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DODGE & COX
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Income Fund
PROSPECTUS
April 29, 1997
Dodge & Cox Income Fund
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The Dodge & Cox Income Fund (the "Fund") is a no-load mutual fund with the
primary objective of providing shareholders with a high and stable rate of
current income, consistent with long-term preservation of capital. A secondary
objective is to take advantage of opportunities to realize capital appreciation.
The Fund seeks to achieve these objectives by investing in a diversified
portfolio consisting primarily of high-quality bonds and other fixed-income
securities. There can be no assurance that the Fund will achieve these
objectives.
Shares of the Fund are purchased and redeemed at net asset value. There are no
sales, redemption or Rule 12b-1 plan distribution charges.
This prospectus sets forth concisely the information you should know about the
Fund before investing. It should be retained for future reference. A Statement
of Additional Information about the Fund, dated April 29, 1997, which is
incorporated by reference in this prospectus, has been filed with the Securities
and Exchange Commission (the "SEC"). To obtain a free copy, call 1-800-621-
3979.
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Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Introduction............................................................... 1
Expense Information........................................................ 1
Financial Highlights....................................................... 2
Investment Objectives and Policies......................................... 2
Investment Restrictions.................................................... 4
Investment Risks........................................................... 4
Additional Information on Investments...................................... 5
Income Dividends and Capital Gain Distributions............................ 6
How to Purchase Shares..................................................... 7
How to Redeem Shares....................................................... 9
Exchanging Shares.......................................................... 10
Telephone Transactions..................................................... 11
Transfer of Shares......................................................... 11
Pricing of Shares.......................................................... 11
Shareholder Services....................................................... 11
Performance Information.................................................... 12
Fund Organization and Management........................................... 13
Portfolio Transactions..................................................... 13
Expenses................................................................... 14
Federal Income Taxes....................................................... 14
Custodian and Transfer Agent............................................... 14
Reports to Shareholders.................................................... 14
Shareholder Inquiries...................................................... 14
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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DODGE & COX
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Income Fund
Introduction
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The Fund is an open-end diversified management investment company which
continuously offers its shares to the public. A unique feature of the Fund and
other "no-load" funds is that shares are sold without sales charge, while many
other investment companies sell their shares with a varying sales charge.
Shares may be redeemed at net asset value at no charge.
The Fund enables you to obtain the benefits of experienced and continuous
investment supervision. Investors in the Fund acquire a diversified bond
portfolio ordinarily limited to large investment accounts. The Fund is designed
to meet the needs of retirement plans, charities, endowments, individuals,
trustees, guardians and others who have funds available for long-term investment
in fixed-income securities.
By investing in the Fund, you avoid the time-consuming details involved in
buying and selling individual securities. The Fund also reduces your record
keeping for tax purposes and simplifies the collection of investment income and
the safe-keeping of individual securities.
The Fund's investment manager, Dodge & Cox, was founded in 1930 and managed over
$25 billion for individual and institutional investors in mutual fund and
private accounts as of December 31, 1996.
Expense Information
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<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Distributions........................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fees.......................................................... .43%
12b-1 Fees............................................................... None
Other Expenses (accounting, transfer agent, custodial, legal, etc.)...... .07%
----
Total Fund Operating Expenses............................................ .50%
</TABLE>
EXAMPLE: A shareholder would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time
period:
<TABLE>
<CAPTION>
Time period 1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C>
Expenses $5 $16 $28 $63
</TABLE>
This example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the above expense information is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. Expense figures are based on amounts incurred
during the year 1996 (See "Expenses"). Wire redemptions are subject to a $12
charge which is not reflected in the above example.
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DODGE & COX
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Income Fund
Financial Highlights
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The following table provides information about the Fund's financial history. It
is based on a single share outstanding throughout each year. The table is part
of the Fund's financial statements which are included in the Fund's Annual
Report and incorporated by reference into the Statement of Additional
Information. This document is available to shareholders upon request. The
financial statements in the Annual Report have been audited by Price Waterhouse
LLP, independent accountants, whose unqualified report covers the most recent
five-year period.
<TABLE>
<CAPTION>
Year Ended December 31,
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1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year.................... $12.02 $10.74 $11.89 $11.55 $11.59 $10.61 $10.68 $10.00
Income from investment operations:
Net investment income................................. .74 .78 .77 .78 .82 .81 .82 .69
Net realized and unrealized gain (loss)............... (.34) 1.34 (1.11) .51 .05 1.02 (.07) .69
------ ------ ------ ------ ------ ------ ------ ------
Total income (loss) from investment operations........ .40 2.12 (.34) 1.29 .87 1.83 .75 1.38
------ ------ ------ ------ ------ ------ ------ ------
Distributions:
Dividends from net investment income.................. (.74) (.78) (.76) (.78) (.82) (.82) (.81) (.69)
Distributions from net realized gain on investments... - (.06) (.05) (.17) (.09) (.03) (.01) (.01)
------ ------ ------ ------ ------ ------ ------ ------
Total distributions................................... (.74) (.84) (.81) (.95) (.91) (.85) (.82) (.70)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of year.......................... $11.68 $12.02 $10.74 $11.89 $11.55 $11.59 $10.61 $10.68
====== ====== ====== ====== ====== ====== ====== ======
Total return.......................................... 3.62% 20.21% (2.89)% 11.34% 7.80% 17.94% 7.41% 14.09%
Ratios/Supplemental Data:
Net assets, end of year (millions).................... $533 $303 $195 $180 $136 $96 $52 $33
Ratio of expenses to average net assets............... .50% .54% .54% .60% .62% .64% .69% .66%
Ratio of net investment income to average net assets.. 6.65% 6.85% 6.90% 6.50% 7.14% 7.63% 7.99% 7.85%
Portfolio turnover rate............................... 37% 53% 55% 26% 12% 15% 13% 3%
</TABLE>
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Investment Objectives and Policies
The Fund is a no-load mutual fund with the primary objective of providing
shareholders with a high and stable rate of current income consistent with long-
term preservation of capital. A secondary objective is to take advantage of
opportunities to realize capital appreciation. These objectives may not be
changed without shareholder approval. However, investors should recognize that
the market risks inherent in investments cannot be avoided, nor is there any
assurance that the investment objectives of the Fund will be achieved.
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Income Fund
The Fund seeks to achieve its objectives by investing in a diversified portfolio
of fixed-income securities. It is the policy of the Fund to invest at least 80%
of the market value of its total assets in the following: (1) debt obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities;
(2) investment-grade debt securities, including U.S. dollar-denominated foreign
issues and supranational agencies, rated in the top four rating groups by either
Moody's Investors Service ("Moody's") (Aaa, Aa, A, Baa) or Standard & Poor's
Ratings Group ("S&P") (AAA, AA, A, BBB); (3) unrated securities if deemed to be
of investment-grade quality by Dodge & Cox; and (4) bankers' acceptances, bank
certificates of deposit, repurchase agreements and commercial paper. At least
65% of the market value of the portfolio will be invested in category (1)
securities and in category (2) securities rated in the top three rating groups.
Further information about specific investments is provided under "Additional
Information on Investments."
No more than 20% of the Fund may be invested in other fixed-income instruments
including: debt obligations rated below investment grade if, in the opinion of
Dodge & Cox, they are of suitable quality, provide attractive investment
opportunities and have a minimum rating of B by Moody's and/or S & P at the time
of investment; preferred stock; corporate bonds convertible into common stocks
or carrying warrants to purchase common stock. The Fund will invest in unrated
securities only if deemed to be of investment-grade quality by Dodge & Cox. It
should be noted that securities rated Baa or BBB and below have speculative
characteristics. Securities rated B may yield a higher level of current income
than higher quality securities but generally have less liquidity, greater market
risk and more price fluctuation. An explanation of Moody's and S&P's rating
groups is included in the Appendix to the Statement of Additional Information.
The percentages referred to in the preceding two paragraphs are determined at
the time of investment and apply under normal market conditions.
The proportions held in the various financial instruments will be revised as
appropriate in light of Dodge & Cox's appraisal of the economy, the relative
yields of securities in the various market sectors, the investment prospects for
issuers and other factors. In making investment decisions, Dodge & Cox will take
many factors into consideration including yield to maturity, quality, liquidity,
current yield and capital appreciation potential.
The Fund attempts to achieve its secondary objective of capital appreciation
through such techniques as fundamental research (i.e., seeking a security or
group of securities which Dodge & Cox believes to be undervalued), purchasing
securities at a discount from their maturity or call value and making gradual
adjustments in the average maturity of the Fund's portfolio.
The average maturity of the Fund's portfolio at any given time depends, in part,
on Dodge & Cox's assessment of economic and market conditions, the future level
of inflation and interest rates, and on the relative yields of securities in the
marketplace. Dodge & Cox normally invests in an array of securities with short,
intermediate and long maturities in varying proportions, with greater emphasis
on longer maturities.
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Income Fund
Purchases and sales of securities are generally made for long-term fundamental
investment reasons rather than for short-term trading purposes. Nevertheless,
Dodge & Cox may sell any of the securities in the Fund, regardless of the length
of time held, in seeking to achieve the objectives of the Fund.
Dodge & Cox maintains a long-term investment orientation and therefore
anticipates a relatively low turnover rate. (The Fund's portfolio turnover
rates for the fiscal years ended December 31, 1996, 1995 and 1994 were 37%, 53%
and 55%, respectively.) However, during rapidly changing economic, political and
market environments, there may be more portfolio changes than in a more stable
period. A higher turnover rate might result in increased transaction expenses
and the realization of capital gains and losses (see "Federal Income Taxes").
In seeking to achieve the objectives of the Fund, Dodge & Cox may purchase
securities on a when-issued basis, purchase or sell securities for delayed
delivery and lend portfolio securities.
The Fund's investment policies as set forth above may be changed without
shareholder approval; however, these policies will not be changed without notice
to shareholders.
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Investment Restrictions
The Fund has adopted certain restrictions designed to achieve diversification of
investment and to reduce investment risk. The Fund may not: (a) Invest more
than 5% of the value of its total assets in the securities of any one issuer,
except obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or issues backed or collateralized by such obligations, nor
acquire more than 10% of the voting securities of any one issuer; (b)
Concentrate investment of more than 25% of the value of its total assets in any
one industry, provided that the various types of public utility companies
(electric, telephone and gas) are considered separate industries for this
purpose; (c) Borrow money, except as a temporary measure for extraordinary or
emergency purposes and not to exceed 5% of the Fund's total assets at the time
of borrowing; (d) Make loans to other persons except this shall not exclude (1)
purchasing debt securities as permitted by the Fund's other investment policies
and restrictions, (2) entering into repurchase agreements and (3) lending of
portfolio securities, provided that the Fund may not loan securities if the
aggregate value of all securities loaned would exceed 20% of the total market
value of the Fund at the time of lending; or (e) Invest more than 10% of the
value of its total assets in the securities of other investment companies. The
investment restrictions described in this paragraph and in the Statement of
Additional Information may be changed only with the approval of the Fund's
shareholders.
