<PAGE>
Dodge & Cox
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Stock Fund
Established 1965
Semi-Annual Report
June 30, 1995
1995
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DODGE & COX
Stock Fund
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Dodge & Cox
Investment Managers
35th Floor
One Sansome Street
San Francisco
California 94104
(415) 981-1710
For Fund literature and
information, please call:
(800) 621-3979
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DODGE & COX
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Stock Fund
<TABLE>
<CAPTION>
Financial Highlights
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SELECTED DATA AND RATIOS (for a share outstanding throughout each period)
Six Months Ended
June 30, Year Ended December 31,
----------------- ----------------------------------------------
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD...................... $53.94 $53.23 $48.37 $44.85 $38.79 $42.57
Income from investment operations:
Investment income......................................... .78 1.47 1.37 1.40 1.50 1.60
Expenses.................................................. (.17) (.32) (.33) (.29) (.27) (.25)
------ ------ ------ ------ ------ ------
Net investment income..................................... .61 1.15 1.04 1.11 1.23 1.35
Net realized and unrealized gain (loss) on investments.... 9.61 1.60 7.70 3.68 6.94 (3.50)
------ ------ ------ ------ ------ ------
Total income from investment operations................... 10.22 2.75 8.74 4.79 8.17 (2.15)
------ ------ ------ ------ ------ ------
Distributions:
Dividends from net investment income...................... (.60) (1.15) (1.04) (1.11) (1.24) (1.35)
Distribution from net realized gain on investments........ (.18) (.89) (2.84) (.16) (.87) (.28)
------ ------ ------ ------ ------ ------
Total distributions....................................... (.78) (2.04) (3.88) (1.27) (2.11) (1.63)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD............................ $63.38 $53.94 $53.23 $48.37 $44.85 $38.79
====== ====== ====== ====== ====== ======
TOTAL RETURN.............................................. % 19.05 5.16 18.31 10.82 21.48 (5.08)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)...................... $ 825 $ 543 $ 436 $ 336 $ 281 $ 173
Ratio of expenses to average net assets................... % .61* .61 .62 .64 .64 .65
Ratio of net investment income to average net assets...... % 2.14* 2.16 1.95 2.43 2.87 3.47
Portfolio turnover rate................................... % 7 7 15 7 5 7
*Annualized
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended June 30, 1995 1 Year 5 Years 10 Years 20 Years
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<S> <C> <C> <C> <C>
Dodge & Cox Stock Fund 25.19% 13.00% 15.52% 14.72%
S&P 500 Index 26.06 12.09 14.67 13.62
</TABLE>
The average annual total return figures include reinvestment of
dividend and capital gain distributions. These results represent past
performance; past performance is no guarantee of future results.
Investment return and share price will vary, and shares may be worth
more or less at redemption than at original purchase.
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<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1995
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SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON FINANCE: 19.8%
STOCKS: 540,000 American Express Co......................................................... $ 18,967,500
93.5% 86,000 American International Group, Inc........................................... 9,804,000
232,000 BankAmerica Corp............................................................ 12,209,000
195,000 Barnett Banks, Inc.......................................................... 9,993,750
168,000 Chubb Corp.................................................................. 13,461,000
88,000 CIGNA Corp.................................................................. 6,831,000
347,000 Citicorp.................................................................... 20,082,625
71,000 General Re Corp............................................................. 9,505,125
355,000 Golden West Financial Corp.................................................. 16,729,375
77,000 Lehman Brothers Holdings, Inc............................................... 1,684,375
185,000 Morgan (J.P.) & Co.......................................................... 12,973,125
375,000 Norwest Corp................................................................ 10,781,250
184,000 Republic New York Corp...................................................... 10,304,000
197,000 The St. Paul Cos., Inc...................................................... 9,702,250
-------------
163,028,375
CONSUMER: 19.7%
337,000 Dayton-Hudson Corp.......................................................... 24,179,750
300,000 Dillard Department Stores, Inc. Class A..................................... 8,812,500
195,000 Fleming Cos., Inc........................................................... 5,167,500
445,000 Fruit of the Loom, Inc...................................................... 9,400,625
455,000 General Motors Corp......................................................... 21,328,125
94,500 Genuine Parts Co............................................................ 3,579,188
820,000 Kmart Corp.................................................................. 11,992,500
605,000 Masco Corp.................................................................. 16,335,000
