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D O D G E & C O X
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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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.
D O D G E & C O X
Stock Fund
Established 1965
Quarterly Report
September 30, 1997
1997
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[RECYCLED PAPER
LOGO APPEARS HERE]
Printed on recycled paper. 9/97 SF QR
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D O D G E & C O X
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Stock Fund
To Our Shareholders
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In the quarter ended September 30, 1997, the Dodge & Cox Stock Fund had a total
return of 10.2% versus 7.5% for the Standard & Poor's 500 Index (S&P 500) of
common stocks. The Fund's performance in the third quarter increased its
year-to-date total return to 30.4%, versus 29.6% for the S&P 500. Average annual
total returns for longer time periods are listed on page three of this report.
Performance Overview
The Fund's holdings in banking, electronics/computer, consumer durables, retail
and paper/forest products industries were important contributors to performance
in the third quarter. Weak relative performers included holdings in the capital
equipment and consumer products industries.
In our last letter we outlined our interest in the utilities sector. We believe
the area is attractive due to low valuations, along with our assessment that
certain companies' managements are adjusting to a deregulated environment.
Although these stocks have lagged the market, we have continued to gradually
expand the Fund's exposure in the gas and electric utility industry. The Fund
now holds seven stocks in this area with a total portfolio weighting of about
6%.
Always Looking at Laggards
We believe it is important to remind our shareholders that we are long-term
investors. Half of the 75 holdings in the portfolio have been held five and a
half years or longer. We do not base investment decisions on speculations about
short-term developments; rather, each decision to buy or sell a stock is based
on our assessment of its investment potential over a three to four year time
horizon. Similarly, each holding in the portfolio is continually reviewed in
terms of its long-term outlook.
Over shorter time periods, companies that we purchase don't always perform as
well as we would like. Reviewing and evaluating investments that have had
disappointing performance is an important task, because companies that appear to
be floundering in the short run can perhaps be strong positive contributors to a
portfolio's future investment results. For example, our investment in Pharmacia
& Upjohn has proved disappointing this year. Pharmacia & Upjohn is a large drug
company that has undergone a significant management change. A key executive from
American Home Products, Fred Hassan, was brought in to run the company earlier
this year. We have talked with him and believe that he can bring a new profit
discipline to the company. Based on our analysis of the situation and Pharmacia
& Upjohn's low valuation, especially in relation to other pharmaceutical
companies, we believe the stock is a good value.
Union Pacific is another company that has underperformed in a strong market.
During the last year, the company has been working on merging the operations of
Southern Pacific, acquired in late 1996, with its own operations. Union Pacific
has hit many snags, resulting in delays in customer shipments. Management has a
solid long-term operating record and is diligently addressing the problems. We
remain confident in the stock's attractiveness, especially when we look at the
low valuation of the company today.
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Stock Fund
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As in the above two cases, companies often have their progress delayed by
extraordinary factors such as personnel changes, management mistakes, or a
deteriorating environment. These factors can result in the stock price stalling
relative to the market. Disappointing performance causes us to intensify our
research effort, and often we end up knowing more as other investors' interest
wanes. In these cases, we occasionally add to our position. In short, we are
enormously persistent investors. However, we are not stubborn about holding a
stock that has underperformed. Instead of burying our heads in the sand, we ask
ourselves the following question: At its current price, would we buy the stock
today in an all-cash portfolio, looking out over a time horizon of three to four
years? If the answer is yes, we stick with it. We have used these two companies
as an example of our process, not because we believe their outlook is any more
promising than the other 73 holdings in the portfolio.
