UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-173
DODGE & COX FUNDS
(Exact name of registrant as specified in charter)
555 California Street, 40th Floor
San Francisco, CA 94104
(Address of principal executive offices) (Zip code)
Roberta R.W. Kameda, Esq.
555 California Street, 40th Floor
San Francisco, CA 94104
(Name and address of agent for service)
Registrant’s telephone number, including area code: 415-981-1710
Date of fiscal year end: DECEMBER 31, 2020
Date of reporting period: DECEMBER 31, 2020
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
(a) The following are the December 31, 2020 annual reports for the Dodge & Cox Funds, a Delaware statutory trust, consisting of six series: Dodge & Cox Stock Fund, Dodge & Cox Global Stock Fund, Dodge & Cox International Stock Fund, Dodge & Cox Balanced Fund, Dodge & Cox Income Fund, and Dodge & Cox Global Bond Fund.
The reports of each series were transmitted to their respective shareholders on February 19, 2021.
Annual Report
December 31, 2020
Stock Fund
ESTABLISHED 1965
TICKER: DODGX
12/20 SF AR Printed on recycled paper 
The Dodge & Cox Stock Fund had a total return of 7.2% for the year ended December 31, 2020, compared to a return of 18.4% for the S&P 500 Index and 2.8% for the Russell 1000 Value Index.
Market Commentary
The U.S. equity market was extremely volatile in 2020. In the first quarter, the coronavirus (COVID-19) evolved into a global pandemic, disrupting major economies around the world and abruptly ending the longest stock market bull run in U.S. history. U.S. equities fell sharply, then quickly rebounded off their March lows and performed strongly for the remainder of the year. A combination of depressed valuations, substantial fiscal and monetary stimulus, and a robust recovery in corporate earnings buoyed the U.S. equity market. After the successful development of effective COVID-19 vaccines in the fourth quarter, segments of the market that had previously lagged—such as Energy, Financials, and Industrials—outperformed as the U.S. stock market surged to an all-time high in December. This rapid and dramatic reversal illustrates the importance of having a long-term view and staying the course with one’s convictions because markets can turn quickly.
Looking back on 2020, companies have fallen into two groups: businesses largely immune to the economic impact of the pandemic (we describe them as “COVID defensive”) and those hit hard by the economic consequences of the pandemic (“COVID cyclical”). Approximately 70%a of the S&P 500 is in COVID-defensive businesses, mainly those in the Information Technology, Health Care, Consumer Staples, and Utilities sectors. Large technology-related companies have surged, especially the FAANGM stocks—Facebook, Amazon, Apple, Netflix, Google (Alphabet), and Microsoft. In contrast, the other 30% of the S&P 500 is comprised of COVID-cyclical companies—largely in the Financials, Energy, Industrials, and Real Estate sectors—that have not fared well. For example, Energy (down 34%) was the worst-performing sector of the S&P 500 in 2020, reflecting an unprecedented decline in demand due to worldwide stay-at-home orders and the global economic slowdown.
Investment Strategy
While the Fund’s value-oriented portfolio underperformed the broad-based S&P 500 over the past decade, it outperformed the Russell 1000 Value by 38 percentage points.b Over the same period, U.S. value stocksc underperformed growth stocks by 218 percentage points.d In September 2020, however, the market started to shift in value’s favor, but it is too soon to know whether this could be the beginning of a major reversal in market leadership. Increasingly, we believe a strong case can be made for investing in value stocks going forward.
First, the valuation differential between value and growth stocks remains wide by historical standards, which creates ample opportunities for value-oriented investors like Dodge & Cox. The Fund trades at a significant discount to the broad-based market: 13.7 times forward earnings compared to 23.7 times for the S&P 500. Historically, lower starting valuations have produced more attractive long-term returns.
Second, we are encouraged by the approval of effective COVID-19 vaccines. The COVID-cyclical areas of the market should continue to recover as more of the population becomes vaccinated and economic activity accelerates. In addition, as supply and demand move toward a better balance in the oil markets, Energy could outperform. Moreover, U.S. interest rates may increase as the economy recovers fully, which would further benefit many of the Fund’s holdings.
Third, history has indicated it is hard to remain a market leader. Several very large, high-valuation technology companies have had a substantial impact on overall market returns. We believe many of them are overvalued and face significant challenges, not only in justifying their valuations but also because of mounting competitive and regulatory threats. In addition, they would be disadvantaged by higher interest rates.
The Fund leans heavily toward COVID-cyclical and value sectors, with notable overweight positions in Financials and Energy. We continue to look for opportunities to optimize in the portfolio based on our long-term outlook for each company and assessment of the valuation and market’s expectations. During 2020, we added significantly to various financial services, energy, and low-valuation technology companies.
In Energy, oil prices have started to recover from a low of about $20/barrel in the spring to $49/barrel on December 31. We believe there is an opportunity for further price increases as demand continues to recover and supply is impacted by the low investment in oil exploration and production. While Energy led market returns in the fourth quarter, the valuations are still quite depressed in our opinion. Our views on two other sectors, Financials and Information Technology, are highlighted in more detail below.
Financials
In 2020, Financials was one of the worst-performing sectors of the market amid concerns that a weaker economy would lead to increases in credit losses for U.S. banks and lower interest rates would reduce profit margins. However, we believe the large U.S. banks are in a much stronger position compared to past downturns. During the 2008-09 global financial crisis, U.S. banks were at the epicenter of the downturn because of their heavy exposure to the troubled housing market. In contrast, the COVID-19 pandemic is a health crisis that has led to a sudden decline in economic activity. Most U.S. banks entered the current crisis with low leverage, restrained risk taking, and well-diversified sources of revenue. Moreover, in anticipation of a sharper downturn, many banks have set aside significant provisions for expected loan losses and remain broadly reserved for higher levels of economic distress than the United States is currently experiencing.
