 275,141,142 (188,133,334)
--------------- ---------------
Net increase in net assets from operations............................. 798,219,855 208,628,105
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (64,603,851) (71,742,283)
Net realized gain...................................................... (294,628,812) (337,213,581)
--------------- ---------------
Total distributions.................................................... (359,232,663) (408,955,864)
--------------- ---------------
BENEFICIAL SHARE TRANSACTIONS:
Amounts received from sale of shares................................... 924,118,464 1,255,961,170
Net asset value of shares issued in reinvestment of distributions...... 338,281,245 373,646,356
Amounts paid for shares redeemed....................................... (1,432,143,224) (1,160,943,436)
--------------- ---------------
Net increase (decrease) from beneficial share
transactions........................................................... (169,743,515) 468,664,090
--------------- ---------------
Total increase in net assets........................................... 269,243,677 268,336,331
NET ASSETS:
Beginning of year...................................................... 4,355,294,419 4,086,958,088
--------------- ---------------
End of year (including undistributed net investment
income of $1,584,302 and $979,836, respectively)....................... $ 4,624,538,096 $ 4,355,294,419
=============== ===============
Shares sold............................................................ 9,114,742 13,018,690
Shares issued in reinvestment of distributions......................... 3,434,611 4,028,923
Shares redeemed........................................................ (14,561,028) (12,248,020)
--------------- ---------------
Net increase (decrease) in shares outstanding.......................... (2,011,675) 4,799,593
=============== ===============
</TABLE>
See accompanying Notes to Financial Statements
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11
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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Stock Fund
Notes to Financial Statements
-------------------------------------------------------------------------
1 Dodge & Cox Stock Fund (the "Fund") is a separate series of Dodge & Cox
Funds (the "Trust"). The Trust is organized as a Delaware business trust
and is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The Fund
consistently follows accounting policies which are in conformity with
generally accepted accounting principles. Significant accounting policies
are as follows: (a) Security valuation: stocks are valued at the latest
quoted sales prices as of the close of the New York Stock Exchange or, if
no sale, then a representative price within the limits of the bid and ask
prices for the day; a security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security; securities for which market quotations
are not readily available are valued at fair value as determined in good
faith by or at the direction of the Board of Trustees; short-term
securities are valued at amortized cost which approximates current value;
all securities held by the Fund are denominated in U.S. dollars. (b)
Security transactions are accounted for on the trade date in the
financial statements. (c) Gains and losses on securities sold are
determined on the basis of identified cost. (d) Dividend and interest
income are recorded on the accrual basis. (e) Distributions to
shareholders of income and capital gains are reflected in the net asset
value per share computation on the ex-dividend date. (f) No provision for
Federal income taxes has been included in the accompanying financial
statements since the Fund intends to distribute all of its taxable income
and otherwise continue to comply with requirements for regulated
investment companies.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Actual results could
differ from those estimates.
2 Under a written agreement, the Fund pays an annual management fee of 1/2
of 1% of the Fund's average daily net asset value to Dodge & Cox,
investment manager of the Fund. The agreement further provides that Dodge
& Cox shall waive its fee to the extent that such fee plus all other
expenses of the Fund exceed 3/4 of 1% of the average daily net asset
value for the year. All officers and six of the trustees of the Trust are
officers and employees of Dodge & Cox. Those trustees who are not
affiliated with Dodge & Cox receive from the Trust an annual fee plus an
attendance fee for each Board or Committee meeting attended. Payments to
trustees are divided equally among each series of the Trust. The Trust
does not pay any other remuneration to its officers or trustees.
3 For the year ended December 31, 1999, purchases and sales of securities,
other than short-term securities, aggregated $753,278,507 and
$1,354,333,611, respectively. At December 31, 1999, the cost of
investments for Federal income tax purposes was equal to the cost for
financial reporting purposes. Net unrealized appreciation aggregated
$1,032,953,341, of which $1,347,645,366 represented appreciated
securities and $314,692,025 represented depreciated securities.
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12
<PAGE>
D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------
SELECTED DATA AND RATIOS (for a share outstanding throughout each year)
Year Ended December 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 90.70 $94.57 $79.81 $67.83 $53.94
Income from investment operations:
Net investment income 1.49 1.57 1.48 1.28 1.27
Net realized and unrealized gain 16.51 3.54 20.86 13.67 16.54
-------------------------------------------
Total from investment operations 18.00 5.11 22.34 14.95 17.81
-------------------------------------------
Distributions to shareholders from:
Net investment income (1.48) (1.56) (1.49) (1.29) (1.26)
Net realized gain (6.70) (7.42) (6.09) (1.68) (2.66)
-------------------------------------------
Total distributions (8.18) (8.98) (7.58) (2.97) (3.92)
-------------------------------------------
Net asset value, end of year $100.52 $90.70 $94.57 $79.81 $67.83
===========================================
Total return 20.20% 5.39% 28.41% 22.26% 33.38%
Ratios/Supplemental data:
Net assets, end of year (millions) $ 4,625 $4,355 $4,087 $2,252 $1,228
Ratio of expenses to average net assets .55% .57% .57% .59% .60%
Ratio of net investment income to average net assets 1.46% 1.63% 1.67% 1.79% 2.07%
Portfolio turnover rate 18% 19% 19% 10% 13%
</TABLE>
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13
<PAGE>
D O D G E & C O X
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Stock Fund
Report of Independent Accountants
-------------------------------------------------------------------
To the Trustees of Dodge & Cox Funds and Shareholders of Dodge &
Cox Stock Fund
In our opinion, the accompanying statement of assets and
liabilities, including the portfolio of investments, and the
related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects,
the financial position of the Dodge & Cox Stock Fund (the "Fund",
one of the series constituting Dodge & Cox Funds) at December 31,
1999, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years
in the period then ended, in conformity with accounting principles
generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits, which included
confirmation of securities at December 31, 1999 by correspondence
with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 26, 2000
-------------------------------------------------------------------
Special 1999 Tax Information (unaudited)
The following information is provided pursuant to provisions of the
Internal Revenue Code:
The Fund hereby designates $263,705,084 of its distributions paid
to shareholders in 1999 as capital gain dividends (treated for
Federal income tax purposes in the hands of shareholders as long-
term capital gain taxable at a maximum rate of 20%).
For shareholders that are corporations, the Fund hereby designates
77% of its ordinary dividends paid to shareholders in 1999 as
dividends from domestic corporations eligible for the corporate
dividends received deduction, provided that the shareholder
otherwise satisfies applicable requirements to claim that
deduction.
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14
<PAGE>
D O D G E & C O X
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Stock Fund
Officers & Trustees
- --------------------------------------------------------------------------------
Harry R. Hagey, Chairman & Trustee
Chairman & CEO, Dodge & Cox
John A. Gunn, President & Trustee
President, Dodge & Cox
A. Horton Shapiro, Executive Vice President & Trustee
Senior Vice President, Dodge & Cox
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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<PAGE>
D O D G E & C O X D O D G E & C O X
- ----------------- -----------------
Balanced Fund
Balanced Fund
Investment Manager Established 1931
Dodge & Cox
One Sansome Street -----------------
35th Floor
San Francisco, -----------------
California 94104-4443
(415) 981-1710
For Fund literature and
information, please
visit the Funds'
web site at:
www.dodgeandcox.com
or write or call:
Dodge & Cox Funds
c/o Boston Financial
Data Services
P.O. Box 9051
Boston,
Massachusetts 02205-9051
(800) 621-3979
-----------------
This report is submitted
for the general information
of the shareholders of the 69th Annual Report
Fund. The report is not December 31, 1999
authorized for distribution
to prospective investors
in the Fund unless it is
accompanied by a current -----------------
prospectus. -----------------
----------------- -----------------
12/99 BF AR
Printed on recycled paper.
<PAGE>
D O D G E & C O X
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Balanced Fund
To Our Shareholders
- -------------------------------------------------------------------------------
The Dodge & Cox Balanced Fund provided a total return of 12.1% during 1999,
compared to 12.0% for the Combined Index/1/ for the same time period. Longer-
term results for the Fund appear on page five of this report. At December 31,
1999 the Fund's total net assets of $5.1 billion were invested 60.7% in
equities, 36.6% in fixed-income securities and 2.7% in cash equivalents.
The Fund's net asset value per share finished the year at $65.71. The Fund
paid income dividends of $2.22 per share and distributed net realized short
and long-term capital gains of $4.98 per share during the year.
Current Valuation of the U.S. Equity Market
These are extraordinary times for U.S. equity investors. The market average
(as measured by the S&P 500) returned 21% during 1999, marking its fifth
consecutive year of greater than 20% annual gains. Similar to returns for
1998, the "average" for 1999 was comprised of sectors and companies with
dramatically dissimilar returns. Last year, returns for the technology sector
(including communications) was an impressive 75%. Excluding that group from
the "average," the S&P 500 would have returned a lackluster 3%.
In our view, it is no exaggeration to say that we are in the midst of the
greatest growth stock boom we have ever experienced. This can be seen from a
number of standpoints:
. Valuation/2/: Absolute levels of valuation are far higher than any prior
recorded period. For fifty years, from 1946 to 1996, the price-to-sales
ratio of the S&P Industrial Index ranged between 0.4 times sales and
1.25 times sales. The long-term average has been about 0.8 times sales. The
price-to-sales ratio for the Industrials is now 2.25 times sales, nearly
twice the previous high. However, as we pointed out above, "averages" do not
tell the whole story. Twenty-seven percent of the equity market, or $3.6
trillion of market capitalization, is in a group of 195 technology,
communication and internet stocks, each selling for more than 7.0 times
sales. The price-to-sales for this group in aggregate is (a breathtaking)
20.5 times! Looking back at another period which appears similar to the
present, the "Nifty Fifty" era in the early 1970s, the top fifty stocks then
sold at 5.0 times sales at their peak, with the highest value for a single
company of 11.5 times sales.
. Market capitalization of the high-valuation segment: Another view of the
exuberance of investors for technology is to measure the size of the
technology sector as a proportion of the market's total capitalization.
There are always a number of companies--often smaller, fast-growing
companies--which are priced at high valuations, reflecting investors' view
of greatly superior growth potential. The striking aspect of the current
equity market, however, is how large a proportion of the market these high-
priced stocks represent. In 1995, the technology and communication sector
represented 14% of the S&P 500. By December 1999, the percentage had doubled
to nearly 30%.
. Valuation "gap" between high and low-valuation sectors: Given the
extraordinary valuations, it is not surprising that the premium of the high-
priced over the low-priced sectors is the largest we have ever seen. In
sharp contrast to the 20 times price-to-sales commanded by the high-value
technology sector, a broad swath of the economic landscape is valued at a
price-to-sales less than one times--more in line with the historical norm
for the overall market. Contrary to what one might expect, this group is not
made up of unattractive companies
/1/ The Combined Index reflects an unmanaged portfolio of 60% Standard &
Poor's 500 Index (S&P 500) and 40% Lehman Brothers Aggregate Bond Index
(LBAG).
/2/ We use a price-to-sales ratio for this purpose, rather than the more
commonly quoted price-to-earnings. This ratio measures a company's price
relative to its sales revenues, rather than to reported earnings, and tends to
be a more stable valuation measure over time.
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1
<PAGE>
D O D G E & C O X
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Balanced Fund
- --------------------------------------------------------------------------------
in dying industries with no growth prospects. This low-valuation group
includes the entire energy, industrial commodity, electric utility and
transportation sectors. Many of the companies in this segment are market
leaders with solid profitability and reasonable, though not spectacular,
growth prospects.
Will the current investment boom in technology end?
Some investors allege that we are in a "new paradigm" and that historical
precedent and traditional valuation methods no longer apply. We disagree. We
think four of the most dangerous words in investing are "this time is
different." We offer an example of a previous period of extreme investor
enthusiasm for a particular economic sector. Enthusiasm for personal computer
companies dominated the last technology boom in the early 1980s. In its
aftermath, many personal computer companies disappeared, and the entire
technology sector underperformed the S&P 500 by 50% from 1983 to 1990.
