<PAGE>
DODGE & COX DODGE & COX
Income Fund
- --------------------------------------- ---------------------------------------
Income Fund
Established 1989
---------------------------------------
---------------------------------------
Dodge & Cox
Investment Managers
35th Floor
One Sansome Street
San Francisco
California 94104
(415) 981-1710
7th Annual Report
For Fund literature and December 31, 1995
information, please call:
(800) 621-3979 1995
- --------------------------------------- ---------------------------------------
<PAGE>
DODGE & COX
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Income Fund
To Our Shareholders
----------------------------------------------------------------------------
Reflecting the bond market's recovery from a weak performance in 1994, the
Dodge & Cox Income Fund provided its shareholders a total return of 20.2%
for 1995. This outpaced the 18.5% total return of the Lehman Brothers
Aggregate Bond (LBAG) Index, a broad-based index composed of investment
grade bonds that serves as a proxy for the overall market. The Income Fund
and the LBAG Index annual returns for one, five and seven years are shown on
page 3 of this report.
The net asset value of the Fund rose from $10.74 at the end of 1994 to
$12.02 as of December 31, 1995. In addition, the Fund paid dividends of
$0.78 per share from investment income and $0.06 per share from net realized
short and long-term capital gains. At year-end, the Fund's total net assets
were valued at $303 million.
Falling Interest Rates Propel Strong Returns
The strong performance of the bond market--and the Dodge & Cox Income Fund--
was largely attributable to a combination of slowing economic growth and low
inflation. After expanding at a robust 5.1% annual pace in the fourth
quarter of 1994, U.S. gross domestic product (GDP) grew at a more modest
annualized rate of 2.7% through the end of September 1995. Inflation, as
measured by the Consumer Price Index, remained steady, posting a 2.5%
increase for 1995.
This slowing GDP growth and restrained inflation, coupled with two interest
rate reductions by the Federal Reserve Board, fueled a powerful rally in the
bond market. Interest rates declined across the maturity spectrum: from
year-end 1994 to year-end 1995, thirty year U.S. Treasury rates fell from
7.88% to 5.95% while two year U.S. Treasury rates declined from 7.70% to
5.15%. As a result of the large drop in interest rates, prices of fixed-
income securities soared, with the largest price increases recorded by
longer-maturity bonds. This price appreciation was the primary driver of the
Fund's 20.2% total return in 1995.
Underlying the price appreciation are two key factors that helped the Fund
outperform the LBAG Index:
. Longer-than-market duration: Because a relatively high percentage of
the Fund's holdings are in longer-maturity bonds, which had greater
price appreciation than short-term securities, the decline in
interest rates boosted the net asset value of the Fund more
dramatically than that of the overall market.
. Good security selection: Our focus on both credit fundamentals and
the structure of individual securities contributed to the Fund's
higher returns as the Fund's non-callable and call-protected
corporate and mortgage-backed securities outperformed callable ones.
The Fund's higher-than-market yield added modestly to relative performance
this year, but we believe it will be an important source of relative return
over longer time periods.
1995 Review and Portfolio Changes
Sector allocations within the Fund remained relatively constant during 1995
with roughly 34% - 40% allocations to each of the corporate and mortgage-
backed sectors and 19% - 25% to the U.S. Treasury sector.
The corporate sector was the best performer for the Fund in 1995, reflecting
both our focus on long-duration corporate securities and reductions in the
yield premiums on many of the Fund's corporate holdings. Time
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DODGE & COX
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Income Fund
Warner Entertainment and AMR, two of the Fund's higher-yielding corporate
holdings, had particularly strong returns. The prices of both benefited from
their long-maturity, non-callable structure and significant improvement in
the market's perception of their creditworthiness. We had previously
identified this value through the comprehensive, fundamental credit research
of our in-house analysts. We added to existing corporate positions during
the year and established new positions in May Department Stores and Norwest
Bank. Caterpillar and Bank of Boston were sold, as we believed their
valuations fully reflected optimistic scenarios about their futures.