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Investment Risks
You should understand that all investments involve risks, and there can be no
guarantee against loss resulting from an investment in the Fund, nor can there
be any assurance that the Fund's investment objectives will be attained. There
are further risk factors described elsewhere in this prospectus and in the
Statement of Additional Information.
The price of certain fixed income securities fluctuate with changes in interest
rates, rising when interest rates fall and falling when interest rates rise.
Yields on short, intermediate, and long-term securities are dependent on a
variety of factors, including the general conditions of the money and bond
markets, the size of a particular offering, the maturity of the obligation, and
the credit quality and
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DODGE & COX
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Income Fund
rating of the issue. Debt securities with longer maturities tend to have higher
yields and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower yields. The
value of the securities may also be affected by changes in the financial
condition of, and other events affecting, specific issuers. Therefore, the
Fund's share price may be higher or lower at the time of sale than your original
purchase. Furthermore, because yield levels on securities vary with changing
interest rates, no specific yield on shares of the Fund can be guaranteed.
Since the Fund will be invested predominantly in higher quality debt securities,
the Fund may not yield as high a level of current income as funds that invest
primarily in lower quality debt securities which generally have less liquidity,
greater market risk and greater price fluctuation.
Foreign securities involve some special risks such as exposure to potentially
adverse local political and economic developments; nationalization and exchange
controls; potentially lower liquidity and higher volatility; possible problems
arising from accounting, disclosure, settlement, and regulatory practices that
differ from U.S. standards; foreign taxes; and the risk that fluctuations in
foreign exchange rates will decrease the investment's value (although favorable
changes can increase its value).
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Additional Information on Investments
U.S. Government Obligations. A portion of the Fund may be invested in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Some of the obligations purchased by the Fund are backed by
the full faith and credit of the U.S. Government and are guaranteed as to both
principal and interest by the U.S. Treasury. Examples of these include direct
obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and bonds,
or indirect obligations of the U.S. Treasury, such as obligations of the
Government National Mortgage Association, the Maritime Administration, the
Farmers Home Administration and the Department of Veterans Affairs.
While the obligations of many of the agencies and instrumentalities of the U.S.
Government are not direct obligations of the U.S. Treasury, they are generally
backed indirectly by the U.S. Government. Some of the agencies are indirectly
backed by their right to borrow from the U.S. Government, such as the Federal
Financing Bank, the Federal Home Loan Bank and the U.S. Postal Service. Others
are supported solely by the credit of the agency or instrumentality itself, but
are given additional support due to the U.S. Treasury's authority to purchase
their outstanding debt obligations. These agencies include the Federal Farm
Credit Banks, the Federal Home Loan Mortgage Corporation and the Federal
National Mortgage Association. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government established or
sponsored agencies. Furthermore, with respect to the U.S. Government securities
purchased by the Fund, guarantees as to the timely payment of principal and
interest do not extend to the value or yield of these securities nor do they
extend to the value of the Fund's shares. The Fund may invest in these
securities if it believes they offer an expected return commensurate with the
risks assumed.
Mortgage Pass-Through Securities. The Fund may invest a portion of its assets
in mortgage pass-through securities which are guaranteed by an agency of the
U.S. Government or are issued by a private entity. These securities represent
ownership in "pools" of mortgage loans and are called "pass-throughs" because
principal and interest payments are passed through to security holders
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DODGE & COX
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Income Fund
monthly. The security holder may also receive unscheduled principal payments
representing prepayments of the underlying mortgage loans. When the Fund
reinvests the principal and interest payments, it may receive a rate of interest
which is either higher or lower than the rate on the existing mortgage.
During periods of declining interest rates there is increased likelihood that
mortgage securities may be prepaid. Such prepayment would most likely be
reinvested at lower rates. On the other hand, if the pass-through securities
had been purchased at a discount, then such prepayment of principal may benefit
the portfolio.
Collateralized Mortgage Obligations. Collateralized Mortgage Obligations
("CMOs") are private entity or U.S. Government agency-issued multi-class bonds
that are collateralized by U.S. agency-guaranteed mortgage pass-through
securities. The issuer typically issues several classes, or "tranches" of bonds,
the debt service of which is provided by the principal and interest payments
from the mortgage pass-through securities in the trust. Each of these tranches
is valued and traded separately based on its distinct cash flow characteristics.
Dodge & Cox will purchase a tranche with the weighted-average life and cash flow
characteristics that it believes will contribute to achieving the objectives of
the Fund.
All CMOs purchased by the Fund will have a AAA rating by either S&P or Moody's.
To qualify for this rating, a CMO is structured so that even under the most
conservative prepayment and reinvestment assumptions, the principal and interest
payments from the collateral are expected to meet or exceed the cash flow
obligations of all the tranches of the CMO. However, there are risks associated
with CMOs which relate to the risks of the underlying mortgage pass-through
securities. In a falling interest rate environment, the mortgage securities may
be prepaid faster than the assumed rate. In this scenario, the prepayments of
principal will generally be reinvested at a rate which is lower than the rate
that the security holder is currently receiving. Conversely, in a rising
interest rate environment, the mortgage collateral may be prepaid at a rate
which is slower than the assumed rate. In this case, the cash flow of the bond
decreases. A reduced prepayment rate effectively lengthens the time period the
security will be outstanding and may adversely affect the value of the security.
Foreign Securities. The Fund may invest in U.S. dollar-denominated securities
of foreign issuers traded in the U.S. Such investments increase a portfolio's
diversification and may enhance return, but they also involve some special
risks. The Fund will invest no more than 25% of its total assets in foreign
securities denominated in U.S. dollars.
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Income Dividends and Capital Gain Distributions
Dividend and capital gain distributions are reinvested in additional Fund shares
in your account unless you select another option on your Account Application
Form. The advantage of reinvesting distributions arises from compounding; that
is, you receive income dividends and capital gain distributions on a rising
number of shares.
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DODGE & COX
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Income Fund
Distributions not reinvested are paid by check or transmitted to your bank
account via electronic transfer using the Automated Clearing House (ACH)
network. If the Post Office cannot deliver your check, or if your check remains
uncashed for six months, the Fund reserves the right to reinvest your
distribution check in your account at the Fund's then current net asset value
per share (NAV) and to reinvest all subsequent distributions in shares of the
Fund.
Income dividends
. The Fund declares and pays dividends (if any) quarterly in March, June,
September and December.
Capital gain distributions
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If the Fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month. If a second distribution is necessary,
it is usually declared and paid in March.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you during the previous year.
This information will also be reported to the IRS.
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How to Purchase Shares
Minimum Initial Investment: $2,500; $1,000 for IRA accounts
Subsequent Minimum Investment: $100
By Mail: Please make your check payable to Dodge & Cox Income Fund (otherwise
it will be returned) and send your check together with the Account Application
Form to the address below. The Fund does not accept third party checks (except
for properly endorsed IRA Rollover checks).
Regular Mail Mailgram, Express, Certified or Registered Mail
Dodge & Cox Income Fund Dodge & Cox Income Fund
c/o Firstar Trust Company c/o Firstar Trust Company
P.O. Box 701 615 East Michigan Street, Third Floor
Milwaukee, WI 53201-0701 Milwaukee, WI 53202-5207
By Wire: To purchase shares in the Fund by Federal wire transfer, you should
request that your bank transmit funds to:
Firstar Bank, ABA#0750-00022
For Credit to: Mutual Fund Services, Account #112-952-137
For Further Credit: Dodge & Cox Income Fund,
[shareholder account number], [name of account]
Prior to having the funds wired, you should call Firstar Trust Company at 1-800-
621-3979 and advise the bank that the funds are being wired. Investors making
initial investments by wire must promptly complete an Account Application Form
and mail it to the Fund, c/o Firstar Trust Company, at either of the addresses
listed above. No account services will be established until the completed
application has been received by the Fund. IRA accounts cannot be opened by
wire.
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Income Fund
By Telephone: By using the Fund's telephone purchase option, you may make
subsequent investments directly from your bank account. To establish the
telephone purchase option for your account, complete the appropriate section on
the Account Application Form. Only bank accounts held at domestic financial
institutions that are Automated Clearing House (ACH) members may be used for
telephone transactions. To make subsequent investments by telephone, call 1-800-
621-3979. This option will become effective approximately 15 business days after
the Account Application Form is received. The price you pay for your shares will
be the next price the Fund computes after the Fund receives your investment from
your bank, which is usually three business days after you authorize the
transfer. If you want to make an investment the same day, you must invest by
wire. You may not use telephone transactions for initial purchases of the Fund's
shares. (See "Telephone Transactions.")
Additional Information about Purchases: All subscriptions are subject to
acceptance by the Fund, and the price of the shares will be the NAV which is
next computed after receipt by the Fund's transfer agent, or other authorized
agent or sub-agent, of the subscription in proper form (see "Pricing of
Shares"). All purchases must be paid for in U.S. dollars; checks must be drawn
on U.S. banks. If your payment is not received or you pay with a check or ACH
transfer that does not clear, your purchase will be canceled. You will be
responsible for any losses or expenses (including a $20 fee) incurred by the
Fund or transfer agent, and the Fund can redeem shares you own in this or
another identically registered Dodge & Cox Fund account as reimbursement. The
Fund and its agents have the right to reject or cancel any purchase, exchange,
or redemption due to nonpayment. All subscriptions will be invested in full and
fractional shares and you will receive a confirmation of all transactions.
Purchases through the Automatic Investment Plan will be confirmed at least
quarterly. Certificates (for full shares only) are not issued unless requested
by you.
A Social Security or Taxpayer Identification Number must be supplied and
certified on the Account Application Form before an account can be established.
If you fail to furnish the Fund with your correct Social Security or Taxpayer
Identification Number, the Fund may be required to withhold Federal income tax
at a rate of 31% ("backup withholding") from dividends, capital gain
distributions and redemptions.
The purchase or redemption of shares through broker-dealers or other financial
institutions may be subject to a service fee by those entities. The Fund and
its agents reserve the right to accept initial purchases by telephone, to cancel
or rescind any purchase or exchange (for example, if an account has been
restricted due to excessive trading or fraud) upon notice to the shareholder
within five business days of the trade; to freeze any account and temporarily
suspend services on the account when notice has been received of a dispute
between the registered or beneficial account owners or there is reason to
believe a fraudulent transaction may occur; to otherwise modify the conditions
of purchase and any services at any time, or to act on instructions believed to
be genuine.