355,000 Melville Corp............................................................... 12,158,750
375,000 Nordstrom, Inc.............................................................. 15,492,375
225,000 Procter & Gamble Co......................................................... 16,171,875
210,908 Times Mirror Co. Series A................................................... 5,035,429
230,000 Whirlpool Corp.............................................................. 12,650,000
-------------
162,303,617
ELECTRONICS AND COMPUTERS: 9.8%
432,000 Digital Equipment Corp...................................................... 17,604,000
184,000 Hewlett-Packard Co.......................................................... 13,708,000
217,000 International Business Machines Corp........................................ 20,832,000
121,400 Motorola, Inc............................................................... 8,148,975
125,000 Sun Microsystems, Inc....................................................... 6,070,375
315,600 Tandem Computers, Inc....................................................... 5,089,050
69,500 Texas Instruments, Inc...................................................... 9,304,313
-------------
80,756,713
BASIC INDUSTRY: 9.7%
323,000 Aluminum Co. of America..................................................... 16,190,375
130,000 Boise Cascade Corp.......................................................... 5,265,000
185,000 Dow Chemical Co............................................................. 13,296,875
165,000 International Paper Co...................................................... 14,148,750
340,000 James River Corp. of Virginia............................................... 9,392,500
189,000 Nalco Chemical Co........................................................... 6,874,875
319,000 Weyerhaeuser Co............................................................. 15,032,875
-------------
80,201,250
</TABLE>
See accompanying Notes to Financial Statements
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<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1995
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SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON ENERGY: 8.5%
STOCKS 265,000 Amerada Hess Corp. ......................................................... $ 12,951,875
(Continued) 218,000 Chevron Corp. .............................................................. 10,164,250
58,000 Exxon Corp. ................................................................ 4,096,250
269,000 Halliburton Co. ............................................................ 9,616,750
63,000 Mobil Corp. ................................................................ 6,048,000
370,000 Phillips Petroleum Co. ..................................................... 12,348,750
90,000 Royal Dutch Petroleum Co. .................................................. 10,968,750
60,000 Schlumberger Ltd. .......................................................... 3,727,500
-------------
69,922,125
CAPITAL EQUIPMENT: 5.8%
243,000 Caterpillar, Inc. .......................................................... 15,612,750
149,200 Deere & Co. ................................................................ 12,775,250
209,000 General Electric Co. ....................................................... 11,782,375
125,000 Sundstrand Corp. ........................................................... 7,468,750
-------------
47,639,125
BUSINESS PRODUCTS AND SERVICES: 5.0%
345,000 Donnelley (R.R.) & Sons Co. ................................................ 12,420,000
287,000 Federal Express Corp. ...................................................... 17,435,250
100,000 Xerox Corp. ................................................................ 11,725,000
-------------
41,580,250
DIVERSIFIED TECHNOLOGY: 4.0%
290,000 Corning, Inc. .............................................................. 9,497,500
132,000 Grace (W.R.) & Co. ......................................................... 8,101,500
121,000 Minnesota Mining & Manufacturing Co. ....................................... 6,927,250
226,100 Raychem Corp. .............................................................. 8,676,588
-------------
33,202,838
PUBLIC UTILITIES: 3.9%
108,000 Carolina Power & Light Co. ................................................. 3,267,000
280,000 Central & South West Corp. ................................................. 7,350,000
67,000 Consolidated Natural Gas Co. ............................................... 2,529,250
108,000 FPL Group, Inc. ............................................................ 4,171,500
60,000 Pacific Gas & Electric Co. ................................................. 1,740,000
129,000 SCEcorp. ................................................................... 2,209,125
185,000 Texas Utilities Co. ........................................................ 6,359,375
183,000 Unicom Corp. ............................................................... 4,872,375
-------------
32,498,625
TRANSPORTATION: 3.7%
640,000 Canadian Pacific Ltd. ...................................................... 11,120,000
117,600 Southern Pacific Rail Corp. ................................................ 1,852,200
321,000 Union Pacific Corp. ........................................................ 17,775,375
-------------
30,747,575
PHARMACEUTICAL AND HEALTH: 3.6%
95,000 Pfizer, Inc. ............................................................... 8,775,625
