The Dodge and Cox Stock Fund

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The Dodge and Cox Stock Fund: Get into this Mutual Fund Before it Closes Again

by Floyd G. Brown, Advisory Panelist, Investment U
Wednesday, May 21, 2008: Issue #798

It’s no fun when a door slams in your face. That’s how I felt a few years ago when I was preparing to buy into the Dodge and Cox Stock Fund. Just as I was preparing my check, the managers closed the door.

With actively managed mutual funds, a hot record leads to a flood of new money. Smart managers close the doors when they begin to struggle to put this money to work. A larger mutual fund is more difficult to manage because bigger dollar amounts can force the manager to alter his investment style. The plain truth is that there are more opportunities available to smaller amounts of money.

I’m attracted to funds run by the deep-value market masters. Value investors like to know if the fund’s underlying holdings are cheap, but it can be difficult to discern whether funds represent a good “Buy.” Many mutual funds only disclose their portfolios once a quarter, making it difficult to see what stocks it owns at any given point.

Following the 2001 to 2002 recession, we saw many of these funds close their doors after years of outstanding returns. But in market corrections, we can see the doors reopen. In fact, several funds have recently cracked their doors open again. I encourage you to use the opportunity to buy these now, because they could shut again at any time…

Dodge and Cox Stock Fund’s Phenomenal Returns

The returns at the Dodge and Cox Stock Fund have been phenomenal over long periods. This firm has been in positive territory in 33 of the last 42 years.

Recent returns for the Dodge and Cox Stock Fund:

Year: 2003
Return: 32.22%
Year: 2004
Return: 19.17%
Year: 2005
Return: 9.37%
Year: 2006
Return: 18.53%
Year: 2007
Return: 0.14%

Not a bad run for the last five years. And this mutual fund carries no load – expenses run a slim 0.52%.

Long-Term Perspective Unlocks Long-Term Value

The history of Dodge and Cox Stock Fund is storied. Established in 1930, it survived the Depression, World War II and the raging inflation of the 1970s. Operating out of the San Francisco Bay area, they have kept themselves from being swept up by the investment fads of Wall Street.

Their investments are conservative. John Gunn has been the lead manager since 1977 and he summarizes the Dodge and Cox investment philosophy this way:

“Decades of investing have taught us that the perception of an investment’s worth fluctuates much more widely than its underlying fundamentals.

We are skeptical that short-term market trends can be predicted with consistency, so we look further out in our analysis, focusing on the key fundamental factors that will determine investment value over the long term.

As our view diverges from the consensus, we find investment opportunities. We continually focus on the long term by asking ourselves the hypothetical question: based on what we know now, how would we invest an “all-cash” portfolio today assuming we could not trade for the next three to five years?

This framework forces us to reevaluate our portfolio holdings within an ever-changing market environment, and to reaffirm our rationale for each investment’s long-term value.”

Dodge and Cox Stock Fund – Modest Subprime Exposure

On top of that, the subprime exposure of Dodge and Cox Stock Fund has been modest.

Buying a fund run by a deep-value manager is the best way to ensure that your funds’ underlying holdings are undervalued. I am thrilled to see this terrific value-leaning fund has recently reopened to new investors.

Sometimes funds reopen simply because redemptions have been high and they have the capacity to take on new assets. However, a reopening is also an excellent indication that a fund manager sees attractive buying opportunities on the horizon.

I have even recommended that my children take a look at the Dodge and Cox Stock Fund. It’s a rare “buy and hold forever” opportunity.

Good investing,

Floyd

Floyd Brown, a regular contributor to Investment U and The Oxford Club, began his highly successful investing career while still in high school… and made his first million before turning 30. Here are three companies Floyd’s recommending right now.

Today’s Investment U Crib Sheet

In addition to the Dodge and Cox Stock Fund (DODGX), here are three other compelling mutual funds that have just reopened to new investors that may be more appropriate to your individual needs: Longleaf Partners (LLPFX): Blend of growth and value, primarily focused on large-cap stocks. Sequoia (SEQUX): Invested in large-cap growth stocks.Third Avenue Small Cap Fund (TASCX): Blend of growth and value mainly in small-cap stocks.
Protected growth securities have been getting a lot of press lately, but for all of the interest in them, few investors have heard of Market Index Target-term Securities (MITTS) and how they can give you guaranteed growth and protection of capital.We’re the first to question any investments when we hear the words “can’t lose.” But these instruments may very well be the “holy grail” for investors seeking absolute safety of principal and capital appreciation. For details, see MITTS Investments: The Only Can’t Lose Stock Market Investment on Earth.
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