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D O D G E & C O X D O D G E & C O X
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Stock Fund
Stock Fund
Established 1965
Investment Managers -----------------
Dodge & Cox
One Sansome Street -----------------
35th Floor
San Francisco
California 94104-4405
(415) 981-1710
For Fund literature and
Information, please
write or call:
Dodge & Cox Funds
c/o BFDS
P.O. Box 9051
Boston
Massachusetts 02205-9051
(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 Quarterly Report
in the Fund unless it is March 31, 1998
accompanied by an effective
prospectus. 1998
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Printed on recycled paper.
3/98 BF 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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During the first quarter ended March 31, 1998, the Dodge & Cox Stock Fund
achieved a total return of 9.72%, compared to 13.95% for the Standard & Poor's
500 Index (S&P 500) of common stocks. Average annual total returns for longer
time periods are listed on page three of this report.
Performance Overview
Important contributors to the Fund's performance in the first quarter included
investments in the consumer durables, retailing, paper/forest products and
diversified technology industries. Fund returns were hindered by the weak
relative performance of investments in the electronics/computer, energy,
insurance/financial services and electric utilities industries.
While the absolute performance of the Fund in the first quarter was strong,
performance relative to the S&P 500 was disappointing. Although short-term
relative results of the Fund have been below our expectations, we believe the
Fund's current portfolio is well positioned for the future.
Challenging Environment for a Value-Oriented Investor
Positioning an equity portfolio for good future returns is never an easy task.
Today it is a significant challenge. Since the end of 1994 the equity market has
soared. The S&P 500 has provided an annual rate of return of 31% from the end of
1994 through 1997, and increased again by 14% in the first three months of 1998.
The forces that have propelled the market are not imaginary. Earnings expanded
at a 15% annualized rate from the previous economic trough in earnings in 1991
to 1997. Due in part to this extended economic expansion, unemployment rates are
currently at low levels. Inflation also remains quite low. In an economic sense,
the market has arguably enjoyed the best of all possible scenarios, and current
valuations reflect that. Valuation for the S&P 500, as measured by the ratio of
price divided by earnings (P/E), is very high compared to historical averages.
Since 1926, there have been only a few times when the market's P/E was higher,
but these were periods when corporate earnings were quite depressed, thus
providing a distorted picture. Today, profit margins (net income as a percent of
revenues) are also at the high end of their historical range. In summary, strong
earnings growth and low inflation have combined to push valuations to levels
seldom seen.
While the market is high, the prospects for U.S. and world economic growth
remain good. Most economic forecasts are for "sunny and fair conditions," and it
is difficult to see threatening "clouds" on the horizon. One potential cloud,
the developments in Asia, bears watching, but at this point it does not appear
to be leading to a worldwide "storm." In fact, the events in Asia confirm the
trend of more and more countries shifting towards true market-based economies.
In addition, major technological advances ripple throughout the world economy.
Capital and knowledge are mobile, and billions of citizens of the developing
world are getting organized to produce and consume more. These very positive,
long-lived trends bode well for the global economy.
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D o d g e & C o x
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Stock Fund
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So what does one do now?
Current Portfolio Position and Strategy
Currently the Fund is positioned very differently from the S&P 500, the most
widely referenced broad market index. About 43% of this index, by market value,
consists of what we consider to be high valuation stocks. This "high valuation"
group has an average P/E ratio of 35 times 1997 earnings (vs. 23 for the rest of
the S&P 500), and the market value of the companies is 3.5 times their annual
revenues (the price to sales ratio, or P/S ratio). By comparison, only 5% of the
Fund's portfolio is invested in this area. Many are fine companies with high
profit margin and revenue growth expectations. However, their high valuations
keep us from investing in these stocks.
Instead, the Fund's equity portfolio is positioned in the lower valuation
sectors (average P/S ratio of 1.0), while continuing to be economically
diversified. We believe that over a three-year period this will be a more
rewarding position, but it has clearly penalized relative investment returns
recently. The high valuation sector had a total return about double that of the
rest of the S&P 500 in the past six months.
Two of the Fund's areas of emphasis are industrial commodities and energy,
representing just over 20% of the Fund's assets. The Fund invests in individual
companies we have identified with attractive long-term prospects and reasonable
valuations. The valuation of many companies in the energy/industrial commodity
sector are at relative lows compared to the market. If the world economy
continues to grow, demand will grow for the basic "building blocks" of
industrial production, like oil, chemicals, aluminum and forest products. While
a number of these commodities appear to have short-term oversupply conditions,
in a growing market-based world economy we believe it is unlikely that this
demand/supply imbalance will continue indefinitely. We believe these sectors are
fertile ground for long-term investment.