The application of technology has led to enormous changes in the way we work
and live. In the long term we expect the technology sector will continue to be
one of the faster growing areas of the economy. We believe, however, that the
current boom in technology investing will subside. Our reasons include:
. Capital Allocation. Extremely high valuations indicate areas of substantial
growth and attract both human and investment capital. Venture capital has
soared from $4 billion invested annually in the mid-1990s to roughly $40
billion this past year. The IPO (initial public offering) market raised
additional capital estimated at $60 to $70 billion, most of which was
allocated to technology companies. Finally, established firms are investing
large amounts of capital to compete in these growth areas. Eventually, as
investment capital floods into an industry, return on capital
(profitability) is eroded.
. Technological Innovation. The irony is that, the more one believes that the
internet is a profound once-in-a-lifetime change, the less you as an
investor should be willing to pay, since the rapid rate and extreme degree
of change creates instability and unpredictability. It becomes nearly
impossible to forecast earnings and revenue growth, let alone to predict who
the survivors will be over time! Some technology observers believe that the
internet will make it more difficult to develop and sustain proprietary
computer or communications products. If so, this would make forecasting even
more difficult and erode profit margins further.
. Economic Cycles. Technology spending is capital spending. The technology
component of capital spending is growing rapidly. The increase in technology
spending alone boosted the growth rate for the entire U.S. economy from 3.3%
to 4.3% last year. Could technology capital spending peak in the next 12 to
24 months? We are not forecasting that, but it certainly is possible. The
pace of technological innovation is so rapid that, from time to time, it can
exceed the population's ability to assimilate it. Imagine what might happen
to the valuation of $3.6 trillion of technology stocks, now priced at 20
times sales, if (or when) sales growth slows.
Dodge & Cox's Response
The elements of our investment approach are unchanged. Using a long-term (three
to five year) investment horizon, we seek to identify and invest in high-
quality business franchises with reasonable valuations. We now view
approximately half of the equity market as unattractively priced. We become
very cautious when investor exuberance causes wide valuation disparities in the
equity market, and especially when the high-valuation segment grows
increasingly concentrated in a single economic area. Avoiding the high-
valuation area means we have the remaining half of the domestic equity market
(plus some non-U.S. companies) as the universe from which to build a
diversified portfolio.
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2
<PAGE>
D O D G E & C O X
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Balanced Fund
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Where are we finding investment value in the current market?
. Industrial Commodities: Approximately 16% of the Fund's equity portfolio is
invested in a broad array of companies in the chemical, metals and forest
products industries. We have selected companies which appear moderately
valued and which we believe should show improving earnings in the coming
years. A number of these holdings were among the Fund's strongest
contributors to investment returns in 1999.
. Energy: About 12% of the equity portfolio is invested in energy, also a
sector which contributed positively to the Fund's 1999 results. In our view,
global economic growth should drive rising demand for oil, gas and oil
services. We believe the Fund's energy holdings offer the opportunity for
growth of earnings and cash flow in the coming years. We view this industry
as attractively valued in comparison with its growth prospects and also in
relation to other investment alternatives.
. Technology: After the preceding commentary about high valuations in the
technology sector, it is important to state that roughly 16% of the Fund's
equity holdings are in companies participating directly in the technology
industry. We continue to push ourselves to find ways for the Fund to
participate in technology opportunities at reasonable valuations. We have
recently been trimming holdings in this area. (For additional description of
our strategy in technology, see last quarter's shareholder letter.)
A Difficult Year for Fixed Income
U.S. Treasury yields rose significantly during 1999, fueled by strong economic
growth, market fears of growing inflation, and a restrictive Federal Reserve
Board. The yield on the benchmark thirty-year U.S. Treasury rose from 5.09% to
6.48%, or 139 basis points (1 basis point = 1/100 of 1%). Gross Domestic
Product (GDP) grew at a 5.7% annualized rate during the first three quarters of
1999, compared to 4.3% growth in 1998. Inflation also rose, with the consumer
price index (CPI) posting a 2.7% increase in 1999, versus a 1.6% increase in
1998. Citing persistent economic growth, tight labor markets and concerns about
future inflation, the Federal Open Market Committee raised its target for the
Federal Funds rate three times in 1999.
The Lehman Brothers Aggregate Bond Index (LBAG) had a total return of -0.8%.
U.S. Treasury yields underperformed other broad sectors due to a relatively
larger increase in Treasury yields. For example, the Lehman Brothers Long
Treasury Index returned -8.7% for the year while the Lehman Brothers Long
Corporate Index returned -5.8%. The Lehman Mortgage-Backed Security Index had
the best performance, responding positively to the rising rate environment and
returning +1.9% for the year versus the Lehman Intermediate Treasury Index at
+0.4%.
The fixed-income portion of the Fund performed essentially in line with the
LBAG in 1999. The portfolio, however, is different from the LBAG in several
ways. Overweight positions in the corporate (including asset-backed securities)
and mortgage-backed sectors contributed positively to performance. Though the
yield premiums of these sectors have declined somewhat from their peaks, we
believe they continue to offer attractive long-term total return potential
relative to U.S. Treasury alternatives.
During 1999, we gradually increased the Fund's positions in ten and thirty-year
Treasury Inflation Protected Securities (TIPS). Beginning with an initial 2.0%
position in January 1999, we brought the position to 7.3% of the fixed-income
portion of the Fund by year end. While these securities benefited from an
increase in the CPI rate during 1999, their prices declined due to a rise in
the real (inflation-adjusted) interest rate during the year. Though these
securities detracted from performance during 1999, we continue to believe they
are attractive long-term investments due to their high real interest rate of
4.3% and the inflation protection they provide.
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3
<PAGE>
D O D G E & C O X
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Balanced Fund
- --------------------------------------------------------------------------------
A Final Note
We believe a balanced approach, using reasonably priced equities and high-
quality bonds, is a sound long-term investment strategy. At the outset of the
Year 2000, we are struck by the enormous disparity of valuations within the
equity market. We believe that equity investors are simultaneously faced with
the opportunity for reasonable long-term returns, as well as substantial
investment risk. Importantly, the success of our equity strategy does not
depend on the decline of the high-valuation sector. In the fixed-income portion
of the Fund we will continue to pursue our strategy of high-average quality and
diversification, while striving to attain a higher-than-market yield. We also
continue to emphasize those issuers whose long-term total return potential, in
our view, is underestimated by the market.
On January 15, 2000, the New York Times announced on the front page: "Investing
in the stock market for the long term, the strategy that has made the most
sense and made the most money for people over the years, is all but dead."
[italics ours] The article went on to say that last year "investors held stocks
for just over eight months on average." In contrast, the Fund's turnover
continues to be low. In 1999 turnover was 17%, which indicates an average
holding period of about five years. In this environment, we believe our
investment approach--security selection with a long-term time horizon,
emphasizing not only economic fundamentals but also low-to-reasonable
valuations--is especially attractive. Long-term investing is not dead at Dodge
& Cox.
W. Timothy Ryan retired from Dodge & Cox on December 31, 1999 after 36 years of
employment. He served as a Trustee and/or officer of the Balanced Fund for 33
years. Frank H. Roberts retired after ten years as an independent Trustee of
the Balanced Fund. We greatly appreciate their wise counsel and many years of
hard work on behalf of the Fund, and wish them well. We are pleased to welcome
L. Dale Crandall, Executive Vice President & CFO, Kaiser Foundation Health Plan
and Hospitals, as a new independent Trustee of the Dodge & Cox Funds.
Our web site (www.dodgeandcox.com) provides additional information on the Fund
as well as answers to frequently asked questions. Thank you for your confidence
in the Dodge & Cox Balanced Fund. As always, we welcome your comments and
questions.
For the Board of Trustees,
/s/ Harry R. Hagey
---------------------------------
January 26, 2000 Harry R. Hagey, Chairman
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4
<PAGE>
D O D G E & C O X
- -------------------------------------------------------------------------------
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Balanced Fund
Objective The Fund seeks regular income, conservation of principal and an op-
portunity for long-term growth of principal and income.
Strategy The Fund invests in a diversified portfolio of common stocks, pre-
ferred stocks and bonds.
Stocks: The Fund invests in well-established companies that, in
Dodge & Cox's opinion, appear to be temporarily undervalued by the
stock market but have a favorable outlook for long-term growth. The
Fund focuses on the underlying financial condition and prospects of
individual companies. The Fund will hold no more than 75% of its
total assets in stocks.
Bonds: Dodge & Cox constructs a diversified portfolio of high-qual-
ity bonds, while striving to maintain the fixed-income yield higher
than that of the broad bond market. Fixed-income investments in-
clude investment-grade: U.S. government obligations, mortgage and
asset-backed securities, corporate bonds, collateralized mortgage
obligations (CMOs) and others.
<TABLE>
<CAPTION>
Ten Years of Investment Performance through December 31, 1999
- -----------------------------------------------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Combined Dodge & Cox
S&P 500 Index LBAG Index Index Balanced Fund
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
1/1/1990 $10,000 $10,000 $10,000 $10,000
12/31/1990 $ 9,688 $10,896 $10,181 $10,092
12/31/1991 $12,641 $12,640 $12,703 $12,184
12/31/1992 $13,602 $13,578 $13,665 $13,473
12/31/1993 $14,971 $14,902 $15,031 $15,625
12/31/1994 $15,165 $14,466 $14,980 $15,936
12/31/1995 $20,863 $17,140 $19,418 $20,400
12/31/1996 $25,651 $17,760 $22,322 $23,407
12/31/1997 $34,202 $19,479 $27,594 $28,372
12/31/1998 $43,973 $21,169 $33,389 $30,274
12/31/1999 $53,230 $20,993 $37,397 $33,919
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended December 31, 1999 1 Year 5 Years 10 Years 20 Years
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 12.06% 16.31% 12.99% 14.25%
Combined Index 12.00 20.09 14.10 14.97
S&P 500 21.06 28.55 18.21 17.86
Lehman Brothers Aggregate Bond Index (LBAG) -0.83 7.73 7.70 10.04
</TABLE>
The chart covers the period from January 1, 1990 to December 31, 1999. It com-
pares a $10,000 investment made in the Dodge & Cox Balanced Fund to $10,000 in-
vestments made in the S&P 500, the LBAG and the Combined Index. The S&P 500 and
LBAG are widely recognized, unmanaged indices of common stock and U.S. dollar-
denominated, investment-grade fixed-income securities, respectively. The Com-
bined Index reflects an unmanaged portfolio of 60% of the S&P 500 and 40% of
the LBAG. The Fund may, however, invest up to 75% of its total assets in
stocks. The Fund's total returns include the reinvestment of dividend and capi-
tal gain distributions. Index returns include dividends and/or interest income,
and unlike Fund returns, do not reflect fees or expenses. Past performance does
not guarantee future results. Investment return and share price will fluctuate
with market conditions, and investors may have a gain or loss when shares are
sold.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5
<PAGE>
D O D G E & C O X
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Fund Information December 31, 1999
- -----------------------------------------------------------------------------
General Information
- -----------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $65.71
Total Net Assets (millions) $5,138
30 Day SEC Yield/1/ 3.59%
1999 Expense Ratio 0.53%
1999 Portfolio Turnover 17%
Fund Inception Date 1931
</TABLE>
Investment Manager: Dodge & Cox, San Francisco. Managed by the
Investment Policy Committee, whose eight members' average tenure at
Dodge & Cox is 22 years, and by the Fixed-Income Strategy Committee,
whose ten members' average tenure is 12 years.
