<PAGE>
D O D G E & C O X D O D G E & C O X
Stock Fund
- ----------------------------- -------------------------------
Stock Fund
Established 1965
-----------------------------
-------------+-------------
Dodge & Cox Semi-Annual Report
Investment Managers
35th Floor June 30, 1996
One Sansome Street
San Francisco
California 94104
(415) 981-1710
For Fund literature and 1996
information, please call:
(800) 621-3979 ---------------------------
-----------------------------
- ----------------------------- -------------------------------
<PAGE>
D O D G E & C O X
=======================================--=======================================
Stock Fund
Financial Highlights
- --------------------------------------------------------------------------------
SELECTED DATA AND RATIOS (for a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------- ----------------------------------------------------------
1996 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.................... $67.83 $53.94 $53.23 $48.37 $44.85 $38.79
Income from investment operations:
Net investment income................................... .62 1.27 1.15 1.04 1.11 1.23
Net realized and unrealized gain (loss)................. 5.99 16.54 1.60 7.70 3.68 6.94
------ ------ ------ ------ ------ ------
Total income from investment operations................. 6.61 17.81 2.75 8.74 4.79 8.17
------ ------ ------ ------ ------ ------
Distributions:
Dividends from net investment income.................... (.62) (1.26) (1.15) (1.04) (1.11) (1.24)
Distribution from net realized gain..................... (.15) (2.66) (.89) (2.84) (.16) (.87)
------ ------ ------ ------ ------ ------
Total distributions..................................... (.77) (3.92) (2.04) (3.88) (1.27) (2.11)
------ ------ ------ ------ ------ ------
Net asset value, end of period.......................... $73.67 $67.83 $53.94 $53.23 $48.37 $44.85
====== ====== ====== ====== ====== ======
Total return % 9.76 33.38 5.16 18.31 10.82 21.48
Ratios/supplemental data
Net assets, end of period (millions).................... $1,694 $1,228 $ 543 $ 436 $ 336 $ 281
Ratio of expenses to average net assets................. % .60* .60 .61 .62 .64 .64
Ratio of net investment income to average
net assets............................................. % 1.79* 2.07 2.16 1.95 2.43 2.87
Portfolio turnover rate................................. % 5 13 7 15 7 5
Average commission rate paid**.......................... $.0522
</TABLE>
* Annualized
** Represents average commission rate paid per share on securities transactions.
Disclosure is required by the S.E.C. beginning in 1996.
<TABLE>
<CAPTION>
Average annual total return for periods ended June 30, 1996 1 Year 5 Years 10 Years 20 Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Stock Fund 22.97% 16.75% 14.30% 15.18%
S&P 500 Index 25.99 15.72 13.81 14.19
</TABLE>
The average annual total return figures include reinvestment of dividend and
capital gain distributions. Index returns, unlike Fund returns, do not reflect
any expenses. 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.
======================================---=======================================
1
<PAGE>
D O D G E & C O X
======================================---=======================================
Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1996
---------------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON CONSUMER: 21.7%
STOCKS: 515,000 Dayton-Hudson Corp. ...................................................... $ 53,109,375
92.0% 545,000 Dillard Department Stores, Inc. Class A .................................. 19,892,500
320,000 Fleming Cos., Inc......................................................... 4,600,000
601,900 Fruit of the Loom, Inc.................................................... 15,348,450
849,000 General Motors Corp....................................................... 44,466,375
356,500 Genuine Parts Co.......................................................... 16,309,875
605,000 James River Corp. of Virginia............................................. 15,956,875
1,275,000 Kmart Corp................................................................ 15,778,125
1,000,000 Masco Corp................................................................ 30,250,000
670,000 Melville Corp............................................................. 27,135,000
596,100 Nordstrom, Inc............................................................ 26,451,938
270,000 Procter & Gamble Co....................................................... 24,468,750
260,000 Sony Corp. ADR............................................................ 17,192,500
119,000 Unilever NV............................................................... 17,269,875
286,200 VF Corp................................................................... 17,064,675
456,300 Whirlpool Corp............................................................ 22,643,888
------------
367,938,201
FINANCE: 18.0%
865,000 American Express Co....................................................... 38,600,625
172,000 American International Group, Inc......................................... 16,963,500
363,000 BankAmerica Corp.......................................................... 27,497,250
260,000 Barnett Banks, Inc........................................................ 15,860,000
450,000 Chubb Corp................................................................ 22,443,750
477,000 Citicorp.................................................................. 39,412,125
