<PAGE>
DODGE & COX
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Income Fund
Established 1989
Semi-Annual Report
June 30, 1995
1995
- --------------------------------------------------------------------------------
DODGE & COX
Income Fund
- --------------------------------------------------------------------------------
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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Income Fund
<TABLE>
<CAPTION>
Financial Highlights
-------------------------------------------------------------------------------------------------------------------------
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........................ $10.74 $11.89 $11.55 $11.59 $10.61 $10.68
Income from investment operations:
Investment income........................................... .42 .83 .85 .89 .88 .89
Expenses.................................................... (.03) (.06) (.07) (.07) (.07) (.07)
------ ------ ------ ------ ------ ------
Net investment income....................................... .39 .77 .78 .82 .81 .82
Net realized and unrealized gain (loss) on investments...... .98 (1.11) .51 .05 1.02 (.07)
------ ------ ------ ------ ------ ------
Total income from investment operations..................... 1.37 (.34) 1.29 .87 1.83 .75
------ ------ ------ ------ ------ ------
Distributions:
Dividends from net investment income........................ (.39) (.76) (.78) (.82) (.82) (.81)
Distribution from net realized gain on investments.......... -- (.05) (.17) (.09) (.03) (.01)
------ ------ ------ ------ ------ ------
Total distributions......................................... (.39) (.81) (.95) (.91) (.85) (.82)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD.............................. $11.72 $10.74 $11.89 $11.55 $11.59 $10.61
====== ====== ====== ====== ====== ======
TOTAL RETURN................................................ % 12.88 (2.89) 11.34 7.80 17.94 7.41
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)........................ $ 226 $ 195 $ 180 $ 136 $ 96 $ 52
Ratio of expenses to average net assets..................... % .54* .54 .60 .62 .64 .69
Ratio of net investment income to average net assets........ % 6.97* 6.90 6.50 7.14 7.63 7.99
Portfolio turnover rate..................................... % 30 55 26 12 15 13
*Annualized
</TABLE>
<TABLE>
<CAPTION>
6.5 Years
Average annual total return for periods ended June 30, 1995 1 Year 5 Years (Since inception)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 14.02% 10.33% 10.39%
Lehman Bros. Aggregate Bond Index 12.55 9.41 9.89
</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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1
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DODGE & COX
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1995
---------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS: U.S. GOVERNMENT: 18.3%
93.3% $14,000,000 U.S. Treasury Notes, 4 1/4%, 1995........................................... $ 13,984,740
2,500,000 U.S. Treasury Notes, 6 1/2%, 1996........................................... 2,523,050
24,200,000 U.S. Treasury Notes, 7 7/8%, 1996........................................... 24,718,122
-------------
41,225,912
FEDERAL AGENCY: 0.3%
619,000 Patriot II Shipping-Leo U.S. Govt. Gtd. Title XI, 8%, 2003.................. 636,023
FEDERAL AGENCY MORTGAGE PASS-THROUGH: 37.7%
171,419 Federal Home Loan Mtge. Corp. Group 54-1078, 6%, 2003....................... 169,705
201,868 Federal Home Loan Mtge. Corp. Group 25-5222, 7%, 2003....................... 201,868
3,354,952 Federal Home Loan Mtge. Corp. Group 25-6654, 8%, 2003....................... 3,418,562
536,407 Federal Home Loan Mtge. Corp. Group 18-0233, 7%, 2006....................... 537,748
355,837 Federal Home Loan Mtge. Corp. Group 26-0478, 7%, 2006....................... 355,837
1,052,693 Federal Home Loan Mtge. Corp. Group 27-2784, 7 1/4%, 2008................... 1,061,904
296,680 Federal Home Loan Mtge. Corp. Group 53-0142, 7 1/2%, 2008................... 302,243
711,191 Federal Home Loan Mtge. Corp. Group 18-8028, 8%, 2008....................... 725,578
608,577 Federal Home Loan Mtge. Corp. Group 18-9269, 8%, 2008....................... 620,116
556,984 Federal Home Loan Mtge. Corp. Group 29-0537, 8%, 2009....................... 572,301
1,146,725 Federal Home Loan Mtge. Corp. Group 29-2668, 8%, 2009....................... 1,170,726
459,350 Federal Home Loan Mtge. Corp. Group 26-0671, 8 1/4%, 2009................... 469,208
435,411 Federal Home Loan Mtge. Corp. Group 53-4727, 6 1/2%, 2012................... 432,690
