<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 account
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 Third Quarter Report
information of the shareholders of the Fund. September 30, 2000
The report is not authorized for distribution
to prospective investors in the Fund unless ------------------
it is accompanied by a current prospectus. ------------------
------------------
------------------
9/00 SF QR Printed on recycled paper
<PAGE>
D O D G E & C O X
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Stock Fund
To Our Shareholders
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The Dodge & Cox Stock Fund posted a positive total return of +6.2% for the
third quarter of 2000, compared to a negative return of -1.0% for the Standard
& Poor's 500 Index (S&P 500) of common stocks. For the first nine months of
2000, the Fund generated a total return of +4.2%, which was above the -1.4%
negative return of the S&P 500. Average annual returns for longer time periods
are summarized on page three of this report. We are encouraged by the Fund's
solid relative performance this year in the face of the rapidly changing stock
prices in the broad market. Particularly strong areas of the Fund's portfolio
included energy, bank and insurance companies and electric utilities. The
strong relative results stemmed not only from the companies
which we did own, but also from those we
did not. Many technology and A Note to Taxable
telecommunications companies have had sharp Shareholders
price declines this year, and the Fund's
value has been preserved, in part, by Capital Gains Realized in
avoiding many of those companies with 2000: The Stock Fund
negative returns. On the other hand, the anticipates distributing
Fund has had its share of investments with large capital gains at year-
poor results this year. Weak areas for the end. These gains were largely
Fund included retail stocks and a number of generated by the Fund's sale
industrial commodity holdings. of long-held positions in
Citigroup, Hewlett Packard
Dodge & Cox's Investment Approach and American Express,
among others. In Dodge &
While the Fund's performance during the Cox's opinion, the price
quarter was encouraging to us, the equity appreciation of these
market has been quite volatile. As investor companies' stocks
sentiment swings widely it is essential to raised valuations to
have a compass. The basic component of our levels that were no
compass is fundamental research of a longer attractive on a
company's opportunities and risks on a long-term investment
three-to-five year investment horizon. We basis. The decision to
then compare that analysis to the company's buy or sell holdings in
current stock price in order to assess the the Fund continues to
potential investment opportunity. We invest be based on our long-
in companies which we believe have durable term, fundamental,
business franchises trading at a price when price disciplined
an investment dollar buys a lot of current approach to investing.
value in the form of earnings, cash flow,
revenues and/or underlying asset value. We Currently, our estimate
also seek situations where management (which is subject to
strategies and changing industry dynamics change) for the capital
create significant probability of solid gain distribution to be
earnings progress on a three-to-five year paid to shareholders of
basis. record on December 26,
2000 is approximately
There are two additional components of our $12.40 per share. For
compass: the latest estimate of
this distribution,
. We maintain a strong research effort in please visit
areas of long-term growth. Often www.dodgeandcox.com.
companies in growth sectors carry a high
valuation, which will preclude us from Note on Buying a
investing. But by maintaining our effort Distribution: Unless
we can from time to time find attractive you are investing
companies at reasonable prices in growth through a tax-deferred
industries, such as technology and account (such as an IRA
healthcare. or 401(k) plan), it may
not be to your
. We maintain broad economic advantage to purchase
diversification in the Fund. We do not shares of the Fund
invest "all your eggs in one basket." shortly before it makes
a distribution. This is
Following these principles results at known as "buying a
present in a portfolio that has a low distribution." Buying a
price-to-earnings ratio (P/E) in relation distribution can cost
to the market. The average P/E multiple of you money in taxes
the 81 stocks held by the Fund is now about since you will receive
12.5 times estimated year 2000 earnings, a portion of the money
compared to a P/E of 24 times for the you just invested in
S&P 500. the form of a taxable
distribution.
Exposure to Global Growth
While many economists are talking about the potential for a slowdown
domestically and abroad, we believe the prospect for global economic growth
(including the U.S.) remains favorable on a long-term basis. As the global
economy expands, we believe that companies in the energy and industrial
commodities sectors may be in the early stages of a long period of earnings
expansion. Adding to our positive growth outlook, companies in these areas are
trading at low valuations. Approximately 25% of the Fund is invested in leading
energy and industrial commodities companies with exposure to global economic
growth.
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D O D G E & C O X
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Stock Fund
Two Examples of Our Approach
An example of one of the Fund's investments in the energy industry is Phillips
Petroleum. Phillips is a medium-sized integrated oil company with exploration
and production activities in 22 countries and refining and marketing operations
in the United States and the United Kingdom. Phillip's recent purchase of
ARCO's Alaskan oil and gas properties has increased the company's exposure to
exploration and production, has doubled their oil reserves and will increase
its long-term earnings and cash flow potential. The acquisition and increased
oil prices will also help boost the company's earnings per share from $2.17 in
1999 to well over $6.00 in 2000. Phillips also has a number of other attractive
opportunities. For example, Phillips is a substantial owner of the Kashagan oil
field in Kazakhstan, which is thought to be a major oil discovery. Even though
an oil price decline from current levels would have a negative impact on
earnings, we believe Phillips' low valuation and solid fundamentals make the
company an attractive long-term investment opportunity.
Another example of our stock selection process is May Department Stores. May is
one of the two largest department store retailers in the U.S., with over 400
stores and approximately $14 billion in revenue. Key factors in the company's
successful record include moderate store expansion, careful inventory
management and good cost controls. May enjoys strong free cash flow, which
should enable the company to make further acquisitions and/or repurchase
shares. May's stock declined significantly in late 1999 and 2000 due to
concerns over a possible slowdown in consumer spending and competitive
pressures from other retailers. In spite of these risks, we believe May is a
good long-term investment opportunity based on the strong franchise, projected
revenue and earnings growth slightly above corporate averages, and a depressed
valuation (9 times estimated 2000 earnings).
Our mention of these two investments is illustrative only, and is not meant to
imply that these selections are more attractive than the Fund's other 79
holdings.
In Closing
Experience has taught us that investors' perceptions fluctuate much more widely
than the underlying fundamentals of a company. With rapid and often dramatic
changes in investors' perceptions--and therefore stock prices--occurring
continually this year, we believe that a long-term investment time horizon and
a focus on fundamentals is more important than ever. While investors continue
to reassess the valuations for individual businesses (especially those in the
technology industry), Dodge & Cox continues to invest in companies like the
ones listed above--companies we believe have enduring business franchises
trading at attractive prices.
As always, we welcome your thoughts and questions, and we appreciate your
confidence in our firm as a shareholder of the Dodge & Cox Stock Fund.