Despite 1995's rapidly falling rates, an environment that can be troublesome
for securities vulnerable to prepayments, mortgage-backed securities made
significant contributions to the Fund's return. Security selection proved to
be the key in this regard as our focus on embedded call protection and
average life stability ensured that these securities participated fully in
1995's rally. Short, well-seasoned mortgage pass-throughs, which have good
defensive qualities, returned between 9% and 15% for the year. The Fund's
collateralized mortgage obligations (CMOs), which primarily have five-to-ten
year average lives, contributed total returns of between 19% and 27% for the
year.
New positions in the mortgage-backed securities sector included two
purchases of V.A. Vendees--CMOs issued by the Department of Veteran Affairs
and collateralized by mortgage loans that carry a U.S. Government guarantee.
The borrowers whose mortgage payments provide the cash flow for these CMOs
have proven less responsive to refinancing opportunities; this has added to
the stability and attractiveness of these securities.
While maintaining the duration of the Fund longer than that of the broad
market throughout 1995, we did take several opportunities to lower the
Fund's price sensitivity to interest rates as the year progressed. We moved
the Fund's duration from 115% of the LBAG Index's duration at the beginning
of the year to 110% in June and reduced it further in December. While we
have not abandoned the possibility of lower interest rates in the future, we
considered it prudent to reduce modestly the duration of the Fund, given the
current levels of both real and nominal rates.
Looking Ahead
In closing, we would like to remind shareholders that 1995's returns were
unusually strong. With nominal interest rates and the Fund's yield
significantly lower than a year ago, it is highly unlikely that the Fund in
1996 and beyond will see a repeat of the large total return of 1995.
Nonetheless, our investment philosophy will not waver. We construct the
Fund's portfolio security-by-security, relying upon diligent, fundamental
research to identify issuers or sectors where we believe the market
underestimates creditworthiness or total return potential. We will do this
while maintaining the Fund's high average quality, diversification, and
higher-than-market yield. And finally, we will continue to invest with a
focus on the long-term return potential of securities.
We would like to recognize and thank a distinguished member of the Board of
Directors who resigned at the end of 1995. Robert C. Harris served as a
Director of the Fund since the Fund's inception in 1989. We have valued his
wise counsel and wish him well in the future.
Thank you for your continued confidence in the Dodge & Cox Income Fund.
As always, we welcome your comments and suggestions.
For the Board of Directors,
/s/ A. Horton Shapiro
January 23, 1996 A. Horton Shapiro, President
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DODGE & COX
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Income Fund
Investment Performance Since Inception
----------------------------------------------------------------------------
Comparison of change in value of a $10,000 investment in the Dodge & Cox
Income Fund and the Lehman Brothers Aggregate Bond (LBAG) Index
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dodge & Cox LBAG
Year Income Fund Index
<S> <C> <C>
88 $ 10,000 $ 10,000
89 11,409 11,454
90 12,255 12,480
91 14,453 14,477
92 15,581 15,549
93 17,348 17,065
94 16,847 16,567
95 20,251 19,628
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended December 31, 1995 1 Year 5 Years 7 Years
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 20.21% 10.57% 10.61%
LBAG Index 18.48 9.48 10.11
</TABLE>
The chart covers the period from January 1, 1989 to December 31, 1995. It
compares a $10,000 investment made in the Dodge & Cox Income Fund to a
$10,000 investment made in the Lehman Brothers Aggregate Bond Index (a broad
based index composed of investment grade bonds). The chart and average
