<PAGE>
D O D G E & C O X D O D G E & C O X
------------------- -------------------
Income Fund Income Fund
Established 1989
--------------------
--------------------
Dodge & Cox Semi-Annual Report
Investment Managers June 30, 1996
35th Floor
One Sansome Street
San Francisco
California 94104
(415) 981-1710
For Fund literature and
information, please call:
(800) 621-3979 1996
------------------- --------------------
--------------------
--------------------
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
Financial Highlights
- --------------------------------------------------------------------------------
Selected data and ratios (for a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
---------------- ---------------------------------------------------
1996 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period........ $12.02 $10.74 $11.89 $11.55 $11.59 $10.61
Income from investment operations:
Net investment income....................... .38 .78 .77 .78 .82 .81
Net realized and unrealized gain (loss)..... (.58) 1.34 (1.11) .51 .05 1.02
------ ------ ------ ------ ------ ------
Total income from investment operations..... (.20) 2.12 (.34) 1.29 .87 1.83
------ ------ ------ ------ ------ ------
Distributions:
Dividends from net investment income........ (.38) (.78) (.76) (.78) (.82) (.82)
Distribution from net realized gain......... -- (.06) (.05) (.17) (.09) (.03)
------ ------ ------ ------ ------ ------
Total distributions......................... (.38) (.84) (.81) (.95) (.91) (.85)
------ ------ ------ ------ ------ ------
Net asset value, end of period.............. $11.44 $12.02 $10.74 $11.89 $11.55 $11.59
====== ====== ====== ====== ====== ======
Total return................................ % (1.62) 20.21 (2.89) 11.34 7.80 17.94
Ratios/supplemental data
Net assets, end of period (millions)........ $ 369 $ 303 $ 195 $ 180 $ 136 $ 96
Ratio of expenses to average net assets..... % .52* .54 .54 .60 .62 .64
Ratio of net investment income to average
net assets................................. % 6.69* 6.85 6.90 6.50 7.14 7.63
Portfolio turnover rate..................... % 21 53 55 26 12 15
</TABLE>
*Annualized
<TABLE>
<CAPTION>
7.5 Years
Average annual total return for periods ended June 30, 1996 1 Year 5 Years (Since inception)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 4.77% 9.14% 9.63%
Lehman Bros. Aggregate Bond Index 5.01 8.26 9.23
</TABLE>
The average annual total return figures include reinvestment of dividend and
capital gain distributions. Index returns, unlike Fund returns, do not reflect
any expenses. 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1996
-------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS: U.S. TREASURY: 20.2%
96.2% $ 8,500,000 U.S. Treasury Notes, 6 1/2%, 1996......................................... $ 8,533,235
5,000,000 U.S. Treasury Notes, 5 1/8%, 1998......................................... 4,878,900
10,000,000 U.S. Treasury Notes, 5 1/4%, 1998......................................... 9,826,600
39,000,000 U.S. Treasury Notes, 7 1/8%, 1998......................................... 39,767,910
7,500,000 U.S. Treasury Notes, 6 1/2%, 2005......................................... 7,392,150
2,000,000 U.S. Treasury Bonds, 14%, 2011, Callable 2006............................. 3,050,620
1,000,000 U.S. Treasury Bonds, 7 7/8%, 2021......................................... 1,097,030
------------
74,546,445
FEDERAL AGENCY MORTGAGE PASS-THROUGH, CMO* AND REMIC**: 40.4%
91,289 Federal Home Loan Mtge. Corp. Group 54-1078, 6%, 2003..................... 90,740
116,767 Federal Home Loan Mtge. Corp. Group 25-5222, 7%, 2003..................... 117,350
2,808,347 Federal Home Loan Mtge. Corp. Group 25-6654, 8%, 2003..................... 2,862,941
414,399 Federal Home Loan Mtge. Corp. Group 18-0233, 7%, 2006..................... 414,689
201,456 Federal Home Loan Mtge. Corp. Group 26-0478, 7%, 2006..................... 202,461
846,108 Federal Home Loan Mtge. Corp. Group 27-2784, 7 1/4%, 2008................. 846,345
249,934 Federal Home Loan Mtge. Corp. Group 53-0142, 7 1/2%, 2008................. 253,206
590,769 Federal Home Loan Mtge. Corp. Group 18-8028, 8%, 2008..................... 603,406
492,601 Federal Home Loan Mtge. Corp. Group 18-9269, 8%, 2008..................... 502,177
448,599 Federal Home Loan Mtge. Corp. Group 29-0537, 8%, 2009..................... 459,809