<TABLE>
<CAPTION>
Asset Allocation
- -----------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
<S> <C>
Bonds: 36.6%
Stocks: 60.7%
Short-Term investments: 2.7%
</TABLE>
<TABLE>
<CAPTION>
Stock Portfolio (60.7% of Fund)
- -----------------------------------------------------------------------------
<S> <C>
Number of Stocks 77
Median Market Capitalization $7.5 billion
Price-to-Earnings Ratio/2/ 20.8x
Price-to-Book Value Ratio 2.2x
Foreign Stocks/3/ (as percentage of Fund) 8%
</TABLE>
<TABLE>
<CAPTION>
Five Largest Sectors % of Fund
- -----------------------------------------------------------------------------
<S> <C>
Energy 7.1
Electronics & Computer 6.7
Insurance & Financial Services 4.8
Banking 4.4
Consumer Durables 3.9
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
- -----------------------------------------------------------------------------
<S> <C>
Alcoa 2.0
Dow Chemical 1.6
News Corp. Ltd. ADR 1.6
FDX Corp. 1.6
Rio Tinto PLC ADR 1.5
Matsushita Ltd. ADR 1.4
Hewlett-Packard 1.4
Golden West Financial 1.4
Union Pacific 1.3
Sony ADR 1.3
</TABLE>
<TABLE>
<CAPTION>
Bond Portfolio (36.6% of Fund)
- -----------------------------------------------------------------------------
<S> <C>
Number of Bonds 130
Average Quality AA
Average Maturity 10.9 years
Effective Duration 4.48 years
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's Quality Ratings % of Fund
- -----------------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 21.1
Aaa/AAA 1.8
Aa/AA 0.1
A/A 7.8
Baa/BBB 5.8
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
- -----------------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 6.9
Federal Agency CMO and REMIC+ 8.8
Federal Agency Mortgage Pass-Through 5.4
Asset-Backed 1.4
Corporate 11.9
Foreign (U.S. dollar-denominated) 2.2
</TABLE>
+Collateralized Mortgage Obligation and
Real Estate Mortgage Investment Conduit
/1/ An annualization of the Fund's total net investment income per share for
the 30-day period ended on the last day of the month.
/2/ Price-to-earnings ratio is calculated using trailing 12-month earnings and
excludes extraordinary items.
/3/ All U.S. dollar-denominated.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
6
<PAGE>
D O D G E & C O X
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
------------------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CONSUMER: 12.5%
STOCKS: CONSUMER DURABLES: 3.9%
59.1% 926,200 General Motors Corp. .............................................................. $ 67,323,163
784,500 Whirlpool Corp. ................................................................... 51,041,531
660,000 Ford Motor Co. .................................................................... 35,268,750
1,871,400 Delphi Automotive Systems Corp. ................................................... 29,474,550
600,000 Dana Corp. ........................................................................ 17,962,500
------------
201,070,494
HEALTHCARE AND PHARMACEUTICAL: 3.1%
1,105,000 Pharmacia & Upjohn, Inc. .......................................................... 49,725,000
1,313,000 Becton, Dickinson & Co. ........................................................... 35,122,750
455,700 Bausch & Lomb, Inc. ............................................................... 31,186,969
369,400 WellPoint Health Networks, Inc.,+ ................................................. 24,357,312
745,000 First Health Group Corp.,+ ........................................................ 20,021,875
------------
160,413,906
RETAIL AND DISTRIBUTION: 3.1%
6,412,000 Kmart Corp.,+ ..................................................................... 64,520,750
1,549,700 Genuine Parts Co. ................................................................. 38,451,931
1,162,600 Nordstrom, Inc. ................................................................... 30,445,587
1,165,000 Dillard's, Inc. Class A ........................................................... 23,518,438
------------
156,936,706
CONSUMER PRODUCTS: 1.6%
1,253,300 Fort James Corp. .................................................................. 34,309,088
1,767,000 Mattel, Inc. ...................................................................... 23,191,875
889,100 Dole Food Co., Inc. ............................................................... 14,447,875
290,100 VF Corp. .......................................................................... 8,703,000
------------
80,651,838
MEDIA AND LEISURE: 0.8%
1,728,300 R.R. Donnelley & Sons Co. ......................................................... 42,883,444
------------
641,956,388
INDUSTRIAL COMMODITIES: 10.0%
METALS AND MINING: 3.5%
1,217,000 Alcoa, Inc. ....................................................................... 101,011,000
807,200 Rio Tinto PLC ADR ................................................................. 76,482,200
------------
177,493,200
CHEMICALS: 3.1%
632,300 Dow Chemical Co. .................................................................. 84,491,087
469,000 Union Carbide Corp. ............................................................... 31,305,750
645,800 Eastman Chemical Co. .............................................................. 30,796,587
271,000 Lubrizol Corp. .................................................................... 8,367,125
274,620 NOVA Chemicals Corp. .............................................................. 5,303,599
------------
160,264,148
</TABLE>
See accompanying Notes to Financial Statements
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7
<PAGE>
D O D G E & C O X
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
---------------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON PAPER AND FOREST PRODUCTS: 2.6%
STOCKS 839,100 Weyerhaeuser Co. ............................................................... $ 60,257,869
(Continued) 775,300 Champion International Corp. ................................................... 48,020,144
529,000 Boise Cascade Corp. ............................................................ 21,424,500
121,500 International Paper Co. ........................................................ 6,857,156
------------
136,559,669
GENERAL MANUFACTURING: 0.8%
3,240,725 Archer Daniels Midland Co. ..................................................... 39,496,336
------------
513,813,353
FINANCE: 9.9%
INSURANCE AND FINANCIAL SERVICES: 4.8%
1,185,250 Citigroup, Inc. ................................................................ 65,855,453
1,620,100 The St. Paul Cos., Inc. ........................................................ 54,577,119
849,000 Loews Corp. .................................................................... 51,523,687
287,600 American Express Co. ........................................................... 47,813,500
473,000 Chubb Corp. .................................................................... 26,635,813
------------
246,405,572
BANKING: 4.4%
2,100,000 Golden West Financial Corp. .................................................... 70,350,000
1,419,000 Bank One Corp. ................................................................. 45,496,687
1,040,000 Wells Fargo & Co. .............................................................. 42,055,000
474,500 Republic New York Corp. ........................................................ 34,164,000
653,434 Bank of America Corp. .......................................................... 32,794,219
------------
224,859,906
REAL ESTATE INVESTMENT TRUST: 0.7%
594,900 Equity Residential Properties Trust ............................................ 25,394,794
514,300 Equity Office Properties Trust ................................................. 12,664,637
------------
38,059,431
------------
509,324,909
TECHNOLOGY: 9.4%
ELECTRONICS & COMPUTER: 6.7%
625,200 Hewlett-Packard Co. ............................................................ 71,233,725
404,400 Motorola, Inc. ................................................................. 59,547,900
771,500 Electronic Data Systems ........................................................ 51,642,281
1,155,500 NCR Corp.,+ .................................................................... 43,764,562
1,353,000 Xerox Corp. .................................................................... 30,696,188
696,700 National Semiconductor Corp.,+ ................................................. 29,827,469
1,895,300 Thermo Electron Corp.,+ ........................................................ 28,429,500
1,507,300 Storage Technology Corp.,+ ..................................................... 27,790,844
------------
342,932,469
CONSUMER ELECTRONICS: 2.7%
262,500 Matsushita Electric Industrial Co., Ltd. ADA ................................... 73,237,500
239,200 Sony Corp. ADR ................................................................. 68,112,200
------------
141,349,700
------------
484,282,169
</TABLE>
See accompanying Notes to Financial Statements
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
8
<PAGE>
D O D G E & C O X
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
---------------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON ENERGY: 7.1%
STOCKS 1,462,700 Unocal Corp. ................................................................ $ 49,091,869
(Continued) 1,026,200 Phillips Petroleum Co. ...................................................... 48,231,400
2,155,000 Occidental Petroleum Corp. .................................................. 46,601,875
520,000 Chevron Corp. ............................................................... 45,045,000
792,600 Amerada Hess Corp. .......................................................... 44,980,050
2,806,185 Union Pacific Resources Group, Inc. ......................................... 35,778,859
1,565,650 Baker Hughes, Inc. .......................................................... 32,976,503
500,000 Royal Dutch Petroleum Co. ................................................... 30,218,750
464,000 Schlumberger Ltd. ........................................................... 26,100,000
89,830 Transocean Sedco Forex, Inc. ................................................ 3,026,161
-------------
362,050,467
TRANSPORTATION: 3.7%
1,975,600 FDX Corp.,+ ................................................................. 80,876,125
1,594,000 Union Pacific Corp. ......................................................... 69,538,250
1,870,000 Canadian Pacific Ltd. ....................................................... 40,321,875
-------------
190,736,250
GENERAL INDUSTRIAL: 3.6%
1,374,200 Deere & Co. ................................................................. 59,605,925
2,001,200 Lockheed Martin Corp. ....................................................... 43,776,250
888,500 Fluor Corp. ................................................................. 40,759,938
700,000 Caterpillar, Inc. ........................................................... 32,943,750
624,100 Unova, Inc.,+ ............................................................... 8,113,300
-------------
185,199,163
ELECTRIC AND GAS UTILITIES: 2.9%
1,765,600 Central & South West Corp. .................................................. 35,312,000
897,000 Texas Utilities Co. ......................................................... 31,899,562
944,000 Ameren Corp. ................................................................ 30,916,000
721,800 FPL Group, Inc. ............................................................. 30,902,063
1,071,000 Wisconsin Energy Corp. ...................................................... 20,616,750
-------------
149,646,375
-------------
Total Common Stocks (Cost $2,355,065,180) ................................ 3,037,009,074
-------------
PREFERRED CONSUMER: 1.6%
STOCKS: 2,432,000 News Corp. Ltd., Limited Voting Ordinary Shares ADR ......................... 81,320,000
1.6% -------------
Total Preferred Stocks (Cost $43,245,774) ................................ 81,320,000
-------------
BONDS: PAR VALUE
36.6% U.S. TREASURY AND GOVERNMENT AGENCY: 6.9%
U.S. TREASURY: 5.5%
$43,103,026 U.S. Treasury Inflation-Indexed Bonds, 3.625%, 4/15/2028 .................... 38,496,175
17,953,359 U.S. Treasury Inflation-Indexed Bonds, 3.875%, 4/15/2029 .................... 16,758,383
85,519,589 U.S. Treasury Inflation-Indexed Notes, 3.875%, 1/15/2009 .................... 82,633,303
86,110,000 U.S. Treasury Notes, 5.375%, 1/31/2000 ...................................... 86,096,222
48,385,000 U.S. Treasury Notes, 7.125%, 2/29/2000 ...................................... 48,520,962
11,850,000 U.S. Treasury Notes, 6.75%, 4/30/2000 ....................................... 11,886,972
-------------
284,392,017
</TABLE>
See accompanying Notes to Financial Statements
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
9
<PAGE>
D O D G E & C O X
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
---------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS GOVERNMENT AGENCY: 1.4%
(Continued) $ 4,935,000 Arkansas Dev. Fin. Auth. GNMA Guaranteed Bonds, 9.75%, 11/15/2014 ............. $ 5,575,119
8,221,169 Govt. Small Business Admin. 504 Series 96-20L, 6.70%, 12/1/2016 ............... 7,915,869
14,574,404 Govt. Small Business Admin. 504 Series 97-20F, 7.20%, 6/1/2017 ................ 14,394,407
17,161,472 Govt. Small Business Admin. 504 Series 97-20I, 6.90%, 9/1/2017 ................ 16,694,946
19,467,979 Govt. Small Business Admin. 504 Series 98-20D, 6.15%, 4/1/2018 ................ 18,102,567
9,323,132 Govt. Small Business Admin. 504 Series 98-20I, 6.00%, 9/1/2018 ................ 8,568,742
------------
71,251,650
------------
355,643,667
FEDERAL AGENCY CMO* AND REMIC**: 8.8%