Closing Note - A Word of Caution
The total return on the Dodge & Cox Stock Fund over the past twelve months was
41.9%, a level of return not equaled by the Fund during the past twenty calendar
years. Although our past words of caution on the subject have been premature, we
believe that it is worth mentioning again that equity returns have been
unusually high during the past few years. While we remain optimistic about
prospects for the world and U.S. economies, possible inflationary pressures
(e.g., in labor costs) need to be closely monitored. In our opinion, the current
high valuation of certain large capitalization common stocks, referred to as the
New Nifty Fifty, leaves little margin for disappointment. We continue to look
for more reasonably valued stocks in this market environment. In fact, the
efforts of our team of research analysts have led to new positions in 12
companies since the beginning of 1997. Despite our optimism about individual
company prospects in the Fund's portfolio, we continue to expect more modest
returns looking forward.
Thank you for your continued confidence in the Dodge & Cox Stock Fund. As
always, we welcome your comments and questions.
For the Board of Directors,
/s/ John A. Gunn
October 24, 1997 John A. Gunn, President
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D O D G E & C O X
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Stock Fund
Objective The Fund's primary objective is to provide shareholders with an
opportunity for long-term growth of principal and income. A
secondary objective is to achieve a reasonable current income.
Strategy The Fund seeks to achieve these objectives by remaining fully
invested in well-established companies which, in the view of
Dodge & Cox, have positive earnings prospects not reflected in
the current price. Dodge & Cox makes a conscious effort to
maintain representation in major economic sectors and areas
with strong long-term profit potential. The strategy is based
on a long-term investment horizon and, as a result, portfolio
turnover tends to be low.
20 Years of Investment Performance through September 30, 1997
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[LINE GRAPH APPEARS HERE]
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<CAPTION>
Dodge & Cox S & P 500
Stock Fund Index
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<S> <C> <C>
10/1/1977 10,000 10,000
9/30/1978 11,546 11,185
9/30/1979 13,128 12,589
9/30/1980 15,963 15,245
9/30/1981 16,083 14,800
9/30/1982 17,795 16,253
9/30/1983 26,431 23,464
9/30/1984 26,939 24,576
9/30/1985 32,435 28,147
9/30/1986 42,285 37,091
9/30/1987 63,609 53,204
9/30/1988 56,284 46,622
9/30/1989 71,624 62,002
9/30/1990 63,342 56,268
9/30/1991 81,969 73,806
9/30/1992 88,480 81,961
9/30/1993 109,722 92,608
9/30/1994 117,091 96,021
9/30/1995 150,148 124,579
9/30/1996 174,976 149,898
9/30/1997 248,381 210,492
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended September 30, 1997 1 Year 5 Years 10 Years 20 Years
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<S> <C> <C> <C> <C>
Dodge & Cox Stock Fund 41.91% 22.92% 14.59% 17.42%
S&P 500 Index 40.42 20.76 14.74 16.46
</TABLE>
The chart covers the period from October 1, 1977 to September 30, 1997. It
compares a $10,000 investment made in the Dodge & Cox Stock Fund to a $10,000
investment made in the Standard & Poor's 500 Stock (S&P 500) Index. The Fund's
total returns include the reinvestment of dividend and capital gain
distributions. The S&P 500 Index is a broad based, unmanaged measure of common
stocks. Index returns include dividends and, unlike Fund returns, do not reflect
fees and expenses. Past performance does not guarantee future results.
Investment return and share price will fluctuate with market conditions, and
investors may have a gain or a loss when shares are sold.
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D O D G E & C O X
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Stock Fund
Fund Information September 30, 1997
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General Information
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<S> <C>
Net Asset Value Per Share $102.27
Total Net Assets (millions) $3,900
1996 Expense Ratio 0.59%
1996 Portfolio Turnover 10%
Quarterly Distribution to Shareholders
of Record 9/25/97 (per share): $0.40 Dividend
Fund Inception Date 1965
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Investment Manager: Dodge & Cox, San Francisco.
Managed by eight-member Investment Policy Committee,
with members' average tenure at Dodge & Cox of 19 years.