For the Board of Trustees,
/s/ Harry R. Hagey /s/ John A. Gunn
------------------------ -----------------------
Harry R. Hagey, Chairman John A. Gunn, President October 31, 2000
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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, including
future earnings, cash flow and dividends. Companies are also
selected with an emphasis on financial strength and sound economic
condition.
<TABLE>
<CAPTION>
Cumulative Performance October 1, 1990 through September 30, 2000
--------------------------------------------------------------------------------
[PERFORMANCE GRAPH APPEARS HERE]
10 years 10 years
Stock Fund S & P 500
---------- ---------
<S> <C> <C>
10/1/1990 $10,000 $10,000
9/30/1991 $12,942 $13,116
9/30/1992 $14,068 $14,614
9/30/1993 $17,458 $16,798
9/30/1994 $18,491 $17,062
9/30/1995 $23,710 $22,137
9/30/1996 $27,632 $26,636
9/30/1997 $39,225 $37,403
9/30/1998 $39,772 $44,815
9/30/1999 $45,474 $52,126
9/30/2000 $50,969 $59,059
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for
periods ended September 30, 2000 1 Year 5 Years 10 Years 20 Years
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<S> <C> <C> <C> <C>
Dodge & Cox Stock Fund 12.10% 16.54% 17.68% 16.22%
Standard & Poor's 500 Index (S&P 500) 13.30 21.68 19.44 16.66
</TABLE>
The Fund's total returns include the reinvestment of dividend and capital gain
distributions, but have not been adjusted for any income taxes payable on these
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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D O D G E & C O X
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Stock Fund
Fund Information September 30, 2000
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<TABLE>
General Information
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<S> <C>
Net Asset Value Per Share $98.09
Total Net Assets (millions) $4,978
1999 Expense Ratio 0.55%
1999 Portfolio Turnover 18%
30-Day SEC Yield/1/ 2.30%
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: 94.5%
Cash Equivalents: 5.5%
</TABLE>
<TABLE>
<CAPTION>
Stock Characteristics
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<S> <C>
Number of Stocks 81
Median Market Capitalization $8.2 billion
Price-to-Earnings Ratio/2/ 14.0x
Price-to-Book Value 1.8x
Foreign Stocks/3/ (% of Fund) 7.0%
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
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<S> <C>
Bank One 3.2
Golden West Financial 3.0
News Corp. Ltd., ADR 2.5
FedEx 2.5
Phillips Petroleum 2.4
Lockheed Martin 2.3
Union Pacific 2.3
Loews 2.1
St. Paul Companies 2.0
Occidental Petroleum 1.9
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Sectors % of Fund
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<S> <C>
Energy 11.4
Banking 10.3
Electronics & Computer 8.6
Transportation 6.2
Insurance & Financial Services 6.0
Consumer Durables 5.8
Retail & Distribution 5.6
Chemicals 5.5
Electric & Gas Utilities 5.3
Consumer Products 4.7
</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 September 30, 2000
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PERCENTAGE OF FUND
<S> <C>
COMMON STOCKS: 92.0%
FINANCE: 18.3%
BANKING: 10.3%
Bank One Corp...................................................... 3.2
Golden West Financial Corp......................................... 3.0
Bank of America Corp............................................... 1.7
Wells Fargo & Co................................................... 1.4
Wachovia Corp...................................................... 1.0
INSURANCE AND FINANCIAL SERVICES: 6.0%
Loews Corp......................................................... 2.1
St. Paul Companies, Inc............................................ 2.0
Chubb Corp......................................................... 1.0
MBIA, Inc.......................................................... 0.5
UNUMProvident Corp................................................. 0.4
REAL ESTATE INVESTMENT TRUST: 2.0%
Equity Office Properties Trust..................................... 1.1
Equity Residential Properties Trust................................ 0.9
CONSUMER: 17.4%
CONSUMER DURABLES: 5.8%
Whirlpool Corp..................................................... 1.3
General Motors Corp................................................ 1.0
Ford Motor Co...................................................... 0.9
Dana Corp.......................................................... 0.9
Delphi Automotive Systems Corp..................................... 0.9
Masco Corp......................................................... 0.8
RETAIL AND DISTRIBUTION: 5.6%
Genuine Parts Co................................................... 1.6
Kmart Corp......................................................... 1.4
May Department Stores Co........................................... 1.3
Nordstrom, Inc..................................................... 0.9
Dillard's, Inc. Class A............................................ 0.4
CONSUMER PRODUCTS: 4.7%
Fort James Corp.................................................... 1.5
VF Corp............................................................ 1.0
Unilever N.V....................................................... 0.7
Mattel, Inc........................................................ 0.6
Eastman Kodak Co................................................... 0.5
Dole Food Co., Inc................................................. 0.4
MEDIA AND LEISURE: 1.3%
R.R. Donnelley & Sons Co........................................... 1.3
INDUSTRIAL COMMODITIES: 12.3%
CHEMICALS: 5.5%
Dow Chemical Co..................................................... 1.5
Air Products & Chemicals, Inc....................................... 0.9
Eastman Chemical Co................................................. 0.9
Engelhard Corp...................................................... 0.6
NOVA Chemicals Corp................................................. 0.5
Union Carbide Corp.................................................. 0.5
Rohm and Haas Co.................................................... 0.4
Lubrizol Corp....................................................... 0.2
METALS AND MINING: 3.0%
Alcoa, Inc.......................................................... 1.6
Rio Tinto PLC ADR................................................... 1.4
PAPER AND FOREST PRODUCTS: 2.6%
Weyerhaeuser Co..................................................... 1.1
International Paper Co.............................................. 1.0
Boise Cascade Corp.................................................. 0.5
GENERAL MANUFACTURING: 1.2%
Archer Daniels Midland Co........................................... 1.2
ENERGY: 11.4%
Phillips Petroleum Co............................................... 2.4
Occidental Petroleum Corp........................................... 1.9
Unocal Corp......................................................... 1.8
Amerada Hess Corp................................................... 1.7
Chevron Corp........................................................ 1.6
Baker Hughes, Inc................................................... 1.2
Anadarko Petroleum Corp............................................. 0.8
TECHNOLOGY: 9.1%
ELECTRONICS & COMPUTER: 8.6%
Thermo Electron Corp................................................ 1.6
Xerox Corp.......................................................... 1.5
NCR Corp............................................................ 1.3
Electronic Data Systems............................................. 1.2
Pitney Bowes, Inc................................................... 1.1
Storage Technology Corp............................................. 0.7
Synopsys Inc........................................................ 0.7
Motorola, Inc....................................................... 0.5
CONSUMER ELECTRONICS: 0.5%