1,177,087 Federal Home Loan Mtge. Corp., 7.00%, 3/15/2005 ,.............................. 1,174,509
14,455,000 Federal Home Loan Mtge. Corp., 7.00%, 1/15/2006 ............................... 14,455,000
11,786,090 Federal Home Loan Mtge. Corp., 7.00%, 10/15/2006 .............................. 11,782,318
15,309,049 Federal Home Loan Mtge. Corp., 6.75%, 11/15/2006 .............................. 15,222,859
4,494,699 Federal Home Loan Mtge. Corp., 6.00%, 1/15/2007 ............................... 4,408,985
20,599,212 Federal Home Loan Mtge. Corp., 7.25%, 4/15/2007 ............................... 20,592,620
21,500,000 Federal Home Loan Mtge. Corp., 6.50%, 10/15/2007 .............................. 21,089,995
12,609,000 Federal Home Loan Mtge. Corp., 7.00%, 1/15/2008 ............................... 12,514,433
10,000,000 Federal Home Loan Mtge. Corp., 6.50%, 5/15/2008 ............................... 9,793,700
14,750,000 Federal Home Loan Mtge. Corp., 6.50%, 5/15/2008 ............................... 14,436,563
16,474,350 Federal Home Loan Mtge. Corp., 6.50%, 8/15/2008 ............................... 16,108,784
19,380,000 Federal Home Loan Mtge. Corp., 6.50%, 10/15/2008 .............................. 18,961,973
30,165,000 Federal Home Loan Mtge. Corp., 6.00%, 12/15/2008 .............................. 28,939,396
12,582,920 Federal Home Loan Mtge. Corp., 7.00%, 5/17/2020 ............................... 12,567,191
17,228,000 Federal Home Loan Mtge. Corp., 6.50%, 5/15/2021 ............................... 16,764,912
23,885,000 Federal Home Loan Mtge. Corp., 6.75%, 8/15/2021 ............................... 23,504,273
27,780,000 Federal Home Loan Mtge. Corp., 6.25%, 9/15/2022 ............................... 26,807,700
28,000,000 Federal Home Loan Mtge. Corp., 7.00%, 8/25/2023 ............................... 26,503,680
4,945,515 Federal Natl. Mtge. Assn., 5.00%, 1/1/2006 .................................... 4,727,566
18,111,595 Federal Natl. Mtge. Assn., 7.50%, 2/25/2007 ................................... 18,179,514
10,000,000 Federal Natl. Mtge. Assn., 6.50%, 6/25/2008 ................................... 9,681,200
21,674,800 Federal Natl. Mtge. Assn., 6.50%, 8/25/2008 ................................... 20,794,153
15,475,000 Federal Natl. Mtge. Assn., 6.00%, 3/25/2009 ................................... 14,764,079
640,710 Federal Natl. Mtge. Assn., 6.50%, 4/1/2009 .................................... 626,294
4,333,268 Federal Natl. Mtge. Assn., 5.70%, 8/25/2016 ................................... 4,275,029
12,715,000 Federal Natl. Mtge. Assn., 7.00%, 6/17/2022 ................................... 12,353,385
15,929,940 Veterans Affairs Vendee Mtge. Trust, 6.75%, 8/15/2014 ......................... 15,880,079
26,000,000 Veterans Affairs Vendee Mtge. Trust, 6.75%, 9/15/2014 ......................... 25,943,060
8,000,000 Veterans Affairs Vendee Mtge. Trust, 6.75%, 5/15/2019 ......................... 7,844,960
23,000,000 Veterans Affairs Vendee Mtge. Trust, 7.00%, 6/15/2019 ......................... 22,820,140
------------
453,518,350
FEDERAL AGENCY MORTGAGE PASS-THROUGH: 5.4%
308,858 Federal Home Loan Mtge. Corp., 6.50%, 2/1/2006 ................................ 305,865
342,719 Federal Home Loan Mtge. Corp., 7.50%, 7/1/2006 ................................ 341,232
242,300 Federal Home Loan Mtge. Corp., 7.25%, 1/1/2008 ................................ 240,204
130,585 Federal Home Loan Mtge. Corp., 7.50%, 2/1/2008 ................................ 130,019
752,660 Federal Home Loan Mtge. Corp., 8.00%, 2/1/2008 ................................ 756,514
16,690,108 Federal Home Loan Mtge. Corp., 7.00%, 5/1/2008 ................................ 16,588,131
</TABLE>
See accompanying Notes to Financial Statements
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
10
<PAGE>
D O D G E & C O X
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
---------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS FEDERAL AGENCY MORTGAGE PASS-THROUGH (continued)
(Continued) $24,925,778 Federal Home Loan Mtge. Corp., 7.00%, 12/1/2008 .............................. $ 24,773,481
6,996,301 Federal Home Loan Mtge. Corp., 6.50%, 2/1/2009 ............................... 6,849,378
20,594,169 Federal Home Loan Mtge. Corp., 7.00%, 8/1/2009 ............................... 20,454,335
15,744,861 Federal Home Loan Mtge. Corp., 6.00%, 9/1/2009 ............................... 15,173,795
732,260 Federal Home Loan Mtge. Corp., 8.75%, 5/1/2010 ............................... 748,399
9,456,079 Federal Home Loan Mtge. Corp., 7.50%, 8/1/2010 ............................... 9,538,064
3,863,404 Federal Home Loan Mtge. Corp., 8.00%, 11/1/2010 .............................. 3,883,184
665,752 Federal Home Loan Mtge. Corp., 8.25%, 2/1/2017 ............................... 673,887
9,045,504 Federal Home Loan Mtge. Corp., 7.75%, 7/1/2021 ............................... 9,084,219
5,848,706 Federal Home Loan Mtge. Corp., 8.50%, 1/1/2023 ............................... 6,017,265
1,855,872 Federal Natl. Mtge. Assn., 7.50%, 12/1/2006 .................................. 1,866,006
3,566,230 Federal Natl. Mtge. Assn., 7.50%, 9/1/2007 ................................... 3,595,187
6,064,932 Federal Natl. Mtge. Assn., 7.00%, 12/1/2007 .................................. 6,017,626
11,753,090 Federal Natl. Mtge. Assn., 7.00%, 12/1/2007 .................................. 11,631,798
6,763,780 Federal Natl. Mtge. Assn., 6.50%, 5/1/2008 ................................... 6,626,610
9,195,134 Federal Natl. Mtge. Assn., 8.00%, 6/1/2008 ................................... 9,363,221
17,191,003 Federal Natl. Mtge. Assn., 6.50%, 11/1/2008 .................................. 16,801,799
7,746,290 Federal Natl. Mtge. Assn., 6.00%, 1/1/2009 ................................... 7,443,798
2,855,344 Federal Natl. Mtge. Assn., 8.00%, 1/1/2009 ................................... 2,910,109
1,037,049 Federal Natl. Mtge. Assn., 7.50%, 8/1/2010 ................................... 1,038,989
3,101,258 Federal Natl. Mtge. Assn., 7.50%, 7/1/2019 ................................... 3,117,416
11,388,011 Govt. Natl. Mtge. Assn., 7.50%, 7/15/2007 .................................... 11,455,883
14,208,291 Govt. Natl. Mtge. Assn., 7.50%, 1/15/2008 .................................... 14,305,902
6,492,255 Govt. Natl. Mtge. Assn., 8.00%, 12/15/2008 ................................... 6,603,792
26,100,122 Govt. Natl. Mtge. Assn., 6.50%, 7/15/2009 .................................... 25,509,215
2,205,416 Govt. Natl. Mtge. Assn., 7.97%, 4/15/2020 .................................... 2,236,049
2,036,672 Govt. Natl. Mtge. Assn., 7.97%, 5/15/2020 .................................... 2,064,961
1,474,236 Govt. Natl. Mtge. Assn., 7.97%, 8/15/2020 .................................... 1,494,714
1,866,171 Govt. Natl. Mtge. Assn., 7.97%, 8/15/2020 .................................... 1,892,092
2,311,483 Govt. Natl. Mtge. Assn., 7.97%, 10/15/2020 ................................... 2,343,589
2,112,945 Govt. Natl. Mtge. Assn., 7.97%, 1/15/2021 .................................... 2,140,159
8,458,429 Veterans Affairs Vendee Mtge. Trust, 5.634%, 2/15/2024 ....................... 7,535,868
5,892,352 Veterans Affairs Vendee Mtge. Trust, 7.203%, 2/15/2025 ....................... 5,719,235
6,315,995 Veterans Affairs Vendee Mtge. Trust, 8.793%, 6/15/2025 ....................... 6,542,928
------------
275,814,918
ASSET-BACKED SECURITIES: 1.4%
37,155,000 CA Infrastructure and Econ. Dev. Bank Special Purpose Trust
PGE-1 Rate Reduction Ctf. 1997-1 A-5, 6.25%, 6/25/2004 ....................... 36,602,379
17,775,000 CA Infrastructure and Econ. Dev. Bank Special Purpose Trust
SCE-1 Rate Reduction Ctf. 1997-1 A-6, 6.38%, 9/25/2008 ....................... 17,073,630
15,800,000 PP&L Transition Bond Series 1999-1 A-2, 6.41%, 12/25/2003 .................... 15,687,346
------------
69,363,355
CORPORATE: 11.9%
INDUSTRIAL: 6.7%
12,500,000 Dayton Hudson Corp., 9.35%, 6/16/2020 ........................................ 14,401,125
7,500,000 Dayton Hudson Corp., 9.875%, 7/1/2020 ........................................ 9,084,300
8,100,000 Dayton Hudson Corp., 9.70%, 6/15/2021 ........................................ 9,725,103
49,370,000 J.E. Seagram & Sons, Inc., 6.80%, 12/15/2008 ................................. 46,263,146
</TABLE>
See accompanying Notes to Financial Statements
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
11
<PAGE>
D O D G E & C O X
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
-----------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS INDUSTRIAL (continued)
(Continued) $29,625,000 Lockheed Martin Corp., 7.65%, 5/1/2016 ......................................... $ 27,428,602
29,625,000 Lockheed Martin Corp., 7.75%, 5/1/2026 ......................................... 27,315,139
5,900,000 May Department Stores, 7.625%, 8/15/2013 ....................................... 5,866,252
14,000,000 May Department Stores, 8.125%, 8/15/2035, Callable 2015 ........................ 13,886,880
10,390,000 May Department Stores, 7.875%, 8/15/2036, Callable 2016 ........................ 10,005,466
34,560,000 Raychem Corp., 7.20%, 10/15/2008 ............................................... 32,856,883
27,970,000 Raytheon Co., 6.75%, 8/15/2007 ................................................. 26,094,052
19,750,000 Raytheon Co., 6.75%, 3/15/2018 ................................................. 17,154,060
17,280,000 Raytheon Co., 7.20%, 8/15/2027 ................................................. 15,406,675
31,600,000 Time Warner Entertainment, 8.375%, 7/15/2033 ................................... 32,768,884
3,405,000 Union Camp Corp., 9.25%, 2/1/2011 .............................................. 3,774,511
34,560,000 Union Carbide Corp., 6.70%, 4/1/2009 ........................................... 32,605,978
19,750,000 Walt Disney Co., 7.55%, 7/15/2093, Callable 2023 ............................... 18,422,603
------------
343,059,659
FINANCE: 4.0%
19,525,000 BankAmerica Capital II, 8.00%, 12/15/2026, Callable 2006,++ .................... 18,410,708
1,975,000 Barclays No. American Capital, 9.75%, 5/15/2021, Callable 2001 ................. 2,114,712
1,720,000 CIGNA Corp., 7.65%, 3/1/2023 ................................................... 1,581,798
4,400,000 CIGNA Corp., 8.30%, 1/15/2033 .................................................. 4,247,892
18,445,000 Citicorp Capital Trust I, 7.933%, 2/15/2027, Callable 2007,++ .................. 17,259,724
4,935,000 First Nationwide Bank, 10.00%, 10/1/2006 ....................................... 5,375,005
22,220,000 GMAC, 5.75%, 11/10/2003 ........................................................ 21,156,995
29,625,000 GMAC, 8.875%, 6/1/2010, Putable 2000/2005 ...................................... 32,440,560
5,000,000 Golden West Financial, 7.875%, 1/15/2002 ....................................... 5,059,650
10,000,000 Golden West Financial, 6.70%, 7/1/2002 ......................................... 9,864,900
23,600,000 Golden West Financial, 6.00%, 10/1/2003 ........................................ 22,609,744
5,805,000 Hartford Financial Services Group, 8.30%, 12/1/2001 ............................ 5,923,306
10,000,000 Hartford Financial Services Group, 6.375%, 11/1/2002 ........................... 9,740,100
24,845,000 J.P. Morgan Capital Trust I, 7.54%, 1/15/2027, Callable 2007,++ ................ 22,228,821
16,290,000 Republic New York Corp., 7.20%, 7/15/2097 ...................................... 13,490,726
13,995,000 Safeco Corp., 6.875%, 7/15/2007 ................................................ 13,050,338
------------
204,554,979
TRANSPORTATION: 1.2%
7,135,723 Consolidated Rail Corp., 6.76%, 5/25/2015 ...................................... 6,741,902
12,390,000 Consolidated Rail Corp., 9.75%, 6/15/2020 ...................................... 14,354,311
48,806,000 Union Pacific Corp., 6.33%, 1/2/2020 ........................................... 42,546,630
------------
63,642,843
UTILITIES: 0.0%
750,000 Idaho Power Co. 1st Mtge., 9.50%, 1/1/2021, Callable 2001 ...................... 796,200
------------
612,053,681
FOREIGN (U.S. DOLLAR-DENOMINATED): 2.2%
CANADIAN: 1.2%
9,875,000 Canadian National Railway Co., 6.80%, 7/15/2018 ................................ 8,788,355
8,640,000 Canadian Pacific Ltd., 9.45%, 8/1/2021 ......................................... 9,681,638
11,850,000 Hydro-Quebec, 7.50%, 4/1/2016 .................................................. 11,590,604
14,810,000 Hydro-Quebec, 8.40%, 1/15/2022 ................................................. 15,711,781
14,810,000 Hydro-Quebec, 8.05%, 7/7/2024, Putable 2006 .................................... 15,641,433
------------
61,413,811
</TABLE>
See accompanying Notes to Financial Statements
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
12
<PAGE>
D O D G E & C O X
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
-----------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS CORPORATE: 0.6%
(Continued) $29,625,000 HSBC Holdings PLC, 7.50%, 7/15/2009 .......................................... $ 29,217,686
-------------
INTERNATIONAL AGENCY: 0.4%
7,110,000 European Investment Bank, 10.125%, 10/1/2000.................................. 7,309,080
17,545,000 Inter-American Development Bank, 7.125%, 3/15/2023, Callable 2003............. 16,153,155
-------------
23,462,235
-------------
114,093,732
-------------
Total Bonds (Cost $1,941,755,172) ......................................... 1,880,487,703
-------------
SHORT- 55,970,506 SSgA Prime Money Market Fund ................................................. 55,970,506
TERM 40,000,000 SSgA United States Treasury Money Market Fund ................................ 40,000,000