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How to Redeem Shares
By Mail: Your written instructions to redeem should be sent to the appropriate
address below:
Regular Mail Mailgram, Express, Certified or Registered Mail
Dodge & Cox Income Fund Dodge & Cox Income Fund
c/o Firstar Trust Company c/o Firstar Trust Company
P.O. Box 701 615 East Michigan Street, Third Floor
Milwaukee, WI 53201-0701 Milwaukee, WI 53202-5207
The request must specify your name, account number, and dollar amount or number
of shares redeemed, and be properly signed. The Fund requires the signatures of
all owners exactly as registered, and possibly a signature guarantee (see
"Signature Guarantees" below).
By Telephone: Telephone redemption requests can be initiated by calling Firstar
Trust Company at 1-800-621-3979. (See "Telephone Transactions.") Telephone
redemption requests for IRA accounts will not be accepted.
Redemption payments may be made by check, wire or ACH:
By Check: Checks will be made payable to you and will be sent to your address
of record. If the proceeds of the redemption are requested to be sent to other
than the address of record or if the address of record has been changed within
15 days of the redemption request, the request must be in writing with your
signature(s) guaranteed.
By Wire: The Fund will wire redemption proceeds only to the bank account
designated on the initial Account Application Form or in written instructions --
with signature guarantee -- received in advance of the redemption order. Wire
redemption requests are subject to a $12 charge, which is subject to change
without notice.
By ACH: Redemption proceeds can be sent to your bank account by ACH transfer.
You can elect this option by completing the appropriate section of the Account
Application Form. If money is moved by ACH transfer, you will not be charged by
the Fund for these services. There is a $100 minimum per ACH transfer.
Signature Guarantees: You may need to have your signature guaranteed in certain
situations, such as:
. Written requests to wire redemption proceeds (if not previously authorized on
the Account Application Form).
. Sending redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a Dodge & Cox account with a different
registration (name/ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to the Fund. The Fund cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
Redemptions-in-Kind: The Fund reserves the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption by making
payment in whole or in part in readily marketable securities chosen by the Fund
and valued as they are for purposes of computing the
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Fund's NAV (a redemption-in-kind). If payment is made in securities, a
shareholder may incur transaction expenses in converting these securities to
cash. The Fund has elected, however, to be governed by Rule 18f-1 under the
Investment Company Act, as a result of which the Fund is obligated to redeem
shares, with respect to any one shareholder during any 90-day period, solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund at
the beginning of the period.
IRA Accounts: Redemption requests for IRA accounts must be in writing and must
include instructions regarding Federal income tax withholding. Unless you have
elected otherwise, your redemptions will be subject to income tax withholding.
Additional Information about Redemptions: Under certain circumstances, the
Fund's transfer agent may require additional documents, including stock powers
with signatures guaranteed, trust instruments, death certificates, appointments
as executor and certificates of corporate authority. If certificates have been
issued for any of the shares to be redeemed, such certificates must be endorsed
with signatures guaranteed and delivered to the Fund's transfer agent. For any
questions regarding documentation or signature requirements for trusts, estates,
corporations, etc., please call Firstar Trust Company (1-800-621-3979).
The redemption price will be the NAV which is next computed after receipt of a
redemption request in good order (see "Pricing of Shares") by Firstar Trust
Company or other authorized agent or sub-agent. The redemption price may be
more or less than your cost, depending upon the market value of the Fund's
investments at the time of redemption. Redemption payments are made as soon as
practicable, generally within two business days, but no later than the seventh
day after the effective date for redemption, or within such shorter period as
may legally be required. If shares are redeemed within two weeks of purchase,
the Fund may delay payment of the redemption proceeds until your purchase check
has cleared, which may take up to 15 days. There is no such delay when shares
being redeemed were purchased by wiring Federal Funds.
The Fund may suspend your redemption right or postpone payment at times when the
New York Stock Exchange is closed or under any emergency circumstances as
determined by the SEC. If the Post Office cannot deliver your check, or if your
check remains uncashed for six months, the Fund reserves the right to reinvest
your redemption proceeds in your account at the then current NAV.
- --------------------------------------------------------------------------------
Exchanging Shares
You may exchange your shares for shares of another Dodge & Cox Fund, provided
that the registration and Taxpayer Identification Number of both accounts are
identical. An exchange may be initiated by contacting the Fund's transfer agent
in writing or by telephone. (See "Telephone Transactions.") An exchange is
treated as a redemption and a purchase; and, therefore, you may realize a
taxable gain or loss. You should obtain and read a current prospectus of the
fund into which the exchange is being made.
There is a $1,000 minimum for all exchanges. If a new account is being opened
by exchange, the minimum investment requirements must be met. After the
exchange, the account from which the exchange is made must have a remaining
balance of at least $2,500 ($1,000 for an IRA account) in order to remain open.
The Fund reserves the right to terminate or materially modify the exchange
privilege upon 60 days advance notice to shareholders.
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10
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DODGE & COX
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Income Fund
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Telephone Transactions
By using telephone purchase, redemption and/or exchange options, you agree to
hold the Fund, Dodge & Cox (any of its affiliated mutual funds), Firstar Trust
Company, and each of their respective directors, trustees, officers, employees
and agents harmless from any losses, expenses, costs or liability (including
attorney fees) which may be incurred in connection with the exercise of these
privileges. Generally, all shareholders are automatically eligible to use these
options. However, you may elect to decline these options in the Account
Application Form or by writing Firstar Trust Company. (You may also reinstate
them at any time by writing Firstar Trust Company.) If the Fund does not employ
reasonable procedures to confirm that the instructions received from any person
with appropriate account information are genuine, the Fund may be liable for
losses due to unauthorized or fraudulent instructions. If you are unable to
reach the Fund by telephone because of technical difficulties, market
conditions, or a natural disaster, purchase, redemption and exchange requests
should be made by regular or express mail. If an account has multiple owners,
the Fund may rely on the instructions of any one account owner. You should note
that purchase and sales orders will not be canceled or modified once received in
good order.
Purchases and sales should be made for long-term investment purposes only.
Because excessive trading may be disadvantageous to the Fund, the Fund reserves
the right to limit purchase and sale transactions, including exchanges, when a
pattern of frequent trading appears evident.
- --------------------------------------------------------------------------------
Transfer of Shares
Changes in account registrations--such as changing the name(s) on your account,
or transferring shares to another person or legal entity--must be submitted in
writing and require a signature guarantee. Please call Firstar Trust Company
(1-800-621-3979) for full instructions.
- --------------------------------------------------------------------------------
Pricing of Shares
The share price (also called "net asset value per share" or "NAV") for the Fund
is calculated at 4:00 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the Fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
If the Fund, or its authorized agent or sub agent receives your request in good
order by 4 p.m. ET, your transactions will be priced at that day's NAV. If your
request is received after 4 p.m., it will be priced at the next business day's
NAV.
The Fund cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
The time at which transactions and shares are priced and the time until which
orders are accepted may be changed in case of an emergency or if the New York
Stock Exchange closes at a time other than 4 p.m. ET.
- --------------------------------------------------------------------------------
Shareholder Services
The Fund offers you the following services: (Please call or write the Fund
(1-800-621-3979) for applications and additional information.)
Automatic Investment Plan: You may make regular monthly or quarterly
investments of $100 or more through automatic deductions from your bank account.
======================================--========================================
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DODGE & COX
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Income Fund
Systematic Withdrawal Plan: If you own $10,000 or more of the Fund's shares,
you may receive regular monthly or quarterly payments of $50 or more. Shares
will automatically be redeemed at NAV to make the withdrawal payments.
Reinvestment Plan: You may direct that dividend and capital gains distributions
be reinvested in additional Fund shares.
Individual Retirement Account (IRA): If you have earned income or are entitled
to certain distributions from eligible retirement plans, you may make or
authorize contributions to your Individual Retirement Account. The Fund has an
IRA Plan available for shareholders of the Fund.
- --------------------------------------------------------------------------------
Performance Information
The Fund may include figures indicating its yield or total return in
advertisements or reports to shareholders or prospective investors. Quotations
of yield, as defined by the SEC, will be based on net investment income per
share earned during a given thirty-day period and will be computed by dividing
this net investment income by the net asset value per share on the last day of
the period and annualizing the results. Yield does not directly reflect changes
in net asset value per share which occurred during the period. Quotations of
the Fund's average annual total rate of return will be expressed in terms of the
average annual compounded rate of return on a hypothetical investment in the
Fund over a specified period, will reflect the deduction of a proportional share
of Fund expenses (on an annual basis) and will assume that all dividends and
capital gains distributions are reinvested when paid. Total return indicates
the positive or negative rate of return that an investor would have earned from
reinvested dividends and distributions and changes in net asset value per share
during the period.
Performance information for the Fund may be compared, in reports and promotional
literature, to: (i) the Lehman Brothers Aggregate Bond Index, the Salomon
Brothers Broad Investment-Grade Bond Index, or other managed and unmanaged
indices of the performance of various types of investments, so that investors
may compare the Fund's results with those of indices widely regarded by
investors as representative of the security markets in general, and (ii) the
performance of other mutual funds. Unmanaged indices may assume the reinvestment
of income distributions, but generally do not reflect deductions for
administrative and management costs and expenses; managed indices do reflect
such deductions.
Performance information for the Fund reflects only the performance of
hypothetical investments in the Fund during the particular time periods on which
the calculations are based. Such information should not be considered as
representative of the performance of the Fund in the future because, unlike some
bank deposits or other investments which pay a fixed yield for a stated period
of time for a fixed principal amount, the performance of the Fund will vary
based not only on the current market value of the securities held in its
portfolio, but also on changes in the Fund's expenses and in the asset size of
the Fund. Performance information should be considered in light of the Fund's
investment objectives and policies, the types and quality of the Fund's
portfolio investments, market conditions during the particular time period and
operating expenses. For a description of the methods used to determine the
Fund's total return and yield, see "Performance Information" in the Statement of
Additional Information. Further information about the performance of the Fund is
contained in the Fund's Annual Report which may be obtained without charge from
the Fund.
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DODGE & COX
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Income Fund
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Fund Organization and Management
Fund Organization and Voting Rights. The Fund, organized as a California
corporation in 1988, is registered as an open-end, diversified management
investment company under the Investment Company Act. The Fund's Board of
Directors supervises Fund operations and performs duties required by applicable
state and Federal law. All shares have the same rights as to voting, redemption,
dividends and in liquidation. Shares have cumulative voting rights for election
of directors, which means that each share is entitled to as many votes as there
are directors to be elected, all of which may be cast for one nominee or
distributed as the shareholder sees fit. All shares issued are fully paid and
non-assessable, are transferable and are redeemable at net asset value upon
demand of the shareholder. Shares have no preemptive or conversion rights. The
Fund is not required to hold annual shareholder meetings and will do so only
when required by law or when specially called in accordance with the Fund's
bylaws.
