The Dodge & Cox Stock Fund had a total return of 2.2% for the fourth quarter of 2014, compared to 4.9% for the S&P 500 Index. For 2014, the Fund had a total return of 10.4%, compared to 13.7% for the S&P 500. At year end, the Fund had net assets of $60.3 billion with a cash position of 1.2%.
MARKET COMMENTARY
U.S. equity markets were strong during the fourth quarter: the S&P 500 posted its eighth consecutive quarter of gains and closed on December 31 near its record high. Utilities and Consumer Discretionary were the best performing sectors in the S&P 500. Energy was the weakest sector as global oil prices collapsed approximately 40% during the quarter due to lower-than-expected demand growth and modestly higher-than-expected supply growth. In the United States, economic activity continued to expand at a moderate pace amid improved labor market conditions (e.g., solid job gains, lower unemployment rate). Consumer sentiment reached a seven-year high; household wealth and spending rose while the housing recovery remained slow.
Despite concerns about global economic growth, our long-term outlook for equities continues to be positive. The U.S. equity market remains reasonably valued: the S&P 500 traded at 15.2 times forward estimated earnings with a 2.0% dividend yield at quarter end. We are optimistic about the long-term prospects for corporate sales growth and earnings growth, and believe cash returned to shareholders can continue to increase. Corporate balance sheets and cash flows continue to be strong. In our opinion, the Fund’s portfolio is well positioned to benefit from long-term global growth opportunities. Acknowledging that markets can be volatile in the short term, we encourage shareholders to remain focused on the long term.
FOURTH QUARTER PERFORMANCE REVIEW
The Fund underperformed the S&P 500 by 2.7 percentage points during the quarter.
KEY DETRACTORS FROM RELATIVE RESULTS
Returns from holdings in the Health Care sector (flat compared to up 7% for the S&P 500 sector) detracted from results. Pharmaceuticals holdings Sanofi (SNY, Financial) (down 19%), Roche (down 8%), and Novartis (NOV, Financial) (down 2%) hindered performance.
The Fund’s holdings in the Energy sector (down 19% compared to down 11% for the S&P 500 sector) were particularly weak. Key detractors included Weatherford International (down 45%), Apache (down 33%), and Schlumberger (down 16%).
The Fund’s holdings in the Financials sector (up 4% compared to up 7% for the S&P 500 sector) hurt relative returns. Laggards included AEGON (AEG, Financial) (down 9%) and Capital One (COF, Financial) (up 2%).
Returns from holdings in the Industrials sector (up 3% compared to up 7% for the S&P 500 sector) detracted from results. Philips (PSX, Financial) (down 9%) performed poorly.
Sprint (down 35%) and Google (down 9%) were also key detractors.
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 CONTRIBUTORS TO RELATIVE RESULTS
The Fund’s average overweight position (15% versus 12%) and holdings in the Consumer Discretionary sector (up 12% compared to up 9% for the S&P 500 sector) contributed to results. CarMax (KMX, Financial) (up 43%), Target (TGT, Financial) (up 22%), and Time Warner (TWC, Financial) (up 14%) were strong.
The Fund’s lack of holdings in the Metals & Mining industry, a weaker area of the market (down 16%), helped performance.
Selected additional contributors included Express Scripts (up 20%), Corning (up 19%), UnitedHealth (up 18%), and Hewlett-Packard (up 14%).
2014 PERFORMANCE REVIEW
The Fund underperformed the S&P 500 by 3.3 percentage points in 2014.
KEY DETRACTORS FROM RELATIVE RESULTS
The Fund’s holdings in the Health Care sector (up 9% compared to up 25% for the S&P 500 sector) hurt results. GlaxoSmithKline (down 16%) and Sanofi (down 13%) lagged.
Returns from holdings in the Financials sector (up 13% compared to up 15% for the S&P 500 sector) hindered performance. Key detractors included AEGON (down 18%) and the Fund’s lack of holdings in the Real Estate Investment Trusts industry, which outpaced the overall market (up 31%). The Fund’s underweight position in the Utilities sector (no holdings compared to 3% for the S&P 500 sector) detracted from results as it was the best performing sector of the market (up 29%).
Returns from holdings in the Industrials sector (up 4% compared to up 10% for the S&P 500 sector) hurt performance. Philips (down 19%), ADT Corp. (down 8%), and General Electric (down 7%) were weak.
Selected additional detractors included Sprint (down 61%), Coach (down 31%), Apache (down 26%), and Weatherford International (down 26%).
KEY CONTRIBUTORS TO RELATIVE RESULTS
The Fund’s holdings in the Consumer Discretionary sector (up 16% compared to up 10% for the S&P 500 sector) helped returns. CarMax (up 42%), Target (up 31% since date of purchase), and Time Warner (up 30%) were strong.
Returns from holdings in the Materials sector (up 14% compared to up 6% for the S&P 500 sector) aided performance. Dow Chemical (up 22% to date of sale) and the Fund’s lack of holdings in the Metals & Mining industry, a weaker area of the market (down 14%), were relative positives.
The Fund’s average underweight position in the Energy sector (9% compared to 10% for the S&P 500 sector) slightly contributed to results since the sector lagged the overall market. 1 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 S&P 500 Index is a market capitalization-weighted index of 500 large capitalization stocks commonly used to represent the U.S. equity market.
