Quick Take: When Diana Strandberg joined Dodge & Cox in 1988, the firm had only recently begun following global companies. It wasn’t until May 2001 that the San Francisco-based asset manager launched the Dodge & Cox International Stock Fund (DODFX), with Strandberg among its seven-person management team.
The fund quickly bore fruit in its first four years. As of Nov. 30, 2005, the $11.1-billion portfolio returned 17.4% for the one-year period, versus a 13.4% gain for its international equity peers; and climbed 29.1% (annualized) over three years, compared with a 18.6% performance by the peer group.
Low expenses are another attraction. The fund’s 0.77% expense ratio is less than half of its peers’ 1.57% average. With 74 holdings, the fund’s turnover rate is a minuscule 6.0%, compared with the peers’ 72.4% average. The fund’s risk level is slightly higher, with a standard deviation of 14.1%, versus 12.1% for the peers.
Top holdings as of September 30 comprised Mitsubishi Tokyo Financial Group Inc., 3.2%; News Corp. `A` (NWS.A), 2.9%; Matsushita Electric Industrial Co. Ltd. (MC), 2.8%; GlaxoSmithKline plc ADR (GSK), 2.7%; and Sanofi-Aventis ADS (SNY), 2.7%. The fund’s largest sector weightings were financials (20.2%); consumer discretionary (17.2%); materials (11.7%); energy (9.7%); and information technology (9.3%). The fund’s top regional concentrations were in Europe (excluding U.K.), 36.5%; Japan, 24.7%; U.K., 9.8%; and Latin America, 8.2%. Emerging markets as a whole accounted for 14.7% of assets.
The Full Interview:
S&P: How would you describe your investment philosophy?
STRANDBERG: We want to be long-term owners of companies whose current valuations do not reflect their long-term earnings and cash flow prospects. We are considered a value manager, we don’t like to pay up for companies. We do our own research and look at industries globally. We focus on governance and transparency.
S&P: What is your investment strategy?
STRANDBERG: The fund uses the same strategy as our domestic equity accounts. The portfolio is managed by a seven-member International Stock Investment Policy Committee. In addition, the firm has 20 research analysts, each looking at two or three industries globally. Our analysts use screens and various metrics, depending on the industry. We want a 360-degree view of a company — a picture from customers, suppliers, management, competitors, and key stockholders — so we can formulate a view of its opportunity and risk and develop our own three-to-five-year forecast.
S&P: What is your decision-making process like?
STRANDBERG: The analysts typically have a list of companies they think could hold investment promise at some point. They write reports on companies they want to recommend, with financial models and other relevant information.
Our buy and sell criteria are based on fundamentals and valuations three to five years out, and we look at each investment on its merits. Does it have the potential to preserve our client’s capital and grow it in real terms? What could go wrong with the stock, and what might that look like in terms of cash flow, balance sheet, and income statement? What is a reasonable outcome? And if things go right, what might that look like?
If we invest in a company and the stock price goes down, we ask if it has become a better opportunity or if something has materially changed. If it’s gotten better, we are persistent investors. But if fundamentals deteriorate, we are willing to sell at a lower price than we paid.
S&P: Your benchmark is the MSCI EAFE Index. How large is your universe of stocks?
STRANDBERG: Our universe consists of companies with market caps of $1 billion and up, from everywhere in the world. That’s about 2,000-2,500 companies. EAFE comprises just the developed markets, and doesn’t include Canada. We picked the benchmark because it’s the one everyone seems to use, and we wanted to have comparability. At any rate, the portfolio isn’t constructed against the benchmark.
S&P: How do you manage risk in the portfolio?