Investment Manager. Dodge & Cox, a California corporation, has served as
investment manager to the Fund since inception. Dodge & Cox is one of the
oldest professional investment management firms in the United States, having
acted continuously as investment managers since 1930. The Fund's investments
are managed by Dodge & Cox's Bond Policy Committee, and no one person is
primarily responsible for making investment recommendations to the Committee.
Dodge & Cox is located at One Sansome Street, 35th Floor, San Francisco,
California 94104.
Dodge & Cox's activities are devoted to investment research and the supervision
of investment accounts for individuals and institutions. In addition, Dodge &
Cox is investment manager to other registered mutual funds, the Dodge & Cox
Balanced Fund since 1931 and the Dodge & Cox Stock Fund since 1965. The Fund
pays Dodge & Cox a management fee which is payable monthly at the annual rate of
0.50% of the average daily net asset value of the Fund up to $100 million and
0.40% of the average daily net asset value of the Fund in excess of $100
million. However, the investment management agreement provides that Dodge & Cox
will waive its fee for any calendar year to the extent that such fee plus all
other ordinary operating expenses paid by the Fund exceeds 1% of the average
daily net asset value of the Fund. No waiver of management fee was required for
1996 under this agreement.
Dodge & Cox has adopted a Code of Ethics that restricts personal investing
practices by its employees. Among other provisions, the Code of Ethics requires
that employees with access to information about the purchase or sale of
securities in the Fund's portfolio obtain preclearance before executing certain
personal trades. The Code of Ethics is designed to ensure that the interests of
the Fund's shareholders come before the interests of the people who manage the
Fund.
- --------------------------------------------------------------------------------
Portfolio Transactions
Orders for the Fund's portfolio securities transactions are placed by Dodge &
Cox, which seeks to obtain the best available prices, taking into account the
costs and quality of executions. In the over-the-counter market, purchases and
sales are transacted directly with principal market-makers except in those
circumstances where it appears better prices and executions are available
elsewhere.
Subject to the above policy, when two or more brokers are in a position to offer
comparable prices and executions, preference may be given to brokers that have
provided investment research, statistical, and other related services for the
benefit of the Fund and/or of other funds and accounts over which Dodge & Cox
exercises investment and brokerage discretion.
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13
<PAGE>
DODGE & COX
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Income Fund
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Expenses
In addition to Dodge & Cox's fee, the Fund pays other direct expenses, including
custodian, transfer agent, legal, accounting and audit fees; costs of preparing
and printing prospectuses and reports sent to shareholders; registration fees
and expenses; proxy and annual meeting expenses (if any); and director fees and
expenses. In 1996, the ratio of total operating expenses to average net assets
of the Fund was 0.50%. Dodge & Cox furnishes personnel and other facilities
necessary for the administration of the Fund for which it receives no additional
compensation.
- --------------------------------------------------------------------------------
Federal Income Taxes
The Fund intends to qualify each year as a regulated investment company under
the Internal Revenue Code. A regulated investment company that distributes for
the year all of its ordinary income and capital gains pays no tax on its
ordinary income or capital gains. A regulated investment company that fails to
distribute all of its ordinary income and capital gains must pay tax on the
undistributed amounts at a maximum rate of 35%. If the company does not
distribute at least 98% of its ordinary income and capital gains, it must pay an
additional 4% excise tax on the amount by which the 98% requirements exceed
actual distributions.
Distributions designated as long-term capital gains distributions are taxed to a
shareholder as though they were long-term capital gains realized by the
shareholder whether received in cash or shares of the Fund and regardless of the
period of time shares of the Fund have been held. All taxable distributions,
except for long-term capital gains distributions, are taxed to a shareholder as
ordinary income dividends whether received in cash or in shares of the Fund.
State taxation of distributions varies from state to state. You should consult
your own tax adviser about the Federal, state and local tax consequences of an
investment in the Fund.
- --------------------------------------------------------------------------------
Custodian and Transfer Agent
Firstar Trust Company, P.O. Box 701, Milwaukee, Wisconsin 53201-0701, (1-800-
621-3979), acts as custodian of all cash and securities of the Fund and receives
and disburses cash and securities for the account of the Fund. Firstar Trust
Company also acts as transfer and dividend disbursing agent for the Fund.
- --------------------------------------------------------------------------------
Reports to Shareholders
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio characteristics. To reduce Fund expenses, the Fund attempts to
identify related shareholders within a household and send only one copy of a
report. Call 1-800-621-3979 if you would like an additional free copy of the
Fund's financial report.
- --------------------------------------------------------------------------------
Shareholder Inquiries
For Fund literature and information, or if you have any questions concerning
your account, please call Firstar Trust Company (1-800-621-3979).
======================================--========================================
14
<PAGE>
DODGE & COX
Income Fund
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Officers and Directors
A. Horton Shapiro, President and Director
Senior Vice-President, Dodge & Cox
John A. Gunn, Vice President and Director
President, Dodge & Cox
W. Timothy Ryan, Secretary-Treasurer
and Director
Senior Vice-President, Dodge & Cox
Dana M. Emery, Assistant
Secretary-Treasurer and Director
Vice-President, Dodge & Cox
Harry R. Hagey, Vice President
Chairman & CEO, Dodge & Cox
Thomas M. Mistele, Assistant Secretary-Treasurer
General Counsel, 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
INVESTMENT MANAGER
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
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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[LOGO OF RECYCLED PAPER APPEARS HERE] 4/97 IF PR
DODGE & COX
- --------------------------------------------------------------------------------
Income Fund
Established 1989
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Prospectus
April 29, 1997
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<PAGE>
DODGE & COX INCOME FUND
c/o Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
(800) 621-3979
STATEMENT OF ADDITIONAL INFORMATION
Dated April 29, 1997
This Statement of Additional Information is not the Fund's Prospectus, but
provides additional information which should be read in conjunction with the
Fund's Prospectus dated April 29, 1997. The Fund's Prospectus and most recent
annual financial statements may be obtained from the Fund at no charge by
writing or telephoning the Fund at the address or telephone number shown above.
___________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objectives and Policies............ 1
Risk Factors.................................. 5
Investment Restrictions....................... 7
Purchase, Redemption, and Pricing of Shares... 8
Performance Information....................... 9
Officers and Directors........................ 10
Investment Manager............................ 12
Portfolio Transactions........................ 12
Additional Tax Considerations................. 14
Independent Accountants....................... 14
Financial Statements.......................... 15
Appendix: Ratings............................ 15
</TABLE>
____________________________
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
- ----------------------------------
The Dodge & Cox Income Fund is a no-load mutual fund with the primary
objective of providing shareholders with a high and stable rate of current
income consistent with long-term preservation of capital. A secondary objective
is to take advantage of opportunities to realize capital appreciation. These
objectives may not be changed without the approval of the holders of a majority
of the Fund's outstanding shares (as defined below). There can be no assurance
that the Fund will achieve its investment objectives.
The Fund seeks to achieve these objectives by investing in a diversified
portfolio of fixed income securities. It is the policy of the Fund to invest at
least 80% of the market value of its total assets in the following: (1) debt
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities; (2) investment-grade debt securities, including U.S. dollar-
denominated foreign issues, rated in the top four rating groups by either
Moody's Investors Service, ("Moody's") (Aaa, Aa, A, Baa) or Standard & Poor's
Ratings Group ("S&P") (AAA, AA, A, BBB); (3) unrated securities if deemed to be
of investment-grade quality by Dodge & Cox; and (4) cash equivalents, bankers'
acceptances, bank certificates of deposit, repurchase agreements and commercial
paper. At least 65% of the market value of the portfolio will be invested in
category (1) securities and in category (2) securities rated in the top three
rating groups. Further information about specific investments is provided
below.
No more than 20% of the Fund may be invested in other fixed income
instruments including: debt obligations rated below investment grade, if, in
the opinion of Dodge & Cox, they are of suitable quality, provide attractive
investment opportunities and have a minimum rating of B by Moody's and/or S&P at
the time of investment; preferred stock; and corporate bonds convertible into
common stocks or carrying warrants to purchase common stock. The Fund will
invest in unrated securities only if deemed to be of investment-grade quality by
Dodge & Cox. It should be noted that securities rated Baa or BBB and those
securities rated below investment grade have speculative characteristics.
Securities rated B by the major rating agencies may yield a higher level of
current income than higher quality securities but generally have less liquidity,
greater market risk and more price fluctuation. An explanation of the Moody's
and S&P rating groups is included in the Appendix.
The percentages referred to in the preceding two paragraphs are determined
at the time of investment and apply under normal market conditions.
The proportions held in the various financial instruments will be revised
as appropriate in light of Dodge & Cox's appraisal of the economy, the relative
yields of securities in the various market sectors, the investment prospects for
issuers, and other factors. In making investment decisions, Dodge & Cox will
take many factors into consideration, including yield to maturity, quality,
liquidity, current yield, and capital appreciation potential.
The Fund attempts to achieve its secondary objective of capital
appreciation through such techniques as fundamental research (i.e., seeking a
security or group of securities which Dodge & Cox believes to be undervalued),
purchasing securities at a discount to their maturity or call value and making
gradual adjustments in the average maturity of the Fund's portfolio.
The average maturity of the Fund's portfolio at any given time depends, in
part, on Dodge & Cox's assessment of economic and market conditions, the future
level of inflation and interest rates, and on the relative yields of securities
in the marketplace. Dodge & Cox normally invests in an array of securities with
short, intermediate and long maturities in varying proportions, with greater
emphasis on longer maturities.
Purchases and sales of securities in the Fund are generally made for long-
term fundamental investment reasons rather than for short-term trading purposes.
Nevertheless, Dodge & Cox may sell any of the securities in the Fund, regardless
of the length of time held, in seeking to achieve the objectives of the Fund.
Dodge & Cox maintains a long-term investment orientation and therefore
anticipates a relatively low turnover rate, which, under normal circumstances,
should not exceed 50% on an annual basis. However, during rapidly changing
economic, political, and market environments, there may be more portfolio
changes than in a more stable period. A higher turnover rate might result in
increased transaction expenses and the realization of capital gains and losses.
In seeking to achieve the objectives of the Fund, Dodge & Cox may purchase
securities on a when-issued basis, purchase or sell securities for delayed
delivery and lend portfolio securities.
1
<PAGE>
The Fund's investment policies as set forth above may be changed without
shareholder approval; however, such policies will not be changed without notice
to shareholders.
TYPES OF PORTFOLIO SECURITIES
- -----------------------------
In seeking to meet its investment objectives, the Fund may invest in
securities or instruments whose investment characteristics are consistent with
the Fund's investment program. The following further describes the principal
types of portfolio securities and investment management practices of the Fund.
COMMON AND PREFERRED STOCKS. Stocks represent shares of ownership in a company.
