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D O D G E & C O X
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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D O D G E & C O X
Income Fund
Established 1989
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Quarterly Report
March 31, 1996
1996
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D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1996
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PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS: U.S. TREASURY: 23.4%
94.7% $ 8,500,000 U.S. Treasury Notes, 61/2%, 1996.................................. $ 8,554,485
15,000,000 U.S. Treasury Notes, 71/4%, 1996 ................................. 15,105,450
19,500,000 U.S. Treasury Notes, 77/8%, 1996 ................................. 19,658,340
10,000,000 U.S. Treasury Notes, 51/4%, 1998 ................................. 9,868,700
7,500,000 U.S. Treasury Notes, 61/2%, 2005 ................................. 7,529,325
6,000,000 U.S. Treasury Notes, 61/2%, 2005 ................................. 6,039,360
7,000,000 U.S. Treasury Bonds, 14%, 2011, Callable 2006 .................... 10,944,080
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77,699,740
FEDERAL AGENCY MORTGAGE PASS-THROUGH, CMO* AND REMIC**: 38.4%
110,291 Federal Home Loan Mtge. Corp. Group 54-1078, 6%, 2003 ............ 109,587
137,468 Federal Home Loan Mtge. Corp. Group 25-5222, 7%, 2003 ............ 138,285
2,948,251 Federal Home Loan Mtge. Corp. Group 25-6654, 8%, 2003 ............ 3,017,181
439,734 Federal Home Loan Mtge. Corp. Group 18-0233, 7%, 2006 ............ 441,110
221,845 Federal Home Loan Mtge. Corp. Group 26-0478, 7%, 2006 ............ 223,163
905,749 Federal Home Loan Mtge. Corp. Group 27-2784, 71/4%, 2008 ......... 916,998
267,702 Federal Home Loan Mtge. Corp. Group 53-0142, 71/2%, 2008 ......... 272,545
612,178 Federal Home Loan Mtge. Corp. Group 18-8028, 8%, 2008 ............ 628,064
525,576 Federal Home Loan Mtge. Corp. Group 18-9269, 8%, 2008 ............ 538,663
479,736 Federal Home Loan Mtge. Corp. Group 29-0537, 8%, 2009 ............ 492,483
1,008,706 Federal Home Loan Mtge. Corp. Group 29-2668, 8%, 2009 ............ 1,035,507
377,664 Federal Home Loan Mtge. Corp. Group 26-0671, 81/4%, 2009 ......... 387,438
309,207 Federal Home Loan Mtge. Corp. Group 53-4727, 61/2%, 2012 ......... 307,049
13,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1209-H, 7%, 2005 ... 13,178,750
9,900,000 Federal Home Loan Mtge. Corp. Multi PC Series 1258-EA, 8%, 2007... 10,289,268
13,284,798 Federal Home Loan Mtge. Corp. Multi PC Series 1565-G, 6%, 2008.... 12,587,346
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series G-37 I, 6%, 2022... 9,125,000
4,322,343 Federal Natl. Mtge. Assn. MBS Pool 57358, 61/4%, 2007 ............ 4,280,676
8,979,299 Federal Natl. Mtge. Assn. MBS Pool 70255, 71/2%, 2007 ............ 9,111,205
1,131,247 Federal Natl. Mtge. Assn. MBS Pool 478, 71/2%, 2011 .............. 1,148,555
2,521,636 Federal Natl. Mtge. Assn. MBS Pool 151777, 8%, 2012 .............. 2,596,856
708,356 Federal Natl. Mtge. Assn. MBS Pool 83014, 61/2%, 2013 ............ 705,962
3,269,509 Federal Natl. Mtge. Assn. MBS Pool 260892, 8%, 2022 .............. 3,371,648
3,000,000 Federal Natl. Mtge. Assn. PC 1992-109-J, 7%, 2007 ................ 2,963,430
9,000,000 Federal Natl. Mtge. Assn. PC 1994-72-J, 6%, 2023 ................. 8,156,250
9,223,896 Govt. Natl. Mtge. Assn. Pool 780337, 71/4%, 2006 ................. 9,358,565
11,209,943 Govt. Natl. Mtge. Assn. Pool 780258, 71/2%, 2007 ................. 11,453,647
897,169 FBC Mtge. Sec. Trust IV-A2, 8.30%, 2009 .......................... 912,026
10,000,000 Veterans Affairs Vendee Mtge. Trust Series 1995-1C 3E, 8%, 2018 .. 10,302,000
9,351,654 Veterans Affairs Vendee Mtge. Trust Series 1995-2D 4A, 9.2925%, 202 9,743,488
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127,792,745
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
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D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1996