INVESTMENTS: 20,000,000 State Street Repurchase Agreement, 2.50%, dated 12/31/99 due 1/3/2000,
2.2% (collateralized by U.S. Treasury Notes, value $20,407,600).................... 20,000,000
-------------
Total Short-Term Investments (Cost $115,970,506)........................... 115,970,506
-------------
TOTAL INVESTMENTS (Cost $4,456,036,632) ................ 99.5% 5,114,787,283
OTHER ASSETS LESS LIABILITIES .......................... 0.5% 23,175,326
------ --------------
TOTAL NET ASSETS ....................................... 100.0% $5,137,962,609
====== ==============
</TABLE>
+ Non-income producing securities
++ Cumulative preferred securities
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
See accompanying Notes to Financial Statements
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
13
<PAGE>
D O D G E & C O X
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities December 31, 1999
---------------------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments, at market value (identified cost
$4,456,036,632) .............................................................. $5,114,787,283
Receivable for paydowns on mortgage-backed
securities ................................................................... 164,341
Receivable for Fund shares sold ............................................... 5,260,432
Dividends and interest receivable ............................................. 33,315,204
Prepaid expenses .............................................................. 59,414
--------------
5,153,586,674
--------------
LIABILITIES:
Payable for Fund shares redeemed .............................................. 13,096,312
Management fees payable ....................................................... 2,159,492
Accounts payable .............................................................. 368,261
--------------
15,624,065
Net asset value --------------
per share $65.71 NET ASSETS .................................................................... $5,137,962,609
==============
Beneficial NET ASSETS CONSIST OF:
shares outstanding Paid in capital ............................................................... $4,320,495,448
78,189,179 Accumulated undistributed net investment income ............................... 2,801,001
(par value $0.01 each, Accumulated undistributed net realized gain on
unlimited shares investments .................................................................. 155,915,509
authorized) Net unrealized appreciation on investments .................................... 658,750,651
--------------
$5,137,962,609
==============
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations Year Ended December 31, 1999
---------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes of $554,792) ................................. $ 62,920,205
Interest ..................................................................... 141,877,019
-------------
204,797,224
-------------
EXPENSES:
Management fees (Note 2) ..................................................... 27,574,694
Custodian and fund accounting fees ........................................... 257,524
Transfer agent fees .......................................................... 1,055,863
Professional fees ............................................................ 47,064
Shareholder reports .......................................................... 193,103
Registration fees ............................................................ 254,209
Trustees' fees (Note 2) ...................................................... 18,500
Miscellaneous ................................................................ 87,195
-------------
29,488,152
-------------
NET INVESTMENT INCOME ........................................................ 175,309,072
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments ............................................ 484,607,708
Net unrealized depreciation on investments .................................. (36,942,549)
-------------
Net realized and unrealized gain on investments ............................ 447,665,159
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ......................... $ 622,974,231
=============
</TABLE>
See accompanying Notes to Financial Statements
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
14
<PAGE>
D O D G E & C O X
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 1998
OPERATIONS:
Net investment income .............................................. $ 175,309,072 $ 187,529,474
Net realized gain .................................................. 484,607,708 304,796,545
Net unrealized depreciation ........................................ (36,942,549) (134,003,289)
--------------- ---------------
Net increase in net assets from operations ......................... 622,974,231 358,322,730
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .............................................. (174,300,777) (186,617,482)
Net realized gain .................................................. (372,974,271) (313,107,429)
--------------- ---------------
Total distributions ................................................ (547,275,048) (499,724,911)
--------------- ---------------
BENEFICIAL SHARE TRANSACTIONS:
Amount received from sale of shares ................................ 1,034,002,523 1,852,918,636
Net asset value of shares issued in reinvestment of distributions .. 534,611,195 483,582,782
Amounts paid for shares redeemed ................................... (2,199,329,763) (1,578,717,026)
--------------- ---------------
Net increase (decrease) from
beneficial share transactions ...................................... (630,716,045) 757,784,392
--------------- ---------------
Total increase (decrease) in net assets ............................ (555,016,862) 616,382,211
NET ASSETS:
Beginning of year .................................................. 5,692,979,471 5,076,597,260
--------------- ---------------
End of year (including undistributed net investment income of
$2,801,001 and $1,792,706, respectively ............................ $ 5,137,962,609 $ 5,692,979,471
=============== ===============
Shares sold ........................................................ 15,078,796 27,407,254
Shares issued in reinvestment of distributions ..................... 8,106,876 7,297,276
Shares redeemed .................................................... (32,283,085) (23,440,423)
--------------- ---------------
Net increase (decrease) in shares outstanding ...................... (9,097,413) 11,264,107
=============== ===============
</TABLE>
See accompanying Notes to Financial Statements
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
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15
<PAGE>
D O D G E & C O X
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Balanced Fund
Notes to Financial Statements
------------------------------------------------------------------------
1 Dodge & Cox Balanced Fund (the "Fund") is a separate series of Dodge & Cox
Funds (the "Trust"). The Trust is organized as a Delaware business trust
and is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The Fund
consistently follows accounting policies which are in conformity with
generally accepted accounting principles. Significant accounting policies
are as follows: (a) Security valuation: stocks are valued at the latest
quoted sales prices as of the close of the New York Stock Exchange or, if
no sale, then a representative price within the limits of the bid and ask
prices for the day; a security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security; long-term debt securities are priced on
the basis of valuations furnished by pricing services which utilize both
dealer-supplied valuations and electronic data processing techniques;
securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or at the direction of
the Board of Trustees; short-term securities are valued at amortized cost
which approximates current value; all securities held by the Fund are
denominated in U.S. dollars. (b) Security transactions are accounted for
on the trade date in the financial statements. (c) Gains and losses on
securities sold are determined on the basis of identified cost. (d)
Dividend and interest income are recorded on the accrual basis. Premiums
and discounts on debt securities purchased are amortized and accreted,
respectively, to interest income over the lives of the respective
securities. (e) Distributions to shareholders of income and capital gains
are reflected in the net asset value per share computation on the ex-
dividend date. (f) No provision for Federal income taxes has been included
in the accompanying financial statements since the Fund intends to
distribute all of its taxable income and otherwise continue to comply
with requirements for regulated investment companies.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Actual results could
differ from those estimates.
2 Under a written agreement, the Fund pays an annual management fee of 1/2
of 1% of the Fund's average daily net asset value to Dodge & Cox,
investment manager of the Fund. All officers and six of the trustees of
the Trust are officers and employees of Dodge & Cox. Those trustees who
are not affiliated with Dodge & Cox receive from the Trust an annual fee
plus an attendance fee for each Board or Committee meeting attended.
Payments to trustees are divided equally among each series of the Trust.
The Trust does not pay any other remuneration to its officers or trustees.
3 For the year ended December 31, 1999, purchases and sales of securities,
other than short-term securities, aggregated $901,793,514 and
$1,845,662,772, respectively, of which U.S. government obligations
aggregated $263,659,200 and $357,716,343, respectively. In 1999, the Fund
recognized net capital gain of $15,764,818 from the delivery of
appreciated securities in an in-kind redemption transaction. For Federal
income tax purposes, this gain is not recognized as taxable income to the
Fund and does not need to be distributed to shareholders. At December 31,
1999, the cost of investments for Federal income tax purposes was equal to
the cost for financial reporting purposes. Net unrealized appreciation
aggregated $658,750,651, of which $960,995,751 represented appreciated
securities and $302,245,100 represented depreciated securities.
- ------------------------------------------------------------------------------
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16
<PAGE>
D O D G E & C O X
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Balanced Fund
<TABLE>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------
SELECTED DATA AND RATIOS (for a share outstanding throughout each year)
Year Ended December 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $65.22 $66.78 $59.82 $54.60 $45.21
Income from investment operations:
Net investment income 2.24 2.24 2.21 1.98 1.90
Net realized and unrealized gain 5.45 2.17 10.24 5.92 10.58
-------------------------------------------------------
Total from investment operations 7.69 4.41 12.45 7.90 12.48
-------------------------------------------------------
Distributions to shareholders from:
Net investment income (2.22) (2.23) (2.22) (1.99) (1.90)
Net realized gain (4.98) (3.74) (3.27) (.69) (1.19)
-------------------------------------------------------
Total distributions (7.20) (5.97) (5.49) (2.68) (3.09)
-------------------------------------------------------
Net asset value, end of year $65.71 $65.22 $66.78 $59.82 $54.60
=======================================================
Total return 12.06% 6.70% 21.21% 14.75% 28.02%
Ratios/Supplemental data
Net assets, end of year (millions) $5,138 $5,693 $5,077 $3,630 $1,800
Ratio of expenses to average net assets .53% .54% .55% .56% .57%
Ratio of net investment income to average net assets 3.18% 3.29% 3.39% 3.60% 3.85%
Portfolio turnover rate 17% 26% 32% 17% 20%
</TABLE>
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17
<PAGE>
D O D G E & C O X
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Balanced Fund
Report of Independent Accountants
------------------------------------------------------------------
To the Trustees of Dodge & Cox Funds and Shareholders of Dodge &
Cox Balanced Fund
In our opinion, the accompanying statement of assets and liabili-
ties, including the portfolio of investments, and the related
statements of operations and of changes in net assets and the fi-
nancial highlights present fairly, in all material respects, the
financial position of the Dodge & Cox Balanced Fund (the "Fund",
one of the series constituting Dodge & Cox Funds) at December 31,
1999, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five
years in the period then ended, in conformity with accounting
principles generally accepted in the United States. These finan-
cial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits
of these financial statements in accordance with auditing stan-
dards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material mis-
statement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial state-
ments, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1999 by cor-
respondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 26, 2000
------------------------------------------------------------------
Special 1999 Tax Information (unaudited)
The following information is provided pursuant to provisions of
the Internal Revenue Code:
The Fund hereby designates $323,087,792 of its distributions paid
to shareholders in 1999 as capital gain dividends (treated for
Federal income tax purposes in the hands of shareholders as long-
term capital gain taxable at a maximum rate of 20%).
