<PAGE>
D O D G E & C O X D O D G E & C O X
----------------- -----------------
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
-----------------
First Quarter Report
This report is submitted for the general March 31, 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. -----------------
-----------------
3/00 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 returned 0.3% during the first quarter, below the
Standard & Poor's 500 Index (S&P 500) return of 2.3%. Longer-term results
appear on page three of this report. With regard to the trends in the market
valuation, the first quarter was a continuation of the fourth quarter, in that
the valuation gap widened between technology companies (the "new economy") and
non-technology businesses (the "old economy"). The technology sector (1/3 of
the market capitalization of the S&P 500) rose by 13.5% while the other 2/3 of
the S&P 500 declined by almost 3%. As we have discussed in previous letters,
the current divergence in valuations (i.e., the spread between the high-
valuation and low-valuation companies) is extreme by all historical
measurement. As we have also written before, it seems to us that the high-
valuation sectors are supported by investor expectations that are
unrealistically optimistic. This is a distinctly different view, however, from
those who look at the market in aggregate, conclude that it is very highly
valued and nervously await a correction. Dodge & Cox occupies a somewhat lonely
zone somewhere in between the "new economy optimists" willing to pay eye-
popping prices to participate in the "new world" and the pessimists expecting a
significant market correction.
The "Three-Tier" Market
As we evaluate the current market, we divide it into three broad categories, or
tiers, based on valuation levels. (This analysis uses stock prices as of the
end of March and earnings estimates for the current year):
. Roughly 30% of the market capitalization of the S&P 500 consists of the
highest-valuation companies--nearly all in technology--with a price-to-
earnings (P/E) ratio averaging 70 times. The Fund has no investments in this
valuation tier.
. A second group of companies (about 38% of the S&P 500) includes many of the
lower-valuation technology stocks, as well as non-technology "growth" stocks
(e.g., Merck, General Electric, Eli Lilly, Coca-Cola, IBM, and Procter &
Gamble). This group has a generous P/E ratio that averages 30 times. About
10% of the Fund is invested in companies in the lower-valuation range of this
second group.
. The remaining one-third of the market, currently residing beneath what many
use as a pejorative banner of the "old economy", averages a more moderate 15
times earnings and includes a wide variety of industries. As far as we can
see, this portion of the economy is incorporating technological innovation at
a rapid pace. Over time, many, if not most, old economy companies will
creatively utilize new economy tools in their businesses. We are actively
looking for organizations that are taking advantage of these new tools to
benefit their business and ultimately, their equity shareholders. About 90%
of the Fund is invested in this lower-valuation tier.
Back-to-Basics Philosophy and Current Strategy
Dodge & Cox's portfolio strategy is driven by a company-by-company analysis (a
"bottom-up" approach). We look at a company's stock price in relation to our
analysis of the stream of earnings and cash flow over the next three to five
years. We do not develop macroeconomic themes, and then search for the
companies that fit within those themes. However, as we look at the portfolio
composition, we observe that there are certain common characteristics in the
areas where we have found value in this market.
. Global Economic Growth. Over half of the Fund consists of companies whose
future earnings progress is sensitive to global economic growth, not just
U.S. economic growth. These companies provide the essential goods and
services that keep modern industrial economies functioning. We are optimistic
about the long-term prospects for the global economy. There are roughly five
billion people in the world outside of the advanced industrial areas of North
America, Western Europe and Japan. In many cases, their economies are
becoming more efficient as they rely increasingly on market mechanisms to
allocate productive capital and direct participation in global markets.
Technological advances in the form of cheaper communications and computer
power break down isolation and enable human capital to develop more rapidly.
These five billion people are organizing to produce and consume more, and
continued global economic growth is likely to be the result. To add to the
positive fundamentals, the average P/E multiple for the companies in this
segment of the portfolio is a reasonable 15 times this year's estimated
earnings.
Energy and industrial commodity companies are part of the above theme. In
many ways, the last twenty years have posed a difficult operating environment
for these companies. Consequently, these industries have been consolidating,
costs have been
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D O D G E & C O X
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Stock Fund
reduced, and capital spending for additional production capacity has
declined. We believe that these companies are poised to profit strongly with
incremental demand. As the global economy expands, they may be in the early
stages of a long period of earnings expansion. One of our analysts recently
returned from visiting a number of Asian chemical facilities--all are
operating close to capacity, yet there are no plans to add new production
facilities anytime soon. This bodes well for pricing of these commodities in
global markets and therefore for profitability, particularly for the low-
cost producers. A number of these well-positioned producers are investments
in the Fund.
Also included in the above-described "global growth" theme are the Fund's
holdings in the technology sector, where we continue to look for durable
business franchises that are reasonably priced. Pickings have been slim. We
have reduced some of the Fund's technology positions during this past
quarter, as valuations have risen rapidly to points well above previous
levels. Though the overall portfolio weighting has been reduced, we have
also added where opportunity allowed. In December and January we made a
significant addition to the Fund's holding in Xerox, which had fallen from a
1999 peak of $60 to a price of $20 per share. We believe that, for a
relatively low valuation, the Fund is buying a company with a viable global
franchise and a strong research effort in digital electronics. We are
constantly looking for ways to participate in technology with its attendant
opportunities for growth, as long as we can do so with a conviction that we
have low downside risk over the long term. (We highlight a specific Fund
investment to illustrate our strong price discipline and "bottom-up
approach" to security selection, not because we believe it is more
attractive than the Fund's other 77 holdings.)
. Stable Earnings. Approximately one-fourth of the Fund is invested in
companies with earnings that are relatively more stable through a business
cycle. Electric utilities, consumer products and health service companies are
examples, as well as a number of the financial service companies in the Fund.
While earnings growth is not as rapid as in the higher valuation segment, we
nonetheless expect increasing earnings for these companies. The average P/E
multiple of the Fund's investments in this segment is approximately 11 times,
and we have been gradually increasing investment in this area. In addition to
the diversification and investment opportunity which is added to the Fund, a
secondary effect is that the dividend yield on the Fund's portfolio has risen
since early 1999, particularly relative to the yield of the S&P 500.