270,000 SmithKline Beecham plc ADR ................................................. 12,217,500
232,000 Upjohn Co. ................................................................. 8,787,000
-------------
29,780,125
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TOTAL COMMON STOCKS (cost $562,169,195)............................... 771,660,618
-------------
</TABLE>
See accompanying Notes to Financial Statements
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<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1995
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SHARES MARKET VALUE
<C> <C> <S> <C>
PREFERRED CONSUMER: 0.3%
STOCKS: 90,092 Times Mirror Co. Conversion Preferred Series B.............................. $ 2,150,947
0.3% ------------
TOTAL PREFERRED STOCKS (cost $1,936,755).............................. 2,150,947
------------
PAR VALUE
SHORT-TERM $ 5,676,210 General Mills, Inc., Variable Demand Note 5.73%, 1995....................... 5,676,210
INVESTMENTS: 14,800,000 Norwest Financial Commercial Paper 6%, 1995................................. 14,800,000
6.9% 15,035,584 Pitney Bowes Credit Corp., Variable Demand Note 5.73%, 1995................. 15,035,584
15,000,000 Prudential Funding Commercial Paper 5.90%, 1995............................. 15,000,000
6,956,978 Wisconsin Electric Power Corp., Variable Demand Note 5.77%, 1995............ 6,956,978
------------
TOTAL SHORT-TERM INVESTMENTS (cost $57,468,772)....................... 57,468,772
------------
TOTAL INVESTMENTS (cost $621,574,722)......................... 100.7% 831,280,337
OTHER ASSETS LESS LIABILITIES................................. (0.7) (5,864,881)
----- ------------
TOTAL NET ASSETS.............................................. 100.0% $825,415,456
===== ============
</TABLE>
<TABLE>
<CAPTION>
THE FUND'S TEN LARGEST COMMON STOCK HOLDINGS
---------------------------------------------------------------------------------------------------------------
% of
Portfolio
---------
<S> <C>
Dayton-Hudson Corp.................................................... 2.9
General Motors Corp................................................... 2.6
International Business Machines Corp.................................. 2.5
Citicorp.............................................................. 2.4
American Express Co................................................... 2.3
Union Pacific Corp.................................................... 2.2
Digital Equipment Corp................................................ 2.1
Federal Express Corp.................................................. 2.1
Golden West Financial Corp............................................ 2.0
Masco Corp............................................................ 2.0
-----
23.1%
</TABLE>
See accompanying Notes to Financial Statements
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DODGE & COX
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<TABLE>
<CAPTION>
Statement of Assets and Liabilities June 30, 1995
---------------------------------------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments (identified cost $621,574,722) at market quotations.............................. $831,280,337
Cash......................................................................................... 1,594,844
Dividends receivable and interest accrued.................................................... 1,839,208
Deferred charges............................................................................. 81,838
------------
834,796,227
------------
LIABILITIES:
Payable for Fund shares redeemed............................................................. 146,972
Payable for investments purchased............................................................ 9,140,127
Accounts payable............................................................................. 93,672
------------
9,380,771
NET ASSET VALUE ------------
PER SHARE $63.38 NET ASSETS................................................................................... $825,415,456
============
Capital shares
outstanding NET ASSETS CONSIST OF:
13,023,070 Paid in capital.............................................................................. $596,575,264
(par value Accumulated undistributed net investment income.............................................. 283,411
$1.00 each) Accumulated undistributed net realized gain on investments................................... 18,851,166
Net unrealized appreciation on investments................................................... 209,705,615
------------
$825,415,456
============
</TABLE>
<TABLE>
<CAPTION>
Condensed Financial Information
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Net Asset Value Per Share Distributions Per Share
--------------------------- -------------------------
Year Ended Capital
December 31 Net Assets Actual Adjusted* Income Gains
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1985 $ 38,493,089 $30.95 $32.47 $ 1.01 $ 1.23
1986 45,062,188 31.66 37.33 .94 3.90
1987 67,466,098 32.94 40.68 1.03 1.58
1988 81,579,776 35.26 44.92 1.07 1.11
1989 125,161,597 42.57 55.30 1.23 .82
1990 172,969,111 38.79 50.74 1.35 .28
1991 281,296,392 44.85 59.92 1.24 .87
1992 335,922,835 48.37 64.82 1.11 .16
1993 435,895,275 53.23 75.21 1.04 2.84
1994 543,475,451 53.94 77.46 1.15 .89
1995 (6/30) 825,415,456 63.38 91.33 .60** .18
------ ------
$11.77 $13.86
====== ======
</TABLE>
* Adjusted for assumed reinvestment of capital gains
distributions.