Sony Corp. ADR...................................................... 0.5
</TABLE>
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5
<PAGE>
D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 2000
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PERCENTAGE OF FUND
<S> <C>
COMMON STOCKS (Continued)
HEALTHCARE: 6.4%
PHARMACEUTICAL & MEDICAL PRODUCTS: 4.0%
Pharmacia Corp...................................................... 1.7
Becton, Dickinson & Co.............................................. 1.1
Bausch & Lomb, Inc.................................................. 0.9
Schering Plough Corporation......................................... 0.3
HEALTHCARE SERVICES: 2.4%
WellPoint Health Networks, Inc...................................... 1.0
HCA-The Healthcare Company.......................................... 0.8
First Health Group Corp............................................. 0.6
TRANSPORTATION: 6.2%
FedEx Corp.......................................................... 2.5
Union Pacific Corp.................................................. 2.3
Canadian Pacific Ltd................................................ 1.4
GENERAL INDUSTRIAL: 5.6%
MACHINERY & EQUIPMENT: 3.3%
Deere & Co.......................................................... 1.3
Fluor Corp.......................................................... 1.0
Caterpillar, Inc.................................................... 0.9
Unova, Inc.......................................................... 0.1
ELECTRICAL & AEROSPACE: 2.3%
Lockheed Martin Corp................................................ 2.3
ELECTRIC AND GAS UTILITIES: 5.3%
FPL Group, Inc...................................................... 1.5
American Electric Power Co., Inc.................................... 1.1
Ameren Corp......................................................... 1.1
TXU Corp............................................................ 1.0
Wisconsin Energy Corp............................................... 0.6
PREFERRED STOCKS: 2.5%
CONSUMER: 2.5%
News Corp. Ltd., Limited Voting Ordinary Shares ADR..................... 2.5
CASH EQUIVALENTS: 6.2%
OTHER ASSETS LESS LIABILITIES: (0.7)%
TOTAL NET ASSETS: 100.0%
</TABLE>
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D O D G E & C O X
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Stock 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
President, 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
Standard & Poor's 500 and S&P 500(R) are trademarks of The McGraw-Hill
Companies, Inc.
The financial information has been taken from the records of the Fund and has
not been audited by our independent accountants who do not express an opinion
thereof. The financial statements of the Fund will be subject to audit by our
independent accountants as of the close of the calendar year.
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<PAGE>
D O D G E & C O X D O D G E & C O X
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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 account
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 Third Quarter Report
information of the shareholders of the Fund. September 30, 2000
The report is not authorized for distribution
to prospective investors in the Fund unless ------------------
it is accompanied by a current prospectus. ------------------
------------------
-----------------
9/00 BF QR Printed on recycled paper
<PAGE>
D O D G E & C O X
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Balanced Fund
To Our Shareholders
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The Dodge & Cox Balanced Fund posted a total return of 5.2% for the third
quarter of 2000, compared to the 0.7% return for the Combined Index/1/. For the
nine months ended September 30, the Fund returned 5.3%, compared to 2.2% for
the Combined Index. Average annual returns for longer time periods are
summarized on page three of this report. As of September 30, 2000, the Fund's
total net assets of $4.7 billion were invested in 62% stocks, 36% fixed-income
securities and 2% cash equivalents.
Equity Portfolio Performance Review A Note to Taxable
Shareholders
We are encouraged by the equity portfolio's
solid performance this year relative to the Capital Gains
Standard & Poor's 500 Index (S&P 500) in the Realized in 2000: The
face of the rapidly changing stock prices in Balanced Fund
the broad market. Particularly strong areas anticipates
of the Fund's equity portfolio included distributing large
energy, bank and insurance companies and capital gains at
electric utilities. The strong relative year-end. These gains
results stemmed not only from the companies were largely
which we did own, but also from those we did generated by the
not. Many technology and telecommunications Fund's sale of long-
companies have had sharp price declines this held positions in
year, and the Fund's value has been Citigroup, Hewlett
preserved, in part, by avoiding many of those Packard and American
companies with negative returns. On the other Express, among
hand, the Fund has had its share of equity others. In Dodge &
investments with poor results this year. Weak Cox's opinion, the
areas included retail stocks and a number of price appreciation of
industrial commodity holdings. these companies'
stocks raised
Dodge & Cox's Equity Approach valuations to levels
that were no longer
While the Fund's equity performance during attractive on a long-
the quarter was encouraging to us, the equity term investment
market has been quite volatile. As investor basis. The decision
sentiment swings widely it is essential to to buy or sell
have a compass. The basic component of our holdings in the Fund
compass is fundamental research of a continues to be based
company's opportunities and risks on a three- on our long-term,
to-five year investment horizon. We then fundamental, price
compare that analysis to the company's disciplined approach
current stock price to assess the potential to investing.
investment opportunity. We invest in
companies which we believe have durable Currently, our
business franchises trading at a price when estimate (which is
an investment dollar buys a lot of current subject to change)
value in the form of earnings, cash flow, for the capital gain
revenues and/or underlying asset value. We distribution to be
also seek situations where management paid to shareholders
strategies and changing industry dynamics of record on December
create significant probability of solid 26, 2000 is
earnings progress on a three-to-five year approximately $7.08
basis. per share. For the
latest estimate of
There are two additional components of our this distribution,
compass: please visit
www.dodgeandcox.com.
. We maintain a strong research effort in
areas of long-term growth. Often companies Note on Buying a
in growth sectors carry a high valuation, Distribution: Unless
which will preclude us from investing. But you are investing
by maintaining our effort we can from time through a tax-
to time find attractive companies at deferred account
reasonable prices in growth industries, (such as an IRA or
such as technology and healthcare. 401(k) plan), it may
not be to your
. We maintain broad economic diversification advantage to purchase
in the equity portfolio. We do not invest shares of the Fund
"all your eggs in one basket." shortly before it
makes a distribution.
Following these principles results at present This is known as
in an equity portfolio that has a low price- "buying a distribution."
to-earnings ratio (P/E) in relation to the Buying a distribution can
market. The average P/E multiple of the 81 cost you money in
stocks held by the Fund is now about 12.5 taxes since you will
times estimated year 2000 earnings, compared receive a portion of
to a P/E of 24 times for the S&P 500. the money you just
invested in the form
Exposure to Global Growth of a taxable distribution.