937,816 Federal Home Loan Mtge. Corp. Group 29-2668, 8%, 2009..................... 959,442
340,672 Federal Home Loan Mtge. Corp. Group 26-0671, 8 1/4%, 2009................. 348,146
264,941 Federal Home Loan Mtge. Corp. Group 53-4727, 6 1/2%, 2012................. 264,485
13,227,412 Federal Home Loan Mtge. Corp. Multi PC Series 1209-H, 7%, 2005............ 13,347,252
10,900,000 Federal Home Loan Mtge. Corp. Multi PC Series 1258-EA, 8%, 2007........... 11,250,217
13,284,798 Federal Home Loan Mtge. Corp. Multi PC Series 1565-G, 6%, 2008............ 12,329,887
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series G-37 I, 6%, 2022............ 8,796,800
4,096,989 Federal Natl. Mtge. Assn. MBS Pool 57358, 6 1/4%, 2007.................... 4,013,902
8,578,036 Federal Natl. Mtge. Assn. MBS Pool 70255, 7 1/2%, 2007.................... 8,666,132
1,064,573 Federal Natl. Mtge. Assn. MBS Pool 478, 7 1/2%, 2011...................... 1,077,029
2,376,417 Federal Natl. Mtge. Assn. MBS Pool 151777, 8%, 2012....................... 2,428,793
669,722 Federal Natl. Mtge. Assn. MBS Pool 83014, 6 1/2%, 2013.................... 655,564
3,074,445 Federal Natl. Mtge. Assn. MBS Pool 260892, 8%, 2022....................... 3,156,871
3,000,000 Federal Natl. Mtge. Assn. PC 1992-109-J, 7%, 2007......................... 2,958,750
10,000,000 Federal Natl. Mtge. Assn. PC G1994-13-E, 7%, 2015......................... 10,009,300
9,000,000 Federal Natl. Mtge. Assn. PC 1994-72-J, 6%, 2023.......................... 7,914,330
8,715,143 Govt. Natl. Mtge. Assn. Pool 780337, 7 1/4%, 2006......................... 8,763,773
10,658,716 Govt. Natl. Mtge. Assn. Pool 780258, 7 1/2%, 2007......................... 10,741,428
822,543 FBC Mtge. Sec. Trust IV-A2, 8.30%, 2009................................... 835,391
14,877,000 Veterans Affairs Vendee Mtge. Trust 1995-3 1D, 7 1/4%, 2016............... 14,728,230
10,000,000 Veterans Affairs Vendee Mtge. Trust 1995-1C 3E, 8%, 2018.................. 10,078,100
8,960,191 Veterans Affairs Vendee Mtge. Trust 1995-2D 4A, 9.2925%, 2025............. 9,399,778
------------
149,076,724
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
<PAGE>
D O D G E & C O X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1996
-------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS INDUSTRIAL: 15.2%
(Continued) $ 2,650,000 Dayton-Hudson Corp. Debentures 9%, 2021.................................. $ 2,921,493
1,000,000 Dayton-Hudson Corp. Debentures 9.70%, 2021............................... 1,170,980
4,435,000 Dayton-Hudson Corp. Debentures 8 7/8%, 2022.............................. 4,832,287
2,000,000 Dayton-Hudson Corp. MTN 9.35%, 2020, Putable 1997........................ 2,263,900
3,000,000 Ford Holdings, Inc. Debentures 9 3/8%, 2020.............................. 3,492,120
5,300,000 Ford Motor Co. Debentures 9.95%, 2032.................................... 6,626,749
2,500,000 General Motors Corp. Debentures 7.70%, 2016.............................. 2,480,525
6,500,000 Lockheed Martin Corp. Debentures 7.65%, 2016............................. 6,475,365
5,000,000 Lockheed Martin Corp. Debentures 7 3/4%, 2026............................ 4,984,200
5,000,000 May Department Stores Notes 7 5/8%, 2013................................. 4,998,300
2,500,000 Ralston Purina Debentures 8 5/8%, 2022................................... 2,658,175
8,000,000 Time Warner Entertainment Senior Debentures 8 3/8%, 2033................. 7,681,920
2,500,000 Union Camp Corp. Debentures 9 1/4%, 2011................................. 2,863,375
2,784,000 Walt Disney Co. Debentures 7.55%, 2093................................... 2,710,001
-----------
56,159,390
FINANCE: 7.7%
1,103,606 Banamex Export Funding Corp. Coll. Notes Series K, 5.74%, 1997........... 1,099,501
1,450,000 Barclays North American Capital Corp. Notes 9 3/4%, 2021, Callable 2001.. 1,634,861
1,000,000 CIGNA Corp. Debentures 7.65%, 2023....................................... 950,350
250,000 Export Finance Corp. Coll. MTN Series I, 8.16%, 1996..................... 250,228
1,955,000 First Nationwide Bank Subordinated Debentures 10%, 2006.................. 2,203,441
1,600,000 General Electric Capital Services Subordinated Notes 7 1/2%, 2035........ 1,598,336
8,000,000 GMAC Put Bonds 8 7/8%, 2010, Putable 2000/2005........................... 8,924,240