annual total return figures include the 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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DODGE & COX
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Income Fund
<TABLE>
<CAPTION>
Financial Highlights Year Ended December 31,
-------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
<C> <S> <C> <C> <C> <C> <C>
Selected data NET ASSET VALUE, BEGINNING OF YEAR........................... $10.74 $11.89 $11.55 $11.59 $10.61
and ratios for a Income from investment operations:
share outstanding Net investment income........................................ .78 .77 .78 .82 .81
throughout Net realized and unrealized gain (loss) on investments....... 1.34 (1.11) .51 .05 1.02
each year ------ ------ ------ ------ ------
Total income (loss) from investment operations............... 2.12 (.34) 1.29 .87 1.83
------ ------ ------ ------ ------
Distributions:
Dividends from net investment income......................... (.78) (.76) (.78) (.82) (.82)
Distributions from net realized gain on investments.......... (.06) (.05) (.17) (.09) (.03)
------ ------ ------ ------ ------
Total distributions.......................................... (.84) (.81) (.95) (.91) (.85)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR................................. $12.02 $10.74 $11.89 $11.55 $11.59
====== ====== ====== ====== ======
TOTAL RETURN.................................................% 20.21 (2.89) 11.34 7.80 17.94
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)........................... $ 303 $ 195 $ 180 $ 136 $ 96
Ratio of expenses to average net assets......................% .54 .54 .60 .62 .64
Ratio of net investment income to average net assets.........% 6.85 6.90 6.50 7.14 7.63
Portfolio turnover rate......................................% 53 55 26 12 15
</TABLE>
<TABLE>
<CAPTION>
QUALITY RATINGS AND PORTFOLIO CHARACTERISTICS AS OF DECEMBER 31, 1995
-------------------------------------------------------------------------------------------------------------
Moody's/
Standard & Poor's % of Portfolio
Quality Ratings Fund Characteristics
----------------- ------ ---------------
<S> <C> <C>
U.S. Government Securities 58.7 S.E.C. 30 Day Yield 6.41%
Aaa/AAA 13.5 Average Quality AA+
Aa/AA 1.9 Average Maturity 10.7 years
A/A 17.0 Effective Duration 4.9 years
Baa/BBB 5.1
Ba/BB 3.8
------
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.
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1995
------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS: U.S. TREASURY: 19.0%
94.1% $ 8,500,000 U.S. Treasury Notes, 6 1/2%, 1996............................................ $ 8,590,270
15,000,000 U.S. Treasury Notes, 7 1/4%, 1996............................................ 15,182,850
22,000,000 U.S. Treasury Notes, 7 7/8%, 1996............................................ 22,323,180
7,000,000 U.S. Treasury Bonds, 14%, 2011, Callable 2006................................ 11,610,130
------------
57,706,430
FEDERAL AGENCY: 0.2%
562,000 Patriot II Shipping-Leo U.S. Govt. Gtd. Title XI, 8%, 2003................... 575,229
FEDERAL AGENCY MORTGAGE PASS-THROUGH, CMO* AND REMIC**: 39.7%
131,328 Federal Home Loan Mtge. Corp. Group 54-1078, 6%, 2003........................ 130,830
156,759 Federal Home Loan Mtge. Corp. Group 25-5222, 7%, 2003........................ 157,638
3,056,679 Federal Home Loan Mtge. Corp. Group 25-6654, 8%, 2003........................ 3,168,034
474,392 Federal Home Loan Mtge. Corp. Group 18-0233, 7%, 2006........................ 483,258
252,916 Federal Home Loan Mtge. Corp. Group 26-0478, 7%, 2006........................ 254,975
956,383 Federal Home Loan Mtge. Corp. Group 27-2784, 7 1/4%, 2008.................... 979,499
276,892 Federal Home Loan Mtge. Corp. Group 53-0142, 7 1/2%, 2008.................... 287,422
670,667 Federal Home Loan Mtge. Corp. Group 18-8028, 8%, 2008........................ 696,374
558,787 Federal Home Loan Mtge. Corp. Group 18-9269, 8%, 2008........................ 582,468
507,413 Federal Home Loan Mtge. Corp. Group 29-0537, 8%, 2009........................ 532,362
1,041,272 Federal Home Loan Mtge. Corp. Group 29-2668, 8%, 2009........................ 1,082,590