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series G-37 I, 6%, 2022.............. 9,012,500
5,102,427 Federal Natl. Mtge. Assn. MBS Pool 57358, 6 1/4%, 2007...................... 5,047,015
10,127,801 Federal Natl. Mtge. Assn. MBS Pool 70255, 7 1/2%, 2007...................... 10,355,677
1,375,058 Federal Natl. Mtge. Assn. MBS Pool 478, 7 1/2%, 2011........................ 1,399,548
2,678,175 Federal Natl. Mtge. Assn. MBS Pool 151777, 8%, 2012......................... 2,756,083
841,290 Federal Natl. Mtge. Assn. MBS Pool 83014, 6 1/2%, 2013...................... 837,084
3,948,577 Federal Natl. Mtge. Assn. MBS Pool 260892, 8%, 2022......................... 4,081,999
3,000,000 Federal Natl. Mtge. Assn. PC 1992-109-J, 7%, 2007........................... 2,985,000
9,000,000 Federal Natl. Mtge. Assn. PC 1994-72-J, 6%, 2023............................ 8,111,250
10,000,000 Veterans Affairs Vendee Mtge. Trust 1994-2-3F, 6 1/2%, 2015................. 9,437,500
10,000,000 Veterans Affairs Vendee Mtge. Trust 1995-1C 3E, 8%, 2018.................... 10,550,000
10,000,000 Veterans Affairs Vendee Mtge. Trust 1995-2 4A, 9.29%, 2025.................. 10,600,000
-------------
85,212,142
COLLATERALIZED MORTGAGE OBLIGATION: 0.5%
1,100,007 FBC Mtge. Sec. Trust IV-A2, 8.30%, 2009..................................... 1,130,939
</TABLE>
See accompanying Notes to Financial Statements
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1995
---------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS INDUSTRIAL: 9.7%
(Continued) $ 2,000,000 Caterpillar, Inc. Debentures 8%, 2023....................................... $ 2,149,020
2,650,000 Dayton-Hudson Corp. Debentures 9%, 2021..................................... 3,012,653
2,850,000 Dayton-Hudson Corp. Debentures 8 7/8%, 2022................................. 3,201,633
3,000,000 Ford Holdings, Inc. Debentures 9 3/8%, 2020................................. 3,583,350
2,000,000 Ford Motor Co. Debentures 9.95%, 2032....................................... 2,578,100
4,500,000 Time Warner Entertainment Senior Debentures 8 3/8%, 2033.................... 4,426,875
2,500,000 Union Camp Corp. Debentures 9 1/4%, 2011.................................... 2,971,250
-------------
21,922,881
FINANCE: 9.3%
1,839,342 Banamex Export Funding Corp. Coll. Notes Series K, 5.74%, 1997.............. 1,825,547
3,960,000 Bank of Boston Subordinated Notes 6 5/8%, 2004.............................. 3,850,466
1,450,000 Barclays North American Capital Corp. Notes 9 3/4%, 2021, Callable 2001..... 1,689,250
1,000,000 CIGNA Corp. Debentures 7.65%, 2023.......................................... 928,360
750,000 Export Finance Corp. Coll. MTN Series I, 8.16%, 1996........................ 756,563
1,955,000 First Nationwide Bank Subordinated Debentures 10%, 2006..................... 2,209,150
4,300,000 GMAC Put Bonds 8 7/8%, 2010, Putable 2000/2005.............................. 4,948,913
4,500,000 ITT Hartford Group Notes 8.30%, 2001........................................ 4,799,160
-------------
21,007,409
TRANSPORTATION: 6.4%
2,590,000 AMR Corp. Debentures 9.88%, 2020............................................ 2,962,261
3,650,000 AMR Corp. Debentures 9 3/4%, 2021........................................... 4,138,370
4,630,000 Consolidated Rail Corp. Debentures 9 3/4%, 2020............................. 5,819,632
400,000 Norfolk & Western Railroad Equipment Trust Certificate 10 1/8%, 2000........ 460,628
1,000,000 Seaboard Coast Line Railroad Equipment Trust Certificate 11 1/4%, 1999...... 1,153,750
-------------
14,534,641
INTERNATIONAL AGENCY: 5.5%
3,250,000 European Investment Bank Bonds 10 1/8%, 2000................................ 3,787,063
2,050,000 European Investment Bank Bonds 9 1/8%, 2002................................. 2,344,688
6,500,000 Inter-American Development Bank Debentures 7 1/8%, 2023,
Callable 2003............................................................ 6,316,505
-------------
12,448,256
CANADIAN: 4.9%
4,100,000 Canadian Pacific Ltd. Debentures 9.45%, 2021................................ 5,007,125
5,000,000 Hydro-Quebec Debentures 9 1/2%, 2030........................................ 6,017,050
-------------
11,024,175
PUBLIC UTILITIES: 0.7%
1,500,000 Idaho Power Co. 1st Mortgage Bonds 9 1/2%, 2021, Callable 2001.............. 1,692,150
-------------
TOTAL BONDS (cost $201,453,101)....................................... 210,834,528
-------------
</TABLE>
See accompanying Notes to Financial Statements
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3