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PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS INDUSTRIAL: 10.2%
(Continued) $ 2,650,000 Dayton-Hudson Corp. Debentures 9%, 2021 .......................... $ 2,884,790
1,000,000 Dayton-Hudson Corp. Debentures 9.70%, 2021 ....................... 1,159,960
4,435,000 Dayton-Hudson Corp. Debentures 87/8%, 2022 ....................... 4,801,242
3,000,000 Ford Holdings, Inc. Debentures 93/8%, 2020 ....................... 3,538,740
4,850,000 Ford Motor Co. Debentures 9.95%, 2032 ............................ 6,159,694
5,000,000 May Department Stores Notes 75/8%, 2013 .......................... 5,081,450
4,500,000 Time Warner Entertainment Senior Debentures 83/8%, 2033 .......... 4,513,320
2,500,000 Union Camp Corp. Debentures 91/4%, 2011 .......................... 2,915,725
2,784,000 Walt Disney Co. Debentures 7.55%, 2093 ........................... 2,759,835
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33,814,756
FINANCE: 8.5%
1,471,474 Banamex Export Funding Corp. Coll. Notes Series K, 5.74%, 1997 ... 1,469,267
1,450,000 Barclays North American Capital Corp. Notes 93/4%, 2021,
Callable 2001 ................................................... 1,637,427
1,000,000 CIGNA Corp. Debentures 7.65%, 2023 ............................... 957,620
250,000 Export Finance Corp. Coll. MTN Series I, 8.16%, 1996 ............. 251,675
1,955,000 First Nationwide Bank Subordinated Debentures 10%, 2006 .......... 2,248,250
1,600,000 General Electric Capital Services Subordinated Notes 71/2%, 2035 . 1,640,032
8,000,000 GMAC Put Bonds 87/8%, 2010, Putable 2000/2005 .................... 9,222,080
4,500,000 ITT Hartford Group Notes 8.30%, 2001 ............................. 4,819,185
2,500,000 Norwest Corp. MTN 6.20%, 2005 .................................... 2,380,475
4,000,000 Norwest Corp. MTN 61/2%, 2005 .................................... 3,869,440
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28,495,451
INTERNATIONAL AGENCY: 5.0%
4,150,000 European Investment Bank Bonds 101/8%, 2000 ...................... 4,726,477
3,300,000 European Investment Bank Bonds 91/8%, 2002 ....................... 3,716,493
8,750,000 Inter-American Development Bank Debentures 71/8%, 2023,
[GRAPHIC OMITTED]Callable 2003 .................................. 8,175,738
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16,618,708
CANADIAN: 4.6%
7,062,000 Canadian Pacific Ltd. Debentures 9.45%, 2021 ..................... 8,288,740
6,000,000 Hydro-Quebec Debentures 91/2%, 2030 .............................. 7,135,560
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15,424,300
TRANSPORTATION: 4.1%
2,590,000 AMR Corp. Debentures 9.88%, 2020 ................................. 3,023,203
5,000,000 AMR Corp. Debentures 93/4%, 2021 ................................. 5,828,200
2,630,000 Consolidated Rail Corp. Debentures 93/4%, 2020 ................... 3,268,906
400,000 Norfolk & Western Railroad Equipment Trust Certificate 101/8%, 2000 453,220
1,000,000 Seaboard Coast Line Railroad Equipment Trust Certificate 111/4%, 1999 1,117,510
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13,691,039
PUBLIC UTILITIES: 0.5%
1,500,000 Idaho Power Co. 1st Mortgage Bonds 91/2%, 2021, Callable 2001 .... 1,649,370
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Total Bonds (cost $310,876,762)........................... 315,186,109
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</TABLE>
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D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments March 31, 1996
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PAR VALUE MARKET VALUE
<C> <C> <S> <C>
SHORT-TERM $ 2,759,631 Eli Lilly & Co., Variable Demand Note 4.96%, 1996................. $2,759,631
INVESTMENTS: 2,158,526 General Mills Inc., Variable Demand Note 5.10%, 1996.............. 2,158,526
4.4% 2,238,112 Pitney Bowes Credit Corp., Variable Demand Note 5.11%, 1996....... 2,238,112
7,542,581 Sara Lee Corp., Variable Demand Note 5.09%, 1996 ................. 7,542,581
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Total Short-Term Investments (cost $14,698,850)........... 14,698,850