U.S. Financials’ valuations are near historic lows compared to the stock market as a whole. Specifically, the S&P 500 Banks industry trades at 13.4 times forward estimated earnings compared to 23.7 times for the broader S&P 500. This sizeable discount does not fully reflect the banks’ underlying strength, in our opinion. Looking ahead, we believe large banks are well positioned to benefit from the vaccine
PAGE 1 ■ Dodge & Cox Stock Fund
rollout and anticipated economic rebound, which should lead to better growth and lower credit costs in 2021. We expect capital returns to increase, as the Federal Reserve has allowed all the large banks to resume paying dividends and buying back their shares, with certain restrictions.
As a Value-Oriented Manager, We Are Finding Attractive Opportunities
On December 31, the Fund had significant exposure to Financials: 28.4% compared to 10.4% for the S&P 500 and 19.6% for the Russell 1000 Value. Capital One Financiale (a 4.3% position) was the Fund’s largest holding at year end.
Capital One Financial
Capital One is a leading financial services company trading at an attractive valuation and, in our opinion, it represents exceptional long-term value. The bank’s most profitable business—credit cards—felt the impact of weaker consumer spending as the pandemic took its toll on the economy. Yet, like many other Financials, it is well positioned to benefit from a healthier economy that we believe should emerge once vaccinations become widespread. The company has a number of strengths: scale in credit cards and auto lending, robust deposits, advanced digital banking platform, and a legacy of heavy investment in technology. Management is focused on the long term, committed to improving the bank’s expense efficiency, and has a track record of earning higher risk-adjusted margins than its peers. At 11 times forward earnings, Capital One is trading at a substantial discount to the overall market, and we opportunistically added to the Fund’s position in this stock during 2020.
Information Technology
Many of the U.S. growth stocks are expensive technology-related companies. Especially after their strong 2020 performance, Information Technology sector valuations are approaching year 2000-type levels by some measures, and unprofitable technology stocks now account for 32% of total technology stocks, which is close to the March 2000 level of 36%.
Given such stretched valuations, the Fund remains underweight the overall Information Technology sector and is primarily invested in lower-valuation technology stocks. The Fund’s technology holdings trade at a significant discount to the overall Information Technology sector on various metrics, including 1.3 times sales (compared to 6.9 times for the S&P 500 sector and 2.1 times for the Russell 1000 Value sector) as well as 13.2 times estimated earnings compared to 29.4 times for the S&P 500 sector and 16.5 times for the Russell 1000 Value sector.
In 2020, we added to the Fund’s enterprise hardware holdings, such as Dell, Hewlett Packard Enterprise, and HP Inc. These companies have strong free cash flow and relatively modest valuations. Since hardware spending is cyclical, these stocks were negatively impacted by the pandemic, but they tend to perform strongly coming out of recessions. In addition, we added to Cognizant Technology Solutions and started a new position in Fiserv, which increased the Fund’s exposure to IT Services.
Fiserv
Fiserv is a diversified provider of financial technology and payment processing services to banks and merchants. Decreased merchant activity during the COVID-19 pandemic, combined with a sooner-than-expected CEO transition and partial sale of KKR’s stake in the company, weighed on Fiserv’s stock price and created an opportunity for us to start a position during the fourth quarter. Fiserv has a strong business franchise with dominant market positions in several major business lines, including global merchant transaction processing, U.S. issuer processing, and U.S. core banking processing. The company has a shareholder-focused management team and trades at an attractive valuation given its growth prospects. It also offers significant margin expansion potential from revenue synergies and cross-selling opportunities. On December 31, Fiserv was a 0.7% position in the Fund.
In Closing
2020 was a difficult year for value investors. However, the tide started to turn dramatically in the fourth quarter, as the previous laggards—specifically Energy, Financials, and Industrials—became the market leaders that quarter. Going forward, we continue to believe this is an opportune time to invest in value stocks.
We have strong conviction in the Fund’s value-oriented portfolio, which is comprised mostly of companies with strong businesses that we believe would benefit from sustained economic growth. We remain optimistic about the outlook for the Fund and confident in our active investment approach. Since changes in valuations and share prices can happen swiftly and without warning, we encourage our shareholders to take a long-term view.
Thank you for your continued confidence in our firm. As always, we welcome your comments and questions.
For the Board of Trustees, | |
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January 29, 2021
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Unless otherwise specified, all weightings and characteristics are as of
December 31, 2020. |
| The Dodge & Cox Stock Fund had a total return of 209.4% from December 31, 2010 through December 31, 2020 compared to 171.3% for the Russell 1000 Value Index. |
| Value stocks are the lower valuation portion of the equity market, and growth stocks are the higher valuation portion. |
| The Russell 1000 Value Index had a total return of 171.3% from December 31, 2010 through December 31, 2020 compared to 389.3% for the Russell 1000 Growth Index. |
| The use of specific examples does not imply that they are more or less attractive investments than the portfolio’s other holdings. |
Dodge & Cox Stock Fund ■ PAGE 2
2020 Performance Review
The Fund underperformed the S&P 500 by 11.2 percentage points in 2020.
Key Detractors from Relative Results
■ Relative results were hurt by strong returns from a small group of large internet- and technology-related companies not held by the Fund.
■ Returns from holdings in the Information Technology sector (up 22% versus up 44% for the S&P 500 sector) detracted. Hewlett Packard Enterprise was weak.
■ In Energy, the Fund’s overweight position and holdings (down 41% versus down 34% for the S&P 500 sector) hindered performance. Occidental Petroleum lagged.
■ A higher average weighting and weaker returns from holdings in the Financials sector (down 7% versus down 2% for the S&P 500 sector) hurt results. Wells Fargo and Bank of America performed poorly.
Key Contributors to Relative Results
■ The Fund’s holdings in Industrials (up 34% versus up 11% for the S&P 500 sector) had a positive impact. FedEx performed well.
■ The Fund’s lack of exposure to Real Estate and Utilities helped results as these sectors were weak (down 2% and unchanged, respectively).
■ Microchip Technology and Dell Technologies also contributed.
The Fund outperformed the Russell 1000 Value by 4.4 percentage points in 2020.
Key Contributors to Relative Results
■ In Information Technology, the Fund’s holdings (up 22% versus up 10% for the R1000V sector) and overweight position had a positive impact. Microchip Technology was strong.