399,582 Federal Home Loan Mtge. Corp. Group 26-0671, 8 1/4%, 2009.................... 414,091
350,185 Federal Home Loan Mtge. Corp. Group 53-4727, 6 1/2%, 2012.................... 351,911
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1209-H, 7%, 2005............... 10,159,300
9,900,000 Federal Home Loan Mtge. Corp. Multi PC Series 1258-EA, 8%, 2007.............. 10,416,582
13,284,798 Federal Home Loan Mtge. Corp. Multi PC Series 1565-G, 6%, 2008............... 13,085,526
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series G-37 I, 6%, 2022............... 9,521,100
4,563,784 Federal Natl. Mtge. Assn. MBS Pool 57358, 6 1/4%, 2007....................... 4,598,286
9,345,664 Federal Natl. Mtge. Assn. MBS Pool 70255, 7 1/2%, 2007....................... 9,721,920
1,188,256 Federal Natl. Mtge. Assn. MBS Pool 478, 7 1/2%, 2011......................... 1,228,312
2,552,890 Federal Natl. Mtge. Assn. MBS Pool 151777, 8%, 2012.......................... 2,709,382
751,804 Federal Natl. Mtge. Assn. MBS Pool 83014, 6 1/2%, 2013....................... 762,450
3,480,690 Federal Natl. Mtge. Assn. MBS Pool 260892, 8%, 2022.......................... 3,639,479
3,000,000 Federal Natl. Mtge. Assn. PC 1992-109-J, 7%, 2007............................ 3,049,590
9,000,000 Federal Natl. Mtge. Assn. PC 1994-72-J, 6%, 2023............................. 8,565,120
11,692,283 Govt. Natl. Mtge. Assn. Pool 780258, 7 1/2%, 2007............................ 12,179,617
959,971 FBC Mtge. Sec. Trust IV-A2, 8.30%, 2009...................................... 988,770
10,000,000 Veterans Affairs Vendee Mtge. Trust Series 1995-1C 3E, 8%, 2018.............. 10,580,000
9,618,621 Veterans Affairs Vendee Mtge. Trust Series 1995-2D 4A, 9.2925%, 2025......... 10,339,152
------------
120,666,038
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
See accompanying Notes to Financial Statements
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DODGE & COX
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1995
------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS INDUSTRIAL: 10.5%
(Continued) $ 2,650,000 Dayton-Hudson Corp. Debentures 9%, 2021...................................... $ 3,152,679
1,000,000 Dayton-Hudson Corp. Debentures 9.70%, 2021................................... 1,269,010
4,435,000 Dayton-Hudson Corp. Debentures 8 7/8%, 2022.................................. 5,217,733
3,000,000 Ford Holdings, Inc. Debentures 9 3/8%, 2020.................................. 3,859,410
3,500,000 Ford Motor Co. Debentures 9.95%, 2032........................................ 4,889,640
5,000,000 May Department Stores Notes 7 5/8%, 2013..................................... 5,437,150
4,500,000 Time Warner Entertainment Senior Debentures 8 3/8%, 2033..................... 4,802,490
2,500,000 Union Camp Corp. Debentures 9 1/4%, 2011..................................... 3,168,600
------------
31,796,712
FINANCE: 9.1%
1,471,474 Banamex Export Funding Corp. Coll. Notes Series K, 5.74%, 1997............... 1,472,342
1,450,000 Barclays North American Capital Corp. Notes 9 3/4%, 2021, Callable 2001...... 1,723,934
1,000,000 CIGNA Corp. Debentures 7.65%, 2023........................................... 1,029,310
500,000 Export Finance Corp. Coll. MTN Series I, 8.16%, 1996......................... 503,520
1,955,000 First Nationwide Bank Subordinated Debentures 10%, 2006...................... 2,363,419
1,600,000 General Electric Capital Services Subordinated Notes 7 1/2%, 2035............ 1,814,384
8,000,000 GMAC Put Bonds 8 7/8%, 2010, Putable 2000/2005............................... 9,789,520
4,500,000 ITT Hartford Group Notes 8.30%, 2001......................................... 4,986,810
4,000,000 Norwest Corp. MTN 6 1/2%, 2005............................................... 4,090,960
------------
27,774,199
INTERNATIONAL AGENCY: 5.9%
4,150,000 European Investment Bank Bonds 10 1/8%, 2000................................. 4,891,854
3,300,000 European Investment Bank Bonds 9 1/8%, 2002.................................. 3,876,213
8,750,000 Inter-American Development Bank Debentures 7 1/8%, 2023, Callable 2003....... 8,991,325
------------
17,759,392
TRANSPORTATION: 4.8%
