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DODGE & COX
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Income Fund
Established 1989
Quarterly Report
September 30, 1995
1995
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DODGE & COX
Income Fund
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Dodge & Cox
Investment Managers
35th Floor
One Sansome Street
San Francisco
California 94104
(415) 981-1710
For Fund literature and
information, please call:
(800) 621-3979
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DODGE & COX
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1995
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PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS: U.S. TREASURY: 20.2%
88.3% $ 5,500,000 U.S. Treasury Notes, 6 1/2%, 1996............................................. $ 5,539,545
15,000,000 U.S. Treasury Notes, 7 1/4%, 1996............................................. 15,189,900
24,200,000 U.S. Treasury Notes, 7 7/8%, 1996............................................. 24,604,624
5,000,000 U.S. Treasury Notes, 5 1/2%, 1997............................................. 4,969,550
4,500,000 U.S. Treasury Bonds, 14%, 2011................................................ 7,203,510
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57,507,129
FEDERAL AGENCY: 0.2%
619,000 Patriot II Shipping-Leo U.S. Govt. Gtd. Title XI, 8%, 2003.................... 634,023
FEDERAL AGENCY MORTGAGE PASS-THROUGH AND REMIC*: 33.1%
149,617 Federal Home Loan Mtge. Corp. Group 54-1078, 6%, 2003......................... 148,121
175,407 Federal Home Loan Mtge. Corp. Group 25-5222, 7%, 2003......................... 175,407
3,215,485 Federal Home Loan Mtge. Corp. Group 25-6654, 8%, 2003......................... 3,290,277
504,872 Federal Home Loan Mtge. Corp. Group 18-0233, 7%, 2006......................... 506,134
302,850 Federal Home Loan Mtge. Corp. Group 26-0478, 7%, 2006......................... 302,850
1,007,812 Federal Home Loan Mtge. Corp. Group 27-2784, 7 1/4%, 2008..................... 1,016,630
287,938 Federal Home Loan Mtge. Corp. Group 53-0142, 7 1/2%, 2008..................... 294,057
693,530 Federal Home Loan Mtge. Corp. Group 18-8028, 8%, 2008......................... 710,667
584,168 Federal Home Loan Mtge. Corp. Group 18-9269, 8%, 2008......................... 597,756
521,412 Federal Home Loan Mtge. Corp. Group 29-0537, 8%, 2009......................... 537,706
1,084,791 Federal Home Loan Mtge. Corp. Group 29-2668, 8%, 2009......................... 1,112,703
425,770 Federal Home Loan Mtge. Corp. Group 26-0671, 8 1/4%, 2009..................... 436,738
391,953 Federal Home Loan Mtge. Corp. Group 53-4727, 6 1/2%, 2012..................... 389,503
9,900,000 Federal Home Loan Mtge. Corp. Multi PC Series 1258-EA, 8%, 2007............... 10,283,625
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series G-37 I, 6%, 2022................ 9,112,500
4,817,440 Federal Natl. Mtge. Assn. MBS Pool 57358, 6 1/4%, 2007........................ 4,772,156
9,739,849 Federal Natl. Mtge. Assn. MBS Pool 70255, 7 1/2%, 2007........................ 9,955,392
1,288,282 Federal Natl. Mtge. Assn. MBS Pool 478, 7 1/2%, 2011.......................... 1,317,255
2,592,527 Federal Natl. Mtge. Assn. MBS Pool 151777, 8%, 2012........................... 2,677,536
795,744 Federal Natl. Mtge. Assn. MBS Pool 83014, 6 1/2%, 2013........................ 789,951
3,705,252 Federal Natl. Mtge. Assn. MBS Pool 260892, 8%, 2022........................... 3,826,784
3,000,000 Federal Natl. Mtge. Assn. PC 1992-109-J, 7%, 2007............................. 3,000,000
9,000,000 Federal Natl. Mtge. Assn. PC 1994-72-J, 6%, 2023.............................. 8,201,250
10,000,000 Veterans Affairs Vendee Mtge. Trust Series 1994-2-3F, 6 1/2%, 2015............ 9,575,000
10,000,000 Veterans Affairs Vendee Mtge. Trust Series 1995-1C-3E, 8%, 2018............... 10,506,200
9,944,077 Veterans Affairs Vendee Mtge. Trust Series 1995-2D-4A PT, 9.2925%, 2025....... 10,578,012
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94,114,210
COLLATERALIZED MORTGAGE OBLIGATION: 0.4%
1,032,908 FBC Mtge. Sec. Trust IV-A2, 8.30%, 2009....................................... 1,057,440
</TABLE>
*Real Estate Mortgage Investment Conduit
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1995
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PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS INDUSTRIAL: 10.0%
(Continued) $ 2,650,000 Dayton-Hudson Corp. Debentures 9%, 2021....................................... $ 3,049,859
1,000,000 Dayton-Hudson Corp. Debentures 9.70%, 2021.................................... 1,225,000
2,850,000 Dayton-Hudson Corp. Debentures 8 7/8%, 2022................................... 3,242,474
3,000,000 Ford Holdings, Inc. Debentures 9 3/8%, 2020................................... 3,652,500
3,500,000 Ford Motor Co. Debentures 9.95%, 2032......................................... 4,572,960
5,000,000 May Department Stores Notes 7 5/8%, 2013...................................... 5,176,650
4,500,000 Time Warner Entertainment Senior Debentures 8 3/8%, 2033...................... 4,553,955
2,500,000 Union Camp Corp. Debentures 9 1/4%, 2011...................................... 3,000,000
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28,473,398
FINANCE: 9.9%
1,839,342 Banamex Export Funding Corp. Coll. Notes Series K, 5.74%, 1997................ 1,830,145