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DODGE & COX
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1995
---------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
SHORT-TERM $ 2,985,629 Eli Lilly & Co., Variable Demand Note 5.55%, 1995........................... $ 2,985,629
INVESTMENTS: 2,510,526 Pitney Bowes Credit Corp., Variable Demand Note 5.73%, 1995................. 2,510,526
5.0% 4,253,942 Southwestern Bell Telephone Co., Variable Demand Note 5.71%, 1995........... 4,253,942
1,500,000 U.S. Treasury Bills 5.50%, 1995............................................. 1,486,950
------------
TOTAL SHORT-TERM INVESTMENTS (cost $11,237,047)....................... 11,237,047
------------
TOTAL INVESTMENTS (cost $212,690,148)................................ 98.3% 222,071,575
OTHER ASSETS LESS LIABILITIES........................................ 1.7 3,736,153
----- ------------
TOTAL NET ASSETS..................................................... 100.0% $225,807,728
===== ============
</TABLE>
<TABLE>
<CAPTION>
QUALITY RATINGS AND PORTFOLIO CHARACTERISTICS AS OF JUNE 30, 1995
---------------------------------------------------------------------------------------------------------------
Moody's/
Standard & Poor's % of Portfolio
Quality Ratings Portfolio Characteristics
----------------- --------- ---------------
<S> <C> <S> <C>
U.S. Government Securities 56.9 S.E.C. 30 Day Yield 6.59%
Aaa/AAA 13.4 Average Quality AA+
Aa/AA 0.7 Average Maturity 11.1 years
A/A 18.6 Effective Duration 4.9 years
Baa/BBB 6.3
Ba/BB 4.1
-----
100.0%
</TABLE>
In calculating the quality sector weightings, the lower of
Moody's or Standard & Poor's ratings were used for each
individual security. U.S. Government Securities represent
obligations issued or guaranteed by the U.S. Government and
its agencies. The Aaa/AAA rating includes the Fund's
investments in short-term demand notes and commercial paper.
Average Maturity is a market-weighted average calculation
using the final maturity date on the U.S. Treasury, Federal
Agency and corporate bonds, and the calculated average-life
date based on conservative prepayment assumptions on mortgage
pass-throughs and collateralized mortgage obligations.
Effective Duration is a measure of the Fund's exposure to
changes in the level of interest rates; it is an estimate of
the percentage change in price for a 1% absolute change in
interest rates.
See accompanying Notes to Financial Statements
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4
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DODGE & COX
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Income Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities June 30, 1995
-------------------------------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments (identified cost $212,690,148) at market quotations...................... $222,071,575
Cash................................................................................. 174,867
Interest accrued..................................................................... 3,398,878
Receivable for investments sold...................................................... 163,473
Deferred charges..................................................................... 49,741
------------
225,858,534
------------
LIABILITIES:
Payable for Fund shares redeemed..................................................... 34,307
Accounts payable..................................................................... 16,499
------------
50,806
NET ASSET VALUE ------------
PER SHARE $11.72 NET ASSETS........................................................................... $225,807,728
============
Capital shares
outstanding NET ASSETS CONSIST OF:
19,266,448 Paid in capital...................................................................... $216,740,834
(par value Accumulated undistributed net investment income...................................... 157,307
$.01 each) Accumulated undistributed net realized loss on investments........................... (471,840)
Net unrealized appreciation on investments........................................... 9,381,427
------------
$225,807,728
============
</TABLE>
<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>
1989 $ 32,762,573 $10.68 $10.69 $ .69 $.01
1990 52,086,033 10.61 10.63 .81 .01
1991 96,219,763 11.59 11.65 .82 .03
1992 136,261,902 11.55 11.70 .82 .09
1993 180,032,487 11.89 12.21 .78 .17
1994 195,373,985 10.74 11.07 .76 .05
1995 (6/30) 225,807,728 11.72 12.08 .39** --
----- ----
$5.07 $.36
===== ====
</TABLE>
* Adjusted for assumed reinvestment of capital gains
distributions.