■ Returns from holdings in the Communication Services sector (up 27% versus up 10% for the R1000V sector). Charter Communications and Alphabet performed well.
■ The Fund’s holdings in Industrials (up 34% versus up 12% for the R1000V sector) helped results. FedEx was a standout performer.
Key Detractors from Relative Results
■ The Fund’s overweight position and holdings in Energy (down 41% versus down 33% for the R1000V sector) hurt results, notably Occidental Petroleum and Apache.
■ In Consumer Staples, the Fund’s only holding—Molson Coors—was weak.
Key Characteristics of Dodge & Cox
Independent Organization
Dodge & Cox is one of the largest privately owned investment managers in the world. We remain committed to independence, with a goal of providing the highest quality investment management service to our existing clients.
90 Years of Investment Experience
Dodge & Cox was founded in 1930. We have a stable and well- qualified team of investment professionals, most of whom have spent their entire careers at Dodge & Cox.
Experienced Investment Team
The U.S. Equity Investment Committee, which is the decision- making body for the Stock Fund, is an eight-member committee with an average tenure at Dodge & Cox of 23 years.
One Business with a Single Research Office
Dodge & Cox manages equity (domestic, international, and global), fixed income (domestic and global), and balanced investments, operating from one office in San Francisco.
Consistent Investment Approach
Our team decision-making process involves thorough, bottom- up fundamental analysis of each investment.
Long-Term Focus and Low Expenses
We invest with a three- to five-year investment horizon, which has historically resulted in low turnover relative to our peers. We manage Funds that maintain low expense ratios.
Risks: The Fund is subject to market risk, meaning holdings in the Fund may decline in value for extended periods due to the financial prospects of individual companies, or due to general market and economic conditions. Please read the prospectus and summary prospectus for specific details regarding the Fund's risk profile.
PAGE 3 ■ Dodge & Cox Stock Fund
Growth of $10,000 Over 10 Years
For An Investment Made On December 31, 2010 
Average Annual Total Return
For Periods Ended December 31, 2020
Returns represent past performance and do not guarantee future results. Investment return and share price will fluctuate with market conditions, and investors may have a gain or loss when shares are sold. Fund performance changes over time and currently may be significantly lower than stated. Performance is updated and published monthly. Visit the Fund’s website at dodgeandcox.com or call 800-621-3979 for current performance figures.
The Fund's total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include dividends but, unlike Fund returns, do not reflect fees or expenses. The Fund’s primary benchmark is the S&P 500 Index, which consists of large cap equity securities and is generally considered representative of the U.S. stock market as a whole. The Fund’s secondary benchmark is the Russell 1000 Value Index, which measures the performance of the large capitalization value segment of the U.S. equity universe.
S&P 500® is a trademark of S&P Global Inc. Russell 1000® is a trademark of the London Stock Exchange Group plc.
Fund Expense Example
As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.
Actual Expenses
The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison with Other Mutual Funds
Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.
Six Months Ended
December 31, 2020 | Beginning Account Value
7/1/2020 | Ending Account Value
12/31/2020 | Expenses Paid
During Period* |
Based on Actual Fund Return | | | |
Based on Hypothetical 5% Yearly Return | | | |
| Expenses are equal to the Fund’s annualized expense ratio of 0.52%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. Though other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).
Dodge & Cox Stock Fund ■ PAGE 4
Portfolio Information (unaudited) December 31, 2020
Sector Diversification (%) | |
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PAGE 5 ■ Dodge & Cox Stock Fund
Portfolio of Investments December 31, 2020
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Communication Services: 12.9% |
Media & Entertainment: 12.6% |
Alphabet, Inc., Class A(a) | | |
Alphabet, Inc., Class C(a) | | |
Charter Communications, Inc., Class A(a) | | |
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DISH Network Corp., Class A(a) | | |
Facebook, Inc., Class A(a) | | |
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Telecommunication Services: 0.3% |
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Consumer Discretionary: 2.7% |
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Booking Holdings, Inc.(a) | | |
Qurate Retail, Inc., Series A(b) | | |
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Food, Beverage & Tobacco: 1.1% |
Molson Coors Beverage Company, Class B(b) | | |
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Baker Hughes Co., Class A(b) | | |
Concho Resources, Inc.(b) | | |
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National Oilwell Varco, Inc. | | |
Occidental Petroleum Corp.(b) | | |
Occidental Petroleum Corp., Warrant(a)(b) | | |
Schlumberger, Ltd. (Curacao/United States) | | |
The Williams Companies, Inc. | | |
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Diversified Financials: 15.6% |
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Bank of New York Mellon Corp. | | |
Capital One Financial Corp.(b) | | |
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Goldman Sachs Group, Inc. | | |
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Aegon NV, NY Shs (Netherlands) | | |
Brighthouse Financial, Inc.(a)(b) | | |
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Health Care Equipment & Services: 5.8% |
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Medtronic PLC (Ireland/United States) | | |
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Pharmaceuticals, Biotechnology & Life Sciences: 10.3% |
Alnylam Pharmaceuticals, Inc.(a) | | |
AstraZeneca PLC ADR (United Kingdom) | | |
BioMarin Pharmaceutical, Inc.(a) | | |
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GlaxoSmithKline PLC ADR (United Kingdom) | | |
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Novartis AG ADR (Switzerland) | | |
Roche Holding AG ADR (Switzerland) | | |
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Johnson Controls International PLC(b) (Ireland/United States) | | |
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Raytheon Technologies Corp. | | |
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Information Technology: 19.1% |
Semiconductors & Semiconductor Equipment: 2.1% |
Microchip Technology, Inc.(b) | | |
Software & Services: 5.7% |
Cognizant Technology Solutions Corp., Class A | | |
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Micro Focus International PLC ADR(a)(b) (United Kingdom) | | |
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Technology, Hardware & Equipment: 11.3% |
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Dell Technologies, Inc., Class C(a) | | |
Hewlett Packard Enterprise Co.(b) | | |
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Juniper Networks, Inc.(b) | | |
TE Connectivity, Ltd. (Switzerland) | | |