In Closing
As we write this letter, the volatility of the equity market is reaching
historical highs, with market prices for the S&P 500 and/or NASDAQ changing as
much as 5% or even 10% through the course of a single day. Clearly, investor
perceptions of future growth and "intrinsic" value of securities are being
subjected to rapid change. Never has it been more important to maintain a long-
term focus in this period of extreme short-term volatility and to keep a steady
eye on the economic fundamentals driving each potential investment. As always,
we persist in using a price-disciplined approach to selecting each company we
hold in the Stock Fund. Surprisingly, in a market which many regard as quite
high, the P/E multiple of the Fund averages 13 times earnings, one of the
lowest valuation multiples in the last ten years. Furthermore, this moderate
multiple is based on current earnings, which in our view, are likely to grow
over the next several years.
As always, we welcome your thoughts and questions, and 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
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Harry R. Hagey, Chairman John A. Gunn, President April 28, 2000
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2
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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>
Ten Years of Investment Performance through March 31, 2000
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[LINE GRAPH APPEARS HERE]
DODGE & COX
STOCK FUND S & P 500
----------- ---------
<S> <C> <C>
4/1/1990 $10,000 $10,000
3/31/1991 $10,920 $11,440
3/31/1992 $11,859 $12,703
3/31/1993 $14,015 $14,634
3/31/1994 $15,276 $14,851
3/31/1995 $17,738 $17,161
3/31/1996 $22,929 $22,671
3/31/1997 $27,028 $27,167
3/31/1998 $37,171 $40,203
3/31/1999 $37,309 $47,617
3/31/2000 $43,017 $56,172
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for
periods ended March 31, 2000 1 Year 5 Years 10 Years 20 Years
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<S> <C> <C> <C> <C>
Dodge & Cox Stock Fund 15.30% 19.38% 15.71% 17.42%
S&P 500 17.97 26.76 18.84 18.24
</TABLE>
The chart covers the period from April 1, 1990 to March 31, 2000. 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 divi-
dend and capital gain distributions. Index returns include dividends and, un-
like 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 March 31, 2000
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<TABLE>
General Information
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<S> <C>
Net Asset Value Per Share $95.47
Total Net Assets (millions) $4,708
1999 Expense Ratio 0.55%
1999 Portfolio Turnover 18%
30 Day SEC Yield/1/ 2.17%
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: 93.3%
Short-Term Investments: 6.7%
</TABLE>
<TABLE>
<CAPTION>
Stock Characteristics
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<S> <C>
Number of Stocks 78
Median Market Capitalization $7.3 billion
Price-to-Earnings Ratio/2/ 15.9x
Price-to-Book Value 2.0x
Foreign Stocks/3/ (as percentage of Fund) 10%
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
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<S> <C>
Bank One 2.7
News Corp. Ltd. ADR 2.7
Alcoa 2.4
Citigroup 2.3
Pharmacia & Upjohn 2.2
FedEx 2.2
Union Pacific 2.2
Dow Chemical 2.2
Golden West Financial 2.0
Xerox 1.9
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Sectors % of Fund
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<S> <C>
Energy 12.3
Electronics & Computer 9.2
Banking 7.2
Retail & Distribution 6.5
Consumer Durables 6.5
Insurance & Financial Services 6.1
Healthcare & Pharmaceutical 6.1
Transportation 5.7
Chemicals 5.7
General Industrial 4.9
</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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<TABLE>
<CAPTION>
Portfolio of Investments March 31, 2000
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Percentage of Fund
<S> <C>
COMMON STOCKS: 90.6%
CONSUMER: 23.6%
RETAIL AND DISTRIBUTION: 6.5%
Kmart Corp......................................................... 1.9
Genuine Parts Co. ................................................. 1.6
Nordstrom, Inc..................................................... 1.5
May Department Stores Co........................................... 1.1
Dillard's, Inc. Class A............................................ 0.4
CONSUMER DURABLES: 6.5%
General Motors Corp................................................ 1.8
Whirlpool Corp..................................................... 1.7
Dana Corp. ........................................................ 1.1
Ford Motor Co. .................................................... 1.0
Delphi Automotive Systems Corp..................................... 0.9
HEALTHCARE AND PHARMACEUTICAL: 6.1%
Pharmacia & Upjohn, Inc. .......................................... 2.2
Bausch & Lomb, Inc................................................. 1.3
Becton, Dickinson & Co. ........................................... 0.9
WellPoint Health Networks, Inc..................................... 0.8
First Health Group Corp. .......................................... 0.6
Cardinal Health, Inc............................................... 0.3
CONSUMER PRODUCTS: 3.4%
Fort James Corp.................................................... 1.0
VF Corp............................................................ 0.7
Mattel, Inc........................................................ 0.6
Unilever N.V....................................................... 0.6
Dole Food Co., Inc. ............................................... 0.5
MEDIA AND LEISURE: 1.1%
R.R. Donnelley & Sons Co........................................... 1.1
FINANCE: 14.9%
BANKING: 7.2%
Bank One Corp...................................................... 2.7
Golden West Financial Corp......................................... 2.0
Wells Fargo & Co................................................... 1.3
Bank of America Corp............................................... 1.2
INSURANCE AND FINANCIAL SERVICES: 6.1%
Citigroup, Inc..................................................... 2.3
The St. Paul Cos., Inc............................................. 1.5
Loews Corp......................................................... 1.3
Chubb Corp......................................................... 0.9
MBIA, Inc. ........................................................ 0.1
REAL ESTATE INVESTMENT TRUST: 1.6%
Equity Office Properties Trust..................................... 0.9
Equity Residential Properties Trust................................ 0.7
INDUSTRIAL COMMODITIES: 14.1%
CHEMICALS: 5.7%
Dow Chemical Co.................................................... 2.2
Eastman Chemical Co................................................ 1.1
Union Carbide Corp. ............................................... 0.7
Air Products & Chemicals, Inc...................................... 0.7
Engelhard Corp..................................................... 0.6
Lubrizol Corp...................................................... 0.2
NOVA Chemicals Corp. .............................................. 0.2
METALS AND MINING: 4.0%