While many economists are talking about the potential for a slowdown
domestically and abroad, we believe the fundamental prospects for global
economic growth (including the U.S.) remains favorable on a long-term basis. As
the global economy expands, we believe that companies in the energy and
industrial commodities sectors may be in the early stages of a long period
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<PAGE>
D O D G E & C O X
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Balanced Fund
of earnings expansion. Adding to our positive growth outlook, companies in
these areas are trading at low valuations. Approximately 25% of the Fund's
equity portfolio is invested in leading energy and industrial commodities
companies with exposure to global economic growth.
Fixed-Income Portfolio
Economic data continues to point to strength in the U.S. economy, albeit with
some slowing from the rapid pace of previous quarters. Second quarter GDP grew
at a 5.6% annualized rate. Demand for workers remained strong as evidenced by a
3.9% unemployment rate, the lowest in 30 years. Yet, even as sustained growth
has raised concerns about inflation, the Federal Reserve left the target
Federal Funds Rate (the interest rate at which banks lend to each other)
unchanged. One sign that previous increases in the Federal Funds Rate are
helping to moderate growth is a slowdown in consumer spending, which increased
at a 3.1% annualized rate in the second quarter, the smallest increase in two
years. Indeed, the preliminary estimate for third quarter GDP growth is 2.7%.
U.S. Treasury rates responded to forecasts for continued but tempered growth
with only slight changes during the quarter. Reflecting expectations that the
Federal Reserve may move to lower the Federal Funds Rate in the future,
intermediate U.S. Treasury rates fell, but rates were nearly unchanged for 30-
year U.S. Treasury bonds. Yields on benchmark two-year and ten-year U.S.
Treasury notes fell 39 and 23 basis points, respectively, ending the quarter at
5.97% and 5.80% (one basis point is equal to 1/100 of 1%). The 30-year U.S.
Treasury bond ended the quarter at 5.88%.
The fixed-income portfolio's overweight position in corporate securities had a
negative effect on performance relative to the Lehman Brothers Aggregate Bond
Index (LBAG) in the third quarter, as these securities underperformed U.S.
Treasuries. The Fund's fixed-income investments in the corporate sector
emphasize longer-duration/2/ corporate securities, which underperformed long
U.S. Treasuries and the overall corporate index. Another negative factor for
fixed-income performance was the movement in the yield curve, which favored
intermediate maturities. The fixed-income portfolio is underweight in this part
of the yield curve relative to the LBAG and overweight shorter and longer-
duration securities. On a positive note, the fixed-income portfolio maintains a
slightly overweight position in mortgage-backed securities, which performed
well last quarter, outpacing the returns of both intermediate Treasury and
corporate securities.
In Closing
With continued volatility in equity prices, we believe the use of fixed-income
securities to provide relative stability makes a long-term, balanced investment
program compelling. Experience has taught us that investors' perceptions
fluctuate much more widely than the underlying fundamentals of a company. With
rapid and often dramatic changes in investors' perceptions occurring
continually this year, we believe that a long-term investment approach and a
focus on fundamentals is more important than ever. While investors continue to
reassess the valuations for individual businesses, Dodge & Cox continues to
invest in companies we believe have enduring business franchises trading at
attractive prices.
As always, we welcome your thoughts and questions, and we appreciate your
confidence in our firm as a shareholder of the Dodge & Cox Balanced Fund.
For the Board of Trustees,
/s/ Harry R. Hagey
--------------------------
October 31, 2000 Harry R. Hagey, Chairman
/1/ The Combined Index reflects an unmanaged portfolio of 60% of the Standard &
Poor's 500 Index (S&P 500) and 40% of the Lehman Brother's Aggregate Bond
Index (LBAG). The Balanced Fund may, however, invest up to 75% of its total
assets in stocks.
/2/ Duration is a measure of a bond's sensitivity to interest rates.
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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 to-
tal 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 include
investment-grade: U.S. government obligations, mortgage and asset-
backed securities, corporate bonds, collateralized mortgage obliga-
tions (CMOs) and others.
<TABLE>
<CAPTION>
Cumulative Performance October 1, 1990 through September 30, 2000
--------------------------------------------------------------------------------
[PERFORMANCE GRAPH APPEARS HERE]
10 years 10 years 10 years 10 years
S & P 500 LBAG 60/40 Blend Balanced Fund
--------- -------- ----------- -------------
<S> <C> <C> <C> <C>
10/1/1990 $10,000 $10,000 $10,000 $10,000
9/30/1991 $13,116 $11,600 $12,507 $12,474
9/30/1992 $14,614 $12,883 $13,936 $13,832
9/30/1993 $16,798 $14,412 $15,854 $16,622
9/30/1994 $17,062 $13,896 $15,781 $17,038
9/30/1995 $22,137 $15,851 $19,454 $20,933
9/30/1996 $26,636 $16,625 $22,177 $23,460
9/30/1997 $37,403 $18,245 $28,281 $30,276
9/30/1998 $44,815 $19,560 $32,463 $31,350
9/30/1999 $52,126 $20,266 $36,287 $34,628
9/30/2000 $59,059 $21,683 $40,303 $38,181
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods
ended September 30, 2000 1 Year 5 Years 10 Years 20 Years
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 10.25% 12.77% 14.34% 13.86%
Combined Index 11.07 15.69 14.96 14.38
Standard & Poor's 500 Index (S&P 500) 13.30 21.68 19.44 16.66
Lehman Brothers Aggregate Bond Index (LBAG) 6.99 6.47 8.05 10.35
</TABLE>
The Fund's total returns include the reinvestment of dividend and capital gain
distributions, but have not been adjusted for any income taxes payable by
shareholders on these distributions. Index returns include dividends and/or in-
terest 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
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Balanced Fund
Fund Information September 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
--------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $65.06
Total Net Assets (millions) $4,675
30-Day SEC Yield/1/ 3.85%
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>
Stocks: 61.6%
Fixed-Income Securities: 36.3%
Cash Equivalents: 2.1%
</TABLE>
<TABLE>
<CAPTION>
Stock Portfolio (61.6% of Fund)
--------------------------------------------------------------------------------
<S> <C>
Number of Stocks 81
Median Market Capitalization $8.2 billion
Price-to-Earnings Ratio/2/ 13.9x
Price-to-Book Value 1.8x
Foreign Stocks/3/ (% of Fund) 4.3%
</TABLE>
<TABLE>
<CAPTION>
Five Largest Sectors % of Fund
--------------------------------------------------------------------------------
<S> <C>
Energy 7.6
Banking 6.8
Electronics & Computers 5.5