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See accompanying Notes to Financial StatementsDodge & Cox Stock Fund ■ PAGE 6
Portfolio of Investments December 31, 2020
Common Stocks (continued) |
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LyondellBasell Industries NV, Class A (Netherlands) | | |
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Total Common Stocks
(Cost $49,210,594,369) | | |
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Consumer Discretionary: 0.1% |
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Qurate Retail, Inc., 8.00%, 3/15/2031(b) | | |
Total Preferred Stocks
(Cost $53,911,445) | | |
Short-Term Investments: 0.7% |
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Repurchase Agreements: 0.3% |
Fixed Income Clearing Corporation(c)
0.000%, dated 12/31/20, due 1/4/21, maturity value $203,661,000 | | |
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State Street Institutional U.S. Government Money Market Fund | | |
Total Short-Term Investments
(Cost $484,905,851) | |
Total Investments In Securities
(Cost $49,749,411,665) | | |
Other Assets Less Liabilities | | |
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| See below regarding holdings of 5% voting securities |
| Repurchase agreement is collateralized by U.S. Cash Management Bills, 5/11/21. Total collateral value is $207,734,299. |
| In determining a company’s country designation, the Fund generally references the country of incorporation. In cases where the Fund considers the country of incorporation to be a “jurisdiction of convenience” chosen primarily for tax purposes or in other limited circumstances, the Fund uses the country designation of an appropriate broad-based market index. In those cases, two countries are listed - the country of incorporation and the country designated by an appropriate index, respectively. |
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ADR: American Depositary Receipt |
Holdings of 5% Voting Securities
Each of the companies listed below was considered to be an affiliate of the Fund because the Fund owned 5% or more of the company’s voting securities during all or part of the year ended December 31, 2020. Further detail on these holdings and related activity during the year appear below.
| Value at
Beginning of Period | | | | Net Change in
Unrealized
Appreciation/
Depreciation | | Dividend
Income
(net of foreign
taxes, if any) |
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Consumer Discretionary 0.5% | | | | | | | |
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Qurate Retail, Inc., Series A | | | | | | | |
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Molson Coors Beverage Company, Class B | | | | | | | |
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Baker Hughes Co., Class A | | | | | | | |
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PAGE 7 ■ Dodge & Cox Stock FundSee accompanying Notes to Financial Statements
Portfolio of Investments December 31, 2020
| Value at Beginning of Period | | | | Net Change in Unrealized Appreciation/ Depreciation | | Dividend Income (net of foreign taxes, if any) |
Occidental Petroleum Corp. | | | | | | | |
Occidental Petroleum Corp., Warrant(a) | | | | | | | |
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Brighthouse Financial, Inc.(a) | | | | | | | |
Capital One Financial Corp. | | | | | | | |
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Johnson Controls International PLC | | | | | | | |
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Information Technology 5.9% | | | | | | | |
Hewlett Packard Enterprise Co. | | | | | | | |
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Micro Focus International PLC ADR(a) | | | | | | | |
Microchip Technology, Inc. | | | | | | | |
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Consumer Discretionary 0.1% | | | | | | | |
Qurate Retail, Inc., 8.00%, 3/15/2031 | | | | | | | |
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| Company was not an affiliate at period end |
See accompanying Notes to Financial StatementsDodge & Cox Stock Fund ■ PAGE 8
Statement of Assets and Liabilities
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Investments in securities, at value | |
Unaffiliated issuers (cost $36,413,596,222) | |
Affiliated issuers (cost $13,335,815,443) | |
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Receivable for investments sold | |
Receivable for Fund shares sold | |
Dividends and interest receivable | |
Prepaid expenses and other assets | |
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Payable for investments purchased | |
Payable for Fund shares redeemed | |
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Fund shares outstanding (par value $0.01 each, unlimited shares authorized) | |
Net asset value per share | |
Statement of Operations
| Year Ended
December 31, 2020 |
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Dividends (net of foreign taxes of $22,883,789) | |
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Custody and fund accounting fees | |
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Realized and Unrealized Gain (Loss): | |
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Investments in securities of unaffiliated issuers (Note 6) | |
Investments in securities of affiliated issuers (Note 6) | |
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Foreign currency transactions | |
Net change in unrealized appreciation/depreciation | |
Investments in securities of unaffiliated issuers | |
Investments in securities of affiliated issuers | |
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Net realized and unrealized gain | |
Net Change in Net Assets From Operations | |
Statement of Changes in Net Assets
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Net change in unrealized appreciation/depreciation | | |
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Distributions to Shareholders: | | |
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Proceeds from sale of shares | | |
Reinvestment of distributions | | |
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Net change from Fund share transactions | | |
Total change in net assets | | |
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Net change in shares outstanding | | |
PAGE 9 ■ Dodge & Cox Stock FundSee accompanying Notes to Financial Statements
Notes to Financial Statements
Note 1: Organization and Significant Accounting Policies
Dodge & Cox Stock Fund (the "Fund") is one of the series constituting the Dodge & Cox Funds (the "Trust" or the "Funds"). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund commenced operations on January 4, 1965, and seeks long-term growth of principal and income. Risk considerations and investment strategies of the Fund are discussed in the Fund's Prospectus.
The Fund is an investment company and follows the accounting and reporting guidance issued in Topic 946 by the Financial Accounting Standards Board. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Actual results may differ from those estimates. Significant accounting policies are as follows:
Security valuation The Fund’s net assets are normally valued as of the scheduled close of trading on the New York Stock Exchange (NYSE), generally 4 p.m. Eastern Time, each day that the NYSE is open for business.