Alcoa, Inc. ....................................................... 2.4
Rio Tinto PLC ADR.................................................. 1.6
PAPER AND FOREST PRODUCTS: 3.4%
Weyerhaeuser Co.................................................... 1.5
Champion International Corp........................................ 1.4
Boise Cascade Corp................................................. 0.5
GENERAL MANUFACTURING: 1.0%
Archer Daniels Midland Co.......................................... 1.0
ENERGY: 12.3%
Amerada Hess Corp.................................................. 1.6
Occidental Petroleum Corp. ........................................ 1.6
Unocal Corp........................................................ 1.5
Chevron Corp....................................................... 1.5
Baker Hughes, Inc. ................................................ 1.5
Phillips Petroleum Co.............................................. 1.4
Union Pacific Resources Group, Inc................................. 1.2
Schlumberger Ltd................................................... 1.0
Royal Dutch Petroleum Co........................................... 1.0
TECHNOLOGY: 10.8%
ELECTRONICS & COMPUTER: 9.2%
Xerox Corp......................................................... 1.9
Hewlett-Packard Co. ............................................... 1.7
Electronic Data Systems............................................ 1.5
NCR Corp. ......................................................... 1.3
Thermo Electron Corp............................................... 1.2
Motorola, Inc. .................................................... 0.9
Storage Technology Corp............................................ 0.7
CONSUMER ELECTRONICS: 1.6%
Matsushita Electric Industrial Co., Ltd. ADR....................... 0.9
Sony Corp. ADR..................................................... 0.7
</TABLE>
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D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 2000
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Percentage of Fund
<S> <C>
COMMON STOCKS (Continued)
TRANSPORTATION: 5.7%
FedEx Corp......................................................... 2.2
Union Pacific Corp................................................. 2.2
Canadian Pacific Ltd............................................... 1.3
GENERAL INDUSTRIAL: 4.9%
Deere & Co......................................................... 1.5
Lockheed Martin Corp............................................... 1.3
Fluor Corp. ....................................................... 1.0
Caterpillar, Inc................................................... 0.9
Unova, Inc. ....................................................... 0.2
ELECTRIC AND GAS UTILITIES: 4.3%
FPL Group, Inc..................................................... 1.1
Central & South West Corp. ........................................ 0.9
Ameren Corp. ...................................................... 0.9
Texas Utilities Co. ............................................... 0.8
Wisconsin Energy Corp.............................................. 0.6
PREFERRED STOCKS: 2.7%
CONSUMER: 2.7%
News Corp. Ltd., Limited Voting Ordinary Shares ADR................ 2.7
SHORT-TERM INVESTMENTS: 7.0%
OTHER ASSETS LESS LIABILITIES: (0.3)%
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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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 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 First Quarter Report
information of the shareholders of the Fund. March 31, 2000
The report is not authorized for distribution
to prospective investors in the Fund unless -----------------
it is accompanied by a current prospectus. -----------------
-----------------
-----------------
3/00 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 returned 1.3% during the first quarter, compared
to 2.4% for the Combined Index/1/ for the same time period. The majority of the
Fund's first quarter return came from its fixed-income portfolio, as the equity
portion had a small positive return. Longer-term results appear on page three
of this report. At March 31, 2000 the Fund's total net assets of $4.9 billion
were invested 60.9% in stocks, 35.7% in fixed-income securities and 3.4% in
cash equivalents.
The "Three-Tier" Stock Market
Fourth quarter valuation trends in the equity market continued into the first
quarter as the valuation gap widened further between technology companies (the
"new economy") and non-technology businesses (the "old economy"). The
technology sector (1/3 of the market capitalization of the S&P 500) rose by
13.5% while the other 2/3 of the S&P 500 declined by almost 3%. As we have
discussed in previous letters, the current divergence in valuations (i.e., the
spread between the high-valuation and low-valuation companies) is extreme by
all historical measurement. It seems to us that the high-valuation sectors are
supported by investor expectations that are unrealistically optimistic. This is
a distinctly different view, however, from those who look at the market in
aggregate, conclude that it is very highly valued and nervously await a
correction. Dodge & Cox occupies a somewhat lonely zone between the "new
economy optimists" willing to pay eye-popping prices and the pessimists
expecting a significant market correction.
As we evaluate the current market, we divide it into three broad categories, or
tiers, based on valuation levels. (This analysis is based on stock prices as of
the end of March and uses earnings estimates for the current year):
. Roughly 30% of the market capitalization of the S&P 500 consists of the
highest-valuation companies--nearly all in technology--with a price-to-
earnings (P/E) ratio averaging 70 times. The Fund has no investments in this
valuation tier.
. A second group of companies (about 38% of the S&P 500) includes many of the
lower-valuation technology stocks, as well as non-technology "growth" stocks
(e.g., Merck, General Electric and Coca-Cola). This group has a generous P/E
ratio that averages 30 times. About 10% of the Fund's equity portfolio is
invested in companies in the lower-valuation range of this second group.
. The remaining one-third of the market averages a more moderate 15 times
earnings and includes a wide variety of industries. As far as we can see,
this portion of the economy is incorporating technological innovation at a
rapid pace. Over time many, if not most, old economy companies will
creatively utilize new economy tools in their businesses. About 90% of the
Fund's equity portfolio is invested in this lower-valuation tier.
Back-to-Basics Philosophy and Current Strategy
Dodge & Cox's portfolio strategy is driven by a company-by-company analysis. We
look at a company's stock price in relation to our analysis of the stream of
earnings and cash flow over the next three to five years. We do not develop
macroeconomic themes, and then search for companies that fit those themes.
However, as we look at the portfolio, we observe that there are certain
economic characteristics in common in the areas where the Fund is invested.