Closing Note
We believe that persistence is a key asset in investing. We think that you, the
Fund's shareholders, are best served by our continuing focus on the long-term
return potential of each individual security, based on our assessment of its
fundamentals and valuation. We have not made major changes in the Fund's
portfolio, despite the short-term relative underperformance. We believe the Fund
will provide reasonable long-term returns. Our mission is to continue to work
hard to find value in an expensive market.
Thank you for your continued confidence in the Dodge & Cox Stock Fund. As
always, we welcome your comments and questions.
For the Board of Trustees,
/s/ Harry R. Hagey /s/ John A. Gunn
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Harry R. Hagey, Chairman John A. Gunn, President
May 1, 1998
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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 investing 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 March 31, 1998
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[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dodge & Cox S & P 500
Stock Fund Index
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<S> <C> <C>
4/01/1978 10,000 10,000
3/31/1979 12,427 11,998
3/31/1980 13,072 12,745
3/31/1981 18,833 17,815
3/31/1982 17,150 15,449
3/31/1983 24,148 22,292
3/31/1984 27,446 24,238
3/31/1985 31,761 28,824
3/31/1986 45,656 39,693
3/31/1987 57,062 50,100
3/31/1988 55,856 45,926
3/31/1989 63,888 54,253
3/31/1990 75,444 64,714
3/31/1991 82,389 74,027
3/31/1992 89,464 82,204
3/31/1993 105,728 94,717
3/31/1994 115,248 96,115
3/31/1995 133,815 111,068
3/31/1996 172,975 146,713
3/31/1997 203,901 175,796
3/31/1998 280,422 260,139
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for
periods ended March 31, 1998 1 Year 5 Years 10 Years 20 Years
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<S> <C> <C> <C> <C>
Dodge & Cox Stock Fund 37.52% 21.53% 17.51% 18.14%
S&P 500 Index 47.98 22.39 18.94 17.70
</TABLE>
The chart covers the period from April 1, 1978 to March 31, 1998. 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 March 31, 1998
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<TABLE>
<CAPTION>
General Information
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<S> <C>
Net Asset Value Per Share $101.85
Total Net Assets (millions) $4,738
1997 Expense Ratio 0.57%
1997 Portfolio Turnover 19%
Fund Inception Date 1965
</TABLE>
Investment Manager: Dodge & Cox, San Francisco. Managed by
ten-member Bond Strategy Committee, with members' average
tenure at Dodge & Cox of 12 years.
<TABLE>
<CAPTION>
Asset Allocation
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<S> <C>
[PIE CHART APPEARS HERE]
Stocks: 90.7%
Short-Term Investments: 9.3%
</TABLE>
<TABLE>
<CAPTION>
Stock Characteristics
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<S> <C>
Number of Stocks 74
Median Market Capitalization $10.2 billion
Price to Earnings Ratio* 21.8x
Price to Book Value (trailing 12 months) 3.5x
Foreign Stocks** (as percentage of Fund) 9%
</TABLE>
<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
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<S> <C>
General Motors 2.8
Citicorp 2.6
Motorola 2.3
Dow Chemical 2.3
Kmart 2.1
FDX Corp. 2.1
Pharmacia & Upjohn 2.1
American Express 2.0
Occidental Petroleum 2.0
Aluminum Co. of America 2.0
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<TABLE>
<CAPTION>
Ten Largest Sectors % of Fund
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<S> <C>
Energy 9.0
Electronics & Computer 8.7
Banking 8.3
Insurance & Financial Services 6.8
Electric & Gas Utilities 6.5
Consumer Products 6.4
Retail & Distribution 6.1
Consumer Durables 5.7
Transportation 5.4
Media, Printing & Entertainment 5.1
</TABLE>
* Price to earnings ratio is calculated using trailing 12-month earnings
and excludes extraordinary items.