Portfolio holdings for which market quotes are readily available are valued at market value. Listed securities, for example, are generally valued using the official quoted close price or the last sale on the exchange that is determined to be the primary market for the security. Preferred stocks are valued using prices received from independent pricing services which utilize dealer quotes, recent transaction data, pricing models, and other inputs to arrive at market-based valuations. Pricing models may consider quoted prices for similar securities, interest rates, cash flows (including prepayment speeds), and credit risk. Exchange-traded derivatives are generally valued at the settlement price determined by the relevant exchange. Short-term securities less than 60 days to maturity may be valued at amortized cost if amortized cost approximates current value. Mutual funds are valued at their respective net asset values. Security values are not discounted based on the size of the Fund’s position and may differ from the value a Fund receives upon sale of the securities. All securities held by the Fund are denominated in U.S. dollars.
If market quotations are not readily available or if normal valuation procedures produce valuations that are deemed unreliable or inappropriate under the circumstances existing at the time, the investment will be valued at fair value as determined in good faith by or under the direction of the Fund’s Board of Trustees. The Board of Trustees has appointed Dodge & Cox, the Fund’s investment manager, to make fair value determinations in accordance with the Dodge & Cox Funds Valuation Policies (“Valuation Policies”), subject to Board oversight. Dodge & Cox has established a Pricing Committee that is comprised of representatives from Treasury, Legal, Compliance, and Operations. The Pricing Committee is responsible for implementing the Valuation Policies, including determining the fair value of securities and other investments when necessary. The Pricing Committee considers relevant indications of value that are reasonably available to it in determining the fair value assigned to a particular security, such as the value of similar financial instruments, trading volumes, contractual restrictions on disposition, related corporate
actions, and changes in economic conditions. In doing so, the Pricing Committee employs various methods for calibrating fair valuation approaches, including a regular review of key inputs and assumptions, back-testing, and review of any related market activity.
Valuing securities through a fair value determination involves greater reliance on judgment than valuation of securities based on readily available market quotations. In some instances, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a security’s value. When fair value pricing is employed, the prices of securities used by the Fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.
Dividend income and corporate action transactions are recorded on the ex-dividend date, or when the Fund first learns of the dividend/corporate action if the ex-dividend date has passed. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends characterized as return of capital for U.S. tax purposes are recorded as a reduction of cost of investments and/or realized gain. Interest income is recorded on the accrual basis.
Expenses are recorded on the accrual basis. Some expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust using methodologies determined by the nature of the expense.
Distributions to shareholders are recorded on the ex-dividend date.
Foreign taxes The Fund may be subject to foreign taxes which may be imposed by certain countries in which the Fund invests. The Fund endeavors to record foreign taxes based on applicable foreign tax law. Withholding taxes are incurred on certain foreign dividends and are accrued at the time the associated dividend is recorded. The Fund files withholding tax reclaims in certain jurisdictions to recover a portion of amounts previously withheld. The Fund records a reclaim receivable based on, among other things, a jurisdiction’s legal obligation to pay reclaims as well as payment history and market convention. In consideration of recent decisions rendered by European courts, the Fund has filed for additional reclaims related to prior years. A corresponding receivable is established when both the amount is known and significant contingencies or uncertainties regarding collectability are removed. These amounts, if any, are reported in “dividends and interest receivable” in the Statement of Assets and Liabilities.
Repurchase agreements Repurchase agreements are transactions under which a Fund purchases a security from a dealer counterparty and agrees to resell the security to that counterparty on a specified future date at the same price, plus a specified interest rate. The Fund’s repurchase agreements are secured by U.S. government or agency securities. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including
Dodge & Cox Stock Fund ■ PAGE 10
Notes to Financial Statements
accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the collateral securities and to apply the proceeds in satisfaction of the obligation.
Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred.
Note 2: Valuation Measurements
Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below.
■ Level 1: Quoted prices in active markets for identical securities
■ Level 2: Other significant observable inputs (including quoted prices for similar securities, market indices, interest rates, credit risk, forward exchange rates, etc.)
■ Level 3: Significant unobservable inputs (including Fund management’s assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used to value the Fund’s holdings at December 31, 2020:
| | LEVEL 2
(Other Significant
Observable Inputs) |
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Note 3: Derivative Instruments
The Fund may use derivatives either to minimize the impact of certain risks to one or more of its investments (as a ‘‘hedging technique’’) or
to implement its investment strategy. A derivative is a financial instrument whose value is derived from a security, currency, interest rate, index, or other financial instrument.
Futures contracts Futures contracts involve an obligation to purchase or sell (depending on whether the Fund has entered a long or short futures contract, respectively) an asset at a future date, at a price set at the time of the contract. Futures contracts are exchange-traded. Upon entering into a futures contract, the Fund is required to deposit an amount of cash or liquid assets (referred to as "initial margin") in a segregated account with the clearing broker. Subsequent payments (referred to as "variation margin") to and from the clearing broker are made on a daily basis based on changes in the market value of the contract. Changes in the market value of open futures contracts are recorded as unrealized appreciation or depreciation in the Statement of Operations. Realized gains and losses on futures contracts are recorded in the Statement of Operations at the closing or expiration of the contracts. Cash deposited with a broker as initial margin is recorded in the Statement of Assets and Liabilities. A receivable and/or payable to brokers for daily variation margin is also recorded in the Statement of Assets and Liabilities.
Investments in futures contracts may include certain risks, which may be different from, and potentially greater than, those of the underlying securities. To the extent the Fund uses futures, it is exposed to additional volatility and potential losses resulting from leverage.
The Fund did not have open futures contracts at December 31, 2020.
Additional derivative information The following summarizes the effect of derivative instruments on the Statement of Operations, categorized by primary underlying risk exposure.
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Net change in unrealized appreciation/depreciation |
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The following summarizes the range of volume in the Fund's derivative instruments during the year ended December 31, 2020.
Note 4: Related Party Transactions
Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays a management fee monthly at an annual rate of 0.50% of the Fund’s average daily net assets to Dodge & Cox, investment manager of the Fund. The agreement further provides that Dodge & Cox shall waive its fee to the extent that such fee plus all other ordinary operating expenses of the Fund exceed 0.75% of the average daily net assets for the year.
Fund officers and trustees All officers and two of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.
