Can Dodge & Cox Bounce Back?

For some time, Dodge & Cox funds, especially the Stock Fund (DODGX) and International Stock Fund (DODFX), were my favorites. DODGX was one of the first funds I bought when I started to investing in mutual funds 6 years ago (I am still buying it every month) and DODFX was once the performance leader among all my mutual fund investments. I admitted more than once that I felt lucky to own two D & C funds, DODGX and DODBX, that were both closed to new investors for a few years, and recommended investing in DODFX when it’s still open.

But all of these were then. Now the funds are falling fast in performance ranking. Actually, it didn’t happen just now. Things started to go bad since last year, when DODGX lagged not only the benchmark S&P 500 index by a significant amount, but also many of its peers. And 2008 is even worse for DODGX. It seems that all the sudden fund managers at D&C lost their touch on picking up the right stocks to invest. Instead, they were betting on all the wrong ones: AIG, Wachovia, Fannie Mae. All the troubled compaines were added to DODGX’s holding list. That’s more like my investments (I bought AIG, Freddie Mac and the vanished Washington Mutual), not the choices of an investment team who have managed the fund for years. The result is massive outflow of cash as investors run to the exit as fast as they rushed early this decade when the fund was the darling for investors.

So what went wrong with D & C?

Dodge & Cox

A 2-yr performance comparison between S&P and DODGX, DODFX and DODBX

Early this week, Morningstar published an article that may provide some clue on what went wrong at D & C, mainly failed to expect the worst case scenario, which turned out to be much worse than anybody could imagine, when making the picks of trouble financial firms:

Dodge & Cox knew AIG would need a lot of cash, but not $85 billion (a sum that reportedly stunned even former CEO Hank Greenberg). It knew the housing crisis would get worse before it got better and companies like Fannie Mae and Wachovia would struggle, but it did not assign a high enough probability to the chaotic unraveling we witnessed and the government’s aggressive, uncompromising response to it.

Indeed, what happened to D & C are pretty bad, as the above performance chart shows, and as an investor, I am very happy with how the fund managers have run the fund so far. At the same time, however, I have no plan to abandon my investments in all three D & C funds that I own. I didn’t get in when the fund was hot and I won’t get out when the fund goes cold. I still have my faith in the the fund and I hope it can soon recover. As the article says:

There’s no guarantee Dodge & Cox funds will snap back like they did in the past. Sure, you could switch to another manager who hasn’t yet hit the skids or to an index fund. But Dodge & Cox retains many simple, enduring long-term advantages besides experience and a long memory. Its process is consistent and has been tested and found worthy in previous crises. Its expense ratios are among the lowest offered by active managers; and the firm’s culture remains trustworthy due to its focus on investing and its investors rather than marketing. These are all traits that we at Morningstar and others have found to correlate with long-term success.

Do you own Dodge & Cox funds? Are you plan to hold them?

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10 Responses to “Can Dodge & Cox Bounce Back?”

  1. MoneyNing |  Nov 06, 2008 at 12:24 pm

    I sold my DODFX a while ago like you know and although I missed part of the decline, I used the money to buy other stocks so it’s all the same :) In a down market, unless you are shorting it or putting the money in cash, it doesn’t really matter which stocks you are in!

    Good luck with DODFX! I hope it does well also as it will mean that my other stocks will go up!

  2. Investor |  Nov 07, 2008 at 2:56 pm

    I transferred most of my gains from DODFX to SEQUX in January of this year and gains I had from DODFX and DODBX to FPACX around July. This was in my Roth IRA. This was pure luck as SEQUX and FPACX were on my watchlist for a long time and fared very well compared to D&C funds.

    I continue to hold DODBX, DODFX and DODWX and may add to them later, but their overall weight in my portfolio has gone down considerably.

  3. Tim |  Nov 07, 2008 at 6:44 pm

    I continue to hold and buy more DODGX, although I am onboard with Kiplinger about how idiotic they were about AIG and Fannie Mae holding way too much of the portfolio in AIG and Fannie. I will continue to buy but will be looking very closely to how they readjust their portfolio of stocks and re-evaluate what went wrong with their decision models. I’m pretty concerned now that AIG and Fannie are reduced to nothing, HP and Comcast are 3:2 highest holdings in the fund. The fund is also heavily exposed to media and entertainment stocks, which in this downturn will be hit hard by the downturn in ad revenue and discretionary spending.

  4. Sun |  Nov 10, 2008 at 1:20 pm

    Yes, I will continue to hold my shares of D & C funds. My biggest concern actually is that the company may be slow in adjusting their portfolios (D&C has very low turnover ratio). The funds have already been hit hard since the turmoil began. If they don’t act quickly, I am afraid they may miss out the recovery, which could be even worse for them. Let’s just hope that they can get their act together so the funds can bounce back when the overall economy starts to recover.

  5. kapitalist |  Dec 08, 2008 at 12:24 pm

    I own DODBX and DODFX which I picked up after reading the Lazy Guide to Investing. I know very little about the markets compared to some of you investors…Im in my late 20′s and just wanted something stable with a low expense ratio. I imagine any funds that I would have had would be down but my 50k dropped to 28k and thats a big chunk of money for me. I considered selling but figured im in for the long haul right? so i keep buying in at the lower price hoping.

    I remember my dad telling me a story that he could have invested in IBM years ago when it was around $14 (he was going to invest 50k but backed out). When the tech craze was going and IBM was up
    to $120 he thought if only I knew.

    I hope I can recoupe my investment down the line. I hoping this is just a time issue.