The Dodge & Cox Global Stock Fund had a total return of –0.3% for the third quarter of 2014, compared to –2.2% for the MSCI World Index. For the nine months ended September 30, 2014, the Fund had a total return of 8.4%, compared to 3.9% for the MSCI World. At quarter end, the Fund had net assets of $5.8 billion with a cash position of 3.9%.
MARKET COMMENTARY
During the third quarter, global equity markets increased slightly in local currency. In the United States (S&P 500 up 1%), economic activity expanded at a moderate pace: household spending rose, businesses continued to invest more in fixed assets, and labor market conditions improved. However, the housing recovery remains slow and fiscal policy continues to restrain U.S. economic growth. Japan (up 6% in local currency) was the best performing region of the market, while Europe (flat in local currency) was the weakest. Eurozone manufacturing activity continued to slow and economic sentiment declined as new orders decreased. Emerging market performance was mixed: certain countries performed well (e.g., China A shares, Mexico), while others lagged (e.g., Russia, South Korea).
The U.S. dollar’s appreciation against both developed and emerging market currencies was a notable headwind to returns: the MSCI World was up 1% in local currency and down 2% in U.S. dollars; MSCI Emerging Markets was up 1% in local currency and down 4% in U.S. dollars.
We continue to see opportunity for global equities as we look for attractively valued investments in both developed and emerging markets. Global equity valuations remain reasonable: the MSCI World traded at 14.8 times forward estimated earnings with a 2.4% dividend yield at quarter end. Corporate balance sheets and cash flows continue to be robust. The Fund is invested in companies that we believe have favorable long-term prospects over our three- to five-year investment horizon. Acknowledging that markets can be volatile over the short term, we encourage shareholders to remain focused on the long term.
THIRD QUARTER PERFORMANCE REVIEW
The Fund outperformed the MSCI World by 1.8 percentage points during the quarter.
KEY CONTRIBUTORS TO RELATIVE RESULTS The Fund’s holdings in the Consumer Discretionary sector (up 1% compared to down 3% for the MSCI World sector) contributed to results. Mahindra & Mahindra (up 17%) was particularly strong. The Fund’s holdings in the Financials sector (flat compared to down 2% for the MSCI World sector) also had a positive impact. Kasikornbank (up 14%) and Charles Schwab (SCHW, Financial) (up 9%) performed well. The Fund’s higher average weighting in the Information Technology sector (20% versus 13% for the MSCI World sector), the strongest sector of the market (up 4%), helped. NetApp (NTAP, Financial) (up 18%), Baidu (BIDU, Financial) (up 17%), eBay (EBAY, Financial) (up 13%), Microsoft (MSFT, Financial) (up 12%), and Hewlett-Packard (HPQ, Financial) (up 6%) were notable contributors. Additional contributors included America Movil (up 23%), China Mobile (up 21%), and Sanofi (up 7%).
Before investing in any Dodge & Cox Fund, you should carefully consider the Fund’s investment objectives, risks, and charges and expenses. To obtain a Fund’s prospectus and summary prospectus, which contain this and other important information, visit www.dodgeandcox.com or call 800-621-3979. Please read the prospectus and summary prospectus carefully before investing.
KEY DETRACTORS FROM RELATIVE RESULTS Relative returns in the Health Care sector (flat compared to up 3% for the MSCI World sector) detracted from results. GlaxoSmithKline (down 13%) was particularly weak. The Fund’s holdings in the Materials sector (down 11% compared to down 7% for the MSCI World sector) had a marginal negative impact. Lafarge (down 16%) hurt results. Additional detractors included Saipem (down 21%), Schneider Electric (down 18%), Samsung Electronics (down 14%), and Schlumberger (down 13%).'
YEAR-TO-DATE PERFORMANCE REVIEW
The Fund outperformed the MSCI World by 4.5 percentage points year to date. Individual stock selection was an important component of the Fund’s returns. KEY CONTRIBUTORS TO RELATIVE RESULTS The Fund’s holdings in the Financials sector (up 9% compared to up 2% for the MSCI World sector), especially in emerging markets, had a positive impact. Kasikornbank (up 52%) and ICICI Bank (up 33%) performed well. The Fund’s holdings in the Consumer Discretionary sector (up 7% compared to down 2% for the MSCI World sector) helped results. Mahindra & Mahindra (up 46%) was particularly strong. Strong returns from the Fund’s holdings in the Energy sector (up 15% compared to up 3% for the MSCI World sector) contributed to results. Weatherford International (up 34%) was a notable contributor. Additional contributors included Hewlett-Packard (up 29%), Microsoft (up 26%), and China Mobile (up 23% since date of purchase).
KEY DETRACTORS FROM RELATIVE RESULTS Relative returns in the Health Care sector (up 7% compared to up 15% for the MSCI World sector) had a negative impact. GlaxoSmithKline (down 11%) was a weak performer. The Fund’s underweight position in the Utilities sector (no holdings versus average 3% for the MSCI World sector), a stronger sector of the market (up 10%), detracted from results. Additional detractors included Sprint (down 47% to date of sale), Coach (down 35%), Millicom International Cellular (down 17%), Samsung Electronics (down 13%), and AEGON (down 10%).
1The Fund’s total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include dividends but, unlike Fund returns, do not reflect fees or expenses. The MSCI World Index is a broad-based, unmanaged equity market index aggregated from 23 developed market country indices, including the United States and Canada. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. All returns are stated in U.S. dollars, unless otherwise noted.