For shareholders that are corporations, the Fund hereby desig-
nates 26% of its ordinary dividends paid to shareholders in 1999
as dividends from domestic corporations eligible for the corpo-
rate dividends received deduction, provided that the shareholder
otherwise satisfies applicable requirements to claim that deduc-
tion.
- ------------------------------------------------------------------------------
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18
<PAGE>
D O D G E & C O X
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Balanced Fund
Officers & Trustees
- -------------------------------------------------------------------------------
Harry R. Hagey, Chairman & Trustee
Chairman & CEO, Dodge & Cox
John A. Gunn, President & Trustee
President, Dodge & Cox
A. Horton Shapiro, Executive Vice President & Trustee
Senior Vice President, Dodge & Cox
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
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
D O D G E & C O X D O D G E & C O X
----------------- -----------------
Income Fund
Income Fund
Established 1989
Investment Manager -----------------
Dodge & Cox
One Sansome Street -----------------
35th Floor
San Francisco,
California 94104-4443
(415) 981-1710
For Fund literature and
information, please visit
the Funds' web site at:
www.dodgeandcox.com
or write or call:
Dodge & Cox Funds
c/o Boston Financial
Data Services
P.O. Box 9051
Boston,
Massachusetts 02205-9051
(800) 621-3979
-----------------
This report is submitted
for the general information
of the shareholders of the
Fund. The report is not
authorized for distribution
to prospective investors 11th Annual Report
in the Fund unless it is December 31, 1999
accompanied by a current
prospectus.
----------------- -----------------
-----------------
-----------------
Printed on recycled paper
12/99 IF AR
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
To Our Shareholders
- --------------------------------------------------------------------------------
Reflecting a difficult market environment for fixed-income securities, the Dodge
& Cox Income Fund provided a total return of -0.8% for 1999. This matched the
- -0.8% total return of the Lehman Brothers Aggregate Bond Index (LBAG), a broad-
based index composed of investment grade bonds which serves as a proxy for the
U.S. bond market. Average annual total returns for longer periods are listed on
page three of this report.
On December 31, the Fund's net asset value per share was $11.40. During the
year, the Fund paid income dividends of $0.71 per share and distributed short
and long-term capital gains of $0.04 per share. At year-end, the Fund's total
net assets were valued at $974 million.
Interest Rates Rise
U.S. Treasury yields rose significantly during 1999, fueled by strong economic
growth, investor concerns of growing inflation, and a restrictive Federal
Reserve Board. The yield on the benchmark thirty-year U.S. Treasury rose from
5.09% to 6.48%, or 139 basis points (1 basis point = 1/100 of 1%). Gross
Domestic Product (GDP) grew at a 5.7% annualized rate during the first three
quarters of 1999, compared to 4.3% growth in 1998. Inflation also rose, with the
consumer price index (CPI) posting a 2.7% increase in 1999, versus a 1.6%
increase in 1998. Citing persistent economic growth, tight labor markets and
concerns about future inflation, the Federal Open Market Committee raised its
target for the Federal Funds rate three times in 1999.
The rise in U.S. Treasury yields was greater than those in other broad sectors,
leading the Treasury sector to underperform. For example, the Lehman Brothers
Long Treasury Index returned -8.7% for the year while the Lehman Brothers Long
Corporate Index returned -5.8%. The Lehman Mortgage-Backed Security Index had
the best performance, responding positively to the rising rate environment and
returning +1.9% for the year versus the Lehman Intermediate Treasury Index at
+0.4%.
1999 Strategy Review
While the Fund's return matched that of the LBAG in 1999, the Fund's portfolio
has characteristics that differentiate it from the LBAG. We would like to
highlight four of these differences that affected relative performance last
year:
. Overweight positions in the corporate and mortgage-related sectors. The
Fund has a higher percentage of holdings in both the corporate and
mortgage sectors than the LBAG. As is typical in a rising interest rate
environment, the mortgage-related sector performed well, contributing
positively to relative returns. Though corporate yield premiums
generally narrowed year-over-year, thereby contributing slightly to
relative returns, we believe that corporates continue to represent good,
long-term investor value.
. Higher-than-market yield. Our emphasis on mortgage-related and corporate
securities gives the Fund a higher yield than the LBAG. While this only
added modestly to relative performance in 1999, we continue to believe
that a relatively high and stable yield will be an important source of
return over longer time periods due to the compounding of income.
. Shorter-than-market duration. Compared to the LBAG, a moderately higher
percentage of the Fund's portfolio is in shorter-duration bonds. This
led to a slightly shorter portfolio duration (a measure of a portfolio's
price sensitivity to changes in interest rates) for the Fund and
relatively less exposure to changes in interest rates. Consequently, the
Fund experienced less price decline due to rising interest rates than
the LBAG.
. Investment in Treasury Inflation Protected Securities (TIPS). During
1999, we gradually increased the Fund's positions in ten and thirty-year
TIPS. Beginning with an initial 2.0% position in January 1999, we
brought the position to 6.1% by year end. While these securities
benefited from an increase in the CPI rate during 1999, their prices
declined due to a rise in the real (inflation-adjusted) interest rate
during the year. Though these securities detracted from the Fund's
performance in 1999, we continue to believe they are attractive long-
term investments for the Fund due to their high real rate of income
(4.3%) and the inflation protection they provide.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
- --------------------------------------------------------------------------------
Attractive Corporate Yield Premiums
Though investor confidence returned to the corporate sector of the market
following the extreme volatility of late 1998, we believe that corporate yield
premiums remain attractive, particularly in the single A and BBB-rated sectors.
In corporate investing, we construct the Fund's portfolio security by security,
utilizing our in-house team of research analysts to identify issuers where we
believe the market underestimates creditworthiness or total return potential. A
solid understanding of the fundamentals of each company--such as market
position, strength of franchise, stability of cash flows, and quality of balance
sheet--combined with characteristics of the security (e.g. structure and price)
form the basis of our investment decisions. We identified several new
opportunities for the Fund in 1999: Eastman Chemical 25-year debentures, HSBC
Holdings PLC 10-year notes, 30-year Dana Corporation debentures, and Burlington
Northern equipment trust certificates. Throughout the year we were also able to
add opportunistically to other corporate holdings such as Lockheed Martin Corp.
and Republic New York Corp. (which has since been acquired by HSBC Holding PLC).
By selling lower yielding corporate securities to fund these purchases, we
increased the portfolio's incremental yield without significantly altering the
Fund's corporate allocation, which was approximately 40% at year end.
In summary, our emphasis in the corporate (including asset-backed securities)
and mortgage-backed sectors contributed positively to the Fund's performance
this year. Though the yield premiums of these sectors have declined somewhat
from their peaks, we believe they continue to offer attractive long-term total
return potential relative to U.S. Treasury alternatives.
In Closing
In the current environment, we are maintaining the Fund's duration shorter than
that of the LBAG benchmark. We see potential for rising inflation from tight
labor markets, above-trend GDP growth, higher commodity prices, and a buoyant
consumer sector. This inflation concern, coupled with low U.S. Treasury rates
(which are close to 6.5% on long bonds), leads us to maintain a slightly below-
market level of interest rate exposure in the Fund.
Looking ahead, we will continue to pursue our strategy of maintaining the Fund's
high-average quality and diversification, while striving to attain a higher-
than-market yield. We will also continue to emphasize those issuers whose long-
term total return potential, in our view, is underestimated by the market.
W. Timothy Ryan retired from Dodge & Cox on December 31, 1999 after 36 years of
employment. He served as a Trustee/Director of the Income Fund for 11 years.
Frank H. Roberts retired after ten years as an independent Trustee of the Income
Fund. We greatly appreciate their wise counsel and many years of hard work on
behalf of the Fund, and wish them well. We are pleased to welcome L. Dale
Crandall, Executive Vice President & CFO, Kaiser Foundation Health Plan and
Hospitals, as a new independent Trustee of the Dodge & Cox Funds.
Thank you for your continued confidence in the Dodge & Cox Income Fund. As
always, we welcome your comments and questions.
For the Board of Trustees,
/s/ Harry R. Hagey, Chairman /s/ A. Horton Shapiro, Executive Vice President
- ---------------------------- -----------------------------------------------
Harry R. Hagey, Chairman A. Horton Shapiro, Executive Vice President
January 26, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
Objective The Fund seeks a high and stable rate of current income, consistent
with long-term preservation of capital. A secondary objective is to
take advantage of opportunities to realize capital appreciation.
Strategy The Fund invests in a diversified portfolio consisting primarily of
high-quality bonds and other fixed-income securities, including
U.S. government obligations, mortgage and asset-backed securities,
corporate bonds, collateralized mortgage obligations (CMOs) and
others rated A or better by either S&P or Moody's.
The proportions held in the various fixed-income securities will be
revised in light of Dodge & Cox's appraisal of the economy, the
relative yields of securities in the various market sectors, the
investment prospects for issuers and other factors. In selecting
securities, Dodge & Cox will consider many factors, including yield
to maturity, quality, liquidity, current yield and capital
appreciation potential.
<TABLE>
<CAPTION>
Ten Years of Investment Performance through December 31, 1999
- ----------------------------------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Dodge & Cox LBAG
Income Fund Index
----------- -------
<S> <C> <C>
1/1/1990 $10,000 $10,000
12/31/1990 $10,740 $10,896
12/31/1991 $12,665 $12,640
12/31/1992 $13,653 $13,578
12/31/1993 $15,202 $14,902
12/31/1994 $14,763 $14,466
12/31/1995 $17,745 $17,140
12/31/1996 $18,390 $17,760
12/31/1997 $20,231 $19,479
12/31/1998 $21,866 $21,169
12/31/1999 $21,691 $20,993
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended December 31, 1999 1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund -0.81% 7.99% 8.05%
Lehman Brothers Aggregate Bond Index (LBAG) -0.83 7.73 7.70
</TABLE>
The chart covers the period from January 1, 1990 to December 31, 1999. It
compares a $10,000 investment made in the Dodge & Cox Income Fund to a $10,000
investment made in the LBAG. The LBAG is a widely recognized, unmanaged index of
U.S. dollar-denominated investment-grade fixed-income securities. The Fund's
total returns include the reinvestment of dividend and capital gain
distributions. Index returns include interest income and, unlike Fund returns,
do not reflect fees or expenses. Past performance does not guarantee future
results. Investment return and share price will fluctuate with market
conditions, and investors may have a gain or loss when shares are sold.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
Fund Information December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $11.40
Total Net Assets (millions) $974
30 Day SEC Yield* 6.84%
1999 Expense Ratio 0.46%
1999 Portfolio Turnover 24%
Fund Inception Date 1989
</TABLE>
Investment Manager: Dodge & Cox, San Francisco.
Managed by the Fixed-Income Strategy Committee, whose ten
members' average tenure at Dodge & Cox is 12 years, and by
the Investment Policy Committee, whose eight members'
average tenure at Dodge & Cox is 22 years.