2,590,000 AMR Corp. Debentures 9.88%, 2020............................................. 3,175,107
5,000,000 AMR Corp. Debentures 9 3/4%, 2021............................................ 6,075,150
2,630,000 Consolidated Rail Corp. Debentures 9 3/4%, 2020.............................. 3,557,022
400,000 Norfolk & Western Railroad Equipment Trust Certificate 10 1/8%, 2000......... 468,504
1,000,000 Seaboard Coast Line Railroad Equipment Trust Certificate 11 1/4%, 1999....... 1,156,370
------------
14,432,153
CANADIAN: 4.3%
4,100,000 Canadian Pacific Ltd. Debentures 9.45%, 2021................................. 5,230,616
6,000,000 Hydro-Quebec Debentures 9 1/2%, 2030......................................... 7,783,620
------------
13,014,236
PUBLIC UTILITIES: 0.6%
1,500,000 Idaho Power Co. 1st Mortgage Bonds 9 1/2%, 2021, Callable 2001............... 1,779,195
------------
TOTAL BONDS (cost $269,005,595)......................................... 285,503,584
------------
</TABLE>
See accompanying Notes to Financial Statements
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1995
------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
SHORT-TERM $1,000,000 American Express Co., Commercial Paper 5.65%, 1996........................... $ 1,000,000
INVESTMENTS: 1,521,047 General Mills Inc., Variable Demand Note 5.58%, 1996......................... 1,521,047
3.8% 2,315,905 Pitney Bowes Credit Corp., Variable Demand Note 5.49%, 1996.................. 2,315,905
4,745,723 Sara Lee Corp., Variable Demand Note 5.47%, 1996............................. 4,745,723
1,977,041 Southwestern Bell Telephone Co., Variable Demand Note 5.72%, 1996............ 1,977,041
------------
TOTAL SHORT-TERM INVESTMENTS (cost $11,559,716)......................... 11,559,716
------------
TOTAL INVESTMENTS (cost $280,565,311)......................... 97.9% 297,063,300
OTHER ASSETS LESS LIABILITIES................................. 2.1 6,260,655
----- ------------
TOTAL NET ASSETS.............................................. 100.0% $303,323,955
===== ============
</TABLE>
See accompanying Notes to Financial Statements
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Income Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities December 31, 1995
-------------------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments (identified cost $280,565,311) at market quotations.......... $297,063,300
Cash..................................................................... 2,131,456
Interest accrued......................................................... 4,070,259
Receivable for investments sold.......................................... 146,475
Deferred charges......................................................... 6,282
------------
303,417,772
------------
LIABILITIES:
Payable for Fund shares redeemed......................................... 82,864
Accounts payable......................................................... 10,953
------------
93,817
Net asset value ------------
per share $12.02 NET ASSETS.......................................................... $303,323,955
============
Capital
shares NET ASSETS CONSIST OF:
outstanding Paid in capital.......................................................... $286,983,673
25,233,189 Accumulated undistributed net investment income.......................... 205,152
(par value Accumulated undistributed net realized loss on investments............... (362,859)
$.01 each, Net unrealized appreciation on investments............................... 16,497,989
authorized shares ------------
100,000,000) $303,323,955
============
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
<CAPTION>
Condensed Financial Information
--------------------------------------------------------------------------------------------------
Net Asset Value Per Share Distributions Per Share
------------------------- -----------------------
Year Ended Capital
December 31 Net Assets Actual Adjusted* Income Gains
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 303,323,955 12.02 12.45 .78 .06**
----- ----
$5.46 $.42
===== ====
</TABLE>
* Adjusted for assumed reinvestment of capital gains
distributions.