138,000 General Re Corp........................................................... 21,010,500
565,000 Golden West Financial Corp................................................ 31,640,000
77,000 Lehman Brothers Holdings, Inc............................................. 1,905,750
283,000 Morgan (J.P.) & Co........................................................ 23,948,875
550,000 Norwest Corp.............................................................. 19,181,250
358,000 Republic New York Corp.................................................... 22,285,500
465,000 The St. Paul Cos., Inc.................................................... 24,877,500
------------
305,626,625
ELECTRONICS AND COMPUTERS: 9.5%
797,000 Digital Equipment Corp.................................................... 35,865,000
249,000 Hewlett-Packard Co........................................................ 24,806,625
361,000 International Business Machines Corp...................................... 35,739,000
296,400 Motorola, Inc............................................................. 18,636,150
1,000,000 National Semiconductor Corp............................................... 15,500,000
1,050,600 Tandem Computers, Inc..................................................... 13,001,175
346,000 Texas Instruments, Inc.................................................... 17,256,750
------------
160,804,700
BASIC INDUSTRY: 9.4%
531,000 Aluminum Co. of America................................................... 30,466,125
409,100 Boise Cascade Corp........................................................ 14,983,288
233,000 Champion International Corp............................................... 9,727,750
38,500 Crown Vantage, Inc........................................................ 548,625
419,000 Dow Chemical Co........................................................... 31,844,000
666,000 International Paper Co.................................................... 24,558,750
</TABLE>
See accompanying Notes to Financial Statements
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2
<PAGE>
D O D G E & C O X
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Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1996
---------------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON BASIC INDUSTRY (continued)
STOCKS 240,000 Lubrizol Corp............................................................ $ 7,290,000
(Continued) 544,000 Nalco Chemical Co........................................................ 17,136,000
521,000 Weyerhaeuser Co.......................................................... 22,142,500
------------
158,697,038
ENERGY: 9.1%
582,000 Amerada Hess Corp........................................................ 31,209,750
308,000 Chevron Corp............................................................. 18,172,000
58,000 Exxon Corp............................................................... 5,038,750
239,000 Halliburton Co........................................................... 13,264,500
63,000 Mobil Corp............................................................... 7,063,875
560,000 Phillips Petroleum Co.................................................... 23,450,000
141,000 Royal Dutch Petroleum Co................................................. 21,678,750
145,000 Schlumberger Ltd......................................................... 12,216,250
293,000 Union Pacific Resources Group, Inc....................................... 7,837,750
231,700 Western Atlas, Inc....................................................... 13,496,525
------------
153,428,150
BUSINESS PRODUCTS AND SERVICES: 5.8%
877,900 Donnelley (R.R.) & Sons Co............................................... 30,616,763
382,200 Dow Jones & Co........................................................... 15,956,850
371,800 Federal Express Corp..................................................... 30,487,600
405,000 Xerox Corp............................................................... 21,667,500
------------
98,728,713
PUBLIC UTILITIES: 5.0%
601,500 BCE, Inc................................................................. 23,759,250
108,000 Carolina Power & Light Co................................................ 4,104,000
549,000 Edison International..................................................... 9,676,125
296,900 FPL Group, Inc........................................................... 13,657,400
579,600 Pacific Enterprises...................................................... 17,170,650
370,000 Texas Utilities Co....................................................... 15,817,500
------------
84,184,925
CAPITAL EQUIPMENT: 4.1%
388,000 Caterpillar, Inc......................................................... 26,287,000
700,600 Deere & Co............................................................... 28,024,000
177,400 General Electric Co...................................................... 15,345,100
------------
69,656,100
TRANSPORTATION: 3.4%
1,110,000 Canadian Pacific Ltd..................................................... 24,420,000
466,000 Union Pacific Corp....................................................... 32,561,750
------------
56,981,750
DIVERSIFIED TECHNOLOGY: 3.2%
625,000 Corning, Inc............................................................. 23,984,375
186,000 Minnesota Mining & Manufacturing Co...................................... 12,834,000
251,100 Raychem Corp............................................................. 18,047,813