** A distribution of $.32 per share from net investment
income was paid June 20, 1995 to shareholders of record
June 13, 1995.
See accompanying Notes to Financial Statements
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<TABLE>
<CAPTION>
Statement of Operations Six Months Ended June 30, 1995
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<S> <C>
INVESTMENT INCOME:
Dividends.................................................................................... $ 8,118,161
Interest..................................................................................... 1,271,883
------------
9,390,044
------------
EXPENSES:
Management fees (Note 2)..................................................................... 1,708,244
Custodian fees............................................................................... 53,973
Transfer agent fees.......................................................................... 186,285
Audit fees................................................................................... 14,800
Legal fees (Note 2).......................................................................... 4,300
Shareholder reports.......................................................................... 57,000
S.E.C. and state registration fees........................................................... 40,000
Directors' fees.............................................................................. 4,500
Miscellaneous................................................................................ 14,955
------------
2,084,057
------------
NET INVESTMENT INCOME........................................................................ 7,305,987
------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gains on investments (excluding short-term investments)....................... 18,851,166
Change in unrealized appreciation of investments........................................... 90,800,876
------------
Net realized and unrealized gain on investments......................................... 109,652,042
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................................................................. $116,958,029
============
</TABLE>
See accompanying Notes to Financial Statements
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<TABLE>
<CAPTION>
Statement of Changes in Net Assets Six Months Ended June 30,
---------------------------------------------------------------------------------------------------------------
1995 1994
<S> <C> <C>
OPERATIONS:
Net investment income................................................... $ 7,305,987 $ 4,791,680
Net realized gain on investments........................................ 18,851,166 5,729,407
Net change in unrealized appreciation................................... 90,800,876 (11,348,638)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS................... 116,958,029 (827,551)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................... (7,846,871) (4,745,012)
Net realized gain from investment transactions.......................... (1,339,814) (2,983,751)
------------ ------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS..................................... (9,186,685) (7,728,763)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Amounts received from sale of shares.................................... 201,727,059 70,876,153
Net asset value of shares issued in connection with
reinvestment of dividends from net investment income
and from distribution of net realized gain on investments............... 8,384,439 6,871,383
------------ ------------
210,111,498 77,747,536
Amounts paid for shares redeemed........................................ (35,942,837) (25,719,476)
------------ ------------
NET INCREASE FROM CAPITAL SHARE TRANSACTIONS............................ 174,168,661 52,028,060
------------ ------------
TOTAL INCREASE IN NET ASSETS............................................ 281,940,005 43,471,746
NET ASSETS:
Beginning of period..................................................... 543,475,451 435,895,275
------------ ------------
End of period (including undistributed net investment income
of $283,441 and $155,440, respectively)................................. $825,415,456 $479,367,021
============ ============
Shares sold............................................................. 3,406,637 1,314,078
Shares issued in connection with reinvestment
of dividends from net investment income and
from distribution of net realized gain on investments................... 140,741 124,988
Shares redeemed......................................................... (600,737) (476,088)
------------ ------------
Net increase in shares outstanding...................................... 2,946,641 962,978
============ ============
</TABLE>
See accompanying Notes to Financial Statements
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Notes to Financial Statements
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1 The Fund is registered under the Investment Company Act of 1940, as
amended, as a diversified open-end management company. The Fund
consistently follows accounting policies which are in conformity with
generally accepted accounting principles for investment companies.