** All U.S. Dollar-denominated.
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D o d g e & C o x
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Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1998
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Percentage of Fund
<S> <C>
COMMON STOCKS: 89.1%
CONSUMER: 21.7%
CONSUMER PRODUCTS: 6.4%
Sony Corp. ADR................................................. 1.4
Matsushita Electric Industrial Co., Ltd. ADR................... 1.3
Unilever NV.................................................... 1.1
Fort James Corp................................................ 1.0
Dole Food Co., Inc............................................. 0.8
Bausch & Lomb, Inc............................................. 0.8
RETAIL AND DISTRIBUTION: 6.0%
Kmart Corp..................................................... 2.1
Nordstrom, Inc................................................. 1.4
Genuine Parts Co............................................... 1.2
Dillard's, Inc. Class A........................................ 1.1
Fleming Cos., Inc.............................................. 0.2
CONSUMER DURABLES: 5.7%
General Motors Corp............................................ 2.8
Whirlpool Corp................................................. 1.6
Ford Motor Co.................................................. 1.3
MEDIA, PRINTING, AND ENTERTAINMENT: 3.6%
R.R. Donnelley & Sons Co....................................... 1.9
Time Warner, Inc............................................... 1.0
Dow Jones & Co................................................. 0.7
FINANCE: 15.1%
BANKING: 8.3%
Citicorp....................................................... 2.6
Republic New York Corp......................................... 1.7
Golden West Financial Corp..................................... 1.5
BankAmerica Corp............................................... 1.4
Norwest Corp................................................... 1.1
INSURANCE AND FINANCIAL SERVICES: 6.8%
American Express Co............................................ 2.0
Loews Corp..................................................... 1.5
The St. Paul Cos., Inc......................................... 1.2
Chubb Corp..................................................... 1.0
General Re Corp................................................ 0.7
Associates First Capital Corp.................................. 0.4
BASIC INDUSTRY: 12.3%
PAPER AND FOREST PRODUCTS: 5.1%
Weyerhaeuser Co................................................ 1.8
International Paper Co......................................... 1.4
Champion International Corp.................................... 1.3
Boise Cascade Corp............................................. 0.6
CHEMICALS: 4.3%
Dow Chemical Co................................................ 2.3
Eastman Chemical Co............................................ 1.1
Nalco Chemical Co.............................................. 0.6
Lubrizol Corp.................................................. 0.3
METALS AND MINING: 2.0%
Aluminum Co. of America........................................ 2.0
GENERAL MANUFACTURING: 0.9%
Archer Daniels Midland Co...................................... 0.9
ENERGY: 9.0%
Occidental Petroleum Corp...................................... 2.0
Amerada Hess Corp.............................................. 1.8
Union Pacific Resources Group, Inc............................. 1.7
Phillips Petroleum Co.......................................... 1.5
Chevron Corp................................................... 1.2
Royal Dutch Petroleum Co....................................... 0.8
ELECTRONICS AND COMPUTER: 8.7%
Motorola, Inc.................................................. 2.3
International Business Machines Corp........................... 1.6
Hewlett-Packard Co............................................. 1.5
Electronic Data Systems........................................ 1.3
NCR Corp....................................................... 1.1
Adobe Systems, Inc............................................. 0.4
National Semiconductor Corp.................................... 0.3
Sybase, Inc.................................................... 0.2
UTILITIES: 7.5%
ELECTRIC AND GAS UTILITIES: 6.5%
Central & South West Corp...................................... 1.3
Texas Utilities Co............................................. 1.0
Pacific Gas & Electric Corp.................................... 1.0
FPL Group, Inc................................................. 1.0
TransCanada PipeLines Ltd...................................... 0.9
Wisconsin Energy Corp.......................................... 0.8
Edison International........................................... 0.5
</TABLE>
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Stock Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1998
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Percentage of Fund
<S> <C>
COMMON STOCKS (Continued)
TELEPHONE: 1.0%
BCE, Inc...................................................... 1.0
TRANSPORTATION: 5.4%
FDX Corp...................................................... 2.1
Union Pacific Corp............................................ 1.9
Canadian Pacific Ltd.......................................... 1.4
CAPITAL EQUIPMENT: 4.3%
Deere & Co.................................................... 1.6
Caterpillar, Inc.............................................. 1.4
Fluor Corp.................................................... 1.3
HEALTHCARE AND PHARMACEUTICAL: 2.6%
Pharmacia & Upjohn, Inc....................................... 2.1
First Health Group Corp....................................... 0.5
DIVERSIFIED TECHNOLOGY: 2.5%
Xerox Corp.................................................... 1.0
Corning, Inc.................................................. 1.0
Unova, Inc.................................................... 0.3
Raychem Corp.................................................. 0.2
PREFERRED STOCKS: 1.6%
CONSUMER: 1.6%
News Corp. Ltd., Limited Voting Ordinary Shares ADR........... 1.5
Kmart Financing I, 7 3/4% Trust Convertible Preferred......... 0.1
SHORT-TERM INVESTMENTS: 9.4%
OTHER ASSETS LESS LIABILITIES: (0.1)%
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 Since 1930, Dodge & Cox has been providing professional
Manager 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 Shares of the Fund are purchased and redeemed at net asset
Fund 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 Shareholders may make regular monthly or quarterly investments
Investment of $100 or more through automatic deductions from their bank
Plan accounts.
Automatic Shareholders may make regular monthly or quarterly investments
Investment Plan of $100 or more through automatic deductions
from their bank accounts.
Withdrawal Shareholders owning $10,000 or more of the Fund's shares may
Plan 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 Shareholders may direct that dividend and capital gains
Plan 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 a Regular and Roth Individual Retirement Account
Plan (IRA) available for shareholders of the Fund.
Shareholder Fund literature and details on all of these Plans are
Inquiries available from the Fund upon request.
Dodge & Cox Income Fund
c/o BFDS
P.O. Box 9051
Boston, MA 02205-9051
(800) 621-3979
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