PAGE 11 ■ Dodge & Cox Stock Fund
Notes to Financial Statements
Note 5: Income Tax Information and Distributions to Shareholders
A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, and such amounts may differ from net investment income and realized gains for financial reporting purposes. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes. Financial reporting records are adjusted for permanent book to tax differences at year end to reflect tax character. Book to tax differences are primarily due to differing treatments of redemptions in-kind, wash sales, foreign currency realized gain (loss), certain corporate action transactions, and distributions.
Distributions during the years noted below were characterized as follows for federal income tax purposes:
| Year Ended
December 31, 2020 | Year Ended
December 31, 2019 |
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At December 31, 2020, the tax basis components of distributable earnings were as follows:
Undistributed ordinary income | |
Undistributed long-term capital gain | |
At December 31, 2020, unrealized appreciation and depreciation for investments and derivatives based on cost for federal income tax purposes were as follows:
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Net unrealized appreciation | |
Fund management has reviewed the tax positions for open periods (three years and four years, respectively, from filing the Fund’s Federal and State tax returns) as applicable to the Fund, and has determined that no provision for income tax is required in the Fund’s financial statements.
Note 6: Redemptions In-Kind
During the year ended December 31, 2020, the Fund distributed securities and cash as payment for a redemption of Fund shares. For financial reporting purposes, the Fund realized a net gain of $750,601,380 attributable to the redemption in-kind: $716,475,620 from unaffiliated issuers and $34,125,760 from affiliated issuers. For tax purposes, no capital gain on the redemption in-kind was recognized.
Note 7: Loan Facilities
Pursuant to an exemptive order issued by the Securities and Exchange Commission (SEC), the Fund may participate in an interfund lending facility (Facility). The Facility allows the Fund to borrow money from or loan money to the Funds. Loans under the Facility are made for temporary or emergency purposes, such as to fund shareholder redemption requests. Interest on borrowings is the average of the current repurchase agreement rate and the bank loan rate. There was no activity in the Facility during the year.
All Funds in the Trust participate in a $500 million committed credit facility (Line of Credit) with State Street Bank and Trust Company, to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The maximum amount available to the Fund is $250 million. Each Fund pays an annual commitment fee on its pro-rata portion of the Line of Credit. For the year ended December 31, 2020, the Fund’s commitment fee amounted to $361,605 and is reflected as a Miscellaneous Expense in the Statement of Operations. Interest on borrowings is charged at the prevailing rate. There were no borrowings on the Line of Credit during the year.
Note 8: Purchases and Sales of Investments
For the year ended December 31, 2020, purchases and sales of securities, other than short-term securities, aggregated $13,483,695,212 and $18,497,100,428, respectively.
Note 9: Subsequent Events
Fund management has determined that no material events or transactions occurred subsequent to December 31, 2020, and through the date of the Fund’s financial statements issuance, which require additional disclosure in the Fund’s financial statements.
Dodge & Cox Stock Fund ■ PAGE 12
Selected data and ratios
(for a share outstanding throughout each period) | |
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Net asset value, beginning of year | | | | | |
Income from investment operations: | | | | | |
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Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions to shareholders from: | | | | | |
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Net asset value, end of year | | | | | |
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Ratios/supplemental data: | | | | | |
Net assets, end of year (millions) | | | | | |
Ratio of expenses to average net assets | | | | | |
Ratio of net investment income to average net assets | | | | | |
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Net investment income per share includes significant amounts received for EU reclaims related to prior years, which amounted to approximately $0.20 per share. Excluding such
amounts, the ratio of net investment income to average net assets would have been 1.87%. |
See accompanying Notes to Financial Statements
PAGE 13 ■ Dodge & Cox Stock Fund
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of the Dodge & Cox Funds and Shareholders of Dodge & Cox Stock Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Dodge & Cox Stock Fund (one of the funds constituting Dodge & Cox Funds, referred to hereafter as the “Fund”) as of December 31, 2020, the related statement of operations for the year ended December 31, 2020, the statement of changes in net assets for each of the two years in the period ended December 31, 2020, including the related notes, and the financial highlights for each of the five years in the period ended December 31, 2020 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2020, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended December 31, 2020 and the financial highlights for each of the five years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2020 by correspondence with the custodian, transfer agent and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
San Francisco, California
February 19, 2021
We have served as the auditor of one or more investment companies in the Dodge & Cox Funds since 1931.
Dodge & Cox Stock Fund ■ PAGE 14
Special 2020 Tax Information (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code:
The Fund designates $3,860,318,914 as long-term capital gain distributions in 2020.
The Fund designates up to a maximum amount of $1,578,617,216 of its distributions paid to shareholders in 2020 as qualified dividends (treated for federal income tax purposes in the hands of shareholders as taxable at a maximum rate of 20%).
For shareholders that are corporations, the Fund designates 85% of its ordinary dividends paid to shareholders in 2020 as dividends from domestic corporations eligible for the corporate dividends received deduction, provided that the shareholder otherwise satisfies applicable requirements to claim that deduction.
Funds' Liquidity Risk Management Program
(unaudited)
The Funds have adopted and implemented a written liquidity risk management program (“Program”) as required by Rule 22e-4 under the Investment Company Act. The Program is reasonably designed to assess and manage the Fund’s liquidity risk, taking into consideration the Fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions; its short and long-term cash flow projections; and its cash holdings and access to other funding sources including the Funds’ interfund lending facility and line of credit.
The Funds’ Board of Trustees has approved the appointment of a Liquidity Risk Management Committee including representatives from Dodge & Cox’s Legal, Compliance, Treasury, Operations, Trading, and Portfolio Management departments, which is responsible for the Program’s administration and oversight and for reporting to the Board on at least an annual basis regarding the Program’s operation and effectiveness.
The Liquidity Risk Management Committee refreshed its assessment of the Funds’ liquidity risk profiles and considered the adequacy and effectiveness of the Program’s operations for the 12 months ended September 30, 2020 (the “covered period”) in order to prepare a written report to the Board of Trustees for consideration at its meeting held on December 16, 2020. The report concluded that (i) while market volatility and reduced liquidity created an unusually challenging liquidity environment during the second quarter of 2020, the Funds had sufficient liquidity to operate effectively throughout the covered period; (ii) each Fund’s investment strategy continues to be appropriate for an open end fund; and (iii) the Funds’ Program is reasonably designed to assess and manage its liquidity risk.