Significant policies are: (a) Investments are stated at market value
based on latest quoted prices; (b) Security transactions are accounted
for on the trade date. Gains and losses on securities sold are
determined on the basis of identified cost. Dividend income is recorded
on the ex-dividend date and interest income is recorded on the accrual
basis; (c) Distributions to shareholders of income and capital gains
are reflected in the net asset value per share computation on the date
following the date of record; (d) No provision for Federal income taxes
has been included in the accompanying financial statements since the
Fund intends to distribute all of its taxable income and otherwise
continue to comply with requirements for regulated investment
companies.
2 Under a written agreement, the Fund pays an annual management fee of
1/2 of 1% of the Fund's average weekly net asset value to Dodge & Cox,
a corporation and manager of the Fund. The agreement further provides
that Dodge & Cox shall waive its fee to the extent that such fee plus
all other expenses of the Fund exceed 3/4 of 1% of the average weekly
net asset value for the year. No waiver of management fee was required
for 1994 under this agreement. Four of the officers and directors of
the Fund are officers or employees of Dodge & Cox. Those directors who
are not affiliated with Dodge & Cox receive from the Fund an annual fee
of $1,000 and an attendance fee of $500 for each meeting of the Board
of Directors attended. The Fund does not pay any other remuneration to
its officers or directors. Legal fees are paid to Heller, Ehrman, White
& McAuliffe, legal counsel for the Fund. Robert C. Harris, an employee
of that firm, is a director of the Fund.
3 For the six months ended June 30, 1995, purchases and sales of
securities, other than short-term securities, aggregated $191,274,530
and $47,631,182, respectively. At June 30, 1995, the cost of
investments for Federal income tax purposes was equal to the cost for
financial reporting purposes.
The financial information has been taken from the records of the Fund and has
not been audited by our independent accountants who do not express an opinion
thereon. The financial statements of the Fund will be subject to audit by our
independent accountants as of the close of the calendar year.
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Officers and Directors
-----------------------------------------------------------------------
John A. Gunn, President and Director
President, Dodge & Cox
Joseph M. Fee, Vice President and Director
Retired Officer, Dodge & Cox
W. Timothy Ryan, Secretary-Treasurer
and Director
Senior Vice-President, Dodge & Cox
Katherine Herrick Drake, Assistant
Secretary-Treasurer and Director
Vice-President, Dodge & Cox
Harry R. Hagey, Assistant Secretary-
Treasurer and Director
Chairman & CEO, Dodge & Cox
Max Gutierrez, Jr., Director
Partner, Brobeck, Phleger & Harrison, Attorneys
Robert C. Harris, Director
Of Counsel to Heller, Ehrman, White & McAuliffe, Attorneys
Frank H. Roberts, Director
Retired Partner, Pillsbury, Madison & Sutro, Attorneys
John B. Taylor, Director
Professor of Economics, Stanford University
Will C. Wood, Director
Principal, Kentwood Associates, Financial Advisers
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MANAGERS
Dodge & Cox
One Sansome Street, 35th Floor
San Francisco, California 94104
Telephone (415) 981-1710
CUSTODIAN & TRANSFER AGENT
Firstar Trust Company
P. O. Box 701
Milwaukee, Wisconsin 53201-0701
Telephone (800) 621-3979
INDEPENDENT ACCOUNTANTS
Price Waterhouse, LLP
San Francisco, California
LEGAL COUNSEL
Heller, Ehrman, White & McAuliffe
San Francisco, California
-----------------------------------------------------------------------
This report is submitted for the general 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 an
effective prospectus.