. Global Economic Growth. Over half of the Fund's equity portfolio consists of
companies whose future earnings progress is sensitive to global economic
growth, not just U.S. growth. These companies provide the essential goods and
services that keep modern industrial economies functioning. We are optimistic
about the long-term prospects for the global economy. There are roughly five
billion people in the world outside of North America, Western Europe and
Japan. In many cases, their economies are becoming more efficient as they
rely increasingly on market mechanisms to allocate capital and direct
participation in global markets. Technological advances in the form of
cheaper communications and computing power break down isolation and enables
human capital to develop more rapidly. These five billion people are
organizing to produce and consume more, and continued global economic growth
is likely to be the result. To add to the positive fundamentals, the average
P/E multiple for the companies in this segment of the portfolio is a
reasonable 15 times this year's estimated earnings.
. Stable Earnings. Approximately one fourth of the Fund's equity portfolio is
invested in companies with earnings that are relatively more stable through a
business cycle. Electric utilities, consumer products and health service
companies are examples, as well as many of the financial service companies in
the portfolio. While earnings growth is not as rapid as in the higher
valuation segment, we nonetheless expect increasing earnings for these
companies. The average P/E of the Fund's
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D O D G E & C O X
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Balanced Fund
investments in this segment is approximately 11 times, and we have been
gradually increasing investment in this area. In addition to the
diversification and investment opportunity which is added to the portfolio,
a secondary effect is that the dividend yield on the Fund's portfolio has
risen since early 1999.
U.S. Treasury Yield Curve Inversion and Spread Widening
Against a positive economic backdrop of strong Gross Domestic Product (GDP)
growth and high consumer confidence, two developments had a strong influence on
U.S. Treasury yields in the first quarter. First, short-term interest rates
rose as the Federal Reserve increased the Federal Funds Rate (the rate at which
certain banks lend short-term funds to each other) in two moves during the
quarter, from 5.5% to 6.0%, citing a risk of higher inflation. In addition,
long-term treasury yields fell in response to the U.S. Treasury's announcement
of current and projected Treasury debt repurchases--the first in 70 years.
These events, both related to continued strength in the U.S. economy, resulted
in an unusual "inverted" yield curve by the end of the quarter, with long-term
Treasury yields lower than short-term Treasury yields. The yield on the 30-year
U.S. Treasury fell 64 basis points to 5.84% (one basis point is equal to 1/100
of 1%). Yields on two-year and five-year U.S. Treasuries rose 25 and fell 2
basis points respectively, ending the quarter at 6.48% and 6.32%. Yields on
corporate and mortgage-related securities fell less than Treasury yields,
resulting in wider yield premiums and their underperformance versus U.S.
Treasuries during the quarter.
The Fund has been overweight the corporate and mortgage sectors versus the
Lehman Brothers Aggregate Bond Index (LBAG). Yet, despite underperformance in
these sectors, the first quarter total return of the Fund's fixed-income
portfolio nearly matched that of the LBAG. Two positive factors were the Fund's
greater-than-market exposure to long-duration (a measure of price sensitivity
to changes in interest rates) securities, which benefited as long rates fell,
and the income effect of the Fund's overweight positions in non-Treasury
sectors, which contributed to a higher-than-market yield for the Fund's fixed-
income portfolio at the beginning of the quarter (7.33% versus 7.16%)/2/.
Spread Widening Creates Investment Opportunities
While yield premiums of corporate and mortgage-backed securities widened during
the quarter, we believe that the higher relative yields of these non-Treasury
securities are due to the unique circumstances of the Treasury buy-back
described above, rather than a weakening of credit fundamentals or an
adjustment in prepayment expectations. Therefore, we view the recent spread
widening as an opportunity to build the incremental yield of the Fund's fixed-
income portfolio through the addition of carefully researched corporate and
mortgage-backed securities.
Response to Continued Inflation Concerns
Due to our continued concern over the possibility of higher inflation and an
accompanying increase in interest rates, we have maintained an effective
duration shorter than that of the LBAG. We have also maintained the Fund's
position in Treasury Inflation Protection Securities (TIPS). We believe that
these securities offer compelling real yields compared to conventional Treasury
securities and stand to benefit in terms of upward principal adjustments and
higher coupon payments if inflation accelerates. TIPS performed well in the
first quarter as the real yields for these securities (the yields to maturity
after adjusting for inflation) decreased significantly.
In Closing
We will continue to seek attractive long-term results through a process of
fundamental analysis and individual security selection in an effort to build a
high-quality, diversified portfolio. As always, we welcome your thoughts and
questions, and appreciate your confidence in our firm as a shareholder of the
Dodge & Cox Balanced Fund.
For the Board of Trustees,
/s/ Harry R. Hagey
------------------------
April 28, 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).
/2/ The 30-day SEC yield (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)
for the Balanced Fund was 3.92% as of March 31, 2000.