Board Approval of Funds' Investment Management Agreements and Management Fees
(unaudited)
The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on
December 16, 2020, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2021 with respect to each Fund. During the course of the year, the Board received extensive information and materials relating to the investment management and administrative services provided by Dodge & Cox and the performance of each of the Funds.
Information Received
Over the past several years, the Board has requested, received, and discussed a number of special presentations on topics relevant to their annual consideration of the proposed renewal of the Funds’ Agreements, including, in 2020, special presentations relating to trends in the asset management industry, the mutual fund competitive landscape, mutual fund ratings methodologies, fund distribution channels, and fund flows and performance analysis. In addition to the foregoing and in advance of the meetings referred to below, the Board, including the Independent Trustees, requested, received, and reviewed materials relating to the Agreements and the services provided by Dodge & Cox. The Independent Trustees retained Broadridge to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Broadridge. The Broadridge materials included information regarding advisory and administrative fee rates, expense ratios, and transfer agency, custodial, and distribution expenses, as well as performance comparisons to each Fund’s peer group and to a broad-based securities index or combination of indices. The Broadridge materials also included a comparison of expenses of various share classes offered by comparable funds. The materials reviewed by the Board contained information concerning, among other things, Dodge & Cox’s profitability, financial results and condition, management fee revenue, and separate account fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates, sales and redemption data, and the investment that Dodge & Cox makes in research used in managing the Funds. The Board received and reviewed memoranda and related materials addressing, among other things, Dodge & Cox’s services to the Funds; how Dodge & Cox Funds’ fees compare to fees of peer group funds; the different fees, services, costs, and risks associated with other accounts managed by Dodge & Cox as compared to the Dodge & Cox Funds; and the ways in which the Funds realize economies of scale. Throughout the process of reviewing the services provided by Dodge & Cox and preparing for the meeting, the Independent Trustees found Dodge & Cox to be open, forthright, detailed, and helpful in answering questions about all issues. The Board received copies of the Agreements and a memorandum from the independent legal counsel to the Independent Trustees discussing the factors generally regarded as appropriate to consider in evaluating mutual fund management arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the independent legal counsel on November 11, 2020 and again on December 16, 2020 to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements. In considering the
PAGE 15 ■ Dodge & Cox Stock Fund
Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board considered several factors, discussed below, to be key factors and reached the conclusions described below.
Nature, Quality, and Extent of the Service
The Board considered that Dodge & Cox provides a range of services to the Funds in addition to portfolio management, including regulatory compliance, trading desks, proxy voting, transfer agent and custodian oversight, administration, regulatory filings, tax compliance and filings, website, and anti-money laundering. The nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality, and extent of portfolio management, administrative, and shareholder services performed by Dodge & Cox. With regard to portfolio management services, the Board considered Dodge & Cox’s established long-term history of care in the management of the Funds; its consistency in investment approach and depth; the background and experience of the Dodge & Cox U.S. Equity Investment Committee, International Equity Investment Committee, Global Equity Investment Committee, U.S. Fixed Income Investment Committee, and Global Fixed Income Investment Committee, and research analysts responsible for managing the Funds; Dodge & Cox’s methods for assessing the regulatory and investment climate in various jurisdictions; its overall level of attention to its core investment management function; and its commitment to the Funds and their shareholders. The Board reviewed information from Dodge & Cox describing conflicts of interest between the Funds and Dodge & Cox or its other clients, and how Dodge & Cox addresses those conflicts. The Board noted Dodge & Cox’s record of favorable press and industry coverage, as well as its good compliance record, and its reputation as a trusted, shareholder-friendly mutual fund family. In addition, the Board considered that Dodge & Cox manages approximately $202 billion in Fund assets (as of November 30, 2020) with fewer professionals than most comparable funds, and that on average these professionals have more experience and longer tenure than investment professionals at comparable funds. The Board also noted that Dodge & Cox is an investment research-oriented firm with no other business endeavors to distract management’s attention from its research efforts, that its investment professionals adhere to a consistent investment approach across the Funds, and that due to its deliberate strategy with respect to new products, Dodge & Cox has had stability in its mutual fund product offerings over the course of many years and has the fewest funds of any of the 25 largest mutual fund families by assets. The Board further considered the “Gold” analyst rating awarded by Morningstar to all of the Funds (other than the Balanced Fund, which has a “Silver” rating). The Board concluded that it was satisfied with the nature, extent, and quality of investment management and other services provided to the Funds by Dodge & Cox.
Investment Performance
The Board reviewed each Fund’s recent and long-term investment performance (including periods of outperformance and underperformance), as compared to relevant indices and the
performance of such Fund’s peer group and broader Morningstar category. In assessing the performance of the Funds, the Board considered the Funds’ investment returns over various periods and the volatility thereof and concluded that the levels experienced were consistent with Dodge & Cox’s long-term approach and active investment style. The Board also compared the short- and long-term investment performance of the equity funds to value-oriented indices, in recognition of the significant performance divergence between value and growth stocks that has persisted for the last several years. It was noted that equity performance has been consistent with the value oriented investment strategy employed by Dodge & Cox. The Board concluded that Dodge & Cox’s historic, long-term, team-oriented, bottom-up investment approach remains consistent and that Dodge & Cox continues to be distinguished by its integrity, transparency, and independence. The Board considered that the performance of the Funds is the result of a value-oriented investment management process that emphasizes a long-term investment horizon, independent research, a team approach, price discipline, low cost, and low portfolio turnover. The Board concluded that Dodge & Cox has delivered long-term performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.