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TOTAL INVESTMENTS (cost $325,575,612)...................... 99.1% 329,884,959
OTHER ASSETS LESS LIABILITIES.............................. 0.9 2,807,285
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TOTAL NET ASSETS........................................... 100.0% $332,692,244
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Capital shares outstanding 28,731,093 Net asset value per share $11.58
(par value $.01 each)
</TABLE>
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D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Condensed Statement of Operations
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For the Three Months Ended March 31, 1996
<S> <C> <C>
Investment income ................................................................ $ 5,716,356
Expenses ......................................................................... 423,099
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Net investment income ............................................................ $ 5,293,257
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Net realized gain from security transactions (based on identified cost).......... $ 10,068
Change in unrealized appreciation of investments ................................. (12,188,642)
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Net realized and unrealized gain (loss) on investments ........................... $(12,178,574)
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S.E.C. yield for the 30 day period ended March 31, 1996 ..... 6.40%
</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 303,323,955 12.02 12.45 .78 .06
1996 (3/31) 332,692,244 11.58 12.00 .19** --
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$5.65 $.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 March 14, 1996.
<TABLE>
<CAPTION>
7.25 Years
Average annual total return for periods ended March 31, 1996 1 Year 5 Years (Since inception)
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<S> <C> <C> <C>
Dodge & Cox Income Fund 11.60% 9.39% 9.91%
Lehman Bros. Aggregate Bond Index 10.78 8.48 9.48
</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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4
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D O D G E & C O X
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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
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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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D O D G E & C O X
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Income Fund
THIS PAGE INTENTIONALLY LEFT BLANK
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D O D G E & C O X
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Income Fund
General Information
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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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<PAGE>
DODGE & COX
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Income Fund
Dear Shareholder April 1996
The Dodge & Cox Income Fund had a total return of -2.1% for the quarter ended
March 31, 1996. The total return for the Lehman Brothers Aggregate Bond (LBAG)
Index was -1.8% for the same period. Returns for longer time periods are
summarized in the box below.
<TABLE>
<CAPTION>
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Average Annual Total Return
7.25 Years
For periods ended March 31, 1996 1 Year 5 Years (Since Inception)
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<S> <C> <C> <C>
Dodge & Cox Income Fund 11.60% 9.39% 9.91%
LBAG Index 10.78 8.48 9.48
</TABLE>
The Fund's average annual total return figures include reinvestment of dividend
and capital gain distributions and are net of expenses and investment management
fees. 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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Increasing Interest Rates
The first quarter of 1996 was marked by rising interest rates and a
corresponding decline in bond prices. The yield on the thirty-year U.S.