Transportation 4.0
Insurance & Financial Services 3.8
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
--------------------------------------------------------------------------------
<S> <C>
Bank One 2.1
Golden West Financial 2.1
FedEx 1.6
Lockheed Martin 1.6
Phillips Petroleum 1.6
News Corp. Ltd., ADR 1.5
Union Pacific 1.5
Occidental Petroleum 1.3
Loews 1.3
Unocal 1.2
</TABLE>
<TABLE>
<CAPTION>
Fixed-Income Portfolio (36.3% of Fund)
--------------------------------------------------------------------------------
<S> <C>
Number of Fixed-Income Securities 123
Average Quality AA
Average Maturity 11.0 years
Effective Duration 4.54 years
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's Quality Ratings % of Fund
--------------------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 20.2
Aaa/AAA 2.4
Aa/AA 0.1
A/A 6.0
Baa/BBB 7.6
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
--------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 6.9
Federal Agency CMO and REMIC+ 7.5
Federal Agency Mortgage Pass-Through 5.8
Asset-Backed 2.1
Corporate 13.4
International Agency/3/ 0.6
</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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
4
<PAGE>
D O D G E & C O X
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 2000
--------------------------------------------------------------------------------
PERCENTAGE OF FUND
<S> <C>
COMMON STOCKS: 60.1%
FINANCE: 11.9%
BANKING: 6.8%
Bank One Corp........................................................ 2.1
Golden West Financial Corp........................................... 2.1
Bank of America Corp................................................. 1.1
Wells Fargo & Co..................................................... 0.9
Wachovia Corp........................................................ 0.6
INSURANCE AND FINANCIAL SERVICES: 3.8%
Loews Corp........................................................... 1.3
St. Paul Companies, Inc.............................................. 1.2
Chubb Corp........................................................... 0.7
MBIA, Inc............................................................ 0.3
UNUMProvident Corp................................................... 0.3
REAL ESTATE INVESTMENT TRUST: 1.3%
Equity Office Properties Trust....................................... 0.7
Equity Residential Properties Trust.................................. 0.6
CONSUMER: 11.3%
RETAIL AND DISTRIBUTION: 3.7%
Genuine Parts Co..................................................... 1.0
Kmart Corp........................................................... 1.0
May Department Stores Co............................................. 0.8
Nordstrom, Inc....................................................... 0.6
Dillard's, Inc. Class A.............................................. 0.3
CONSUMER DURABLES: 3.5%
Whirlpool Corp....................................................... 0.8
General Motors Corp.................................................. 0.6
Dana Corp............................................................ 0.6
Delphi Automotive Systems Corp....................................... 0.6
Ford Motor Co........................................................ 0.5
Masco Corp........................................................... 0.4
CONSUMER PRODUCTS: 3.1%
Fort James Corp...................................................... 0.9
VF Corp.............................................................. 0.7
Mattel, Inc.......................................................... 0.5
Unilever N.V......................................................... 0.4
Eastman Kodak Co..................................................... 0.3
Dole Food Co., Inc................................................... 0.3
MEDIA AND LEISURE: 1.0%
R.R. Donnelley & Sons Co............................................. 1.0
INDUSTRIAL COMMODITIES: 8.1%
CHEMICALS: 3.7%
Dow Chemical Co...................................................... 1.0
Eastman Chemical Co.................................................. 0.6
Air Products & Chemicals, Inc........................................ 0.6
Engelhard Corp....................................................... 0.4
Union Carbide Corp................................................... 0.4
NOVA Chemicals Corp.................................................. 0.3
Rohm and Haas Co..................................................... 0.3
Lubrizol Corp........................................................ 0.1
METALS AND MINING: 2.0%
Alcoa, Inc........................................................... 1.1
Rio Tinto PLC ADR.................................................... 0.9
PAPER AND FOREST PRODUCTS: 1.6%
Weyerhaeuser Co...................................................... 0.7
International Paper Co............................................... 0.5
Boise Cascade Corp................................................... 0.4
GENERAL MANUFACTURING: 0.8%
Archer Daniels Midland Co............................................ 0.8
ENERGY: 7.6%
Phillips Petroleum Co................................................ 1.6
Occidental Petroleum Corp............................................ 1.3
Unocal Corp.......................................................... 1.2
Chevron Corp......................................................... 1.1
Amerada Hess Corp.................................................... 1.1
Baker Hughes, Inc.................................................... 0.8
Anadarko Petroleum Corp.............................................. 0.5
TECHNOLOGY: 5.8%
ELECTRONICS & COMPUTER: 5.5%
Thermo Electron Corp................................................. 1.1
Xerox Corp........................................................... 0.9
NCR Corp............................................................. 0.9
Pitney Bowes, Inc.................................................... 0.7
Electronic Data Systems.............................................. 0.7
Storage Technology Corp.............................................. 0.4
Synopsys Inc......................................................... 0.4
Motorola, Inc........................................................ 0.4
CONSUMER ELECTRONICS: 0.3%
Sony Corp. ADR....................................................... 0.3
HEALTHCARE: 4.4%
PHARMACEUTICAL & MEDICAL PRODUCTS: 2.6%
Pharmacia Corp....................................................... 1.1
Becton, Dickinson & Co............................................... 0.7
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
5
<PAGE>
D O D G E & C O X
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 2000
--------------------------------------------------------------------------------
PERCENTAGE OF FUND
PHARMACEUTICAL & MEDICAL PRODUCTS (Continued)
<S> <C>
Bausch & Lomb, Inc................................................ 0.6
Schering Plough Corporation....................................... 0.2
HEALTHCARE SERVICES: 1.8%
WellPoint Health Networks, Inc.................................... 0.7
HCA-The Healthcare Company........................................ 0.6