------------
54,866,188
</TABLE>
See accompanying Notes to Financial Statements
======================================---=======================================
3
<PAGE>
D O D G E & C O X
======================================---=======================================
Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1996
---------------------------------------------------------------------------------------------------------
SHARES MARKET VALUE
<C> <C> <S> <C>
COMMON PHARMACEUTICAL AND HEALTH: 2.7%
STOCKS 190,000 Pfizer, Inc.............................................................. $ 13,561,250
(Continued) 372,650 Pharmacia & Upjohn, Inc.................................................. 16,536,344
300,000 SmithKline Beecham plc ADR............................................... 16,312,500
--------------
46,410,094
MISCELLANEOUS: 0.1%
50,000 Meditrust................................................................ 1,668,750
--------------
Total Common Stocks (cost $1,173,332,563)........................... 1,558,991,234
--------------
PREFERRED CONSUMER: 0.4%
STOCKS: 64,100 Kmart Financing I, 7 3/4% Trust Convertible Preferred.................... 3,477,425
0.4% 90,092 Times Mirror Co. Conversion Preferred Series B........................... 2,421,223
--------------
Total Preferred Stocks (cost $5,141,755)............................ 5,898,648
--------------
PAR VALUE
SHORT-TERM $20,000,000 American Express Co., Commercial Paper 5.37%, 1996....................... 20,000,000
INVESTMENTS: 6,915,559 Eli Lilly & Co., Variable Demand Note 4.98%, 1996........................ 6,915,559
7.3% 25,171,336 General Mills, Inc., Variable Demand Note 5.14%, 1996.................... 25,171,336
26,940,270 Pitney Bowes Credit Corp., Variable Demand Note 5.14%, 1996.............. 26,940,270
34,490,389 Southwestern Bell Telephone Co., Variable Demand Note 5.12%, 1996........ 34,490,389
4,933,786 Warner Lambert Co., Variable Demand Note 5.12%, 1996..................... 4,933,786
5,566,837 Wisconsin Electric Power Corp., Variable Demand Note 5.19%, 1996......... 5,566,837
--------------
Total Short-Term Investments (cost $124,018,177).................... 124,018,177
--------------
TOTAL INVESTMENTS (cost $1,302,492,495).............. 99.7% 1,688,908,059
OTHER ASSETS LESS LIABILITIES........................ 0.3 5,057,188
------ --------------
TOTAL NET ASSETS..................................... 100.0% $1,693,965,247
====== ==============
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
<CAPTION>
THE FUND'S TEN LARGEST COMMON STOCK HOLDINGS
-----------------------------------------------------------------------------------------------------------
% of
Fund
------
<S> <C>
Dayton-Hudson Corp..................................................... 3.1
General Motors Corp.................................................... 2.6
Citicorp............................................................... 2.3
American Express Co.................................................... 2.3
Digital Equipment Corp................................................. 2.1
International Business Machines Corp................................... 2.1
Union Pacific Corp..................................................... 1.9
Dow Chemical Co........................................................ 1.9
Golden West Financial Corp............................................. 1.9
Amerada Hess Corp...................................................... 1.8
------
22.0%
</TABLE>
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4
<PAGE>
D O D G E & C O X
======================================---=======================================
Stock Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities June 30, 1996
------------------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments (identified cost $1,302,492,495) at market quotations.......... $1,688,908,059
Cash....................................................................... 5,883,072
Dividends receivable and interest accrued.................................. 3,205,763
Receivable for investments sold............................................ 5,793,283
Deferred charges........................................................... 67,645
--------------
1,703,857,822
--------------
LIABILITIES:
Payable for Fund shares redeemed........................................... 593,320
Payable for investments purchased.......................................... 9,092,450
Accounts payable........................................................... 206,805
--------------
Net asset value 9,892,575
per share $73.67 --------------
NET ASSETS............................................................. $1,693,965,247
==============
Capital NET ASSETS CONSIST OF:
shares outstanding Paid in capital............................................................ $1,289,645,388
22,994,002 Accumulated undistributed net investment income............................ 340,583
(par value $1.00 each, Accumulated undistributed net realized gain on investments................. 17,563,712
authorized shares Net unrealized appreciation on investments................................. 386,415,564
50,000,000) --------------
$1,693,965,247
==============
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
<CAPTION>
Condensed Financial Information
------------------------------------------------------------------------------------------
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>
1986 $ 45,062,188 $31.66 $35.62 $ .94 $ 3.90
1987 67,466,098 32.94 38.80 1.03 1.58