4,500,000 ITT Hartford Group Notes 8.30%, 2001..................................... 4,762,305
3,370,000 Norwest Corp. MTN 6.20%, 2005............................................ 3,127,461
4,000,000 Norwest Corp. MTN 6 1/2%, 2005........................................... 3,800,720
-----------
28,351,443
INTERNATIONAL AGENCY: 4.5%
4,150,000 European Investment Bank Bonds 10 1/8%, 2000............................. 4,643,601
3,300,000 European Investment Bank Bonds 9 1/8%, 2002.............................. 3,654,618
8,750,000 Inter-American Development Bank Debentures 7 1/8%, 2023, Callable 2003... 8,176,525
-----------
16,474,744
CANADIAN: 4.1%
7,062,000 Canadian Pacific Ltd. Debentures 9.45%, 2021............................. 8,118,405
6,000,000 Hydro-Quebec Debentures 9 1/2%, 2030..................................... 7,048,200
-----------
15,166,605
TRANSPORTATION: 3.7%
2,590,000 AMR Corp. Debentures 9.88%, 2020......................................... 3,010,331
2,000,000 AMR Corp. Debentures 9 3/4%, 2021........................................ 2,320,980
5,630,000 Consolidated Rail Corp. Debentures 9 3/4%, 2020.......................... 6,859,029
400,000 Norfolk & Western Railroad Equipment Trust Certificate 10 1/8%, 2000..... 445,240
1,000,000 Seaboard Coast Line Railroad Equipment Trust Certificate 11 1/4%, 1999... 1,110,870
-----------
13,746,450
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1996
-------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS PUBLIC UTILITIES: 0.4%
(Continued) $ 1,500,000 Idaho Power Co. 1st Mortgage Bonds 9 1/2%, 2021, Callable 2001..... $ 1,651,875
------------
Total Bonds (cost $353,297,134)............................. 355,173,676
------------
SHORT-TERM 2,493,467 General Mills, Inc., Variable Demand Note 5.14%, 1996.............. 2,493,467
INVESTMENTS: 1,676,127 Pitney Bowes Credit Corp., Variable Demand Note 5.14%, 1996........ 1,676,127
2.5% 3,571,001 Southwestern Bell Telephone Co., Variable Demand Note 5.12%, 1996.. 3,571,001
1,518,892 Warner Lambert Co., Variable Demand Note 5.12%, 1996............... 1,518,892
------------
Total Short-Term Investments (cost $9,259,487).............. 9,259,487
------------
TOTAL INVESTMENTS (cost $362,556,621).............. 98.7% 364,433,163
OTHER ASSETS LESS LIABILITIES...................... 1.3 4,873,593
----- ------------
TOTAL NET ASSETS................................... 100.0% $369,306,756
===== ============
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
<CAPTION>
QUALITY RATINGS AND PORTFOLIO CHARACTERISTICS AS OF JUNE 30, 1996
------------------------------------------------------------------------------------------------------------
Moody's/
Standard & Poor's % of Portfolio
Quality Ratings Fund Characteristics
--------------- ------ ---------------
<S> <C> <C> <C>
U.S. Government Securities 60.4 S.E.C. 30 Day Yield 6.94%
Aaa/AAA 9.4 Average Quality AA+
Aa/AA 2.3 Average Maturity 11.4 years
A/A 14.5 Effective Duration 5.1 years
Baa/BBB 11.4
Ba/BB 2.0
------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities June 30, 1996
---------------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments (identified cost $362,556,621) at market quotations....... $364,433,163
Cash.................................................................. 80,884
Interest accrued...................................................... 4,706,512
Receivable for investments sold....................................... 158,377
Deferred charges...................................................... 13,798
------------
369,392,734
------------
LIABILITIES:
Payable for Fund shares redeemed...................................... 65,007
Accounts payable...................................................... 20,971
------------
85,978
Net asset value ------------
per share $11.44 NET ASSETS........................................................ $369,306,756
============
Capital shares NET ASSETS CONSIST OF:
outstanding Paid in capital....................................................... $369,084,203
32,271,166 Accumulated undistributed net investment income....................... 163,594
(par value $.01 Accumulated undistributed net realized loss on investments............ (1,817,583)
each, authorized Net unrealized appreciation on investments............................ 1,876,542