- --------------------------------------------------------------------------------
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2
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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>
Ten Years of Investment Performance through March 31, 2000
- --------------------------------------------------------------------------------
[PERFORMANCE GRAPH APPEARS HERE]
COMBINED DODGE & COX
S & P 500 LBAG INDEX BALANCED FUND
--------- -------- -------- -------------
<S> <C> <C> <C> <C>
4/1/1990 $10,000 $10,000 $10,000 $10,000
3/31/1991 $11,440 $11,292 $11,410 $11,209
3/31/1992 $12,703 $12,578 $12,711 $12,419
3/31/1993 $14,634 $14,251 $14,553 $14,547
3/31/1994 $14,851 $14,588 $14,828 $15,623
3/31/1995 $17,161 $15,317 $16,500 $17,408
3/31/1996 $22,671 $16,966 $20,323 $21,296
3/31/1997 $27,167 $17,799 $23,127 $23,974
3/31/1998 $40,203 $19,935 $30,702 $30,624
3/31/1999 $47,617 $21,226 $35,056 $31,528
3/31/2000 $56,172 $21,625 $39,115 $34,786
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods
ended March 31, 2000 1 Year 5 Years 10 Years 20 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund 10.36% 14.85% 13.28% 14.65%
Combined Index 11.58 18.85 14.61 15.44
S&P 500 17.97 26.76 18.84 18.24
Lehman Brothers Aggregate Bond Index (LBAG) 1.88 7.14 8.02 10.66
</TABLE>
The chart covers the period from April 1, 1990 to March 31, 2000. It compares a
$10,000 investment made in the Dodge & Cox Balanced Fund to $10,000 investments
made in the S&P 500, the LBAG and the Combined Index. The S&P 500 and LBAG are
widely recognized, unmanaged indices of common stock and U.S. dollar-denominat-
ed, investment-grade fixed-income securities, respectively. The Combined Index
reflects an unmanaged portfolio of 60% of the S&P 500 and 40% of the LBAG. The
Fund may, however, invest up to 75% of its total assets in stocks. The Fund's
total returns include the reinvestment of dividend and capital gain distribu-
tions. Index returns include dividends and/or interest income, and unlike Fund
returns, do not reflect fees or expenses. Past performance does not guarantee
future results. Investment return and share price will fluctuate with market
conditions, and investors may have a gain or loss when shares are sold.
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3
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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Balanced Fund
Fund Information March 31, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $63.76
Total Net Assets (millions) $4,904
30 Day SEC Yield/1/ 3.92%
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: 35.7%
Stocks: 60.9%
Short-Term Investments: 3.4%
</TABLE>
<TABLE>
<CAPTION>
Stock Portfolio (60.9% of Fund)
- --------------------------------------------------------------------------------
<S> <C>
Number of Stocks 78
Median Market Capitalization $7.3 billion
Price-to-Earnings Ratio/2/ 15.8x
Price-to-Book Value 2.0x
Foreign Stocks/3/ (as percentage of Fund) 6%
</TABLE>
<TABLE>
<CAPTION>
Five Largest Sectors % of Fund
- --------------------------------------------------------------------------------
<S> <C>
Energy 8.0
Electronics & Computer 6.1
Banking 4.6
Retail & Distribution 4.3
Consumer Durables 4.2
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
News Corp. Ltd. ADR 1.8
Bank One 1.8
FedEx 1.5
Alcoa 1.5
Union Pacific 1.5
Dow Chemical 1.4
Golden West Financial 1.3
Kmart 1.3
Xerox 1.2
Pharmacia & Upjohn 1.2
</TABLE>
<TABLE>
<CAPTION>
Bond Portfolio (35.7% of Fund)
- --------------------------------------------------------------------------------
<S> <C>
Number of Bonds 128
Average Quality AA
Average Maturity 10.8 years
Effective Duration 4.52 years
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's Quality Ratings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 20.9
Aaa/AAA 1.9
Aa/AA 0.1
A/A 5.9
Baa/BBB 6.9
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 5.8
Federal Agency CMO and REMIC+ 9.1
Federal Agency Mortgage Pass-Through 6.1
Asset-Backed 1.4
Corporate 11.7
Foreign (U.S. dollar-denominated) 1.6
</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.
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4
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 2000
- --------------------------------------------------------------------------------
Percentage of Fund
<S> <C>
COMMON STOCKS: 59.1%
CONSUMER: 15.6%
RETAIL AND DISTRIBUTION: 4.3%
Kmart Corp. ......................................................... 1.3
Nordstrom, Inc....................................................... 1.0
Genuine Parts Co. ................................................... 0.9
May Department Stores Co. ........................................... 0.7
Dillard's, Inc. Class A.............................................. 0.4
CONSUMER DURABLES: 4.2%
General Motors Corp.................................................. 1.2
Whirlpool Corp....................................................... 1.1
Dana Corp............................................................ 0.7
Delphi Automotive Systems Corp....................................... 0.6
Ford Motor Co........................................................ 0.6
HEALTHCARE AND PHARMACEUTICAL: 4.0%
Pharmacia & Upjohn, Inc.............................................. 1.2
Bausch & Lomb, Inc................................................... 0.9
Becton, Dickinson & Co............................................... 0.7
WellPoint Health Networks, Inc....................................... 0.5
First Health Group Corp.............................................. 0.5
Cardinal Health, Inc................................................. 0.2
CONSUMER PRODUCTS: 2.3%
Fort James Corp...................................................... 0.7
VF Corp. ............................................................ 0.5
Mattel, Inc.......................................................... 0.4
Dole Food Co., Inc................................................... 0.4
Unilever N.V. ....................................................... 0.3
MEDIA AND LEISURE: 0.8%
R.R. Donnelley & Sons Co. ........................................... 0.8
FINANCE: 9.5%
BANKING: 4.6%
Bank One Corp. ...................................................... 1.8
Golden West Financial Corp. ......................................... 1.3
Wells Fargo & Co..................................................... 0.8
Bank of America Corp................................................. 0.7
INSURANCE AND FINANCIAL SERVICES: 3.9%
Citigroup, Inc....................................................... 1.2
The St. Paul Cos., Inc............................................... 1.1
Loews Corp. ......................................................... 0.9
Chubb Corp........................................................... 0.7
MBIA, Inc............................................................ 0.0+
REAL ESTATE INVESTMENT TRUST: 1.0%
Equity Office Properties Trust....................................... 0.5
Equity Residential Properties Trust.................................. 0.5
INDUSTRIAL COMMODITIES: 9.0%
CHEMICALS: 3.8%
Dow Chemical Co...................................................... 1.4
Eastman Chemical Co.................................................. 0.7