1988 81,579,776 35.26 42.84 1.07 1.11
1989 125,161,597 42.57 52.74 1.23 .82
1990 172,969,111 38.79 48.41 1.35 .28
1991 281,296,392 44.85 57.14 1.24 .87
1992 335,922,835 48.37 61.82 1.11 .16
1993 435,895,275 53.23 71.70 1.04 2.84
1994 543,475,451 53.94 73.90 1.15 .89
1995 1,227,927,343 67.83 96.66 1.26 2.66
1996 (6/30) 1,693,965,247 73.67 105.20 .62** .15
------ ------
$12.04 $15.26
====== ======
</TABLE>
* Adjusted for assumed reinvestment of capital gains distributions.
** A distribution of $.32 per share from net investment income was paid to
shareholders of record June 13, 1996.
======================================---=======================================
5
<PAGE>
D O D G E & C O X
======================================---=======================================
Stock Fund
<TABLE>
<CAPTION>
Statement of Operations Six Months Ended June 30, 1996
------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends.................................................................. $ 14,621,458
Interest................................................................... 3,010,446
------------
17,631,904
------------
EXPENSES:
Management fees (Note 2)................................................... 3,694,383
Custodian fees............................................................. 83,642
Transfer agent fees........................................................ 348,310
Audit fees................................................................. 15,000
Legal fees................................................................. 5,000
Shareholder reports........................................................ 117,000
S.E.C. and state registration fees......................................... 140,000
Directors' fees............................................................ 5,000
Miscellaneous.............................................................. 24,925
------------
4,433,260
------------
NET INVESTMENT INCOME...................................................... 13,198,644
------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gains on investments (excluding short-term investments)..... 17,563,712
Change in unrealized appreciation of investments......................... 99,188,336
------------
Net realized and unrealized gain on investments...................... 116,752,048
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............................................... $129,950,692
============
</TABLE>
See accompanying Notes to Financial Statements
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6
<PAGE>
D O D G E & C O X
======================================---=======================================
Stock Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Six Months Ended June 30,
-----------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
OPERATIONS:
Net investment income................................................ $ 13,198,644 $ 7,305,987
Net realized gain.................................................... 17,563,712 18,851,166
Net change in unrealized appreciation................................ 99,188,336 90,800,876
-------------- ------------
Net increase in net assets from operations........................... 129,950,692 116,958,029
-------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................ (13,216,218) (7,155,903)
Net realized gain.................................................... (2,985,072) (2,030,782)
-------------- ------------
Total distributions.................................................. (16,201,290) (9,186,685)
-------------- ------------
CAPITAL SHARE TRANSACTIONS:
Amounts received from sale of shares................................. 446,680,589 201,727,059
Net asset value of shares issued in reinvestment of distributions.... 14,953,030 8,384,439
-------------- ------------
461,633,619 210,111,498
Amounts paid for shares redeemed..................................... (109,345,117) (35,942,837)
-------------- ------------
Net increase from capital share transactions......................... 352,288,502 174,168,661
-------------- ------------
Total increase in net assets......................................... 466,037,904 281,940,005
NET ASSETS:
Beginning of period.................................................. 1,227,927,343 543,475,451
-------------- ------------
End of period (including undistributed net investment income
of $340,583 and $283,411, respectively).............................. $1,693,965,247 $825,415,456
============== ============
Shares sold.......................................................... 6,221,180 3,406,637
Shares issued in reinvestment of distributions....................... 205,370 140,741
Shares redeemed...................................................... (1,536,811) (600,737)
-------------- ------------
Net increase in shares outstanding................................... 4,889,739 2,946,641
============== ============
</TABLE>
See accompanying Notes to Financial Statements
======================================---=======================================
7
<PAGE>
D O D G E & C O X
======================================---=======================================
Stock Fund
Notes to Financial Statements
---------------------------------------------------------------------------
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 in the financial statements. 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.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Actual results could
differ from those estimates.