Stock Characteristics
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<S> <C>
Number of Stocks 75
Median Market Capitalization $9.2 billion
Price to Earnings Ratio (trailing 12 months) 21.6x
Price to Book Value (trailing 12 months) 3.0x
Foreign Stocks* (as percentage of Fund) 8%
</TABLE>
Ten Largest Stock Holdings % of Fund
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<TABLE>
<S> <C>
General Motors 3.0
Digital Equipment 2.3
Union Pacific 2.2
Federal Express 2.2
Citicorp 2.2
International Business Machines 2.2
American Express 2.1
Kmart 2.0
Dow Chemical 2.0
Pharmacia & Upjohn 1.8
</TABLE>
Asset Allocation
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[PIE CHART APPEARS HERE]
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<S> <C>
Stocks: 89.8%
Short-Term Investments: 10.2%
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Ten Largest Sectors % of Fund
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<S> <C>
Electronics & Computer 9.5
Energy 9.3
Banking 7.7
Consumer Durables 7.6
Insurance & Financial Services 6.7
Retail & Distribution 6.5
Consumer Products 6.4
Electric & Gas Utilities 6.0
Transportation 5.6
Paper & Forest Products 5.3
</TABLE>
* All U.S. Dollar-denominated.
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Stock Fund
Portfolio of Investments September 30, 1997
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<TABLE>
<CAPTION>
Percentage of Fund
<S> <C>
COMMON STOCKS: 89.4%
CONSUMER: 24.0%
CONSUMER DURABLES: 7.6%
General Motors Corp. .................................................. 3.0
Whirlpool Corp. ....................................................... 1.8
Ford Motor Co. ........................................................ 1.6
Masco Corp. ........................................................... 1.2
RETAIL AND DISTRIBUTION: 6.5%
Kmart Corp. ........................................................... 2.0
Nordstrom, Inc. ....................................................... 1.6
Dillard's, Inc. Class A ............................................... 1.2
Dayton Hudson Corp. ................................................... 1.1
Genuine Parts Co. ..................................................... 0.4
Fleming Cos., Inc. .................................................... 0.2
CONSUMER PRODUCTS: 6.4%
Sony Corp. ADR ........................................................ 1.4
Unilever NV ........................................................... 1.0
Matsushita Electric, Inc. ADR ......................................... 1.0
Bausch & Lomb, Inc. ................................................... 0.8
Fort James Corp. ...................................................... 0.8
Dole Food Co., Inc. ................................................... 0.8
VF Corp. .............................................................. 0.6
MEDIA, PRINTING AND ENTERTAINMENT: 3.5%
R.R. Donnelley & Sons Co. ............................................. 1.7
Time Warner, Inc. ..................................................... 1.0
Dow Jones & Co. ....................................................... 0.8
FINANCE: 14.4%
BANKING: 7.7%
Citicorp .............................................................. 2.2
Golden West Financial Corp. ........................................... 1.7
BankAmerica Corp. ..................................................... 1.5
Republic New York Corp. ............................................... 1.3
Norwest Corp. ......................................................... 1.0
INSURANCE AND FINANCIAL SERVICES: 6.7%
American Express Co. .................................................. 2.1
Loews Corp. ........................................................... 1.5
The St. Paul Cos., Inc. ............................................... 1.2
Chubb Corp. ........................................................... 1.1
General Re Corp. ...................................................... 0.8
BASIC INDUSTRY: 10.8%
PAPER AND FOREST PRODUCTS: 5.3%
Weyerhaeuser Co. ...................................................... 1.6
International Paper Co. ............................................... 1.5
Champion International Corp. .......................................... 1.5
Boise Cascade Corp. ................................................... 0.7
CHEMICALS: 3.8%
Dow Chemical Co. ...................................................... 2.0
Eastman Chemical Co. .................................................. 0.7
Nalco Chemical Co. .................................................... 0.7
Lubrizol Corp. ........................................................ 0.4
METALS AND MINING: 1.7%
Aluminum Co. of America ............................................... 1.7
ELECTRONICS AND COMPUTER: 9.5%