Union Carbide Corp. ................................................. 0.6
Air Products & Chemicals, Inc. ...................................... 0.4
Engelhard Corp. ..................................................... 0.4
Lubrizol Corp........................................................ 0.2
NOVA Chemicals Corp.................................................. 0.1
METALS AND MINING: 2.5%
Alcoa, Inc. ......................................................... 1.5
Rio Tinto PLC ADR.................................................... 1.0
PAPER AND FOREST PRODUCTS: 2.0%
Weyerhaeuser Co. .................................................... 0.9
Champion International Corp.......................................... 0.7
Boise Cascade Corp. ................................................. 0.4
GENERAL MANUFACTURING: 0.7%
Archer Daniels Midland Co............................................ 0.7
ENERGY: 8.0%
Occidental Petroleum Corp............................................ 1.1
Amerada Hess Corp. .................................................. 1.1
Unocal Corp.......................................................... 1.0
Chevron Corp......................................................... 1.0
Phillips Petroleum Co................................................ 1.0
Baker Hughes, Inc. .................................................. 0.9
Union Pacific Resources Group, Inc................................... 0.8
Schlumberger Ltd..................................................... 0.6
Royal Dutch Petroleum Co............................................. 0.5
TECHNOLOGY: 7.1%
ELECTRONICS & COMPUTER: 6.1%
Xerox Corp........................................................... 1.2
Hewlett-Packard Co. ................................................. 1.1
NCR Corp. ........................................................... 0.9
Electronic Data Systems.............................................. 0.9
Thermo Electron Corp................................................. 0.9
Motorola, Inc........................................................ 0.6
Storage Technology Corp.............................................. 0.5
CONSUMER ELECTRONICS: 1.0%
Matsushita Electric Industrial Co., Ltd. ADR......................... 0.5
Sony Corp. ADR....................................................... 0.5
</TABLE>
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5
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Balanced Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 2000
- --------------------------------------------------------------------------------
Percentage of Fund
COMMON STOCKS (Continued)
<S> <C>
TRANSPORTATION: 3.8%
FedEx Corp......................................................... 1.5
Union Pacific Corp................................................. 1.5
Canadian Pacific Ltd. ............................................. 0.8
GENERAL INDUSTRIAL: 3.2%
Deere & Co......................................................... 0.9
Lockheed Martin Corp. ............................................. 0.9
Fluor Corp......................................................... 0.6
Caterpillar, Inc................................................... 0.6
Unova, Inc......................................................... 0.2
ELECTRIC AND GAS UTILITIES: 2.9%
FPL Group, Inc. ................................................... 0.7
Central & South West Corp.......................................... 0.6
Ameren Corp........................................................ 0.6
Texas Utilities Co................................................. 0.6
Wisconsin Energy Corp.............................................. 0.4
PREFERRED STOCKS: 1.8%
CONSUMER: 1.8%
News Corp. Ltd., Limited Voting Ordinary Shares ADR................ 1.8
BONDS: 35.7%
U.S. TREASURY AND GOV'T AGENCY: 5.8%
FEDERAL AGENCY CMO* AND REMIC**: 9.1%
FEDERAL AGENCY MTG. PASS-THROUGH: 6.1%
ASSET-BACKED SECURITIES: 1.4%
CA Infrastructure and Econ. Dev. Bank Special Purpose Trust PGE-1
Rate Reduction Ctf. 1997-1 A-5 6.25%, 6/25/2004................... 0.7
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%, 12/25/2003........... 0.3
CORPORATE: 11.7%
INDUSTRIAL: 6.1%
Raytheon Co., various securities................................... 1.2
Lockheed Martin Corp., various securities.......................... 1.1
J.E. Seagram & Sons, Inc. 6.80%, 12/15/2008........................ 0.9
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: 4.3%
GMAC, various securities........................................... 1.1
EOP Operating Limited Partnership 8.375%, 3/15/2006................ 0.7
Golden West Financial, various securities.......................... 0.6
Citicorp Capital Trust I 7.933%, 2/15/2027......................... 0.4
Hartford Financial Services Group, various securities.............. 0.3
BankAmerica Capital II 8.00%, 12/15/2026........................... 0.3
Republic New York Corp. 7.20%, 7/15/2097........................... 0.3
Safeco Corp. 6.875%, 7/15/2007..................................... 0.3
J.P. Morgan Capital Trust I 7.54%, 1/15/2027....................... 0.1
CIGNA Corp., various securities.................................... 0.1
First Nationwide Bank 10.00%, 10/1/2006............................ 0.1
Barclays No. American Capital 9.75%, 5/15/2021..................... 0.0+
TRANSPORTATION: 1.3%
Union Pacific Corp. 6.33%, 1/2/2020................................ 0.9
Consolidated Rail Corp., various securities........................ 0.4
UTILITIES: 0.0%+
Idaho Power Co. 1st Mtge. 9.50%, 1/1/2021.......................... 0.0+
FOREIGN (U.S. DOLLAR-DENOMINATED): 1.6%
CANADIAN: 0.6%
Hydro-Quebec 7.50%, 4/1/2016....................................... 0.2
Canadian Pacific Ltd. 9.45%, 8/1/2021.............................. 0.2
Canadian National Railway Co. 6.80%, 7/15/2018..................... 0.2
CORPORATE: 0.5%
Bank of Tokyo-Mitsubishi Ltd. 8.40%, 4/15/2010..................... 0.3
HSBC Holdings PLC 7.50%, 7/15/2009................................. 0.2
INTERNATIONAL AGENCY: 0.5%
Inter-American Development Bank 7.125%, 3/15/2023.................. 0.3
European Investment Bank 10.125%, 10/1/2000........................ 0.2
SHORT-TERM INVESTMENTS: 2.2%
OTHER ASSETS LESS LIABILITIES: 1.2%
TOTAL NET ASSETS: 100.0%
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
+ Rounds to 0.0%
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6
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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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.
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<PAGE>
D O D G E & C O X D O D G E & C O X
----------------- -----------------
Income Fund
Income Fund
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
-----------------
First Quarter Report
This report is submitted for the general March 31, 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. --------------
-----------------
3/00 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 2.1% for the quarter
ended March 31, 2000, compared to a total return of 2.2% for the Lehman
Brothers Aggregate Bond Index (LBAG), a broad-based index composed of
investment-grade bonds. Average annual returns for longer periods appear on
page three of this report.
