02 Aug 2010 Dodge & Cox - Q2 2010 Commentary
We believe a long-term perspective on investing is especially important during periods like the first half of 2010. Short-term concerns can often deflect attention from longer-term positive developments. After the events of 2008, it is not surprising that many are searching to identify the next “crisis.” In the United States, for example, high unemployment, rising health care costs, and weakness in real estate are real concerns. Past economic recoveries have struggled with similar issues, yet the economic rebound was sustained (the post-1982 and post-1991 recoveries are two examples). The current environment has significant positives: interest rates are at record lows, inflation remains subdued, home prices are stabilizing, and household net worth is rising. While some
economic indicators may lag, the economic recovery can continue. This optimism, combined with what we believe are attractive current valuations, leads us to the view that the long-term prospects for equity investing are favorable.

10 Nov 2009 Dodge & Cox - Q3 2009 Commentary
After a dramatic rally in the equity markets since March 2009 lows (S&P 500 up 58% and the Fund up 76% from March 9 through September 30), some observers are questioning whether investors have become too optimistic, given the current outlook for the domestic economy. We are reminded of the classic expression: “it’s tough to make predictions, especially about the future.” At Dodge & Cox, rather than attempt to forecast near-term economic or market results, we consider the range of potential outcomes for individual companies’ profits and cash flows during the next three to five years. We use this information in selecting the Fund’s investments and are confident that many attractive investment opportunities remain available over our longer-term time horizon.

Opportunity in Health Care - The health care sector of the U.S. economy has been getting significant attention lately, due to the well-publicized movement for government reform in some fashion. In our view, the cloud of uncertainty hanging over the sector is giving us the opportunity to invest in solid business franchises in pharmaceuticals, medical devices, and services at their lowest valuations in decades. Our fundamental research and stock selection process continues to be “bottom-up” oriented, focused on the long-term outlook for and valuation of individual companies. We develop a range of potential outcomes, incorporating downside risk and upside potential, for each company’s profits and cash flow. As we assess the possible impact of U.S. health care reform, we believe current stock prices for many leading companies reflect a fairly pessimistic scenario and may not reflect positive developments. For example, technological innovation will continue to drive advancements in medical products and services. We also believe the developing world is likely to be a source of significant long-term incremental growth, as more resources are dedicated to modern health care.

12 Aug 2009 Dodge & Cox - Semi Annual Report
The first half of 2009 illustrates the importance of persistence for long-term investors. The S&P 500 fell 25% from January 1 through the recent market trough on March 9. During this time, the U.S. government and others around the world pledged fiscal and monetary stimulus. Management at many companies took dramatic actions to reduce costs and inventories in response to rapidly shrinking demand. Some companies even increased productivity in this time period. With capital markets stabilizing and the rate of economic decline moderating, investors began to anticipate the nadir and eventual upturn of the economy. We do not know why the shift in investor sentiment began on March 10, but since then the S&P 500 rose by 37% through June 30. Our investment experience and belief in the favorable long-term prospects of the individual companies in our diversified portfolio lead us to be optimistic and persistent in staying fully invested. Looking back over the last six months, it would be difficult to identify the time to invest by observing daily news reports. Even now, the recent signs of potential improvement (such as increased consumer confidence, increasing auto sales, and increasing new home starts) are balanced by countervailing forces (such as increased unemployment, continued decline in housing prices, and increased foreclosures).

We have found in decades of investing that share prices can change much more in the short term than underlying business fundamentals. In a difficult environment, when companies are under pressure and share prices are down, we often see indiscriminate selling of companies perceived as risky. We believe our investment process gives us the tools to make informed decisions: an independent research team with detailed knowledge of the companies the Fund holds, an eye on long-term value across economic cycles, and the patience to hold on to investments that we believe are sound.

17 Jul 2009 Dodge & Cox - Q2 2009 Commentary
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.

25 Feb 2009 Dodge & Cox Funds - Annual Report
While the economic landscape has clearly worsened with rising unemployment, declining home values, and continuing uncertainty within the Financials sector, there are a number of factors which build our convictions about the positive prospects for equity returns over the long term.

First, government officials and companies’ management teams have been actively addressing and responding to the economic downturn. Unlike some past recessions or the Great Depression, when policy makers either did nothing or raised barriers, the U.S. and foreign governments have implemented large programs to support the financial system and stimulate the economy, and have largely maintained free-market principles.

In our regular discussions with management teams, we hear how they are also rapidly responding to the downturn. Many companies are reducing costs, improving processes, reconsidering strategies, and looking for growth and market share opportunities as competitors struggle.

The survivors should be better positioned and more profitable when the economy does turn around. Examples of Fund holdings gaining market share and/or aggressively cutting costs include Hewlett-Packard, Comcast, Pfizer, FedEx, Schlumberger, and Wal-Mart.

Second, the U.S. economy has been through difficult periods before - it has survived wars, flu pandemics, inflation, labor unrest, and terrorist attacks. Pessimism during these periods - just like optimism during upturns - can become pervasive. Stock market volatility during this crisis has been at record levels with prices moving as much as 10% in a day - certainly beyond any changes in the underlying fundamentals of the companies these stocks represent.

Third, valuations for companies have obviously come down dramatically, and in our opinion are even more attractive today. As a whole, the stock market is selling at depressed valuations, and select companies are selling at very low multiples to sales and earnings potential. When the global economy stabilizes and recovers, attractive nominal returns could be achieved. Furthermore, companies perceived by investors as being more defensive- generally in the Utilities, Telecommunication Services, and Consumer Staples sectors - now trade at premium valuations, while companies viewed as riskier - generally those in the Consumer Discretionary, Information Technology, Industrials, and Financials sectors - have been discounted. The “flight to safety” strategy could prove successful in the near term. We, however, do not believe it will prove to be successful over the long term.

And finally, the powerful forces behind accelerated global economic growth over the past five years remain in place - namely, technological innovation and the growth in developing countries.