Generally, preferred stock has a specified dividend and ranks after bonds and
before common stocks in its claim on income for dividend payments and on assets
should the company be liquidated. After other claims are satisfied, common
stockholders participate in company profits on a pro rata basis; profits may be
paid out in dividends or reinvested in the company to help it grow. Increases
and decreases in earnings are usually reflected in a company's stock price, so
common stocks generally have the greatest appreciation and depreciation
potential of all corporate securities.
CONVERTIBLE SECURITIES AND WARRANTS. The Fund may invest in debt or preferred
equity securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stock dividend rates but lower than nonconvertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree.
In recent years, convertibles have been developed which combine higher or lower
current income with other features. Warrants are options to buy a stated number
of shares of common stock at a specified price anytime during the life of the
warrants (generally two or more years).
FOREIGN SECURITIES. Under normal market conditions, the Fund will invest no
more than 25% of its total assets in U.S. dollar denominated securities of
foreign issuers.
CASH POSITION. The Fund will hold a certain portion of its assets in U.S.
dollar denominated money market securities, including repurchase agreements,
commercial paper, and bank obligations in the two highest rating categories
maturing in one year or less. For temporary, defensive purposes, the Fund may
invest without limitation in such securities. This reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new investments
and serves as a short-term defense during periods of unusual market volatility.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other
-----------------
short-term debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The Fund may invest in U.S. banks, foreign branches of U.S. banks, U.S.
branches of foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible corporate
-------------------------------------
debt securities (such as bonds and debentures) which have one year or less
remaining to maturity. Corporate notes may have fixed, variable, or floating
rates.
Commercial Paper. Short-term promissory notes issued by corporations
-----------------
primarily to finance short-term credit needs. Certain notes may have floating
or variable rates.
Repurchase Agreements. The Fund may enter into a repurchase agreement
----------------------
through which an investor (such as the Fund) purchases a security (known as the
"underlying security") from a well-established securities dealer or bank that is
a member of the Federal Reserve System. Any such dealer or bank will be on
Dodge & Cox's approved list and have a credit rating with respect to its short-
term debt of at least A1 by S&P, P1 by Moody's, or the equivalent rating by
Dodge & Cox. At that time, the bank or securities dealer agrees to repurchase
the underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will be
treated as illiquid securities. The Fund will only enter into repurchase
agreements where (i) the underlying securities are issued by the U.S.
government, its agencies and instrumentalities, (ii) the market value of the
underlying security, including interest accrued, will be at all times equal to
or exceed the value of the repurchase agreement, and (iii) payment for the
underlying security is made only upon physical delivery or evidence of book-
entry transfer to the account of the custodian or a bank acting as agent. In
the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the underlying
security
2
<PAGE>
and losses, including: (a) possible decline in the value of the underlying
security during the period which the Fund seeks to enforce its rights thereto;
(b) possible subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights. The Fund does not presently
intend to invest in repurchase agreements maturing in more than seven days, or
with respect to securities for which there are no readily available market
quotations.
BORROWING MONEY. The Fund can borrow money from banks as a temporary measure
for emergency purposes or to facilitate redemption requests. Such borrowing may
be collateralized with Fund assets, subject to restrictions.
U.S. GOVERNMENT OBLIGATIONS. A portion of the Fund may be invested in
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Some of the obligations purchased by the Fund are backed by
the full faith and credit of the U.S. government and are guaranteed as to both
principal and interest by the U.S. Treasury. Examples of these include direct
obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and bonds,
or indirect obligations of the U.S. Treasury, such as obligations of the
Government National Mortgage Association, the Maritime Administration, the
Farmers Home Administration, the Veterans Administration, the Federal Housing
Administration and the Export-Import Bank.
While the obligations of many of the agencies and instrumentalities of the
U.S. government are not direct obligations of the U.S. Treasury, they are
generally backed indirectly by the U.S. government. Some of the agencies are
indirectly backed by their right to borrow from the U.S. government, such as the
Federal Financing Bank, the Federal Home Loan Bank and the U.S. Postal Service.
Others are supported solely by the credit of the agency or instrumentality
itself, but are given additional support due to the U.S. Treasury's authority to
purchase their outstanding debt obligations. These agencies include the Federal
Farm Credit Banks, the Federal National Mortgage Association the Federal Home
Loan Mortgage Corporation, and the Student Loan Marketing Association. No
assurance can be given that the U.S. government would provide financial support
to U.S. government established or sponsored agencies. Furthermore, with respect
to the U.S. government securities purchased by the Fund, guarantees as to the
timely payment of principal and interest do not extend to the value or yield of
these securities nor do they extend to the value of the Fund's shares. Dodge &
Cox will invest the Fund's assets in these securities if it believes they offer
an expected return commensurate with the risks assumed.
MORTGAGE PASS-THROUGH SECURITIES. In addition, the Fund may invest a portion of
its assets in mortgage pass-through securities which are guaranteed by an agency
of the U.S. government or are issued by a private entity. These securities
represent ownership in "pools" of mortgage loans and are called "pass-throughs"
because principal and interest payments are passed through to security holders
monthly. The security holder may also receive unscheduled principal payments
representing prepayments of the underlying mortgage loans. When the Fund
reinvests the principal and interest payments, it may receive a rate of interest
which is either higher or lower than the rate on the existing mortgage.
During periods of declining interest rates there is increased likelihood
that mortgage securities may be prepaid. Such prepayment would most likely be
reinvested at lower rates. On the other hand, if the pass-through securities
had been purchased at a discount, then such prepayments of principal would
benefit the Fund's portfolio.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized Mortgage Obligations
("CMOs") are private entity or U.S. government agency-issued multi-class bonds
that are collateralized by U.S. agency-guaranteed mortgage pass-through
securities. A CMO is created when the issuer purchases a collection of mortgage
pass-through securities ("the collateral") and places these securities in a
trust, which is administered by an independent trustee. Next, the issuer
typically issues several classes, or "tranches" of bonds, the debt service of
which is provided by the principal and interest payments from the mortgage pass-
through securities in the trust. Each of these tranches is valued and traded
separately based on its distinct cash flow characteristics.
Although the mortgage pass-through collateral typically has monthly
payments of principal and interest, CMO bonds will generally have semiannual or
quarterly payments of principal and interest. Payments received from the
collateral are reinvested in short-term debt securities by the trustee between
payment dates on the CMO. On the CMO payment dates, the principal and interest
payments received from the collateral plus reinvestment income, are applied
first to pay interest on the bonds and then to repay principal. Generally, the
bonds are retired sequentially; the first payments of principal are applied to
retire the first tranche, while all other tranches receive interest only. Only
after the first tranche is retired do principal payments commence on the second
tranche. The process continues in this sequence until all tranches are retired.
3
<PAGE>
At issuance, each CMO tranche has a stated final maturity date. The stated
final maturity date is the date by which the bonds would be completely retired
assuming standard amortization of principal but no prepayments of principal on
the underlying collateral. However, since it is likely that the collateral will
have principal prepayments, the CMO bonds are actually valued on the basis of an
assumed prepayment rate. The assumed prepayment rate is used in the calculation
of the securities' weighted-average life, a measure of the securities' cash flow
characteristics. Dodge & Cox will purchase the tranche with the weighted-
average life and cash flow characteristics that it believes will contribute to
achieving the objectives of the Fund.
All CMOs purchased by the Fund will have a AAA rating by either S&P or
Moody's. To qualify for this rating, a CMO is structured so that even under the
most conservative prepayment and reinvestment assumptions, the principal and
interest payments from the collateral are expected to meet or exceed the cash
flow obligations of all the tranches of the CMO. However, there are risks
associated with CMOs, which relate to the risks of the underlying mortgage pass-
through securities. In a falling interest rate environment, the mortgage
securities may be prepaid faster than the assumed rate. In this scenario, the
prepayments of principal will generally be reinvested at a rate which is lower
than the rate that the security holder is currently receiving. Conversely, in a
rising interest rate environment, the mortgage collateral may be prepaid at a
rate which is slower than the assumed rate. In this case, the cash flow of the
bond decreases. A reduced prepayment rate effectively lengthens the time period
the security will be outstanding and may adversely affect the value of the
security.
RESTRICTED SECURITIES. The Fund may invest in restricted securities (privately-
placed debt and preferred equity securities) and other securities without
readily available market quotations, but will not acquire such securities or
other illiquid securities, including repurchase agreements maturing in more than
seven days, if as a result they would comprise more than 10% of the value of the
Fund's total assets.
Restricted securities may be sold only in privately-negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933. Where registration is required, the
Fund may be obligated to pay all or a part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions
were to develop, the Fund might obtain a less favorable price than prevailed
when it decided to sell. Restricted securities will be priced at fair value as
determined in good faith by the Fund's Board of Directors.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities in which
the Fund may invest are entities organized and operated solely for the purpose
of restructuring the investment characteristics of various securities. These
entities are typically organized by investment banking firms which receive fees
in connection with establishing each entity and arranging for the placement of
its securities. This type of restructuring involves the deposit with or
purchases by an entity, such as a corporation or trust, of specified instruments
and the issuance by that entity of one or more classes of securities (structured
investments) backed by, or representing interests in, the underlying
instruments. The cash flow on the underlying instruments may be apportioned
among the newly issued structured investments to create securities with
different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to structured investments is dependent on the extent of the cash flow on
the underlying instruments.
The Fund is permitted to invest in a class of structured investments that
is either subordinated or unsubordinated to the right of payment of another
class. Subordinated structured investments typically have higher yields and
present greater risks than unsubordinated structured investments. Although the
Fund's purchase of subordinated structured investments would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the limitations
placed on the extent of the Fund's assets that may be used for borrowing
activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the Investment Company Act. As a result, the Fund's
investment in these structured investments may be limited by the restrictions
contained in the Investment Company Act.
WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. The Fund may purchase securities on
a when-issued or a delayed-delivery basis, that is, for payment and delivery on
a date later than normal settlement, but generally within 30 days.
The purchase price and yield on these securities are generally set at the
time of purchase. On the date that a security is purchased on a when-issued
basis, the Fund reserves liquid assets with a value at least as great as the
purchase price of the security, in a segregated account at the custodian bank,
as long as the obligation to purchase
4
<PAGE>
continues. The value of the delayed-delivery security is reflected in the Fund's
net asset value as of the purchase date, however, no income accrues to the Fund
from these securities prior to their delivery to the Fund. The Fund makes such
purchases for long-term investment reasons, but may actually sell the securities
prior to settlement date if Dodge & Cox deems it advisable in seeking to achieve
the objectives of the Fund. The purchase of these types of securities may
increase the Fund's overall investment exposure and involves a risk of loss if
the value of the securities declines prior to the settlement date. Unsettled
securities purchased on a when-issued or delayed-delivery basis will not exceed
5% of the Fund's total assets at any one time.
LENDING OF PORTFOLIO SECURITIES. The Fund has reserved the right to lend its
securities to qualified broker-dealers, banks or other financial institutions.