Treasury bond, under six percent at the end of 1995, rose more than seventy
basis points (one basis point equals 1/100th of one percent) in the first
quarter to 6.67%. Rates rose less dramatically among the shorter maturities:
two-year U.S. Treasury notes were up sixty basis points while one-year U.S.
Treasury bills rose only 25 basis points during the quarter.
This rate rise resulted in lower prices for the Fund's securities with the
prices of longer duration bonds falling more than shorter ones. Because the
Fund has a relatively high percentage of long duration bonds, the price decline
in the Fund was greater than in broader market portfolios, such as the LBAG
Index. This price decline was only partly offset by the income from the Fund's
holdings.
The Fund's first quarter results illustrate a point we have often made in the
past: over short time periods, price moves can dominate the total return of a
fixed income investment. Over longer time horizons however, the income
component of total return, and its compounding, will tend to be more important
to total returns than short term price movements. Thus, we will continue to
invest with a long term time horizon and a focus on building a relatively high
and stable yield for the Fund.
Security Selection: An Example
As we've discussed in past letters, security selection, with a focus on credit
and structural characteristics, is central to our investment philosophy. A
recent Fund purchase, the debt of Walt Disney Co., reflects this approach.
Please note that Disney is discussed as an example of our investment process,
not because we believe it is necessarily more attractive than the Fund's other
investments.
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Dodge & Cox One Sansome Street San Francisco, California 94104
<PAGE>
DODGE & COX
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Income Fund
First and foremost, Disney--in which the Fund recently established a 1%
position--is a well run and well positioned company. Historically, its primary
businesses have been theme parks and filmed entertainment. In the past ten
years, the company has augmented these businesses with the development of a very
successful consumer products division. The recent Disney acquisition of Capital
Cities/ABC gives the company a large presence in the broadcasting industry as
well. Disney is now a market leader in its four primary businesses. On top of
this strong competitive position, Disney's credit fundamentals are quite strong.
The company has carried a relatively low amount of debt throughout its history,
as large positive cash flow has allowed the company to grow without tapping the
credit markets for significant financing.
The structure of this particular Disney bond, 7.55% due July 15, 2093, was
attractive to us. This issue is non-callable for thirty years, then callable at
a premium to par for the following ten years. Many investors, including
professional ones, may blanche at the prospect of a 100-year maturity bond.
However, our research has convinced us that there is only slightly more interest
rate risk in a 100-year bond than in a more typical 30-year security.
Furthermore, the principal repayment of a long maturity bond represents a small
portion of its current price. Since the principal payment of this Disney bond,
if not called, occurs at the end of 100 years, its present value (the principal
amount discounted by a compounded annual yield) is a negligible contributor to
the current value of the security.
As to whether Disney will be around in 100 years to repay the principal, we rely
on our team of industry analysts and portfolio managers to continually monitor
the companies in which we invest. Given Disney's strong competitive position
and credit fundamentals, we are highly confident in the company's ability to
meet its debt obligations. If events in the future were to reduce this
confidence, we would sell the Disney position and reinvest the proceeds in a
more compelling security.
The price of the Disney securities made them attractive as well. The Disney
bonds were available at a yield premium of 95 basis points to the 30-year U.S.
Treasury. A portion of this incremental yield represented a "structure
discount," i.e. a price discount demanded by the market for this unusual
100-year structure. Since our analysis showed that this discount was largely
unwarranted, we found the extra yield associated with this Disney bond an even
more compelling reason for purchase.
A focus on security selection necessitates researching all the pertinent details
of every bond that goes into the Fund's portfolio. In this particular example,
we feel that we have identified a solid corporate bond with strong credit
fundamentals, a long duration structure and an attractive yield relative to the
incremental risk of the investment. This is the essence of our security
selection approach for corporate securities.
In Closing
We want to reiterate our commitment to a disciplined methodology, as exemplified
by our security selection process, and a long-term investment horizon. As
always, we welcome your comments and suggestions.
Dodge & Cox
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