17 Jul 2009 Dodge & Cox - Q2 2009 Commentary ( Portfolio )
Although we are pleased by the recent strong equity market rally, the economic recession has not yet ended and credit markets remain dependent on Federal Reserve Board and U.S. Treasury Department support programs. However, credit and business cycles invariably run their course and capital markets usually anticipate the eventual recovery well in advance of improving conditions. We remain optimistic about the potential for long-term global economic growth, especially in the developing world, in the years ahead.

As we continually survey the investment landscape with an eye toward a meaningful economic rebound over the next few years, our bottom-up research approach has led us to invest in many companies in Health Care, Information Technology, and Media, where the Fund is overweight compared to the S&P 500. These areas represented more than 60% of the Fund’s portfolio as of June 30 and include industry leaders Hewlett-Packard, Sony, Comcast, Time Warner, GlaxoSmithKline, Merck, Amgen, and WellPoint. In addition, the Fund holds a number of midsize competitors such as Citrix Systems, Maxim Integrated Products, Interpublic Group, Liberty Media, and Boston Scientific. In other cases, where our analysis indicates that the risks outweigh the potential returns, the Fund has sold positions. Sales in the second quarter included Citigroup and American International Group (AIG).

We are devoting resources to understanding the possible investment implications of the health care reform initiatives being proposed by President Obama’s administration and Congress. In our opinion, historically low valuations in the Fund’s pharmaceutical and managed-care companies reflect these potential risks. At the same time, we see significant long-term growth opportunities for these companies as technological innovation continues in the developing world and penetration of health care products and services increases over time.

Dodge & Cox’s experienced team of investment professionals is working hard to take advantage of what we believe are attractive opportunities being created during this period of economic stress. Although it is impossible to predict the short-term direction of stock prices, decades of experience have taught us that persistence in the face of significant market dislocations can potentially be rewarding for patient investors with long-term investment horizons. For further review of the Fund’s performance and long-term investment strategy, please visit www.dodgeandcox.com and download the Fund’s Semi-Annual Report, which will be available in August.