First Health Group Corp........................................... 0.5
TRANSPORTATION: 4.0%
FedEx Corp........................................................ 1.6
Union Pacific Corp................................................ 1.5
Canadian Pacific Ltd.............................................. 0.9
GENERAL INDUSTRIAL: 3.6%
MACHINERY & EQUIPMENT: 2.0%
Deere & Co........................................................ 0.8
Fluor Corp........................................................ 0.6
Caterpillar, Inc.................................................. 0.6
Unova, Inc........................................................ 0.0+
ELECTRICAL & AEROSPACE: 1.6%
Lockheed Martin Corp.............................................. 1.6
ELECTRIC AND GAS UTILITIES: 3.4%
TXU Corp.......................................................... 0.8
Ameren Corp....................................................... 0.7
American Electric Power Co., Inc.................................. 0.7
FPL Group, Inc.................................................... 0.7
Wisconsin Energy Corp............................................. 0.5
PREFERRED STOCKS: 1.5%
CONSUMER: 1.5%
News Corp. Ltd., Limited Voting Ordinary Shares ADR............... 1.5
FIXED-INCOME SECURITIES: 36.3%
U.S. TREASURY AND GOV'T AGENCY: 6.9%
FEDERAL AGENCY CMO* AND REMIC**: 7.5%
FEDERAL AGENCY MTG. PASS-THROUGH: 5.8%
ASSET-BACKED SECURITIES: 2.1%
CA Infrastructure and Econ. Dev. Bank Special Purpose Trust PGE-1
Rate Reduction Ctf. 1997-1 A-5 6.25%, 6/25/2004 ................. 0.8
Union Planters Mortgage Finance Corp. 7.70%, 4/25/2009............ 0.6
CA Infrastructure and Econ. Dev. Bank Special Purpose Trust SCE-1
Rate Reduction Ctf. 1997-1 A-6 6.38%, 9/25/2008.................. 0.4
PP&L Transition Bond Series 1999-1 A-2 6.41%, 12/26/2003.......... 0.3
CORPORATE: 13.4%
INDUSTRIAL: 6.4%
Raytheon Co., various securities.................................. 1.3
Lockheed Martin Corp., various securities......................... 1.2
J.E. Seagram & Sons, Inc. 6.80%, 12/15/2008....................... 1.0
Raychem Corp. 7.20%, 10/15/2008................................... 0.7
Time Warner Entertainment 8.375%, 7/15/2033....................... 0.7
May Department Stores, various securities......................... 0.6
Union Carbide Corp. 6.70%, 4/1/2009............................... 0.4
Walt Disney Co. 7.55%, 7/15/2093.................................. 0.4
Union Camp Corp. 9.25%, 2/1/2011.................................. 0.1
FINANCE: 5.3%
GMAC, various securities.......................................... 0.9
EOP Operating Limited Partnership 8.375%, 3/15/2006............... 0.8
Golden West Financial, various securities......................... 0.6
St. Paul Companies, Inc. 8.125%, 4/15/2010........................ 0.4
Bank of Tokyo-Mitsubishi Ltd. 8.40%, 4/15/2010.................... 0.3
Hartford Financial Services Group, various securities............. 0.3
Republic New York Corp. 7.20%, 7/15/2097.......................... 0.3
Bank One Capital III 8.75%, 9/1/2030.............................. 0.3
BankAmerica Capital II 8.00%, 12/15/2026.......................... 0.3
Safeco Corp. 6.875%, 7/15/2007.................................... 0.3
Citicorp Capital Trust I 7.933%, 2/15/2027........................ 0.3
HSBC Holdings PLC 7.50%, 7/15/2009................................ 0.2
CIGNA Corp., various securities................................... 0.1
First Nationwide Bank 10.00%, 10/1/2006........................... 0.1
Barclays No. American Capital 9.75%, 5/15/2021.................... 0.1
TRANSPORTATION: 1.7%
Union Pacific Corp. 6.33%, 1/2/2020............................... 0.9
Consolidated Rail Corp., various securities....................... 0.4
Canadian Pacific Ltd. 9.45%, 8/1/2021............................. 0.2
Canadian National Railway Co. 6.80%, 7/15/2018.................... 0.2
UTILITIES: 0.0%+
Idaho Power Co. 1st Mtge. 9.50%, 1/1/2021......................... 0.0
INTERNATIONAL AGENCY (U.S. DOLLAR-DENOMINATED): 0.6%
Inter-American Development Bank 7.125%, 3/15/2023................. 0.3
Hydro-Quebec 7.50%, 4/1/2016...................................... 0.3
CASH EQUIVALENTS: 2.2%
OTHER ASSETS LESS LIABILITIES: (0.1)%
TOTAL NET ASSETS: 100.0%
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
+ Rounds to 0.0%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
6
<PAGE>
D O D G E & C O X
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Balanced Fund
Officers & Trustees
--------------------------------------------------------------------------------
Harry R. Hagey, Chairman & Trustee
Chairman & CEO, Dodge & Cox
John A. Gunn, President & Trustee
President, Dodge & Cox
A. Horton Shapiro, Executive Vice President & Trustee
Senior Vice President, Dodge & Cox
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
President, 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
Lehman Brothers(R) is a trademark of Lehman Brothers, Inc.; Moody's(R) is a
trademark of Moody's Investors Services, Inc.; and Standard & Poor's, Standard
& Poor's 500, and S&P 500(R) are trademarks of The McGraw-Hill Companies, Inc.
The financial information has been taken from the records of the Fund and has
not been audited by our independent accountants who do not express an opinion
thereof. The financial statements of the Fund will be subject to audit by our
independent accountants as of the close of the calendar year.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
D O D G E & C O X D O D G E & C O X
----------------- -----------------
Income Fund
Income Fund
Investment Manager Established 1989
Dodge & Cox
One Sansome Street -----------------
35th Floor -----------------
San Francisco, California
94104-4443
(415) 981-1710
For Fund literature and account
information, please visit the
Funds' web site at:
www.dodgeandcox.com
or write or call:
Dodge & Cox Funds
c/o Boston Financial Data Services
P.O. Box 9051
Boston, Massachusetts
02205-9051
(800) 621-3979
-----------------
Third Quarter Report
This report is submitted for the general September 30, 2000
information of the shareholders of the Fund.
The report is not authorized for distribution ------------------
to prospective investors in the Fund unless ------------------
it is accompanied by a current prospectus. ------------------
-----------------
9/00 IF QR Printed on recycled paper
<PAGE>
D O D G E & C O X
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Income Fund
To Our Shareholders
--------------------------------------------------------------------------------
The Dodge & Cox Income Fund produced a total return of 2.7% for the quarter
ended September 30, 2000, compared to a total return of 3.0% for the Lehman
Brothers Aggregate Bond Index (LBAG), a broad-based index composed of
investment-grade bonds. For the first nine months of 2000, the Fund earned a
total return of 6.3%, compared to the 7.1% return of the benchmark LBAG.
Average annual returns for longer time periods are summarized on page three of
this report. The Fund ended the quarter with total net assets of $959 million.