Digital Equipment Corp. ............................................... 2.3
International Business Machines Corp. ................................. 2.2
Hewlett-Packard Co. ................................................... 1.6
Motorola, Inc. ........................................................ 1.3
Electronic Data Systems ............................................... 1.1
NCR Corp. ............................................................. 0.5
Sybase, Inc. .......................................................... 0.5
ENERGY: 9.3%
Amerada Hess Corp. .................................................... 1.8
Union Pacific Resources Group, Inc. ................................... 1.6
Phillips Petroleum Co. ................................................ 1.5
Occidental Petroleum Corp. ............................................ 1.2
Chevron Corp. ......................................................... 1.2
Western Atlas, Inc. ................................................... 1.0
Royal Dutch Petroleum Co. ............................................. 1.0
UTILITIES: 6.9%
ELECTRIC AND GAS UTILITIES: 6.0%
Central & South West Corp. ............................................ 1.3
Texas Utilities Co. ................................................... 1.1
FPL Group, Inc. ....................................................... 1.0
TransCanada PipeLines Ltd. ............................................ 0.8
Wisconsin Energy Corp. ................................................ 0.6
Pacific Enterprises ................................................... 0.6
Edison International .................................................. 0.6
TELEPHONE: 0.9%
BCE, Inc. ............................................................. 0.9
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Stock Fund
Portfolio of Investments September 30, 1997
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<TABLE>
<CAPTION>
Percentage of Fund
<S> <C>
COMMON STOCKS (Continued)
TRANSPORTATION: 5.6%
Union Pacific Corp. ................................................... 2.2
Federal Express Corp. ................................................. 2.2
Canadian Pacific Ltd. ................................................. 1.2
HEALTHCARE AND PHARMACEUTICAL: 3.2%
Pharmacia & Upjohn, Inc. .............................................. 1.8
SmithKline Beecham plc ADR ............................................ 0.8
HealthCare COMPARE Corp. .............................................. 0.6
CAPITAL EQUIPMENT: 2.9%
Deere & Co. ........................................................... 1.6
Caterpillar, Inc. ..................................................... 1.3
DIVERSIFIED TECHNOLOGY: 1.9%
Xerox Corp. ........................................................... 0.8
Corning, Inc. ......................................................... 0.8
Raychem Corp. ......................................................... 0.3
MISCELLANEOUS: 0.9%
REAL ESTATE INVESTMENT TRUST: 0.9%
Meditrust ............................................................. 0.9
PREFERRED STOCKS: 0.4%
CONSUMER: 0.4%
News Corp Ltd., Limited Voting Ordinary Shares ADR .................... 0.3
Kmart Financing I, 7 3/4% Trust Convertible Preferred .................. 0.1
SHORT-TERM INVESTMENTS: 10.6%
OTHER ASSETS LESS LIABILITIES: (0.4%)
TOTAL NET ASSETS: 100.0%
</TABLE>
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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Stock Fund
General Information
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Investment Manager
Since 1930, Dodge & Cox has been providing professional investment management
for individuals, trustees, corporations, pension and profit-sharing funds, and
charitable institutions. Dodge & Cox manages the Dodge & Cox Stock Fund, the
Dodge & Cox Balanced Fund and the Dodge & Cox Income Fund.
No-Load Fund
Shares of the Fund are purchased and redeemed at net asset value. There are no
sales, redemption or Rule 12b-1 plan distribution charges.
Gifts
Fund shares provide a convenient method for making gifts to children and to
other family members. 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.
Automatic Investment Plan
Shareholders may make regular monthly or quarterly 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.
Reinvestment Plan
Shareholders may direct that dividend and capital gains distributions be
reinvested in additional Fund shares.
The above plans are completely voluntary and involve no service charge of any
kind.
IRA Plan
The Fund has an Individual Retirement Plan (IRA) available for shareholders of
the Fund.
Shareholder Inquiries
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
(800) 621-3979
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