<TABLE>
<CAPTION>
Asset Allocation
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
<S> <C>
Bonds: 96.9%
Short-Term Investments: 3.1%
</TABLE>
<TABLE>
<CAPTION>
Bond Characteristics
- --------------------------------------------------------------------------------
<S> <C>
Number of Bonds 113
Average Quality AA
Average Maturity 11.5 years
Effective Duration 4.52 years
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 17.4
Federal Agency CMO and REMIC+ 22.2
Federal Agency Mortgage Pass-Through 17.2
Asset-Backed 3.6
Corporate 31.1
Foreign (U.S. dollar-denominated) 5.4
Short-Term Investments 3.1
+ Collateralized Mortgage Obligation and Real Estate Mortgage Investment Conduit
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's
Quality Ratings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 56.8
Aaa/AAA 4.0
Aa/AA 0.2
A/A 19.2
Baa/BBB 16.7
Short-Term Investments 3.1
</TABLE>
<TABLE>
<CAPTION>
Maturity Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
0-1 Years to Maturity 14.2
1-5 25.1
5-10 30.4
10-15 4.4
15-20 6.8
20-25 5.8
25 and Over 13.3
</TABLE>
*An annualization of the Fund's total net investment income per share for the
30-day period ended on the last day of the month.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS: U.S. TREASURY AND GOVERNMENT AGENCY: 17.4%
96.9% U.S. TREASURY: 14.0%
$20,277,660 U.S. Treasury Inflation-Indexed Bonds, 3.625%, 4/15/2028................ $ 18,110,384
12,103,273 U.S. Treasury Inflation-Indexed Bonds, 3.875%, 4/15/2029................ 11,297,679
31,074,165 U.S. Treasury Inflation-Indexed Notes, 3.875%, 1/15/2009................ 30,025,412
35,000,000 U.S. Treasury Notes, 6.375%, 1/15/2000.................................. 35,000,000
40,000,000 U.S. Treasury Notes, 6.75%, 4/30/2000................................... 40,124,800
2,000,000 U.S. Treasury Notes, 6.25%, 1/31/2002................................... 1,999,380
------------
136,557,655
GOVERNMENT AGENCY: 3.4%
5,421,567 Govt. Small Business Admin. 504 Series 97-20E, 7.30%, 5/1/2017.......... 5,383,302
6,220,970 Govt. Small Business Admin. 504 Series 97-20J, 6.55%, 10/1/2017......... 5,934,137
5,900,608 Govt. Small Business Admin. 504 Series 98-20C, 6.35%, 3/1/2018.......... 5,557,240
6,728,400 Govt. Small Business Admin. 504 Series 98-20H, 6.15%, 8/1/2018.......... 6,247,910
5,332,684 Govt. Small Business Admin. 504 Series 99-20C, 6.30%, 3/1/2019.......... 4,977,443
4,865,000 Govt. Small Business Admin. 504 Series 99-20I, 7.30%, 9/1/2019.......... 4,803,270
------------
32,903,302
------------
169,460,957
FEDERAL AGENCY CMO* AND REMIC**: 22.2%
59,712 FBC Mtge. Sec. Trust IV-A2, 8.30%, 8/1/2009............................. 59,675
16,451,656 Federal Home Loan Mtge. Corp., 7.10%, 11/15/2006........................ 16,461,856
6,865,399 Federal Home Loan Mtge. Corp., 8.00%, 4/15/2007......................... 6,961,926
13,000,000 Federal Home Loan Mtge. Corp., 7.00%, 9/15/2007......................... 12,902,500
13,284,798 Federal Home Loan Mtge. Corp., 6.00%, 8/15/2008......................... 12,695,219
20,100,000 Federal Home Loan Mtge. Corp., 6.00%, 10/15/2008........................ 18,780,837
40,000,000 Federal Home Loan Mtge. Corp., 6.00%, 11/15/2008........................ 38,987,200
20,000,000 Federal Home Loan Mtge. Corp., 6.50%, 4/15/2022......................... 19,187,400
10,000,000 Federal Home Loan Mtge. Corp., 6.00%, 6/17/2022......................... 9,090,600
3,000,000 Federal Natl. Mtge. Assn., 7.00%, 2/25/2007............................. 2,984,040
16,824,004 Federal Natl. Mtge. Assn., 7.00%, 7/17/2015............................. 16,855,465
17,000,000 Federal Natl. Mtge. Assn., 6.25%, 3/25/2023............................. 16,335,810
9,000,000 Federal Natl. Mtge. Assn., 6.00%, 6/25/2023............................. 8,190,000
12,616,000 Veterans Affairs Vendee Mtge. Trust, 7.00%, 6/15/2010................... 12,383,361
15,277,000 Veterans Affairs Vendee Mtge. Trust, 7.25%, 7/15/2016................... 15,286,472
9,300,608 Veterans Affairs Vendee Mtge. Trust, 8.00%, 7/15/2018................... 9,367,386
------------
216,529,747
FEDERAL AGENCY MORTGAGE PASS-THROUGH: 17.2%
11,062 Federal Home Loan Mtge. Corp., 7.00%, 1/1/2003.......................... 10,964
2,134 Federal Home Loan Mtge. Corp., 6.00%, 10/1/2003......................... 2,100
1,046,035 Federal Home Loan Mtge. Corp., 8.00%, 12/1/2003......................... 1,048,315
21,008 Federal Home Loan Mtge. Corp., 7.00%, 3/1/2006.......................... 20,736
94,323 Federal Home Loan Mtge. Corp., 7.00%, 9/1/2006.......................... 93,101
269,834 Federal Home Loan Mtge. Corp., 7.25%, 1/1/2008.......................... 267,500
168,827 Federal Home Loan Mtge. Corp., 8.00%, 1/1/2008.......................... 169,195
202,890 Federal Home Loan Mtge. Corp., 8.00%, 1/1/2008.......................... 203,929
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
-----------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS FEDERAL AGENCY MORTGAGE PASS-THROUGH (continued)
(Continued) $ 115,999 Federal Home Loan Mtge. Corp., 7.50%, 10/1/2008........................ $ 115,600
3,773,856 Federal Home Loan Mtge. Corp., 7.00%, 11/1/2008........................ 3,750,798
215,985 Federal Home Loan Mtge. Corp., 8.00%, 5/1/2009......................... 217,091
66,647 Federal Home Loan Mtge. Corp., 8.25%, 5/1/2009......................... 67,185
400,819 Federal Home Loan Mtge. Corp., 8.00%, 8/1/2009......................... 402,390
36,283 Federal Home Loan Mtge. Corp., 6.50%, 6/1/2012......................... 35,716
21,204,864 Federal Home Loan Mtge. Corp., 7.90%, 2/1/2021......................... 21,431,119
9,737,063 Federal Natl. Mtge. Assn., 6.825%, 5/1/2006............................ 9,522,299
3,964,554 Federal Natl. Mtge. Assn., 7.50%, 9/1/2007............................. 3,996,747
1,297,526 Federal Natl. Mtge. Assn., 6.25%, 12/1/2007............................ 1,271,537
10,344,730 Federal Natl. Mtge. Assn., 7.00%, 7/1/2008............................. 10,237,972
10,138,608 Federal Natl. Mtge. Assn., 6.50%, 12/1/2008............................ 9,909,070
16,189,309 Federal Natl. Mtge. Assn., 5.50%, 6/1/2009............................. 15,342,284
8,055,692 Federal Natl. Mtge. Assn., 6.50%, 7/1/2009............................. 7,873,311
3,664,394 Federal Natl. Mtge. Assn., 8.00%, 8/1/2010............................. 3,721,632
422,818 Federal Natl. Mtge. Assn., 7.50%, 2/1/2011............................. 424,517
1,204,749 Federal Natl. Mtge. Assn., 8.00%, 1/1/2012............................. 1,225,808
199,470 Federal Natl. Mtge. Assn., 6.50%, 1/1/2013............................. 195,920
1,404,195 Federal Natl. Mtge. Assn., 8.00%, 8/1/2022............................. 1,431,057
3,561,452 Govt. Natl. Mtge. Assn., 7.25%, 2/15/2006.............................. 3,550,091
4,555,204 Govt. Natl. Mtge. Assn., 7.50%, 7/15/2007.............................. 4,582,353
13,777,895 Govt. Natl. Mtge. Assn., 7.00%, 4/15/2009.............................. 13,635,707
13,464,871 Govt. Natl. Mtge. Assn., 6.50%, 7/15/2009.............................. 13,160,027
6,736,327 Govt. Natl. Mtge. Assn., 7.50%, 9/15/2017.............................. 6,725,212
1,533,221 Govt. Natl. Mtge. Assn., 7.80%, 6/15/2020.............................. 1,544,184
1,080,255 Govt. Natl. Mtge. Assn., 7.80%, 7/15/2020.............................. 1,087,979
1,250,951 Govt. Natl. Mtge. Assn., 7.80%, 7/15/2020.............................. 1,259,896
3,559,679 Govt. Natl. Mtge. Assn., 7.80%, 8/15/2020.............................. 3,585,131
1,779,861 Govt. Natl. Mtge. Assn., 7.80%, 9/15/2020.............................. 1,792,587
924,944 Govt. Natl. Mtge. Assn., 7.80%, 10/15/2020............................. 931,557
1,006,899 Govt. Natl. Mtge. Assn., 7.80%, 11/15/2020............................. 1,014,099
1,483,155 Govt. Natl. Mtge. Assn., 7.80%, 1/15/2021.............................. 1,492,395
3,980,358 Govt. Natl. Mtge. Assn., 7.80%, 1/15/2021.............................. 4,005,156
4,401,311 Veterans Affairs Vendee Mtge. Trust, 9.293%, 5/15/2025................. 4,628,242
11,224,753 Veterans Affairs Vendee Mtge. Trust, 8.095%, 10/15/2027................ 11,329,929
------------
167,312,438
ASSET-BACKED SECURITIES: 3.6%
10,000,000 CA Infrastructure and Econ. Dev. Bank Special Purpose Trust
PGE-1 Rate Reduction Ctf. 1997-1 A-7, 6.42%, 9/25/2008................. 9,679,234
1,562,421 CA Infrastructure and Econ. Dev. Bank Special Purpose Trust
SCE-1 Rate Reduction Ctf. 1997-1 A-2, 6.14%, 3/25/2002................. 1,566,928
13,300,000 ComEd Transitional Funding Trust Notes Series 1998-1 Class A-2,
5.29%, 6/25/2003....................................................... 13,032,170
10,784,244 PP&L Transition Bond Series 1999-1 A-1, 6.08%, 3/25/2003............... 10,736,470
------------
35,014,802
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
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6
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
-----------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS: CORPORATE: 31.1%
(Continued) INDUSTRIAL: 18.5%
$20,000,000 Dana Corp., 7.00%, 3/1/2029............................................ $ 17,402,400
9,000,000 Dayton Hudson Corp., 9.00%, 10/1/2021.................................. 10,154,430
20,000,000 Eastman Chemical Co., 7.25%, 1/15/2024................................. 18,009,800
20,000,000 J.E. Seagram & Sons, Inc., 7.50%, 12/15/2018........................... 18,949,600
20,000,000 Lockheed Martin Corp., 7.65%, 5/1/2016................................. 18,517,200
12,500,000 Lockheed Martin Corp., 7.75%, 5/1/2026................................. 11,525,375
5,000,000 May Department Stores, 7.625%, 8/15/2013............................... 4,971,400
7,500,000 May Department Stores, 7.875%, 8/15/2036, Callable 2016................ 7,222,425
20,000,000 Raychem Corp., 7.20%, 10/15/2008....................................... 19,014,400
10,000,000 Raytheon Co., 6.75%, 8/15/2007......................................... 9,329,300
12,500,000 Raytheon Co., 6.75%, 3/15/2018......................................... 10,857,000
16,600,000 Time Warner Entertainment, 8.375%, 7/15/2033........................... 17,214,034
2,500,000 Union Camp Corp., 9.25%, 2/1/2011...................................... 2,771,300
15,034,000 Walt Disney Co., 7.55%, 7/15/2093, Callable 2023....................... 14,023,565
------------
179,962,229
FINANCE: 7.8%
6,000,000 BankAmerica Capital II, 8.00%, 12/15/2026, Callable 2006++............. 5,657,580
1,450,000 Barclays No. American Capital, 9.75%, 5/15/2021, Callable 2001......... 1,552,573
1,000,000 CIGNA Corp., 7.65%, 3/1/2023........................................... 919,650
5,430,000 Citicorp Capital Trust I, 7.933%, 2/15/2027, Callable 2007++........... 5,081,068
3,065,000 Citicorp Capital Trust II, 8.015%, 2/15/2027, Callable 2007++.......... 2,900,563
4,000,000 First Nationwide Bank, 10.00%, 10/1/2006............................... 4,356,640
10,000,000 GMAC, 5.75%, 11/10/2003................................................ 9,521,600
13,500,000 GMAC, 8.875%, 6/1/2010, Putable 2000/2005.............................. 14,783,040
4,500,000 Hartford Financial Services Group, 8.30%, 12/1/2001.................... 4,591,710
10,000,000 Hartford Financial Services Group, 6.375%, 11/1/2002................... 9,740,100
6,800,000 J.P. Morgan Capital Trust I, 7.54%, 1/15/2027, Callable 2007++......... 6,083,960
5,000,000 Norwest Corp., 5.75%, 2/1/2003......................................... 4,812,400
7,500,000 Republic New York Corp., 7.20%, 7/15/2097.............................. 6,211,200
------------
76,212,084
TRANSPORTATION: 4.6%
15,000,000 Burlington Northern Santa Fe Railway, 7.57%, 1/2/2021.................. 14,682,300
5,630,000 Consolidated Rail Corp., 9.75%, 6/15/2020.............................. 6,522,580
400,000 Norfolk & Western Railroad, 10.125%, 7/1/2000.......................... 406,920
6,412,007 Union Pacific Corp., 6.85%, 1/2/2019................................... 5,881,605
19,251,194 Union Pacific Corp., 6.70%, 2/23/2019.................................. 17,756,531
------------
45,249,936
UTILITIES: 0.2%
1,500,000 Idaho Power Co. 1st Mtge., 9.50%, 1/1/2021, Callable 2001.............. 1,592,400
------------
303,016,649
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1999
-----------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS FOREIGN (U.S. DOLLAR-DENOMINATED): 5.4%
(Continued) CANADIAN: 2.5%
$ 7,062,000 Canadian Pacific Ltd., 9.45%, 8/1/2021................................. $ 7,913,395
9,000,000 Hydro-Quebec, 8.05%, 7/7/2024, Putable................................. 9,505,260
6,000,000 Hydro-Quebec, 9.50%, 11/15/2030........................................ 7,131,660
------------
24,550,315
CORPORATE: 2.4%
24,000,000 HSBC Holdings PLC, 7.50%, 7/15/2009.................................... 23,670,024
------------
INTERNATIONAL AGENCY: 0.5%
4,150,000 European Investment Bank, 10.125%, 10/1/2000........................... 4,266,200
------------
52,486,539
------------
Total Bonds (Cost $974,158,890).................................... 943,821,132
------------
SHORT-TERM 8,042,153 SSgA Prime Money Market Fund........................................... 8,042,153
INVESTMENTS: 10,000,000 U.S. Treasury Bills, 2/17/2000......................................... 9,933,743