** A distribution of $.19 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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DODGE & COX
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Income Fund
<TABLE>
<CAPTION>
Statement of Operations Six Months Ended June 30, 1995
-------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest............................................................................... $ 7,649,136
EXPENSES:
Management fees (Note 2)............................................................... 457,584
Custodian fees......................................................................... 16,601
Transfer agent fees.................................................................... 12,189
Audit fees............................................................................. 14,650
Legal fees (Note 2).................................................................... 4,400
Shareholder reports.................................................................... 14,300
S.E.C. and state registration fees..................................................... 21,168
Directors' fees........................................................................ 4,500
Miscellaneous.......................................................................... 4,846
-----------
550,238
-----------
NET INVESTMENT INCOME.................................................................. 7,098,898
-----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments (excluding short-term investments).................. 243,055
Change in unrealized appreciation (depreciation) of investments...................... 17,230,353
-----------
Net realized and unrealized gain on investments.................................. 17,473,408
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS......................................................... $24,572,306
===========
</TABLE>
See accompanying Notes to Financial Statements
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DODGE & COX
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Income Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Six Months Ended June 30,
-------------------------------------------------------------------------------------------------------
1995 1994
<S> <C> <C>
OPERATIONS:
Net investment income................................................ $ 7,098,898 $ 6,235,600
Net realized gain (loss) on investments.............................. 243,055 (137,507)
Net change in unrealized appreciation (depreciation)................. 17,230,353 (13,471,981)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS................ 24,572,306 (7,373,888)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................ (7,094,282) (6,344,931)
Net realized gain from investment transactions....................... 0 (793,013)
------------ ------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS.................................. (7,094,282) (7,137,944)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Amounts received from sale of shares................................. 38,719,347 46,274,233
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........... 3,810,680 4,314,859
------------ ------------
42,530,027 50,589,092
Amounts paid for shares redeemed..................................... (29,574,308) (19,537,976)
------------ ------------
NET INCREASE FROM CAPITAL SHARE TRANSACTIONS......................... 12,955,719 31,051,116
------------ ------------
TOTAL INCREASE IN NET ASSETS......................................... 30,433,743 16,539,284
NET ASSETS:
Beginning of period.................................................. 195,373,985 180,032,487
------------ ------------
End of period (including undistributed net investment income
of $157,307 and $(79,987), respectively)............................ $225,807,728 $196,571,771
============ ============
Shares sold.......................................................... 3,389,620 4,038,757
Shares issued in connection with reinvestment
of dividends from net investment income and
from distribution of net realized gain on investments............... 333,198 380,517
Shares redeemed...................................................... (2,647,619) (1,704,433)
------------ ------------
Net increase in shares outstanding................................... 1,075,199 2,714,841
============ ============
</TABLE>
See accompanying Notes to Financial Statements
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DODGE & COX
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Income Fund
Notes to Financial Statements
-----------------------------------------------------------------------
1 Dodge & Cox Income Fund commenced offering its shares to the public on
January 3, 1989. 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. Interest income is
recorded on the accrual basis and dividend income is recorded on the
ex-dividend date; (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
5/10 of 1% of the Fund's average weekly net asset value up to $100
million and 4/10 of 1% of the Fund's average weekly net asset value in
excess of $100 million 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 ordinary operating
expenses of the Fund exceed 1% of the average weekly net asset value
for the year. No waiver of management fee was required for 1994 under
this agreement. All officers and four of the 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 $63,040,696
and $58,643,529, respectively, of which U.S. government obligations
aggregated $56,507,163 and $49,081,394, 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.