shares ------------
100,000,000) $369,306,756
============
</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
1996 (6/30) 369,306,756 11.44 11.85 .38** --
------ ------
$5.84 $.42
====== ======
</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 June 13, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Statement of Operations Six Months Ended June 30, 1996
------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest........................................................................ $12,130,512
EXPENSES:
Management fees (Note 2)........................................................ 722,781
Custodian fees.................................................................. 19,864
Transfer agent fees............................................................. 25,102
Audit fees...................................................................... 15,000
Legal fees...................................................................... 3,750
Shareholder reports............................................................. 34,500
S.E.C. and state registration fees.............................................. 42,000
Directors' fees................................................................. 5,000
Miscellaneous................................................................... 14,601
-----------
882,598
-----------
NET INVESTMENT INCOME........................................................... 11,247,914
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized loss on investments (excluding short-term investments)............ (1,454,724)
Change in unrealized appreciation (depreciation) of investments................ (14,621,447)
-----------
Net realized and unrealized loss on investments................................ (16,076,171)
-----------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS...................................................... $(4,828,257)
===========
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Six Months Ended June 30,
---------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
OPERATIONS:
Net investment income........................................... $ 11,247,914 $ 7,098,898
Net realized gain (loss)........................................ (1,454,724) 243,055
Net change in unrealized appreciation (depreciation)............ (14,621,447) 17,230,353
------------ ------------
Net increase (decrease) in net assets from operations........... (4,828,257) 24,572,306
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income........................................... (11,289,472) (7,094,282)
Net realized gain............................................... 0 0
------------ ------------
Total distributions to shareholders............................. (11,289,472) (7,094,282)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Amounts received from sale of shares............................ 97,839,113 38,719,347
Net asset value of shares issued in reinvestment of
distributions................................................... 6,431,582 3,810,680
------------ ------------
104,270,695 42,530,027
Amounts paid for shares redeemed................................ (22,170,165) (29,574,308)
------------ ------------
Net increase from capital share transactions.................... 82,100,530 12,955,719
------------ ------------
Total increase in net assets.................................... 65,982,801 30,433,743
NET ASSETS:
Beginning of period............................................. 303,323,955 195,373,985
------------ ------------
End of period (including undistributed net investment income
of $163,594 and $157,307, respectively)......................... $369,306,756 $225,807,728
============ ============
Shares sold..................................................... 8,367,522 3,389,620
Shares issued in reinvestment of distributions.................. 565,572 333,198
Shares redeemed................................................. (1,895,117) (2,647,619)
------------ ------------
Net increase in shares outstanding.............................. 7,037,977 1,075,199
============ ============
</TABLE>
See accompanying Notes to Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 in the
financial statements. 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 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.