2 Under a written agreement, the Fund pays an annual management fee of 1/2 of
1% of the Fund's average 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 1995 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.
3 For the six months ended June 30, 1996, purchases and sales of securities,
other than short-term securities, aggregated $373,545,469 and $61,932,682,
respectively. At June 30, 1996, the cost of investments for Federal income
tax purposes was equal to the cost for financial reporting purposes. Net
unrealized appreciation aggregated $386,415,564, of which $395,172,836
represented appreciated securities and $8,757,272 represented depreciated
securities.
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.
======================================---=======================================
8
<PAGE>
D O D G E & C O X
======================================---=======================================
Stock Fund
Officers and Directors
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
John A. Gunn, President and Director Max Gutierrez, Jr., Director
President, Dodge & Cox Partner, Brobeck, Phleger & Harrison, Attorneys
W. Timothy Ryan, Secretary-Treasurer Frank H. Roberts, Director
and Director Retired Partner, Pillsbury, Madison & Sutro, Attorneys
Senior Vice-President, Dodge & Cox
John B. Taylor, Director
Katherine Herrick Drake, Assistant Professor of Economics, Stanford University
Secretary-Treasurer and Director
Vice-President, Dodge & Cox Will C. Wood, Director
Principal, Kentwood Associates, Financial Advisers
Harry R. Hagey, Assistant Secretary-
Treasurer and Director
Chairman & CEO, Dodge & Cox
</TABLE>
- --------------------------------------------------------------------------------
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.
======================================---=======================================
9
<PAGE>
D O D G E & C O X
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Stock Fund
THIS PAGE INTENTIONALLY LEFT BLANK
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10
<PAGE>
D O D G E & C O X
======================================--========================================
Stock Fund
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, corporations,
Management 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 investments
Investment Plan 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
======================================--========================================
<PAGE>
D O D G E & C O X
================================================================================
Stock Fund
Dear Shareholder July 1996
The Dodge & Cox Stock Fund had a total return of 3.3% for the quarter ended June
30, 1996 and 9.8% for the first six months of 1996. Returns for the Fund were
slightly behind the Standard & Poor's 500 Index (S&P 500), which returned 4.5%
and 10.1% for these periods, respectively. For the first half of this year, the
Fund's holdings in the retail, energy, capital equipment and transportation
industries performed well relative to the overall equity market, while stocks in
the industrial commodities, technology, consumer durables and insurance areas
were weak relative performers. Returns for longer time periods are presented in
the table below.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Annual Total Return
For periods ended June 30, 1996 1 year 5 years 10 years 20 years
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Stock Fund 22.97% 16.75% 14.30% 15.18%
S&P 500 Index 25.99 15.72 13.81 14.19
</TABLE>
The total return figures include reinvestment of dividend and capital gain
distributions. Index returns, unlike fund returns, do not reflect any expenses.
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.
- --------------------------------------------------------------------------------
Equity Strategy
Reflecting Dodge & Cox's long-term investment philosophy, the Fund's portfolio
has not materially changed since we wrote to you last quarter. Below we briefly
discuss the major sectors where the Fund is overweight relative to the S&P 500,
along with our current investment thesis for these sectors. We remind you that
the Fund is constructed and reviewed on a stock-by-stock basis, and our analysis
of individual securities is the key determinant of our investment actions.
. Industrial and Manufacturing Approximately 23% of the Fund, compared to 12%
of the S&P 500, is invested in a wide array of industrial commodity, machinery,
transportation and consumer durable companies; in other words, traditional
American manufacturing corporations. Many of the Fund's investments in this
area are companies that went through a difficult period in the early 1990's.
