The Dodge & Cox International Stock Fund had a total return of –2.7% for the third quarter of 2014, compared to –5.9% for the MSCI EAFE (Europe, Australasia, Far East) Index. For the nine months ended September 30, 2014, the Fund had a total return of 5.0%, compared to –1.4% for the MSCI EAFE. At quarter end, the Fund had net assets of $64.7 billion with a cash position of 1.7%.
MARKET COMMENTARY
In local currency, global equity markets increased slightly during the third quarter. However, the U.S. dollar’s significant appreciation against both developed and emerging market currencies was a meaningful headwind to returns: the MSCI EAFE was up 1% in local currency and down 6% in U.S. dollars; MSCI Emerging Markets was up 1% in local currency and down 4% in U.S. dollars. 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 amid rising tensions between the European Union and Russia over Ukraine. Emerging market performance was mixed: certain countries performed well (e.g., China A shares, Mexico), while others lagged (e.g., Russia, South Korea).
We continue to see opportunity for international equities as we look for attractively valued investments in both developed and emerging markets. International equity valuations remain reasonable: the MSCI EAFE traded at 13.8 times forward estimated earnings with a 3.1% 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.
T H I R D QU A RT E R P E R F O R M A N C E R E V I E W
The Fund outperformed the MSCI EAFE by 3.2 percentage points during the quarter. Individual stock selection was an important component of the Fund’s returns.
KEY CONTRIBUTORS TO RELATIVE RESULTS
The Fund’s holdings in emerging markets (up 1%) significantly contributed to results:
– Strong returns from the Fund’s Telecommunication Services holdings in the developing world (up 14%) aided performance, especially America Movil (up 23%), China Mobile (up 21%), and Bharti Airtel (up 18%).
– The Fund’s emerging market Financials holdings (down 1%) helped results. Siam Commercial Bank (BKK:SCB, Financial) (up 15%) and Kasikornbank (BKK:KBANK, Financial) (up 14%) performed well.
The Fund’s holdings in the Industrials sector (down 2% compared to down 7% for the MSCI EAFE sector) augmented performance, especially Nidec (up 11%) and Mitsubishi Electric (up 8%).
The Fund’s holdings in the Consumer Discretionary sector (down 2% compared to down 9% for the MSCI EAFE sector), especially in the Automobiles and Auto Components industries, performed well. Mahindra & Mahindra (up 17%) and Yamaha Motor (up 14%) were particularly strong.
The Fund’s overweight position in the Information Technology sector (16% versus 5% for the MSCI EAFE sector), one of the strongest sectors of the market (down 1%), contributed to results. Baidu (BIDU, Financial) (up 17%), Nokia (NOK, Financial) (up 13%), Hewlett-Packard (HPQ, Financial) (up 6%), and Ericsson (up 5%) were notable contributors.
KEY DETRACTORS FROM RELATIVE RESULTS
While the Fund’s holdings in the Energy Equipment & Services (oil services) industry performed relatively well (down 14% compared to down 22% for the MSCI EAFE industry), the Fund’s average overweight position (4% versus 1%) in this weaker area of the market detracted from results. Saipem (down 21%) and Schlumberger (down 13%) hindered results.
Additional detractors included Schneider Electric (down 18%), Lafarge (down 16%), and Samsung Electronics (down 14%).
Y E A R - T O - D AT E P E R F O R M A N C E R E V I E W
The Fund outperformed the MSCI EAFE by 6.4 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 emerging markets (up 14%) significantly contributed to results:
– The Fund’s emerging market Financials (up 24%) performed well. Kasikornbank (up 52%), ICICI Bank (up 33%), and Siam Commercial Bank (up 30% since date of purchase) were notable contributors.
– Strong returns from the Fund’s Telecommunication Services holdings in the developing world (up 12%) helped performance, especially China Mobile (up 23% since date of purchase).
The Fund’s holdings in the Consumer Discretionary sector (up 7% compared to down 7% for the MSCI EAFE sector) performed well, especially the autorelated and media holdings. Mahindra & Mahindra (up 46%), Yamaha Motor (up 32%), NGK Spark Plug (up 25%), and Naspers (up 6%) were strong.
The Fund’s average overweight position (16% versus 4%) and holdings in the Information Technology sector (up 7% compared to flat for the MSCI EAFE region) aided performance. Hewlett-Packard (up 29%), Baidu (up 23%), Fujitsu (up 20%), and Nokia (up 11%) were key contributors.
Strong returns from the Fund’s holdings in the Energy sector (up 13% compared to flat for the MSCI EAFE sector), especially in the Energy Equipment & Services (oil services) industry, helped results. Weatherford International (up 34%) and Schlumberger (up 14%) contributed.
KEY DETRACTORS FROM RELATIVE RESULTS
In Europe & UK Financials, selected Fund holdings detracted from results, especially Barclays (down 16%), Standard Chartered (down 14%), and Credit Suisse Group (down 7%).
The Fund’s underweight position in the Utilities sector (no holdings versus average 4% for the MSCI EAFE sector), a stronger sector of the market (up 8%), hurt results.
The Fund’s holdings in the Health Care sector (up 6% compared to up 12% for the MSCI EAFE sector), the strongest sector of the market, hindered performance. GlaxoSmithKline (down 11%) especially lagged.
Additional detractors included Nintendo (down 18%), Millicom International Cellular (down 17%), and Samsung Electronics (down 13%). The 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 EAFE (Europe, Australasia, Far East) Index is a broad-based, unmanaged equity market index aggregated from 21 developed market country indices, excluding 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.
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. 9/14 ISF FS