3 For the six months ended June 30, 1996, purchases and sales
of securities, other than short-term securities, aggregated
$152,194,078 and $66,447,815, respectively, of which U.S.
government obligations aggregated $114,423,970 and
$62,294,159, respectively. At June 30, 1996, the cost of
investments for Federal income tax purposes was equal to the
cost for financial reporting purposes. Net unrealized
appreciation aggregated $1,876,542, of which $6,086,881
represented appreciated securities and $4,210,339 represented
depreciated securities.
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
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income Fund
Officers and Directors
---------------------------------------------------------------------------------------------------------------
<S> <C>
A. Horton Shapiro, President and Director Max Gutierrez, Jr., Director
Senior Vice-President, Dodge & Cox Partner, Brobeck, Phleger & Harrison, Attorneys
John A. Gunn, Vice President and Director Frank H. Roberts, Director
President, Dodge & Cox Retired Partner, Pillsbury, Madison & Sutro, Attorneys
W. Timothy Ryan, Secretary-Treasurer John B. Taylor, Director
and Director Professor of Economics, Stanford University
Senior Vice-President, Dodge & Cox
Will C. Wood, Director
Dana M. Emery, Assistant Principal, Kentwood Associates, Financial Advisers
Secretary-Treasurer and Director
Vice-President, Dodge & Cox
-----------------------------------------------------------------------------------------------------------------
</TABLE>
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
THIS PAGE INTENTIONALLY LEFT BLANK
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10
<PAGE>
D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income Fund
General Information
------------------------------------------------------------------
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 investment
Counsel management for individuals, trustees, corporations, pension and
Management 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 shares
Charge 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 of
Investment $100 or more through automatic deductions from their bank
Plan accounts.
Withdrawal Shareholders owning $10,000 or more of the Fund's shares may elect
Plan 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>
D O D G E & C O X
================================================================================
Income Fund
Dear Shareholder July 1996
The Dodge & Cox Income Fund had a total return of 0.5% for the quarter ended
June 30, 1996, and a -1.6% return for the first half of 1996. The total return
for the Lehman Brothers Aggregate Bond (LBAG) Index was 0.6% and -1.2% for the
same periods, respectively. Returns for longer time periods are presented in
the table below.
- --------------------------------------------------------------------------------
Average Annual Total Return
<TABLE>
<CAPTION>
7.5 Years
For periods ended June 30, 1996 1 Year 5 Years (Since Inception)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 4.77% 9.14% 9.63%
LBAG Index 5.01 8.26 9.23
</TABLE>
The total return figures include reinvestment of dividend and capital
gain distributions. Index returns, unlike Fund returns, do not reflect
any expenses. 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.
- --------------------------------------------------------------------------------
Further Increases in Interest Rates and a Change in Duration
The second quarter of 1996 was marked by higher interest rates and corresponding
declines in bond prices, continuing the trend of the first quarter. The yield
on the benchmark thirty-year U.S. Treasury bond, which rose more than seventy
basis points (one basis point equals 1/100th of one percent) in the first
quarter of 1996, rose an additional twenty basis points, to 6.9% in the second
quarter. Rates rose among the shorter-maturities as well: three-year U.S.
Treasury notes were up nearly forty basis points to 6.3%, while one-year U.S.
Treasury bills rose 30 basis points to 5.7%. However, the income on the Fund's
holdings made up for the price declines and allowed the Fund to post a small
positive total return for the quarter.