By lending its portfolio securities, the Fund would attempt to increase its
income by receiving a fixed fee or a percentage of the collateral, in addition
to continuing to receive the interest or dividends on the securities loaned.
The terms, structure and the aggregate amount of such loans would be consistent
with the Investment Company Act. The borrower would be required to secure any
such loan with collateral in cash or cash equivalents maintained on a current
basis in an amount at least equal to the total market value and accrued interest
of the securities loaned by the Fund.
The Fund does not presently intend to lend portfolio securities.
RISK FACTORS
- ------------
GENERAL
Because of its investment policy, the Fund may not be suitable or
appropriate for all investors. The Fund is not a money market fund and is not
an appropriate investment for those whose primary objective is principal
stability. The Fund will normally have substantially all of its assets in fixed
income securities. This portion of the Fund's assets will be subject to all of
the risks of investing in the financial markets. There is risk in all
investment. The value of the portfolio securities of the Fund will fluctuate
based upon market conditions. Although the Fund seeks to reduce risk by
investing in a diversified portfolio, diversification does not eliminate all
risk. There can be no assurance that the Fund will achieve its investment
objectives.
DEBT OBLIGATIONS
The Fund may invest in debt securities which hold the prospect of
contributing to the achievement of the Fund's objectives. Yields on short,
intermediate, and long-term securities are dependent on a variety of factors,
including the general conditions of the money and bond markets, the size of a
particular offering, the maturity of the obligation, and the credit quality and
rating of the issue. Debt securities with longer maturities tend to have higher
yields and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower yields. The
market prices of debt securities usually vary, depending upon available yields.
An increase in interest rates will generally reduce the value of portfolio
investments, and a decline in interest rates will generally increase the value
of portfolio investments. The ability of the Fund to achieve its investment
objectives is also dependent on the continuing ability of the issuers of the
debt securities in which the Fund invests to meet their obligations for the
payment of interest and principal when due. The Fund's investment program
permits it to hold lower quality securities. However, the principal value of
lower-rated securities generally will fluctuate more widely than higher quality
securities. Lower quality investments entail a higher risk of default--that is,
the nonpayment of interest and principal by the issuer than higher quality
investments. Such securities are also subject to special risks, discussed
below. Although the Fund seeks to reduce risk by portfolio diversification,
credit analysis, and attention to trends in the economy, industries and
financial markets, these efforts will not eliminate all risk.
After purchase by the Fund, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, Dodge
& Cox will consider such event in its determination of whether the Fund should
continue to hold the security. To the extent that the ratings given by Moody's
or S&P may change as a result of changes in such organizations or their rating
systems, the Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in the
Prospectus.
SPECIAL RISKS OF HIGH YIELD INVESTING
As described above, under limited circumstances the Fund may hold low
quality bonds commonly referred
5
<PAGE>
to as "junk bonds". Junk bonds are regarded as predominantly speculative with
respect to the issuer's continuing ability to meet principal and interest
payments. Because investment in low and lower-medium quality bonds involves
greater investment risk, to the extent the Fund holds such bonds, achievement of
its investment objective will be more dependent on Dodge & Cox's credit analysis
than would be the case if the Fund was investing in higher quality bonds. High
yield bonds may be more susceptible to real or perceived adverse economic
conditions than investment grade bonds. A projection of an economic downturn, or
higher interest rates, for example, could cause a decline in high yield bond
prices because the advent of such events could lessen the ability of highly
leverage issuers to make principal and interest payments on their debt
securities. In addition, the secondary trading market for high yield bonds may
be less liquid than the market for higher grade bonds, which can adversely
affect the ability of the Fund to dispose of its portfolio securities. Bonds for
which there is only a "thin" market can be more difficult to value inasmuch as
objective pricing data may be less available and judgment may play a greater
role in the valuation process.
FOREIGN SECURITIES
While the Fund generally emphasizes investments in companies domiciled in
the United States, it may invest in U.S. dollar-denominated securities of
foreign issuers. The Fund may invest in foreign securities when the anticipated
performance of the foreign securities is believed by Dodge & Cox to offer
greater potential than domestic alternatives in keeping with the investment
objectives of the Fund.
RISK FACTORS OF FOREIGN INVESTING
There are special risks in foreign investing. Many of the risks are more
pronounced for investments in developing or emerging countries, such as many of
the countries of Southeast Asia, Latin America, Eastern Europe, and the Middle
East. The Fund has no present intention of investing in developing or emerging
countries.
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respect as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position. The
internal politics of certain foreign countries are not as stable as in the
United States. In addition, significant external political risks currently
affect some foreign countries.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and are
accordingly affected by protective trade barriers and economic conditions of
their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon the
securities markets of such countries.
CURRENCY FLUCTUATIONS. Although the Fund will invest in U.S. dollar-
denominated foreign securities, the underlying securities will be denominated in
various currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets. Such changes will also affect the Fund's income.
Generally, when a given currency appreciates against the dollar (the dollar
weakens), the value of securities denominated in that currency will rise. When
a given currency depreciates against the dollar (the dollar strengthens), the
value of securities denominated in that currency would be expected to decline.
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may limit at times and preclude investment
in certain of such countries and may increase the cost and expenses of the Fund.
Investments by foreign investors are subject to a variety of restrictions.
These restrictions may take the form of prior governmental approval, limits on
the amount or type of securities held by foreigners, and limits on the types of
companies in which foreigners may invest. Additional or different restrictions
may be imposed at any time by these or other countries in which the Fund
invests. In addition, the repatriation of both investment income and capital
from some foreign countries is restricted and controlled under certain
regulations, including in some cases the need to obtain certain government
consents.
MARKET CHARACTERISTICS. Foreign stock markets are generally not as
developed or efficient as, and may be more volatile than, those in the United
States. While growing in volume, they usually have substantially less
6
<PAGE>
volume than U.S. markets and the Fund's portfolio securities may be less liquid
and subject to more rapid and erratic price movements than securities of
comparable U.S. companies. Equity securities may trade at price/earnings
multiples higher than comparable United States securities and such levels may
not be sustainable. Fixed commissions on foreign stock exchanges are generally
higher than negotiated commissions on United States exchanges. There is
generally less government supervision and regulation of foreign stock exchanges,
brokers and listed companies than in the United States. Moreover, settlement
practices for transactions in foreign markets may differ from those in United
States markets. Such differences may include delays beyond periods customary in
the United States and practices, such as delivery of securities prior to receipt
of payment, which increase the likelihood of a "failed settlement." Failed
settlements can result in losses to the Fund.
INFORMATION AND SUPERVISION. There is generally less publicly available
information about foreign companies comparable to reports and ratings that are
published about companies in the United States. Foreign companies are also
generally not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies. It also may be more difficult to keep currently informed of
corporate actions which affect the prices of portfolio securities.
TAXES. The dividends and interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Fund's shareholders.
OTHER. With respect to certain foreign countries, there is the possibility
of adverse changes in investment or exchange control regulations, expropriation
or confiscatory taxation, limitations on the removal of funds or other assets of
the Fund, political or social instability, or diplomatic developments which
could affect investments by U.S. persons in those countries.
INVESTMENT RESTRICTIONS
- -----------------------
The Fund has adopted the following investment restrictions. These
restrictions, as well as the Fund's investment objectives, cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
shares. The Investment Company Act defines a majority as the lesser of (1) 67%
or more of the voting shares present at a meeting if the holders of more than
50% of the outstanding voting shares are present or represented by proxy, or (2)
more than 50% of the outstanding voting shares of the Fund. The Fund may not:
1. Invest more than 5% of the value of its total assets in the securities of
any one issuer, except the obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or issues backed or
collateralized by such obligations, nor acquire more than 10% of the
voting securities of any one issuer.
2. Concentrate investment of more than 25% of the value of its total assets
in any one industry, provided that the various types of public utility
companies (electric, telephone and gas) are considered separate
industries for this purpose.
3. Borrow money, except the Fund may borrow money from banks as a temporary
measure for extraordinary or emergency purposes. Such temporary borrowing
may not exceed 5% of the value of the Fund's total assets at the time the
loan is made. The Fund may pledge up to 10% of the lesser of the cost or
market value of its total assets to secure temporary borrowings. The Fund
will not borrow for investment purposes. Immediately after any borrowing,
the Fund will maintain an asset coverage of not less than 300% with
respect to all borrowings.
4. Make loans of money, except by the purchase of debt securities or by
entering into repurchase agreements, as permitted by the Fund's other
investment policies and restrictions. Although there is no present
intention of doing so in the foreseeable future, the Fund reserves the
authority to make loans of its portfolio securities in an aggregate
amount not exceeding 20% of its total assets. Such loans will only be
made upon approval of, and subject to any conditions imposed by, the
Fund's Board of Directors.
5. Purchase securities of another investment company ("acquired company")
except in connection with a merger, consolidation, acquisition or
reorganization and except as otherwise permitted by Section 12(d) of the
Investment Company Act, if after such purchase more than 5% of the value
of the Fund's total assets would be invested in securities issued by the
acquired company, or the Fund would own more than 3% of the total
outstanding voting stock of the acquired company, or more than 10% of the
value of the Fund's total assets would be invested in securities of
investment companies.
6. Invest in any company for the purpose of exercising control or
management.
7
<PAGE>
7. Issue senior securities, as defined in the Investment Company Act, or
mortgage, pledge, hypothecate or in any manner transfer, as security for
indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowing mentioned in restriction No. 3
above, and then such mortgaging, pledging or hypothecating may not exceed
10% of the Fund's total assets, taken at the lesser of cost or market
value.
8. Underwrite securities of other issuers, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.
9. Purchase or sell commodities or commodity contracts.
10. Purchase securities on margin or sell short.
11. Purchase or sell real estate including limited partnerships that invest
therein, provided that the Fund may invest in marketable securities
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
12. Purchase interests in oil, gas and mineral leases or other mineral
exploration or development programs, although the Fund may invest in
preferred stocks or debt instruments of companies which invest in or
sponsor such programs.
13. Purchase warrants if as a result the Fund would then have more than 5% of
its net assets invested in warrants (valued at the lower of cost or
market), or more than 2% of its net assets invested in warrants which are
not listed on the New York or American Stock Exchanges.
14. Purchase any security if as a result the Fund would then have more than
10% of its total assets invested in securities which are illiquid,
including repurchase agreements not maturing in seven days or less and
securities restricted as to disposition under the federal securities
laws.
15. Purchase securities of any issuer if, to the knowledge of the Fund, any
officer or director of the Fund or Dodge & Cox, owns more than 1/2 of 1%
of the outstanding securities of such issuer or if such officers or
directors in the aggregate own more than 5% of the outstanding securities
of such issuer.