------------
1.9% Total Short-Term Investments (Cost $17,975,896).................... 17,975,896
------------
TOTAL INVESTMENTS (cost $992,134,786)............................ 98.8% 961,797,028
OTHER ASSETS LESS LIABILITIES.................................... 1.2% 12,165,342
------ ------------
TOTAL NET ASSETS................................................. 100.0% $973,962,370
====== ============
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment
++ Cumulative preferred securities
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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8
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities December 31, 1999
------------------------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments, at market value (identified cost $992,134,786).................... $ 961,797,028
Cash........................................................................... 630
Receivable for paydowns on mortgage-backed securities.......................... 97,778
Receivable for Fund shares sold................................................ 209,586
Interest receivable............................................................ 13,706,542
Prepaid expenses............................................................... 80,081
--------------
975,891,645
--------------
LIABILITIES:
Payable for Fund shares redeemed............................................... 1,484,589
Management fees payable........................................................ 345,085
Accounts payable............................................................... 99,601
--------------
1,929,275
Net asset value --------------
per share $11.40 NET ASSETS..................................................................... $ 973,962,370
==============
Beneficial
shares NET ASSETS CONSIST OF:
outstanding Paid in capital................................................................ $1,003,422,194
85,458,548 Accumulated undistributed net investment income................................ 1,149,473
(par value $0.01 Accumulated undistributed net realized loss on investments..................... (271,539)
each, unlimited Net unrealized depreciation on investments..................................... (30,337,758)
shares authorized) --------------
$ 973,962,370
==============
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
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9
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Statement of Operations Year Ended December 31, 1999
------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest................................................................... $ 64,915,756
------------
EXPENSES:
Management fees (Note 2)................................................... 4,057,018
Custodian and fund accounting fees......................................... 65,700
Transfer agent fees........................................................ 148,363
Professional fees.......................................................... 46,840
Shareholder reports........................................................ 66,193
Registration fees.......................................................... 113,281
Trustees' fees (Note 2).................................................... 18,500
Miscellaneous.............................................................. 16,035
------------
4,531,930
------------
NET INVESTMENT INCOME...................................................... 60,383,826
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments......................................... (239,332)
Net unrealized depreciation on investments............................... (67,646,328)
------------
Net realized and unrealized loss on investments........................ (67,885,660)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS....................... $ (7,501,834)
============
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
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10
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Year Ended December 31,
------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
OPERATIONS:
Net investment income................................................. $ 60,383,826 $ 50,543,225
Net realized gain (loss).............................................. (239,332) 4,766,489
Net unrealized appreciation (depreciation)............................ (67,646,328) 10,871,148
------------- ------------
Net increase (decrease) in net assets from operations................. (7,501,834) 66,180,862
------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................. (59,584,527) (50,793,711)
Net realized gain..................................................... (3,016,202) (4,501,063)
------------- ------------
Total distributions................................................... (62,600,729) (55,294,774)
------------- ------------
BENEFICIAL SHARE TRANSACTIONS:
Amounts received from sale of shares.................................. 398,340,184 454,714,046
Net asset value of shares issued in reinvestment of distributions..... 44,688,775 35,771,573
Amounts paid for shares redeemed...................................... (350,923,665) (254,862,156)
------------- ------------
Net increase from beneficial share transactions....................... 92,105,294 235,623,463
------------- ------------
Total increase in net assets.......................................... 22,002,731 246,509,551
NET ASSETS:
Beginning of year..................................................... 951,959,639 705,450,088
------------- ------------
End of year (including undistributed net investment income
of $1,149,473 and $333,313, respectively)............................. $ 973,962,370 $ 951,959,639
============= ============
Shares sold........................................................... 33,584,943 37,288,086
Shares issued in reinvestment of distributions........................ 3,836,354 2,942,520
Shares redeemed....................................................... (29,682,780) (20,919,560)
------------- ------------
Net increase in shares outstanding.................................... 7,738,517 19,311,046
============= ============
</TABLE>
See accompanying Notes to Financial Statements
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11
<PAGE>
D O D G E & C O X
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Income Fund
Notes to Financial Statements
-------------------------------------------------------------------
1 Dodge & Cox Income Fund (the "Fund") is a separate series of Dodge
& Cox Funds (the "Trust"). The Trust is organized as a Delaware
business trust and is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management
investment company. The Fund consistently follows accounting
policies which are in conformity with generally accepted accounting
principles. Significant accounting policies are as follows: (a)
Security valuation: long-term debt securities are priced on the
basis of valuations furnished by pricing services which utilize
both dealer-supplied valuations and electronic data processing
techniques; securities for which market quotations are not readily
available are valued at fair value as determined in good faith by
or at the direction of the Board of Trustees; short-term securities
are valued at amortized cost which approximates current value; all
securities held by the Fund are denominated in U.S. dollars. (b)
Security transactions are accounted for on the trade date in the
financial statements. (c) Gains and losses on securities sold are
determined on the basis of identified cost. (d) Interest income is
recorded on the accrual basis. Premiums and discounts on debt
securities purchased are amortized and accreted, respectively, to
interest income over the lives of the respective securities. (e)
Distributions to shareholders of income and capital gains are
reflected in the net asset value per share computation on the ex-
dividend date. (f) No provision for Federal income taxes has been
included in the accompanying financial statements since the Fund
intends to distribute all of its taxable income and otherwise
continue to comply with requirements for regulated investment
companies.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
2 Under a written agreement, the Fund pays an annual management fee
of 5/10 of 1% of the Fund's average daily net asset value up to
$100 million and 4/10 of 1% of the Funds' average daily net asset
value in excess of $100 million to Dodge & Cox, investment manager
of the Fund. The agreement further provides that Dodge & Cox shall
waive its fee to the extent that such fee plus all other ordinary
operating expenses of the Fund exceed 1% of the average daily net
asset value for the year. All officers and six of the trustees of
the Trust are officers and employees of Dodge & Cox. Those trustees
who are not affiliated with Dodge & Cox receive from the Trust an
annual fee plus an attendance fee for each Board or Committee
meeting attended. Payments to trustees are divided equally among
each series of the Trust. The Trust does not pay any other
remuneration to its officers or trustees.
3 For the year ended December 31, 1999, purchases and sales of
securities, other than short-term securities, aggregated
$316,875,898 and $231,318,590, respectively, of which U.S.
government obligations aggregated $197,224,740 and $169,565,139,
respectively. At December 31, 1999, the cost of investments for
Federal income tax purposes was equal to the cost for financial
reporting purposes. As permitted by Federal tax law, the Fund
elected to defer realized net capital losses of $342,116 occurring
between November 1, 1999 and December 31, 1999, and to treat those
losses as arising in the fiscal year ending December 31, 2000. At
December 31, 1999, net unrealized depreciation aggregated
$30,337,758, of which $3,007,572 represented appreciated securities
and $33,345,330 represented depreciated securities.
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12
<PAGE>
D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Financial Highlights
- --------------------------------------------------------------------------------
SELECTED DATA AND RATIOS (for a share outstanding throughout each year)
Year Ended December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.25 $12.08 $11.68 $12.02 $10.74
Income from investment operations:
Net investment income .72 .72 .73 .74 .78
Net realized and unrealized gain (loss) (.82) .23 .40 (.34) 1.34
------------------------------------------------------
Total from investment operations (.10) .95 1.13 .40 2.12
------------------------------------------------------
Distributions to shareholders from:
Net investment income (.71) (.72) (.73) (.74) (.78)
Net realized gain (.04) (.06) - - (.06)
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Total distributions (.75) (.78) (.73) (.74) (.84)
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Net asset value, end of year $11.40 $12.25 $12.08 $11.68 $12.02
======================================================
Total return (0.81)% 8.08% 10.00% 3.62% 20.21%
Ratios/supplemental data:
Net assets, end of year (millions) $ 974 $ 952 $ 705 $ 533 $ 303
Ratio of expenses to average net assets .46% .47% .49% .50% .54%
Ratio of net investment income to average net assets 6.10% 6.00% 6.32% 6.65% 6.85%
Portfolio turnover rate 24% 35% 28% 37% 53%
</TABLE>
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13
<PAGE>
D O D G E & C O X
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Income Fund
Report of Independent Accountants
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To the Trustees of Dodge & Cox Funds and Shareholders of Dodge &
Cox Income Fund
In our opinion, the accompanying statement of assets and
liabilities, including the portfolio of investments, and the
related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects,
the financial position of the Dodge & Cox Income Fund (the "Fund",
one of the series constituting Dodge & Cox Funds) at December 31,
1999, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years
in the period then ended, in conformity with accounting principles
generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits, which included
confirmation of securities at December 31, 1999 by correspondence
with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 26, 2000
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Special 1999 Tax Information (unaudited)
The following information is provided pursuant to provisions of the
Internal Revenue Code:
The Fund hereby designates $1,998,411 of its distributions paid to
shareholders in 1999 as capital gain dividends (treated for Federal
income tax purposes in the hands of shareholders as long-term
capital gain taxable at a maximum rate of 20%).
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14
<PAGE>
D O D G E & C O X
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Income Fund
Officers & Trustees
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Harry R. Hagey, Chairman & Trustee
Chairman & CEO, Dodge & Cox
John A. Gunn, President & Trustee
President, Dodge & Cox
A. Horton Shapiro, Executive Vice President & Trustee
Senior Vice President, Dodge & Cox
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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