======================================---=======================================
8
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DODGE & COX
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Income Fund
Officers and Directors
-----------------------------------------------------------------------
A. Horton Shapiro, President and Director
Senior Vice-President, Dodge & Cox
John A. Gunn, Vice President and Director
President, Dodge & Cox
W. Timothy Ryan, Secretary-Treasurer
and Director
Senior Vice-President, Dodge & Cox
Dana M. Emery, Assistant
Secretary-Treasurer and Director
Vice-President, 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
-----------------------------------------------------------------------
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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DODGE & COX
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Income Fund
THIS PAGE INTENTIONALLY LEFT BLANK
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DODGE & COX
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Income Fund
General Information
-------------------------------------------------------------
DODGE & COX The Fund enables investors to obtain the benefits of
INCOME FUND experienced and continuous investment supervision. The Fund
is invested in a diversified portfolio of fixed-income
securities with the primary objective of providing
shareholders with a high and stable rate of current income
consistent with long-term preservation of capital.
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 Stock 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 Income 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 INCOME FUND
c/o Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
Telephone (800) 621-3979
======================================---=======================================
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
Dear Shareholder: July 1995
With this letter, the Dodge & Cox Income Fund is beginning a program of
more frequent updates to its shareholders. Our goal in this first mid-year
letter--as it will be in 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 Income Fund had a total return of 12.9% for the first six
months of 1995. This performance was fueled by a significant decline in interest
rates which resulted in price appreciation for many of the Fund's holdings, in
addition to regular income earned. This compared to the total return of 11.4%
for the Lehman Brothers Aggregate Bond (LBAG) Index (a broad-based index
composed of investment grade bonds). For the past one and five years, the Fund's
annualized performance was 14.0% and 10.3%, respectively. Comparable returns for
the LBAG Index were 12.6% and 9.4%.
The Fund's absolute and relative performance in the last six months was
attributable to several factors. We kept the Fund's duration, a measure of bond
price sensitivity to changes in interest rates, longer than that of the LBAG
Index. The Fund also benefited from a higher yield-to-maturity than the LBAG
Index, and an emphasis on long, call-protected corporate and mortgage
securities, which performed well.
Portfolio Strategy
A focus of our strategy in managing the Fund is to construct and manage a
high quality portfolio which features a yield-to-maturity higher than that of
the broad bond market. We believe that over longer time periods income return
and the reinvestment of income are the most important components of total return
for fixed income securities. Price change due to changes in the general level of
interest rates, while important over short time periods, is a less significant
component of total return over long time periods. We accomplish this high
absolute and relative yield by allocating a greater percentage of the Fund's
assets to corporate bonds and Federal Agency guaranteed mortgage-backed
securities. These are selected after conducting thorough fundamental research of
the issuer's credit and the security's structure.
Recent Changes in the Fund
After gradually increasing the Fund's duration during 1994, we moderately
decreased it at the end of last quarter. This should lead to a more stable net
asset value if interest rates should rise in the future. Nevertheless, we kept
the Fund's duration longer than that of the LBAG Index, reflecting our continued
belief that long term bond yields are attractive relative to the expected rate
of inflation.
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Dodge & Cox One Sansome Street San Francisco, California 94104
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DODGE & COX
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Income Fund
One clear illustration of the key role fundamental research plays in our
security selection process is the Fund's purchase of $10 million par value of
the V.A. Vendee Series 1995-2 4A. This is a mortgage pass-through security
issued by the U.S. Department of Veteran Affairs and backed by the full faith
and credit of the United States Government. Certain features of the mortgage
loans that collateralize the issue provide these securities with more stable
cash flow characteristics than alternative mortgage investments. Furthermore,
despite what we perceive as better investment attributes, the V.A. Vendee
securities offer greater yield premiums than similar mortgage-backed securities
from other U.S. Government Agency issuers such as FNMA, FHLMC and GNMA. This can
be ascribed to the small size of the program and a general lack of investment
community awareness of the program and its attributes. Our understanding of the
investment merits of these securities was solidified in a recent visit by one of
our mortgage-backed securities analysts to V.A. headquarters in Washington, D.C.
Consistent Investment Approach
Despite a relatively volatile interest rate environment, the Fund's
fundamental investment strategy remains unchanged. Our objective in managing the
Fund's assets is to provide better-than-market investment performance over
market cycles. In pursuit of this goal we shall continue to apply our thorough,
independent research effort to the selection of individual securities that our
analyses show will enhance the Fund's total return performance over an extended
investment horizon. We will continue to maintain the Fund's high average quality
and to emphasize those sectors which will provide a higher-than-market yield.
Closing Note
We would like to welcome a new Director to the Dodge & Cox Income 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 that our strategies do not change
rapidly. We are truly long term investors. We appreciate your interest and
confidence in the Dodge & Cox Income Fund.
Dodge & Cox
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