16. Write put or call options.
17. Purchase any security if as a result the Fund would then have more than
10% of its total assets invested in preferred stock or debt securities
principally traded in foreign markets. The Fund may purchase Eurodollar
certificates of deposit without regard to such 10% limit.
Whenever any investment policy or investment restriction states a maximum
percentage of the Fund's assets which may be invested in any security or other
instrument, it is intended that such maximum percentage limitation be determined
immediately after and as a result of the Fund's acquisition of such security or
instrument. Industries are determined by reference to the classifications of
industries set forth in the Fund's semi-annual and annual reports.
PURCHASE, REDEMPTION, AND PRICING OF SHARES
- -------------------------------------------
The procedures for purchasing and redeeming shares of the Fund are
described in the Fund's Prospectus, which is incorporated herein by reference.
NET ASSET VALUE PER SHARE. The purchase and redemption price of the
Fund's shares is equal to the Fund's net asset value per share or share price.
The Fund determines its net asset value per share by subtracting the Fund's
total liabilities (including accrued expenses and dividends payable) from its
total assets (the market value of the securities the Fund holds plus cash and
other assets, including income accrued but not yet received) and dividing the
result by the total number of shares outstanding. The net asset value per share
of the Fund is normally calculated as of the close of trading on the New York
Stock Exchange ("NYSE") every day the NYSE is open for trading. The NYSE is
closed on the following days: New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering, sale redemption and
repurchase of shares) for the Fund may be suspended when (a) the NYSE is closed,
other than customary weekend and holiday closings, (b) trading on the NYSE is
restricted, (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (d)
a governmental body having jurisdiction over the Fund may by order permit such a
8
<PAGE>
suspension for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange Commission (or
any succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b), (c), or (d) exist.
In determining the total net asset value of the Fund, debt securities,
including listed issues, are priced on the basis of valuations furnished by a
pricing service which utilizes both dealer-supplied valuations and electronic
data processing techniques. These values take into account appropriate factors
such as institutional-size trading markets in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data and do not rely exclusively upon exchange or over-the-
counter listed prices. Use of the pricing service has been approved by the Board
of Directors. If acquired, preferred stocks, common stocks and warrants, if
listed on an exchange, will be valued at market, using as a price the last sale
of the day at the close of the New York Stock Exchange. If not traded, or if
unlisted, the security is valued at the mean between the last current bid and
ask prices. Portfolio securities for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Directors.
PERFORMANCE INFORMATION
- -----------------------
The Fund may include figures indicating the Fund's yield or total return
in advertisements or reports to shareholders or prospective investors.
Quotations of the Fund's yield, as defined by the Securities & Exchange
Commission, will be based on all investment income per share earned
during a particular thirty-day period and will be computed by dividing
this net investment income by the net asset value per share on the last
day of the period and annualizing the results, according to the following
formula:
YIELD = 2[(a-b + 1)/6/ -1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements or
waivers),
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
The Fund's current yield for the thirty days ended December 31, 1996 was
6.43%. Yield does not directly reflect changes in net asset value per share
which occurred during the period.
Quotations of the Fund's average annual total return will be expressed in
terms of the average annual compounded rate of return on a hypothetical
investment in the Fund over periods of one, five and ten years (but not for a
period greater than the life of the Fund), will reflect the deduction of a
proportional share of Fund expenses (on an annual basis), will assume that all
dividends and capital gains distributions are reinvested when paid, and will be
calculated pursuant to the following formula:
P (1 + T)/n/ = ERV
where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years,
ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.
The average annual total return of the Fund for the one, five and eight
year periods ended December 31, 1996 was 3.62%, 7.74% and 9.71%, respectively.
Total return indicates the positive or negative rate of return that an investor
would have earned from reinvested dividends and distributions and changes in net
asset value per share during the period.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Lehman Brothers Aggregate Bond Index, the
Salomon Brothers Broad Investment-Grade Bond Index, or other appropriate managed
and unmanaged indices of the performance of various types of investments, so
that investors may compare the Fund's results with those of indices widely
regarded by investors as representative of the fixed-income
9
<PAGE>
markets in general, and (ii) the performance of other mutual funds. Unmanaged
indices may assume the reinvestment of dividends, but generally do not reflect
deductions for administrative and management costs and expenses; managed indices
do reflect such deductions.
Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Such information should not be considered as
representative of the performance of the Fund in the future because, unlike some
bank deposits or other investments which pay a fixed yield for a stated period
of time for a fixed principal amount, the performance of the Fund will vary
based not only on the current market value of the securities held in its
portfolio, but also on changes in the Fund's expenses and in the asset size of
the Fund. Performance information should be considered in light of the Fund's
investment objectives and policies, the types and quality of the Fund's
portfolio investments, market conditions during the particular time period and
operating expenses. Further information about the performance of the Fund is
contained in the Fund's Annual Report which may be obtained without charge from
the Fund. From time to time, the Fund and Dodge & Cox may also refer to the
following information:
1. Portfolio information, including median market capitalization, price to
earnings ratio, price to book value, average bond quality, average bond
maturity, and effective bond duration.
2. The asset allocation and sector weightings of the Fund's portfolio and
the Fund's top ten holdings.
3. A description of the Dodge & Cox investment management philosophy and
approach.
OFFICERS AND DIRECTORS
- ----------------------
<TABLE>
<CAPTION>
Total 1996
Aggregate 1996
Position(s) Principal Occupation Compensation Compensation Fund and
Name and Address Age with Fund During Past 5 Years from Fund Fund Complex **
- ---------------- ----- ----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
A. Horton Shapiro* 57 President and Senior Vice-President of $0 $0
Director Dodge & Cox; Vice-Chairman
and Trustee, Dodge & Cox
Balanced Fund; Vice
President, Dodge & Cox
Stock Fund
John A. Gunn* 53 Vice-President President of Dodge & Cox; 0 0
and Director President and Director,
Dodge & Cox Stock Fund
W. Timothy Ryan* 59 Secretary- Senior Vice-President and 0 0
Treasurer Secretary-Treasurer of
and Director Dodge & Cox;
Secretary-Treasurer and
Director, Dodge & Cox
Stock Fund; Secretary,
Dodge & Cox Balanced Fund
Dana M. Emery* 35 Assistant Manager-Fixed Income and 0 0
Secretary- Vice-President of Dodge &
Treasurer and Cox
Director
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Total 1996
Aggregate 1996 Compensation from
Position(s) Principal Occupation Compensation Fund and Fund
Name and Address Age with fund During Past 5 Years from Fund Complex **
- ---------------- --- ----------- ------------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Harry R. Hagey 55 Vice Chairman and Chief Executive $ 0 $ 0
President Officer of Dodge & Cox; Chairman
and Trustee, Dodge & Cox Balanced
Fund; Director and Vice
President, Dodge & Cox Stock Fund
Thomas M. Mistele 43 Assistant General Counsel of Dodge & Cox; 0 0
Secretary- Assistant Secretary, Dodge & Cox
Treasurer Balanced Fund; Assistant
Secretary-Treasurer, Dodge & Cox
Stock Fund; formerly Senior Vice
President of Templeton Global
Investors, Inc. and Secretary of
the Templeton Mutual Funds.
Max Gutierrez, Jr. 66 Director Partner in Brobeck, Phleger & 1,500 4,500
One Market Plaza Harrison, Attorneys; Director,
San Francisco, Dodge & Cox Stock Fund; Trustee,
California Dodge & Cox Balanced Fund
Frank H. Roberts 77 Director Retired Partner in Pillsbury, 3,000 9,000
114 Sansome Street Madison & Sutro, Attorneys;
San Francisco, Director, Dodge & Cox Stock Fund;
California Trustee, Dodge & Cox Balanced Fund
John B. Taylor 50 Director Professor of Economics and 2,500 7,500
Department of Director of the Center for
Economics Economic Policy Research,
Stanford University Stanford University; Director,
Stanford, California Dodge & Cox Stock Fund; Trustee,
Dodge & Cox Balanced Fund
Will C. Wood 57 Director Principal, Kentwood Associates, 3,000 9,000
1550 El Camino Real Financial Advisers; prior to
Menlo Park, California 1994, Managing Director, IDI
Associates, Financial Advisers;
Director, Dodge & Cox Stock Fund;
Trustee, Dodge & Cox Balanced Fund
- ------------------------------------------------
</TABLE>
* Each has been an employee of Dodge & Cox, 35th Floor, One Sansome Street,
San Francisco, California for over ten years in an executive position and is
an "interested person" of the Fund as defined in the Investment Company Act.
As of March 31, 1997, each has a beneficial interest in 463,962 shares of the
Fund (0.94% of total outstanding shares) owned by Dodge & Cox Pension Trust
and 404,345 shares of the Fund (0.82% of total outstanding shares) owned by
Dodge & Cox Profit Sharing Trust.
11
<PAGE>
** Total 1996 Compensation from Fund and Fund Complex consists of
compensation and fees paid to directors and trustees by all the Dodge & Cox
Funds: Dodge & Cox Balanced Fund, Dodge & Cox Stock Fund, and Dodge & Cox
Income Fund.
Directors and officers of the Fund affiliated with Dodge & Cox hold a
controlling interest in 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 Board or Committee meeting attended. The Fund does not pay
any other remuneration to its officers or directors, and has no bonus, profit-
sharing, pension or retirement plan. On March 31, 1997 the officers and
directors of the Fund and members of their families and relatives owned less
than 1.0% of the outstanding shares of the Fund.
On March 31, 1997, Charles Schwab & Co. Inc., 101 Montgomery Street, San
Francisco, California 94104 owned of record 3,535,000 shares (or 7.17% of the
outstanding shares of the Fund); and Donaldson Lufkin & Jenrette-Pershing
Division, P.O. Box 2052, Jersey City, NJ 07303 owned of record 2,609,039 shares
(or 5.29% of the outstanding shares of the Fund. The Fund knows of no other
person who owns beneficially or of record more than 5% of the outstanding shares
of the Fund.
INVESTMENT MANAGER
- ------------------
Dodge & Cox, One Sansome Street, San Francisco, California 94104, a
California corporation, is the Fund's manager and investment adviser, subject to
the direction of the Board of Directors. Dodge & Cox is one of the oldest
professional investment management firms in the United States, having acted
continuously as investment managers since 1930. The Fund's investments are
managed by Dodge & Cox's Bond Policy Committee, and no one person is primarily
responsible for making investment recommendations to the Committee. The
research work of the firm is organized for comprehensive and continuous
appraisal of the economy and of various industries and companies. Supplemental
research facilities are used to obtain additional coverage of business and
financial developments affecting comparative security values.