3,960,000 Bank of Boston Subordinated Notes 6 5/8%, 2004................................ 3,866,188
1,450,000 Barclays North American Capital Corp. Notes 9 3/4%, 2021, Callable 2001....... 1,667,399
1,000,000 CIGNA Corp. Debentures 7.65%, 2023............................................ 948,750
500,000 Export Finance Corp. Coll. MTN Series I, 8.16%, 1996.......................... 505,000
1,955,000 First Nationwide Bank Subordinated Debentures 10%, 2006....................... 2,228,700
1,600,000 General Electric Capital Services Subordinated Notes 7 1/2%, 2035............. 1,680,000
5,800,000 GMAC Put Bonds 8 7/8%, 2010, Putable 2000/2005................................ 6,757,000
4,500,000 ITT Hartford Group Notes 8.30%, 2001.......................................... 4,826,250
4,000,000 Norwest Corp. MTN 6 1/2%, 2005................................................ 3,928,000
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28,237,432
INTERNATIONAL AGENCY: 5.3%
3,250,000 European Investment Bank Bonds 10 1/8%, 2000.................................. 3,758,430
3,300,000 European Investment Bank Bonds 9 1/8%, 2002................................... 3,771,570
7,750,000 Inter-American Development Bank Debentures 7 1/8%, 2023, Callable 2003........ 7,565,240
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15,095,240
CANADIAN: 4.3%
4,100,000 Canadian Pacific Ltd. Debentures 9.45%, 2021.................................. 4,996,875
6,000,000 Hydro-Quebec Debentures 9 1/2%, 2030.......................................... 7,270,980
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12,267,855
TRANSPORTATION: 4.3%
2,590,000 AMR Corp. Debentures 9.88%, 2020.............................................. 3,000,826
3,650,000 AMR Corp. Debentures 9 3/4%, 2021............................................. 4,187,207
2,630,000 Consolidated Rail Corp. Debentures 9 3/4%, 2020............................... 3,342,388
400,000 Norfolk & Western Railroad Equipment Trust Certificate 10 1/8%, 2000.......... 457,804
1,000,000 Seaboard Coast Line Railroad Equipment Trust Certificate 11 1/4%, 1999........ 1,138,980
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12,127,205
PUBLIC UTILITIES: 0.6%
1,500,000 Idaho Power Co. 1st Mortgage Bonds 9 1/2%, 2021, Callable 2001................ 1,706,250
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TOTAL BONDS (cost $241,084,406).......................................... 251,220,182
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</TABLE>
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1995
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PAR VALUE MARKET VALUE
<C> <C> <S> <C>
SHORT-TERM $ 2,994,084 Pitney Bowes Credit Corp., Variable Demand Note 5.47%, 1995................... $ 2,994,084
INVESTMENTS: 4,700,000 Prudential Funding Corp., Commercial Paper 6 1/4%, 1995....................... 4,700,000
3.4% 2,125,941 Sara Lee Corp., Variable Demand Note 5.45%, 1995.............................. 2,125,941
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TOTAL SHORT-TERM INVESTMENTS (cost $9,820,025)........................... 9,820,025
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TOTAL INVESTMENTS (cost $250,904,431)........................................ 91.7% 261,040,207
OTHER ASSETS LESS LIABILITIES................................................ 8.3 23,570,943
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TOTAL NET ASSETS............................................................. 100.0% $284,611,150
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Capital shares outstanding 24,179,685 NET ASSET VALUE PER SHARE $11.77
(par value $.01 each)
</TABLE>
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Income Fund
<TABLE>
<CAPTION>
Condensed Statement of Operations
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For the Nine Months Ended September 30, 1995
<S> <C>
Investment income................................................................................. $12,137,692
Expenses.......................................................................................... 880,913
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Net investment income............................................................................. $11,256,779
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Net realized gain from security transactions (based on identified cost)........................... $ 621,969
Change in unrealized appreciation (depreciation) of investments................................... 17,984,702
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Net realized and unrealized gain on investments................................................... $18,606,671
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SEC yield for the 30 day period ended September 30, 1995..................... 6.62%
</TABLE>
<TABLE>
<CAPTION>
Condensed Financial Information
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Net Asset Value Per Share Distributions Per Share
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Year Ended Capital
December 31 Net Assets Actual Adjusted* Income Gains
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<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 (9/30) 284,611,150 11.77 12.13 .58** --
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$5.26 $.36
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</TABLE>
* Adjusted for assumed reinvestment of capital gains
distributions.