The management of these companies responded to this environment by initiating
significant restructuring efforts, which, in our opinion, has put them in a
strong earnings position over the next three to five years. We believe these
companies' stock prices are low relative to their potential earnings power and
to other alternatives in the stock market.
. Finance 18% of the Fund is invested in banks, insurance and other financial
companies, compared to just over 13% for the S&P 500. The individual companies
we have identified in these businesses have earnings growth prospects that,
while not rapid, continue to be stable, and price-to-earnings multiples that are
well below that of the S&P 500.
. Retail The Fund's retail position is just over 8%, compared to 5% for the
S&P 500. Despite the continuation of a very competitive environment, a number
of the Fund's retail holdings appear to be in the early stages of a profit
recovery. The retail sector has been among the best performing groups in the
first half of 1996, after very weak performance in 1995. We have modestly
trimmed some of the Fund's holdings in this area, but we still believe that
valuations are reasonable and long-term prospects are attractive.
. Technology While we have only a modestly higher concentration than the S&P
500, roughly 12% versus 10%, the Fund is invested in companies whose stocks are
in the lower end of the valuation range for the technology sector. The Fund's
holdings are well established companies with substantial technological
expertise, and their stocks are selling at low-to-average valuations relative to
the S&P 500.
================================================================================
Dodge & Cox One Sansome Street San Francisco, California 94104
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D O D G E & C O X
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Stock Fund
Focus on A Lagging Stock
One of our objectives in our quarterly letters to shareholders is to give you an
understanding of how we invest your money. We thought it would be instructive
to look at a stock in the Fund that has not performed up to our expectations
over the last 18 months: Whirlpool Corporation. Please note that this company
is discussed as an example of our research and investment process, not because
we believe it is necessarily more attractive than the Fund's other investments.
We first invested in Whirlpool in the Fund in 1989 at a price of $32. The
company had a significant advance in earnings from 1990 to 1994, but a
combination of factors--new plant start-up problems, the recession in Mexico,
investments in Asia and increased domestic competition--depressed Whirlpool's
earnings in 1995 and so far in 1996. In the last 18 months, the S&P 500 had a
cumulative total return just over 51%; during this same time period, Whirlpool
has returned only 2.8%.
Why have we maintained the Fund's ownership in the company during this difficult
period? Because we believe that Whirlpool is well on its way to becoming a
global leader in consumer appliances. The company has already established a
strong competitive position in Europe and is taking the necessary steps to do
the same in Asia. With an estimated $9 billion of 1996 revenues, or $120 per
share (40% of which are from outside the U.S.), we are optimistic that Whirlpool
has good long-term profit opportunities as its global strategy matures. At a
recent price of $50 per share, we believe the stock's valuation is attractive
relative to its potential earnings power.
Underperformance by a stock is not sufficient reason by itself to abandon it as
an investment. With our accumulated knowledge of companies' fundamentals, we
continually ask ourselves how we would invest today for the next three to five
years. Although we will not always be right in our selection of stocks, we
believe that persistence and patience are key ingredients for long-term
investment success.
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Thoughts on Our Team Approach
The Dodge & Cox Funds utilize a team approach to investment management, unlike
many mutual funds that designate individual managers to make investment
decisions. The investment process begins with intensive fundamental research
performed by our thirteen in-house equity and fixed income analysts. Our
portfolio managers, all of whom began their careers as analysts, are often
involved in the research process. When purchase or sale of a security is
advocated, a group discussion of the investment's merits and risks takes place.
Our Investment Policy Committee--consisting of Dodge & Cox's most senior
investment professionals--reviews each investment recommendation and makes the
final decision. The eight member Policy Committee has an average of 18 years of
experience at Dodge & Cox.
A collegial atmosphere is crucial to the success of this kind of team-oriented
investing, and at Dodge & Cox we have a group of professionals that work
extremely well together. Most of our professionals began their investment
careers at Dodge & Cox, and our firm has been fortunate to have unusually low
turnover of our analysts and portfolio managers. This combination of individual
security analysis and group decision making is a distinguishing feature of Dodge
& Cox and is central to our investment approach.
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In Closing
Thank you for your continued confidence in the Dodge & Cox Stock Fund. As
always, we welcome your comments and questions.
Dodge & Cox
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