Dodge & Cox is not engaged in the brokerage business nor in the business of
dealing in or selling securities. Its activities are devoted to investment
research and the supervision of investment accounts for individuals, trustees,
corporations, pension and profit-sharing funds, and charitable institutions. In
addition, Dodge & Cox has managed the Dodge & Cox Balanced Fund since 1931 and
the Dodge & Cox Stock Fund since 1965. The investment management agreement
between the Fund and Dodge & Cox provides for a management fee which is accrued
daily and payable monthly to Dodge & Cox at a rate of 0.50% annually of the
average daily net asset value of the Fund up to $100 million and 0.40% annually
of the average daily net asset value of the Fund in excess of $100 million.
However, the contract provides that Dodge & Cox shall waive its fee for any
calendar year to the extent that such fee plus all other ordinary operating
expenses paid by the Fund exceeds 1% of the average daily net asset value of the
Fund. Brokerage commissions and taxes on the Fund's portfolio transactions are
not deemed ordinary operating expenses for purposes of limiting Dodge & Cox's
fee. No waiver of management fee was required in 1996, 1995, or 1994 under this
agreement, and Dodge & Cox was paid a fee of $1,650,053 for the year 1996,
$1,045,074 for the year 1995, and $869,973 for the year 1994. The contract may
be terminated at any time without penalty upon 60 days written notice by action
of the directors, shareholders or by Dodge & Cox. The contract will terminate
automatically should there be an "assignment" thereof (as defined in the
Investment Company Act). In addition to Dodge & Cox's fee, the Fund pays other
ordinary operating expenses, including transfer agent, custodial, accounting,
legal, and audit fees; costs of preparing and printing prospectuses and reports
sent to shareholders; registration fees and expenses; proxy and annual meeting
expenses (if any); and Director fees and expenses. In 1996, the ratio of total
operating expenses to average net assets of the Fund was 0.50%. Dodge & Cox
furnishes personnel and other facilities necessary for the operation of the Fund
for which it receives no additional compensation. Dodge & Cox supervises the
administration of the Fund and directs the investment and reinvestment of its
assets and furnishes all executive personnel and office space required.
PORTFOLIO TRANSACTIONS
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The Investment Management Agreement provides that Dodge & Cox is
responsible for selecting members of securities exchanges, brokers and dealers
(such members, brokers and dealers being hereinafter referred to as "brokers")
for the execution of the Fund's portfolio transactions and, when applicable, the
negotiation of commissions. All decisions and placements are made in accordance
with the following principles:
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1. Purchase and sale orders will usually be placed with brokers who are selected
by Dodge & Cox as able to achieve "best execution" of such orders. "Best
execution" means prompt and reliable execution at the most favorable
securities price, taking into account the other provisions hereinafter set
forth. The determination of what may constitute best execution and price in
the execution of a securities transaction by a broker involves a number of
considerations, including without limitation, the overall direct net economic
result to the Fund (involving both price paid or received and any commissions
and other costs paid), the efficiency with which the transaction is effected,
the ability to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly difficult
transactions in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by Dodge & Cox in
determining the overall reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, Dodge & Cox takes into
account its past experience as to brokers qualified to achieve best
execution, including brokers who specialize in any foreign securities held by
the Fund.
3. Dodge & Cox is authorized to allocate brokerage business to brokers who have
provided brokerage and research services, as such services are defined in
Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act"), for
the Fund and/or other accounts, if any, for which Dodge & Cox exercises
investment discretion (as defined in Section 3(a)(35) of the 1934 Act) and,
as to transactions as to which fixed minimum commission rates are not
applicable. Such allocation may cause the Fund to pay a commission for
effecting a securities transaction in excess of the amount another broker
would have charged for effecting that transaction, if Dodge & Cox determines
in good faith that such amount of commission is reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed
in terms of either that particular transaction or with Dodge & Cox's overall
responsibilities with respect to the Fund and the other accounts, if any, as
to which it exercises investment discretion. In reaching such determination,
Dodge & Cox is not required to place or attempt to place a specific dollar
value on the research or execution services of a broker or on the portion of
any commission reflecting brokerage or research services. In demonstrating
that such determinations were made in good faith, Dodge & Cox will be
prepared to show that all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that commissions were paid only
for products or services which provide lawful and appropriate assistance to
Dodge & Cox in the performance of its investment decision-making
responsibilities; and that the commissions paid were within a reasonable
range. The determination that commissions were within a reasonable range
will be based on any available information as to the level of commissions
known to be charged by other brokers on comparable transactions, but there
will also be taken into account the Fund's policies that (i) obtaining a low
commission is deemed secondary to obtaining a favorable securities price,
since it is recognized that usually it is more beneficial to the Fund to
obtain a favorable price than to pay the lowest commission; and (ii) the
quality, comprehensiveness and frequency of research studies which are
provided for Dodge & Cox are useful to Dodge & Cox in performing its advisory
services under its Investment Management Agreement with the Fund. Research
services provided by brokers to Dodge & Cox are considered to be in addition
to, and not in lieu of, services required to be performed by Dodge & Cox
under its Investment Management Agreement. Research furnished by brokers
through whom the Fund effects securities transactions may be used by Dodge &
Cox for any of its accounts, and not all such research may be used by Dodge &
Cox for the Fund.
4. Purchases and sales of portfolio securities within the United States other
than on a securities exchange will be executed with primary market makers
acting as principal except where, in the judgment of Dodge & Cox, better
prices and execution may be obtained on a commission basis or from other
sources.
Insofar as known to management, no Director or officer of the Fund, nor
Dodge & Cox or any person affiliated with any of them, has any material direct
or indirect interest in any broker employed by or on behalf of the Fund. There
is no fixed method used in determining which broker-dealers receive which order
or how many orders.
Periodically Dodge & Cox reviews the current effective commission rates and
discusses the execution capabilities and the services provided by the various
broker-dealers that Dodge & Cox is utilizing in the execution of orders.
Research services furnished by the brokers through whom Dodge & Cox effects
securities transactions for the Fund may be used in servicing some or all of
Dodge & Cox's accounts, however, all such services may not be used by Dodge &
Cox in connection with the Fund. Except as indicated above, Dodge & Cox does
not intend to place portfolio
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transactions with any particular broker-dealer.
Investment decisions for the Fund are made independently from those of the
Dodge & Cox Stock Fund, the Dodge & Cox Balanced Fund and other accounts managed
by Dodge & Cox. It may frequently develop that the same investment decision is
made for more than one account. Simultaneous transactions may often occur when
the same security is suitable for the investment objective of more than one
account. When two or more accounts are simultaneously engaged in the purchase
or sale of the same security, the transactions are averaged as to price and
allocated as to amount in accordance with a formula considered to be equitable
to each account. It is recognized that in some cases this system could have a
detrimental effect on the price or availability of the security as far as the
Fund is concerned. In other cases, however, it is believed that the ability of
the Fund to participate in volume transactions will produce more advantageous
executions for the Fund.
ADDITIONAL TAX CONSIDERATIONS
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You need to be aware of the possible tax consequences when:
. You sell Fund shares, including an exchange from one Dodge & Cox Fund
to another.
. The Fund makes a distribution to your account.
TAXES ON FUND REDEMPTIONS. When you sell shares in the Fund, you may
realize a gain or loss. An exchange from one Fund to another is a sale for tax
purposes.
In January, you will be sent Form 1099-B, indicating the amount of sales
made in the Fund during the prior year. This information will also be reported
to the IRS. For certain accounts opened after September 30, 1987, the Fund will
provide you with the average cost of the shares sold during the year, based on
the "average cost" method. This information is not reported to the IRS, and you
do not have to use it. You may calculate the cost basis using other methods
acceptable to the IRS, such as "specific identification".
To help you maintain accurate records, the Fund sends a confirmation
immediately following each transaction (except for systematic purchases) and
quarterly and year-end statements detailing all transactions in your account
during the year.
TAXES ON FUND DISTRIBUTIONS. The following summary does not apply to
retirement accounts, such as IRAs, which are tax-deferred until shareholders
withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
distributions paid to you during the prior year. This information will also be
reported to the IRS. All distributions made by the Fund are taxable to you for
the year in which they were paid.
Short-term capital gain distributions are taxable as ordinary income and
long-term capital gain distributions are taxable at the applicable long-term
capital gain rate. If you realize a capital loss on the sale or exchange of
Fund shares held six months or less, your short-term capital loss is
reclassified to long-term to the extent of any long-term capital gain
distribution received with respect to such Fund shares.
TAX EFFECT OF BUYING SHARES BEFORE A CAPITAL GAIN OR INCOME DISTRIBUTION.
If you buy shares shortly before or on the "record date" for a Fund distribution
- -- the date that establishes you as the person to receive the upcoming
distribution you will receive, in the form of a taxable distribution, a
portion of the money you just invested. Therefore, you may wish to find out the
Fund's record date before investing. Of course, the Fund's share price may, at
any time, reflect undistributed capital gains or income and unrealized
appreciation. When these amounts are eventually distributed, they are taxable.
The discussion above and in the Fund's Prospectus regarding the Federal
income tax consequences of investing in the Fund have been prepared by Dodge &
Cox and do not purport to be complete descriptions of all tax implications of an
investment in the Fund. You are advised to consult with your own tax adviser
concerning the application of Federal, state and local taxes to an investment in
the Fund. The Fund's legal counsel has expressed no opinion in respect thereof.
INDEPENDENT ACCOUNTANTS
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Price Waterhouse LLP, 555 California Street, San Francisco, California
94104, are independent accountants to the Fund, subject to annual appointment by
the Board of Directors. Price Waterhouse conducts an annual audit of the
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accounts and records of the Fund, reports on the Fund's annual financial
statements, and performs tax and accounting advisory services.
FINANCIAL STATEMENTS
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Please refer to the Fund's Financial Statements consisting of the financial
statements of the Fund and the notes thereto, and the report of independent
accountants contained in the Fund's 1996 Annual Report to Shareholders. The
Financial Statements and the report of independent accountants (but no other
material from that Annual Report) are incorporated herein by reference.
Additional copies of the Annual Report may be obtained from the Fund at no
charge by writing or telephoning the Fund.
APPENDIX: RATINGS
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A debt obligation rating by Moody's or S&P reflects their current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. The purpose of the rating systems is to provide investors with a
simple system of gradation by which the relative investment qualities of bonds
may be noted. A rating is not a recommendation as to investment value, inasmuch
as it does not comment as to market price or suitability for a particular
investor.
The ratings are based on current information furnished by the issuer or
from other sources that the rating agencies deem reliable. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The following is a description of the characteristics of ratings as
published by Moody's and S&P.
RATINGS BY MOODY'S (MOODY'S INVESTORS SERVICE)
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
NOTE: Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modification 1 indicates that the security ranks in the higher end of its
generic rating group; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
group.
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RATINGS BY S&P (STANDARD & POOR'S RATINGS GROUP)
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated groups.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this group than in higher rated groups.
BB, B Debt rated BB AND B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
PLUS (+) OR MINUS (-): The ratings from AA to B may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
groups.
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