Continued U.S. Economic Strength and Lower Intermediate Treasury Yields
Economic data continued to point to strength in the U.S. economy, albeit with
some slowing from the rapid pace of previous quarters. Second quarter GDP grew
at a 5.6% annualized rate and demand for workers remained strong as evidenced
by a 3.9% unemployment rate, the lowest in 30 years. Yet, even as sustained
growth and higher oil prices have raised concerns about inflation, the Federal
Reserve left the target Federal Funds Rate (the interest rate at which banks
lend to each other) unchanged, citing gains in productivity and expectations
for more moderate economic growth. One sign that previous increases in the
Federal Funds Rate are helping to moderate growth is a slowdown in consumer
spending, which increased at a 3.1% annualized rate in the second quarter, the
smallest increase in two years. Indeed, the preliminary estimate for third
quarter GDP growth is 2.7%.
U.S. Treasury rates responded to forecasts for continued but tempered growth
with only slight changes during the quarter. Reflecting expectations that the
Federal Reserve may move to lower the Federal Funds Rate in the future,
intermediate U.S. Treasury rates fell, but rates were nearly unchanged for 30-
year U.S. Treasury bonds. Yields on benchmark two-year and ten-year U.S.
Treasury notes fell 39 and 23 basis points (one basis point is equal to 1/100
of 1%), respectively, ending the quarter at 5.97% and 5.80%. The 30-year U.S.
Treasury bond ended the quarter at 5.88%.
The Fund's overweight position in corporate securities (39.7% at quarter end
vs. 23.9% for the LBAG) had a negative effect on relative performance in the
third quarter as these securities underperformed U.S. Treasuries. The Fund's
investments in the corporate sector emphasize longer-duration/1/ securities,
which lagged the returns of long U.S. Treasuries and the overall corporate
index. Another negative factor for performance was the movement in the yield
curve, which favored intermediate maturities. The Fund is underweight in this
part of the yield curve relative to the LBAG and overweight shorter and longer-
duration securities. On a positive note, the Fund maintains a slightly
overweight position in mortgage-backed securities, which performed well last
quarter, outpacing the returns of both intermediate Treasury and corporate
securities. Because of our concern that inflation will continue to rise, we
continue to position the Fund with a slightly shorter effective duration than
that of the LBAG. In addition, the Fund holds a 6.6% position in U.S. Treasury
Inflation Protected Securities (TIPS).
Corporate Securities Provide Opportunities for Long-Term Investors
A "yield premium" is the additional yield (over and above that offered by a
similar-maturity risk-free U.S. Treasury) that compensates a bond investor for
the credit risk, greater price volatility and reduced liquidity of a corporate,
or other non-Treasury, bond. Wider yield premiums imply greater investor
concern over these risk factors, while lower yield premiums reflect the
opposite. The current level of corporate yield premiums matches or exceeds 1991
recession levels at a time when the U.S. economy, while slowing from the rapid
pace of the fourth quarter of 1999, is still operating at a generous rate of
expansion. In light of the negative impact that increasing corporate yield
premiums has had on recent relative performance, we would like to discuss our
rationale for maintaining an overweight position in the corporate sector.
We believe that current corporate yield premiums provide attractive
compensation to investors for bearing the risk of corporate bond investing. 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. Another way we examine the
attractiveness of current corporate yield premiums is by comparing investment-
grade corporates to the credit loss experience of investment-grade corporates
in the past. For example, even if credit losses over the next five years were
as high as the worst five-year period since 1970/2/, corporate bonds could
still outperform their
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1
<PAGE>
D O D G E & C O X
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Income Fund
--------------------------------------------------------------------------------
Treasury counterparts. While there is no guarantee that future credit losses
won't surpass the post-1970 highs, or that the loss experience of the Fund's
corporate securities won't be greater than average, we are confident in both
our positive long-term outlook for the U.S. economy, and the fundamental credit
research we have used in selecting the Fund's corporate investments.
In the current market environment investors are paying a premium for U.S.
Treasuries, presumably for their greater liquidity and potentially diminishing
supply. At the same time, investors appear fearful of investment-grade
corporates due to increased volatility and the potential that an economic
slowdown will negatively affect corporate credit. We believe that this has
created a significant opportunity for long-term investors.
Corporate Security Addition
A recent purchase highlights the attractive value which we believe can
currently be found in the corporate sector. In July the Fund purchased a 1.3%
position of Bank One Corporation senior notes due August 1, 2005. We purchased
these Aa3/A+ rated securities, which pay a coupon of 7.625%, at a yield premium
of 154 basis points over the five-year U.S. Treasury. We believe that this
yield premium is attractive relative to bonds with similar credit risk and
comparable duration. Bank One is the fourth-largest bank in the U.S. with $314
billion in managed assets. It is a dominant presence in retail and business
banking in the Midwest and Southwest. Subsidiary First USA is the second
largest issuer of credit cards in the world ($67 billion of managed
receivables). In addition, Bank One is the third-largest provider of small
business lending in the nation, and is the leading consumer and commercial bank
in the Midwest. Rounding out their well branded product offerings is asset
management, a relatively stable fee-generating business, where they rank tenth
among U.S. banks. We believe that the purchase of the Bank One notes represents
a compelling relative value opportunity for investors with a longer-term
investment horizon.
In Closing
While the widening in corporate yield premiums has had a negative impact on
recent performance relative to the Fund's benchmark, we believe it also creates
an opportunity for long-term investors who are willing to analyze carefully the
underlying risk and potential benefit of individual securities. We will
continue to seek attractive fixed-income investments that will contribute to
the yield advantage of the Fund, adding selectively based on thorough
fundamental research.
As always, we welcome your thoughts and questions, and we appreciate your
confidence in our firm as a shareholder of the Dodge & Cox Income Fund.
For the Board of Trustees,
/s/ Harry R. Hagey /s/ A. Horton Shapiro
------------------------ -------------------------------------------
Harry R. Hagey, Chairman A. Horton Shapiro, Executive Vice President
October 31, 2000
/1/ Duration is a measure of a bond's sensitivity to interest rates.
