Quick Take: Going against the grain could sum up both the investment philosophy of Dodge & Cox Stock Fund (DODGX), as well as the corporate practices of Dodge & Cox itself, according to John Gunn, one of the fund’s managers and the firm’s president and chief investment officer. The fund takes a contrarian approach, picking up beaten-down stocks under temporary ‘clouds.’ But unlike most money managers, Dodge & Cox provides a similar portfolio of these very same stocks for the bulk of its clients.
Gunn believes investors, either in the fund or through an individual account at Dodge & Cox, benefit from many of the same stock holdings collectively, an approach shunned by most firms because of the profits they enjoy from constructing multiple offerings, he explains. Instead, Dodge & Cox stays focused on its core strength: building a portfolio of stocks of undervalued companies with attractive long-term prospects as judged by the firm’s 30-member equity-investment team.
Dodge & Cox Stock fund is the fifth-best performing large-cap value fund for the ten years through last month, returning an annualized 12.7%, versus 7.4% for the average large-cap value fund. For the three years through last month, the fund rose 2.4%, compared with a 7.9% decline for its peers. Based on quantitative and qualitative criteria, Gunn and the fund’s team were selected as one of 10 winners of the first annual Standard & Poor’s/BusinessWeek Excellence in Fund Management Awards.
The Full Interview:
What Your Peers Are Reading
S&P: You tend to hold stocks that do well over the long term. How do you find them?
GUNN: Our turnover is about 15% to 20%, and valuations are very important to us. We try to buy stocks of companies with durable business franchises for the next four to five years. We usually buy them when they are under a short-term cloud.
We try to avoid over-valued stocks. When considering a potential holding, we ask how it would do if we put it in a safety deposit box for four years. For the last three years, we’ve avoided two-thirds of the stocks in the S&P 500, because we thought they were overvalued. We believed if you put two-thirds of the S&P 500 in a safety deposit box, it would have shrunken considerably over the next four years.
S&P: A lot can happen to a stock in four years.
GUNN: We constantly look at our holdings. Everyday, you implicitly repurchase your portfolio if you don’t change it. We are always trading, but we don’t make huge shifts. We don’t think anyone can forecast short-term moves.
S&P: Why do few other funds follow your strategy?
GUNN: One key advantage we have is that we are independent. Dodge & Cox was founded in 1930 by Van Duyn Dodge and E. Morris Cox. They were disillusioned by the excesses of the 1920s equity market and firms making money from transactions, rather than from how the clients did.
Today, we manage about $70 billion in total net assets, with about $27 billion in mutual funds. We follow a very disciplined approach, and the equity portfolios for all our clients are very similar.