Given the rapid rise in interest rates in early 1996, we decided to increase the
duration (a measure of a portfolio's sensitivity to changes in interest rates)
of the Fund in April. We accomplished this by selling a portion of the Fund's
shorter-maturity U.S. Treasuries and investing the proceeds into longer-
duration, higher-yielding U.S. Treasuries. In this way we do not have to sell
our less liquid corporate and mortgage-backed securities to effect the duration
change. As readers of past letters know, we are not active "market timers"; we
do not devote energy and/or resources to forecast small changes in market levels
and adjust the portfolio to attempt to benefit from that forecast. However, in
situations such as this, when a sharp rise in bond yields has provided an
attractive cushion, of sorts, between these yields and a range of forecasted
inflation, we will take the opportunity to increase the duration of the Fund.
The Fund's duration now stands at 5.13 years, roughly 10% longer than that of
the LBAG Index.
Continued "Overweighting" in Corporates
The Fund has a larger percentage of its holdings in corporate bonds than the
LBAG Index. Several Dodge & Cox clients have recently asked about this
overweighting given the narrow yield premiums of many corporate securities
relative to risk-free U.S. Treasury alternatives. At Dodge & Cox, our approach
places most of the emphasis on the security itself. We do not devote a
significant amount of time to the specific decision to overweight or underweight
a certain sector. For example, we have recently taken advantage of a narrow
yield premium on one of the Fund's corporate holdings and begun to sell the
Fund's position in that security. In this particular case, we do not believe
the yield premium is wide enough given the company's and industry's
fundamentals. At the same time, we have
================================================================================
Dodge & Cox One Sansome Street San Francisco, California 94104
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
purchased several new corporate issues, such as Disney and Lockheed Martin,
which we believe will add more long-term value to the Fund than similar-maturity
government bonds.
Thus, despite some changes in composition, the percentage of the Fund devoted to
corporates has remained relatively constant. Given Dodge & Cox's emphasis on
fundamental research and building incremental yield into the portfolio, it is
likely that the Fund will remain overweight in the corporate sector. Our
continued emphasis on corporate bonds also underscores our belief that it is
difficult to predict the timing and/or magnitude of sector price movements. A
strategic decision to decrease our allocation to corporate securities would have
a direct and measurable cost: the incremental yield that a corporate bond
provides above that of a similar-maturity, but lower risk, U.S. Treasury. To
compensate for this reduction in portfolio yield, a relative price decline in
corporate securities must occur relatively quickly, or be very dramatic, for
this strategy to be effective.
As an example, one year ago an investor may have been concerned about an
overweight allocation to the corporate sector, as yield premiums on corporate
securities were not significantly higher than they are now. If we had, at that
time, decided to reduce significantly the Fund's allocation to the corporate
sector, the Fund's total return (relative to the LBAG Index) would have suffered
in the following year as we would have foregone both the incremental yield of
these corporates, and their good relative price performance of the past twelve
months.
- --------------------------------------------------------------------------------
Thoughts on Our Team Approach
The Dodge & Cox Funds utilize a team approach to investment management, unlike
many mutual funds that designate individual managers to make investment
decisions. The investment process begins with intensive fundamental research
performed by our thirteen in-house equity and fixed income analysts. Our
portfolio managers, all of whom began their careers as analysts, are often
involved in the research process. When purchase or sale of a security is
advocated, a group discussion of the investment's merits and risks takes place.
Our Bond Strategy Committee--consisting of Dodge & Cox's fixed income portfolio
managers and other senior investment professionals--reviews each investment
recommendation and makes the final decision. The nine member Strategy Committee
has an average of 11 years of experience at Dodge & Cox.
A collegial atmosphere is crucial to the success of this kind of team-oriented
investing, and at Dodge & Cox we have a group of professionals that work
extremely well together. Most of our professionals began their investment
careers at Dodge & Cox, and our firm has been fortunate to have unusually low
turnover of our analysts and portfolio managers. This combination of individual
security analysis and group decision making is a distinguishing feature of Dodge
& Cox and is central to our investment approach.
- --------------------------------------------------------------------------------
In Closing
We will continue to invest with a focus on individual security selection,
fundamental research, and incremental yield, an important contributor to long-
term total return. Thank you for your continued confidence in the Dodge & Cox
Income Fund. As always, we welcome your comments and questions.
Dodge & Cox
================================================================================