/2/ Source for loss rate data: Moody's Investor Service. Assumes semi-annual
coupon payments with reinvestment at initial yield to maturity and a 50%
recovery rate.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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>
Cumulative Performance October 1, 1990 through September 30, 2000
--------------------------------------------------------------------------------
[PERFORMANCE GRAPH APPEARS HERE]
10 years 10 Years
LBAG Income Fund
-------- -----------
<S> <C> <C>
10/1/1990 $10,000 $10,000
9/30/1991 $11,600 $11,725
9/30/1992 $12,883 $13,094
9/30/1993 $14,412 $14,955
9/30/1994 $13,896 $14,373
9/30/1995 $15,851 $16,649
9/30/1996 $16,625 $17,440
9/30/1997 $18,245 $19,204
9/30/1998 $19,560 $20,586
9/30/1999 $20,266 $21,214
9/30/2000 $21,683 $22,567
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods
ended September 30, 2000 1 Year 5 Years 10 Years
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 6.37% 6.27% 8.48%
Lehman Brothers Aggregate Bond Index (LBAG) 6.99 6.47 8.05
</TABLE>
The Fund's total returns include the reinvestment of dividend and capital gain
distributions, but have not been adjusted for any income taxes payable by
shareholders on these 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 September 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
--------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $11.52
Total Net Assets (millions) $959
30-Day SEC Yield* 6.99%
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>
Fixed-Income Securities: 97.2%
Cash Equivalents: 2.8%
</TABLE>
<TABLE>
<CAPTION>
Fixed-Income Securities Characteristics
--------------------------------------------------------------------------------
<S> <C>
Number of Fixed-Income Securities 110
Average Quality AA
Average Maturity 11.1 years
Effective Duration 4.64 years
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
--------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 18.3
Federal Agency CMO and REMIC+ 19.0
Federal Agency Mortgage Pass-Through 16.3
Asset-Backed 2.9
Corporate 39.7
International Agency (U.S. dollar-denominated) 1.0
Cash Equivalents 2.8
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's Quality Ratings % of Fund
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<S> <C>
U.S. Government & Government Agencies 53.6
Aaa/AAA 2.9
Aa/AA 0.2
A/A 18.5
Baa/BBB 21.4
Ba/BBB 0.6
Cash Equivalents 2.8
</TABLE>
<TABLE>
<CAPTION>
Maturity Breakdown % of Fund
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<S> <C>
0-1 Years to Maturity 12.7
1-5 25.8
5-10 35.7
10-15 2.8
15-20 6.7
20-25 4.0
25 and Over 12.3
</TABLE>
+ Collateralized Mortgage Obligation and Real Estate Mortgage Investment
Conduit
* An annualization of the Fund's total net investment income per share for the
30-day period ended on the last day of the month.
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 2000
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PERCENTAGE OF FUND
<S> <C>
FIXED-INCOME SECURITIES: 97.2%
U.S. TREASURY AND GOVERNMENT AGENCY: 18.3%
FEDERAL AGENCY CMO* AND REMIC**: 19.0%
FEDERAL AGENCY MORTGAGE PASS-THROUGH: 16.3%
ASSET-BACKED SECURITIES: 2.9%
CA Infrastructure and Econ. Dev. Bank Special Purpose Trust PGE-1
Rate Reduction Ctf. 1997-1 A-7 6.42%, 9/25/2008................... 1.7
ComEd Transitional Funding Trust Notes Series 1998-1 Class A-2
5.29%, 6/25/2003.................................................. 0.8
PP&L Transition Bond Series 1999-1 A-1 6.08%, 3/25/2003............ 0.4
CORPORATE: 39.7%
INDUSTRIAL: 19.6%
Lockheed Martin Corp., various securities.......................... 3.3
Raytheon Co., various securities................................... 2.1
J.E. Seagram & Sons, Inc. 7.50%, 12/15/2018........................ 2.0
Raychem Corp. 7.20%, 10/15/2008.................................... 2.0
Eastman Chemical Co. 7.25%, 1/15/2024.............................. 1.8
Time Warner Entertainment 8.375%, 7/15/2033........................ 1.8
Dana Corp. 7.00%, 3/1/2029......................................... 1.7
Walt Disney Co. 7.55%, 7/15/2093................................... 1.5
May Department Stores, various securities.......................... 1.2
Dillard's, Inc. 7.13%, 8/1/2018.................................... 0.9
HCA-The Healthcare Company 8.75%, 9/1/2010......................... 0.6
Phillips Petroleum Co. 8.75%, 5/25/2010............................ 0.4
Union Camp Corp. 9.25%, 2/1/2011................................... 0.3
FINANCE: 14.6%
EOP Operating Limited Partnership 8.375%, 3/15/2006................ 2.3
HSBC Holdings PLC 7.50%, 7/15/2009................................. 2.1
GMAC 8.875%, 6/1/2010.............................................. 1.5
Hartford Financial Services Group, various securities.............. 1.5
Bank One Corp. 7.625%, 8/1/2005.................................... 1.3
St. Paul Companies, Inc. 8.125%, 4/15/2010......................... 1.1
Safeco Corp. 7.875%, 3/15/2003..................................... 1.0
Bank of Tokyo-Mitsubishi Ltd. 8.40%, 4/15/2010..................... 1.0
Republic New York Corp. 7.20%, 7/15/2097........................... 0.7
BankAmerica Capital II 8.00%, 12/15/2026........................... 0.6
Citicorp Capital Trust I 7.933%, 2/15/2027......................... 0.5
First Nationwide Bank 10.00%, 10/1/2006............................ 0.4
Citicorp Capital Trust II 8.015%, 2/15/2027........................ 0.3
Barclays No. American Capital 9.75%, 5/15/2021..................... 0.2
CIGNA Corp. 7.65%, 3/1/2023........................................ 0.1
TRANSPORTATION: 5.3%
Union Pacific Corp., various securities............................ 2.4
Burlington Northern Santa Fe Railway 7.57%, 1/2/2021............... 1.4
Canadian Pacific Ltd. 9.45%, 8/1/2021.............................. 0.8
Consolidated Rail Corp. 9.75%, 6/15/2020........................... 0.7
UTILITIES: 0.2%
Idaho Power Co. 1st Mtge. 9.50%, 1/1/2021.......................... 0.2
INTERNATIONAL AGENCY (U.S. DOLLAR-DENOMINATED): 1.0%
Hydro-Quebec 8.05%, 7/7/2024....................................... 1.0
CASH EQUIVALENTS: 4.6%
OTHER ASSETS LESS LIABILITIES: (1.8)%
TOTAL NET ASSETS: 100.0%
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
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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
President, 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
Lehman Brothers(R) is a trademark of Lehman Brothers, Inc.; Moody's(R) is a
trademark of Moody's Investors Services, Inc.; and Standard & Poor's and S&P(R)
are trademarks of The McGraw-Hill Companies, Inc.
The financial information has been taken from the records of the Fund and has
not been audited by our independent accountants who do not express an opinion
thereof. The financial statements of the Fund will be subject to audit by our
independent accountants as of the close of the calendar year.
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