U.S. Treasury Yield Curve Inversion and Spread Widening
As evidenced by a final estimate of 7.3% for fourth quarter 1999 Gross Domestic
Product (GDP) growth, the U.S. economy has continued to grow at a strong pace.
Expectations are that this robust growth will continue, at least in the near
term, with consensus first quarter 2000 GDP growth topping 5.0%. Consumers
appear to agree. In spite of rising home mortgage rates and credit card rates,
consumer confidence is unflagging; the University of Michigan Consumer
Confidence Index registered an all-time high in January. Job growth continues
to be strong and unemployment reached a 30-year low of 4.0% in January.
Against this positive economic backdrop, two developments had a strong
influence on U.S. Treasury yields. First, short-term interest rates rose as the
Federal Reserve increased the Federal Funds Rate (the rate at which certain
banks lend short-term funds to each other) in two moves during the quarter,
from 5.5% to 6.0%, citing a risk of higher inflation. In addition, long-term
treasury yields fell in response to the U.S. Treasury's announcement of current
and projected Treasury debt repurchases--the first in 70 years. The U.S.
Treasury announced that it would buy back as much as $30 billion in government
debt during the year and made its first repurchases in March totaling
approximately $2 billion. These events, both related to continued strength in
the U.S. economy, resulted in an unusual "inverted" yield curve by the end of
the quarter, with long-term Treasury yields lower than short-term Treasury
yields. The yield on the 30-year U.S. Treasury fell 64 basis points to 5.84%
(one basis point is equal to 1/100 of 1%). Yields on two-year and five-year
U.S. Treasuries rose 25 and fell 2 basis points respectively, ending the
quarter at 6.48% and 6.32%.
Yields on corporate and mortgage-related securities fell less than Treasury
yields, resulting in wider yield premiums and underperformance versus U.S.
Treasuries during the quarter. For example, the Lehman Brothers Treasury Index
registered a total return of 3.8% for the quarter, while the corporate and
mortgage indexes each returned 1.4%. The Fund has been overweight the corporate
and mortgage sectors relative to the LBAG. Yet, despite underperformance in
these sectors, the Fund's first quarter total return nearly matched that of the
LBAG. Two positive impacts were the Fund's greater-than-market exposure to
long-duration (a measure of price sensitivity to changes in interest rates)
securities, which benefited as long rates fell, and the income effect of the
Fund's overweight positions in non-Treasury sectors, which contributed to a
higher-than-market yield for the Fund at the beginning of the quarter (7.34%
versus 7.16%)*.
Spread Widening Creates Investment Opportunities
While yield premiums of corporate and mortgage-backed securities widened during
the quarter, we believe that the higher relative yields of these non-Treasury
securities are due to the unique circumstances of the Treasury buy-back
described above, rather than a weakening of credit fundamentals or an
adjustment in prepayment expectations. Given this perspective, we view the
recent spread widening as an opportunity to build the Fund's incremental yield
through the addition of carefully researched corporate and mortgage-backed
securities. During the quarter, we added to the Fund's holdings of Ford, May
Department Stores, Safeco and FNMA multifamily mortgage securities. Also, in
March, we
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1
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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Income Fund
- --------------------------------------------------------------------------------
purchased $21 million par value of EOP Operating Limited Partnership 8.375% of
2006 at a yield premium of 188 basis points over the comparable maturity U.S.
Treasury. We describe this purchase in greater detail below as an example of
how we combine fundamental research with price analysis in our selection of
each security for the Fund.
EOP, or Equity Office Properties, was originally part of a real estate
portfolio managed by Sam Zell. It became a publicly held company in 1997 and is
now the country's largest REIT (Real Estate Investment Trust) with 380 office
properties totaling 95 million square feet. The properties are well-diversified
geographically, located in 39 markets in 26 states, and represent an
approximately even mix between suburban and "central business district" office
spaces. The majority of the properties are considered to be "Class A," the
highest grade assigned to buildings. The notes we purchased in the Fund were
issued partially to finance EOP's acquisition of Cornerstone, another high-
quality portfolio of properties. We believe that EOP offers attractive
fundamental investment characteristics and strong relative value, as yield
premiums in the REIT sector have been significantly wider than comparably rated
issuers in the industrial and financial sectors.
Response to Continued Inflation Concerns
Due to our continued concern over the possibility of higher inflation and an
accompanying increase in interest rates, we have maintained an effective
duration shorter than that of the LBAG Index. We have also maintained the
Fund's approximately 6% position in Treasury Inflation Protection Securities
(TIPS). We believe that these securities offer compelling real yields compared
to conventional Treasury securities and stand to benefit in terms of upward
principal adjustments and higher coupon payments if inflation accelerates. TIPS
performed well in the first quarter as the real yields for these securities
(the yields to maturity after adjusting for inflation) decreased significantly.
The real yield for 10-year TIPS fell from 4.33% to 4.02% while the real yield
for 30-year TIPS fell from 4.28% to 3.92%. As a result, the prices of these
securities increased sharply, causing TIPS to register strong total returns,
with 10-year TIPS returning 3.7% and 30-year TIPS returning 7.5%. We continue
to believe that TIPS' real yields, and the inflation protection offered by
these securities, represent an attractive long-term investment opportunity for
the Fund.
In Closing
We continue to seek attractive long-term results through a process of
fundamental analysis and individual security selection in an effort to build a
high-quality, diversified portfolio with a higher-than-market yield. As always,
we welcome your thoughts and questions, and 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
April 28, 2000
* The 30-day SEC yield (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)
for the Income Fund was 7.00% as of March 31, 2000.
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2
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
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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.