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THIS PAGE INTENTIONALLY LEFT BLANK
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DODGE & COX
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General Information
-------------------------------------------------------------
DODGE & COX The Fund enables investors to obtain the benefits of
STOCK FUND experienced and continuous investment supervision. The Fund
is invested in a broadly diversified and carefully selected
list of common stocks to provide shareholders with an
opportunity for long-term growth of principal and income.
INVESTMENT Since 1930, Dodge & Cox has been providing professional
COUNSEL investment management for individuals, trustees,
MANAGEMENT corporations, pension and profit-sharing funds, and
charitable institutions. In addition, Dodge & Cox manages the
Dodge & Cox Balanced Fund and the Dodge & Cox Income Fund.
Dodge & Cox is not engaged in the brokerage business nor in
the business of dealing in or selling securities.
NO SALES CHARGE There are no commissions on the purchase or redemption of
shares of the Fund.
GIFTS Dodge & Cox Stock Fund shares provide a convenient method
for making gifts to children and to other family members.
Fund shares may be held by an adult custodian for the benefit
of a minor under a Uniform Gifts/Transfers to Minors Act.
Trustees and guardians may also hold shares for a minor's
benefit.
REINVESTMENT Shareholders may direct that dividend and capital gains
PLAN distributions be reinvested in additional Fund shares.
AUTOMATIC Shareholders may make regular monthly or quarterly
INVESTMENT PLAN investments of $100 or more through automatic deductions
from their bank accounts.
WITHDRAWAL PLAN Shareholders owning $10,000 or more of the Fund's shares
may elect to receive periodic monthly or quarterly payments
of at least $50. Under the plan, all dividend distributions
are automatically reinvested at net asset value with the
periodic payments made from the proceeds of the redemption of
sufficient shares.
The above plans are completely voluntary and involve no
service charge of any kind.
IRA PLAN The Fund has available an Individual Retirement Plan (IRA)
for shareholders of the Fund.
Fund literature and details on all of these plans are
available from the Fund upon request.
DODGE & COX STOCK FUND
c/o Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
Telephone (800) 621-3979
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<PAGE>
DODGE & COX
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Stock Fund
Dear Shareholder: July 1995
With this letter, the Dodge & Cox Stock Fund is beginning a program of more
frequent updates to shareholders. Our goal in this first mid-year letter--as it
will be in all future reports--is to review recent activity in the Fund, discuss
changes in portfolio strategy, and explain how we are managing your assets to
achieve the Fund's stated investment objectives. We realize that communication
is a two-way street, and we encourage your comments and questions. Such feedback
will provide a guide for topics we may cover in future correspondence. Please
direct any inquiries by mail to our office in San Francisco. We look forward to
hearing from you.
- --------------------------------------------------------------------------------
Mutual Fund Management at
Dodge & Cox
Dodge & Cox began managing its first mutual fund in 1931,
decades before the explosive growth of the fund business
experienced during the past ten years. Our Balanced Fund has
one of the longest track records in the industry--over sixty
years. We introduced the Stock Fund in 1965 and more recently
the Income Fund in 1989.
Our business approach in mutual funds remains quite simple. We
maintain low operating expenses and focus on what we do best--
independent fundamental research and prudent investment of
equity and fixed income assets with a long-term time horizon.
We purposely do not offer a multitude of services or niche
funds. We believe that our consistent investment philosophy
and proven results will appeal to a wide variety of investors.
- --------------------------------------------------------------------------------
Investment Performance
The Dodge & Cox Stock Fund had a total return of 19.1% in the first six
months of 1995. This performance compares with the return for the Standard &
Poor's 500 (S&P 500) Index of common stocks of 20.2% for the same period. For
the past one and five years, the Fund's annualized performance was 25.2% and
13.0% respectively. Comparable returns for the S&P 500 Index were 26.1% and
12.1%.
Many of the stocks in the Fund performed well, with particularly strong
results from our technology and bank stock holdings. Six of the Fund's top ten
performers were in these two industries. Overall, only three of seventy-five
stocks in the portfolio had a negative return in the first half.