** A distribution of $.19 per share from net investment income was
paid to shareholders of record September 14, 1995.
<TABLE>
<CAPTION>
6.75 Years
Average annual total return for periods ended September 30, 1995 1 Year 5 Years (Since inception)
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<S> <C> <C> <C>
Dodge & Cox Income Fund 15.83% 10.74% 10.32%
Lehman Bros. Aggregate Bond Index 14.07 9.65 9.83
</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.
* * *
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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DODGE & COX
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Income Fund
Officers and Directors
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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
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MANAGERS
Dodge & Cox
One Sansome Street, 35th Floor
San Francisco, California 94104
Telephone (415) 981-1710
CUSTODIAN & TRANSFER AGENT
Firstar Trust Company
P. O. Box 701
Milwaukee, Wisconsin 53201-0701
Telephone (800) 621-3979
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
San Francisco, California
LEGAL COUNSEL
Heller, Ehrman, White & McAuliffe
San Francisco, California
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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.
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DODGE & COX
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Income Fund
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Income Fund
General Information
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DODGE & COX The Fund enables investors to obtain the benefits of experienced
INCOME FUND 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, corporations,
MANAGEMENT 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 There are no commissions on the purchase or redemption of
CHARGE 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 investments
INVESTMENT of $100 or more through automatic deductions from their bank
PLAN 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.
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
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Dodge & Cox
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Income Fund
Dear Shareholder October 1995
The Dodge & Cox Income Fund provided a total return of 2.1% for the quarter
ended September 30, 1995. The total return for the Lehman Brothers Aggregate
Bond (LBAG) Index (a broad-based index composed of investment grade bonds) was
2.0% for the same period. For the first nine months of 1995 the Fund returned
15.2%, compared to a 13.6% return from the LBAG Index.
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Average Annual Total Return
<TABLE>
<CAPTION>
6.75 Years
For periods ended September 30, 1995 1 Year 5 Years (Since Inception)
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 15.83% 10.74% 10.32%
LBAG Index 14.07 9.65 9.83
</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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Despite some intra-period volatility, interest rates finished the quarter very
close to where they began. The Fund's third quarter total return was primarily a
function of the income on the portfolio's holdings. Additionally, there was some
price appreciation in our longer maturity corporate securities, the result of a
narrowing of their yield premiums and a small decline in long term interest
rates.
Dodge & Cox Hallmarks: Incremental Yield and Security Selection
We manage the Income Fund with a three to five year investment horizon and
believe that, over this time period, income return and the reinvestment of
income will be the dominant components of the Fund's total return. Therefore, a
cornerstone of our fixed income strategy is building incremental yield into the
Income Fund without sacrificing its broad diversification and high average
quality. We accomplish this by allocating a significant percentage (nearly 70%
currently) of the Fund's assets to corporate and mortgage securities which
provide a greater yield than similar duration U.S. Treasuries. The quality and
diversity of the Fund's holdings are maintained through a second cornerstone of
our management style: security selection.
A focus on security selection necessitates researching all of the pertinent
details of every bond which goes into the portfolio. This approach makes us very
choosy buyers; only the proper combination of credit (what are the fundamental
risks of lending money to the issuer?), structure (is this a compelling
maturity/coupon/option features combination?), and price (is this truly
reflective of the risk/reward tradeoff for this security?) will result in a bond
being purchased for the Fund. Building a portfolio with a high and stable yield
through our focus on security selection is the most important thing that we do
as managers.
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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
Readily Available Fundamental Analysis
Last quarter we talked about what security selection means for mortgage-backed
securities. Security selection also plays a vital role in the corporate sector
of the Fund. The process for corporate bonds relies upon in-depth credit
research, and in this regard we make full use of our eleven in-house research
analysts. Each analyst follows the companies within their assigned industries,
providing fundamental and unbiased corporate credit analysis. Our fixed income
department has continual access to these professionals due to Dodge & Cox's
single office location in San Francisco. Combining fundamental credit research
with thorough structural analysis gives us the confidence to invest a
significant percentage (34% as of September 30) of the Fund's assets in
corporate securities. The Fund now holds the debt of twenty-four companies, with
the recent additions of G.E. Capital and May Department Stores.
Portfolio Composition
Shareholders may note that sector percentages for the Fund at quarter end have
changed from three months ago. The corporate and mortgage-backed securities
weightings decreased by 2.1 and 4.8 percentage points respectively, while the
cash component of the Fund increased from 6.7% to nearly 12%. Coincident with
the close of the third quarter, the Fund received a significant subscription,
which increased the end-of-quarter cash component of the Fund and reduced the
weightings of other sectors as a proportion of the Fund's total assets. We have
since moved to invest this money. As always, we will actively search out
opportunities to increase the yield of the Fund and its potential return without
sacrificing its high average quality and diversification.
In closing, we want to thank you for your continued confidence in Dodge & Cox.
We believe that our ongoing commitment to independent fundamental research and
individual security selection will continue to benefit Fund shareholders in the
years ahead.
Dodge & Cox
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