Ten Years of Investment Performance through March 31, 2000
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
DODGE & COX
LBAG INCOME FUND
------- -----------
<S> <C> <C>
4/1/1990 $10,000 $10,000
3/31/1991 $11,292 $11,267
3/31/1992 $12,578 $12,653
3/31/1993 $14,251 $14,524
3/31/1994 $14,588 $15,072
3/31/1995 $15,317 $15,815
3/31/1996 $16,966 $17,650
3/31/1997 $17,799 $18,532
3/31/1998 $19,935 $20,839
3/31/1999 $21,226 $22,139
3/31/2000 $21,625 $22,500
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods
ended March 31, 2000 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 1.62% 7.29% 8.44%
Lehman Brothers Aggregate Bond Index (LBAG) 1.88 7.14 8.02
</TABLE>
The chart covers the period from April 1, 1990 to March 31, 2000. It compares a
$10,000 investment made in the Dodge & Cox Income Fund to a $10,000 investment
made in the LBAG. The LBAG is a widely recognized, unmanaged index of U.S.
dollar-denominated investment grade fixed-income securities. The Fund's total
returns include the reinvestment of dividend and capital gain distributions.
Index returns include interest income and, unlike Fund returns, do not reflect
fees or expenses. Past performance does not guarantee future results.
Investment return and share price will fluctuate with market conditions, and
investors may have a gain or loss when shares are sold.
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3
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D O D G E & C O X
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Income Fund
Fund Information March 31, 2000
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<TABLE>
<CAPTION>
General Information
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<S> <C>
Net Asset Value Per Share $11.46
Total Net Assets (millions) $1,002
30 Day SEC Yield* 7.00%
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
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[PIE CHART APPEARS HERE]
<S> <C>
Bonds: 96.7%
Short-Term Investments: 3.3%
</TABLE>
<TABLE>
<CAPTION>
Bond Characteristics
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<S> <C>
Number of Bonds 115
Average Quality AA
Average Maturity 11.1 years
Effective Duration 4.52 years
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's Quality Ratings % of Fund
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<S> <C>
U.S. Government & Government Agencies 55.8
Aaa/AAA 3.5
Aa/AA 0.2
A/A 17.9
Baa/BBB 19.3
Short-Term Investments 3.3
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
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<S> <C>
U.S. Treasury and Government Agency 17.9
Federal Agency CMO and REMIC+ 21.0
Federal Agency Mortgage Pass-Through 16.9
Asset-Backed 3.1
Corporate 32.7
Foreign (U.S. dollar-denominated) 5.1
Short-Term Investments 3.3
</TABLE>
<TABLE>
Maturity Breakdown % of Fund
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<S> <C>
0-1 Years to Maturity 12.8
1-5 26.7
5-10 31.6
10-15 5.3
15-20 6.6
20-25 4.6
25 and Over 12.4
</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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4
<PAGE>
D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 2000
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Percentage of Fund
<S> <C>
BONDS: 96.7%
U.S. TREASURY AND GOVERNMENT AGENCY: 17.9%
FEDERAL AGENCY CMO* AND REMIC**: 21.0%
FEDERAL AGENCY MORTGAGE PASS-THROUGH: 16.9%
ASSET-BACKED SECURITIES: 3.1%
ComEd Transitional Funding Trust Notes Series 1998-1
Class A-2 5.29%, 6/25/2003...................................... 1.3
CA Infrastructure and Econ. Dev. Bank Special Purpose Trust
PGE-1 Rate Reduction Ctf. 1997-1 A-7 6.42%, 9/25/2008........... 1.0
PP&L Transition Bond Series 1999-1 A-1 6.08%, 3/25/2003.......... 0.8
CORPORATE: 32.7%
INDUSTRIAL: 17.5%
Lockheed Martin Corp., various securities........................ 3.1
Raytheon Co., various securities................................. 2.0
Raychem Corp. 7.20%, 10/15/2008.................................. 1.9
J.E. Seagram & Sons, Inc. 7.50%, 12/15/2018...................... 1.9
Eastman Chemical Co. 7.25%, 1/15/2024............................ 1.8
May Department Stores, various securities........................ 1.7
Time Warner Entertainment 8.375%, 7/15/2033...................... 1.7
Dana Corp. 7.00%, 3/1/2029....................................... 1.7
Walt Disney Co. 7.55%, 7/15/2093................................. 1.4
Union Camp Corp. 9.25%, 2/1/2011................................. 0.3
FINANCE: 10.5%
GMAC, various securities......................................... 2.4
EOP Operating Limited Partnership 8.375%, 3/15/2006.............. 2.1
Hartford Financial Services Group, various securities............ 1.4
Safeco Corp. 7.875%, 3/15/2003................................... 1.0
Ford Motor Credit Co. 5.80%, 1/12/2009........................... 0.9
Republic New York Corp. 7.20%, 7/15/2097......................... 0.6
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: 4.6%
Union Pacific Corp., various securities.......................... 2.4
Burlington Northern Santa Fe Railway 7.57%, 1/2/2021............. 1.5
Consolidated Rail Corp. 9.75%, 6/15/2020......................... 0.7
Norfolk & Western Railroad Equip. Tr. 10.125%, 7/1/2000.......... 0.0+
UTILITIES: 0.1%
Idaho Power Co. 1st Mtg. Bonds 9.50%, 1/1/2021................... 0.1
FOREIGN (U.S. DOLLAR-DENOMINATED): 5.1%
CORPORATE: 2.9%
HSBC Holdings PLC 7.50%, 7/15/2009............................... 1.9
Bank of Tokyo-Mitsubishi Ltd. 8.40%, 4/15/2010................... 1.0
CANADIAN: 1.8%
Hydro-Quebec 8.05%, 7/7/2024..................................... 1.0
Canadian Pacific Ltd. 9.45%, 8/1/2021............................ 0.8
INTERNATIONAL AGENCY: 0.4%
European Investment Bank 10.125%, 10/1/2000...................... 0.4
SHORT-TERM INVESTMENTS: 2.2%
OTHER ASSETS LESS LIABILITIES: 1.1%
TOTAL NET ASSETS: 100.0%
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
+ Rounds to 0.0%
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5
<PAGE>
D O D G E & C O X
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Income Fund
THIS PAGE INTENTIONALLY LEFT BLANK
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6
<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
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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