Individual Stock Selection
Dodge & Cox's stock selection process is known as "bottom up," meaning our
research focuses on the analysis of individual companies, rather than "top down"
macroeconomic or sector analysis. Although stock prices have been setting record
highs in 1995, we remain optimistic about the long term potential for equities.
Corporate earnings have been strong, and we believe the valuations of our equity
holdings are still reasonable. A look at several of the banking companies in the
portfolio provides an example of our approach.
Banks Remain A Good Value
Banks currently represent about 12% of the portfolio. The Fund's bank
stocks have price to earnings (P/E) multiples of 10 or lower--well beneath the
overall market P/E of about 16. We expect that bank earnings can continue to
grow and, as of June 30, the Fund held seven bank stocks with a diverse mix of
geographic and business line exposure. Citicorp is the Fund's largest single
finance position. After careful individual analysis, we added two banks in the
first half of 1995--Barnett Banks and Republic New York--and sold two holdings--
Bank of Boston and NBD Bancorp.
Barnett Banks, located in Florida, has one of the strongest consumer
franchises in the nation. Our bank research analyst has followed the company for
many years. At about 10 times expected 1995 earnings, with good growth prospects
in its region and a dividend yield of 3.7%, we believe it is now attractive in
relation to other banks. Republic New York also has a strong retail franchise
and offers other specialized banking services to institutions and
======================================---=======================================
Dodge & Cox One Sansome Street San Francisco, California 94104
<PAGE>
DODGE & COX
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Stock Fund
wealthy individuals. Its founder owns more than 25% of the company and has
recently been increasing his stake. We like to invest in businesses with
management ownership, because their economic interest is clearly aligned with
shareholders'. Republic has recently been trading at only 9 times expected 1995
profits and 1.5 times book value, also well under the S&P 500 Index price to
book value of over 3 times.
Out Of Favor Retailing Sector
If a major company or group of companies falls in price relative to the
market, we will intensify our research efforts. As worries about a company or
industry grow, bargains can sometimes be found. The worries are never imaginary,
but are often overdone. With our strong research approach and our long term
investment horizon, we believe that attractive investments can occasionally be
identified in these "out of favor" areas.
We believe retailing is one such area today. Over the past three years, the
retail sector has declined in value relative to the market. Retailers have had
difficulty maintaining prices of their goods as they face retail space
"overcapacity." In this environment, our analyst, who has followed the industry
for ten years, has found more retailers selling at historically low relative
valuations. Our Policy Committee has agreed with the analyst's recommendations
to gradually increase our retail holdings over the past eighteen months. About
9% of the Fund's portfolio is currently invested in retail companies, with
Dayton-Hudson being the largest stock position in the Fund.
In the first quarter, we purchased our fifth stock in the area--Dillard
Department Stores. The company operates 240 department stores located primarily
in the Southwest and Southeast portions of the United States. They have a strong
reputation for cost control and financial systems. We believe Dillard can expand
earnings at an 8-10% rate over the next few years. We bought the stock at about
12 times expected 1995 earnings, a P/E multiple which is 25% below that of the
S&P 500 Index. In addition to Dillard, we added to each of our other four retail
holdings in the first half of 1995.
Cycle-Sensitive Sector
Just under half of the market value of the Fund is invested in an array of
technology, capital equipment, industrial commodity, transportation and consumer
durable companies. We call it the "cycle-sensitive" sector, because the earnings
of these companies are relatively more sensitive to the business cycle. During
the first half of 1995, we trimmed our positions in several technology
companies, including Texas Instruments, as their stock prices appreciated
dramatically. However, we continue to believe that many company valuations are
reasonable in this broadly diversified area of the portfolio.
Closing Note
We would like to welcome a new Director to the Dodge & Cox Stock Fund. John
B. Taylor, Professor of Economics at Stanford University, was elected in early
1995. Professor Taylor was a member of the Council of Economic Advisors in
Washington, D.C. from 1989 to 1991. We are delighted to have the benefit of his
experience and insight.
As you follow the Fund, you will notice our strategy does not change
rapidly. We are truly long term investors. We appreciate your interest and
confidence in the Dodge & Cox Stock Fund.
Dodge & Cox
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