** The capital gains distribution of $.06 per share includes
a net short-term capital gain of $.03 per share which was
distributed to shareholders as ordinary income.
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Income Fund
<TABLE>
<CAPTION>
Statement of Operations Year Ended December 31, 1995
-----------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest........................................................................ $17,443,770
EXPENSES:
Management fees (Note 2)........................................................ 1,045,074
Custodian fees.................................................................. 40,234
Transfer agent fees............................................................. 27,822
Audit fees...................................................................... 29,600
Legal fees (Note 2)............................................................. 7,867
Shareholder reports............................................................. 39,167
S.E.C. and state registration fees.............................................. 53,898
Directors' fees................................................................. 12,000
Miscellaneous................................................................... 15,342
-----------
1,271,004
-----------
NET INVESTMENT INCOME........................................................... 16,172,766
-----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments (excluding short-term investments)........... 1,800,568
Change in unrealized appreciation of investments.............................. 24,346,915
-----------
Net realized and unrealized gain on investments........................... 26,147,483
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS..................................................... $42,320,249
===========
</TABLE>
See accompanying Notes to Financial Statements
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<TABLE>
<CAPTION>
Statement of Changes in Net Assets Year Ended December 31,
---------------------------------------------------------------------------------------------------------
1995 1994
<S> <C> <C>
OPERATIONS:
Net investment income................................................. $ 16,172,766 $ 13,281,313
Net realized gain (loss) on investments............................... 1,800,568 (714,895)
Net change in unrealized appreciation (depreciation).................. 24,346,915 (18,113,134)
------------ ------------
Net increase (decrease) in net assets from operations................. 42,320,249 (5,546,716)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................. (16,120,304) (13,157,967)
Net realized gain from investment transactions........................ (1,448,533) (793,013)
------------ ------------
Total distributions to shareholders................................... (17,568,837) (13,950,980)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Amounts received from sale of shares.................................. 137,967,192 72,687,480
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............. 9,874,550 8,362,194
------------ ------------
147,841,742 81,049,674
Amounts paid for shares redeemed...................................... (64,643,184) (46,210,480)
------------ ------------
Net increase from capital share transactions.......................... 83,198,558 34,839,194
------------ ------------
Total increase in net assets.......................................... 107,949,970 15,341,498
NET ASSETS:
Beginning of year..................................................... 195,373,985 180,032,487
------------ ------------
End of year (including undistributed net investment income
of $205,152 and $152,690, respectively)............................... $303,323,955 $195,373,985
============ ============
Shares sold........................................................... 11,803,101 6,436,642
Shares issued in connection with reinvestment
of dividends from net investment income and
from distribution of net realized gain on investments................. 844,987 754,949
Shares redeemed....................................................... (5,606,147) (4,137,249)
------------ ------------
Net increase in shares outstanding.................................... 7,041,941 3,054,342
============ ============
</TABLE>
See accompanying Notes to Financial Statements
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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.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Actual results could
differ from those estimates.
2 Under a written agreement, the Fund pays an annual management fee of 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 1995 under this agreement. All officers and four of the
directors of the Fund are officers and 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, was a director of the Fund until December 31, 1995.
3 For the year ended December 31, 1995, purchases and sales of securities,
other than short-term securities, aggregated $190,269,918 and $119,877,771,
respectively, of which U.S. government obligations aggregated $156,461,696
and $101,130,959, respectively. At December 31, 1995, the cost of
investments for Federal income tax purposes was equal to the cost for
financial reporting purposes. Net unrealized appreciation aggregated
$16,497,989, of which $16,823,859 represented appreciated securities and
$325,870 represented depreciated securities.
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DODGE & COX
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Income Fund
Report of Independent Accountants
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To the Directors and Shareholders of Dodge & Cox Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of the Dodge & Cox
Income Fund (the "Fund") at December 31, 1995, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended and the financial highlights for each of the
five years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at
December 31, 1995 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
January 23, 1996
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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
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
----------------------------------------------------------------------------
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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13
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DODGE & COX
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Income Fund
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14
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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
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