Costs and Ancillary Benefits
Costs of Services to Funds: Fees and Expenses The Board considered each Fund’s management fee rate and net expense ratio relative to (1) a broad category of other mutual funds with similar portfolio characteristics and share class and expense structures and (2) a smaller group of peers selected by Broadridge based on investment style, share class characteristics, and asset levels. The Board also considered the management fees charged by Dodge & Cox to other clients. In particular, the Board noted that the management fee rate paid by each Fund compares favorably to its broad category and is competitive within the Fund’s peer group. The Board also evaluated the operating structures of the Funds and Dodge & Cox, noting that the Funds do not charge front-end sales commissions or distribution fees, and Dodge & Cox bears, among other things, the cost of most third-party research, reimbursement for shareholder recordkeeping and administrative costs to third-party retirement plan administrators, and administrative and office overhead. The Board noted that the Broadridge report shows that the net expense ratio of every Dodge & Cox Fund is in the least expensive quartile compared to its broad Morningstar category (taking into account, in the case of the Global Bond Fund, voluntary expense reimbursements by Dodge & Cox). The Board noted the Funds’ unusual single-share-class structure and reviewed Broadridge data (including asset-weighted average expense ratios) showing that most of the peer group funds offer several different classes of shares, with different expense ratios, to different categories of investors, and that the Broadridge expense comparisons described above generally compare the net expense ratio of each Dodge & Cox Fund’s single share class to one of the least expensive share classes of the peer fund, even though those share classes are often not available to retail investors. On an asset-weighted basis, each Fund ranks in the least expensive quartile of its Broadridge peer group (taking into account, in the case of the Global Bond Fund, voluntary expense reimbursements by Dodge & Cox). The Board noted that the Funds
Dodge & Cox Stock Fund ■ PAGE 16
provide access for small investors to quality investment management at a relatively low cost.
The Board also considered that the Funds are priced to scale, i.e., management fee rates begin at relatively low levels. Even without breakpoints, the Funds’ management fee rates are lower than those of many peer funds whose fee schedules include breakpoints. With respect to non-U.S. funds sponsored and managed by Dodge & Cox that are comparable to the Funds in many respects, the Board noted that the fee rates charged by Dodge & Cox are the same as or higher than the fee rates charged to the Funds. The Board reviewed information regarding the fee rates Dodge & Cox charges to separate accounts that have investment programs similar to those of the Funds, including instances where separate account fees are lower than Fund fees. The Board considered the differences in the nature and scope of services Dodge & Cox provides to the Funds as compared to other client accounts, as well as material differences in regulatory, litigation, and other risks as between the Dodge & Cox Funds and other types of clients. The Board noted that different markets exist for mutual fund and institutional separate account management services and that a comparison of Fund fee rates and separate account fee rates must consider the fact that separate account clients bear additional costs and responsibilities that are included in the cost of a Fund. After consideration of these matters, the Board concluded that the overall costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation, and performance of Dodge & Cox and the low overall expense ratios of the Funds.
Profitability and Costs of Services to Dodge & Cox; "Fall-out" Benefits The Board reviewed reports of Dodge & Cox’s financial position, profitability, and estimated overall value and considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the scope and quality of the services provided. The Board noted in particular that Dodge & Cox’s profits are not generated by high fee rates, but reflect a focused business approach toward investment management. The Board recognized the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that the compensation/profit structure at Dodge & Cox includes a return on shareholder employees’ investment in the firm, which is vital for remaining independent and facilitating retention of management and investment professionals. The Board also considered that Dodge & Cox has in the past closed some of the Funds to new investors to proactively manage growth in those Funds. While these actions are intended to benefit existing Fund shareholders, the effect is to reduce potential revenues to Dodge & Cox from new shareholders. The Board also considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers and reputational benefits to non-U.S. funds sponsored and managed by Dodge & Cox) that Dodge & Cox might receive as a result of its association with the Funds and determined that they are acceptable. The Board also noted that Dodge & Cox continues to invest in its business to provide enhanced services, systems, and research capabilities, all of which benefit the Funds. The Board concluded that Dodge & Cox’s profitability is the keystone of its
independence, stability, and long-term investment performance and that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) is fair and reasonable.
Economies of Scale
The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the level of Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee and expense structure and the fact that the Dodge & Cox Funds build economies of scale into their fee structures by charging low fees from a fund’s inception and keeping overall expenses down as a Fund grows, as compared to other fund complexes that employ fee “breakpoints” only after a fund reaches a certain scale. An assessment of economies of scale must also take into account that Dodge & Cox invests time and resources in each new Fund for months (and sometimes years) prior to launch; in addition, in a Fund’s early periods of operations, expenses are capped, which means that Dodge & Cox subsidizes the operations of a new Fund for a period of time until it reaches scale. The Board also observed that, while total Fund assets have grown over the long term, this growth has not been continuous or evenly distributed across all of the Funds. In addition, the Board noted that Dodge & Cox has shared the benefits of economies of scale with the Funds by adding services to the Funds over time, and that Dodge & Cox’s internal costs of providing investment management, technology, administrative, legal, and compliance services to the Funds continue to increase. For example, Dodge & Cox has increased its global research staff and investment resources over the years to add new capabilities for the benefit of Fund shareholders and to address the increased complexity of investing globally. In addition, Dodge & Cox has made expenditures in other staff, technology, and infrastructure to enable it to integrate credit and equity analyses and to implement its strategy in a more effective manner. Over the last ten years, Dodge & Cox has increased its spending on research, investment management, client servicing, cybersecurity, technology, third-party research, data services, and computer systems for trading, operations, compliance, accounting, and communications at a rate that has outpaced the Funds’ growth rate during the same period. The Board also observed that, even without fee breakpoints, the Funds are competitively priced in a competitive market and that having a low fee from inception is better for shareholders than starting with a higher fee and adding breakpoints. The Board also noted that there are certain diseconomies of scale associated with managing large funds, insofar as certain of the costs and risks associated with portfolio management increase disproportionately as assets grow. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately shares economies of scale that may exist.
Conclusion
Based on their evaluation of all material factors and assisted by the advice of independent legal counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the management fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that
PAGE 17 ■ Dodge & Cox Stock Fund
Dodge & Cox’s services have provided value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.
Fund Holdings
The Fund provides a complete list of its holdings on a quarterly basis by filing the lists with the SEC on Form N-CSR (as of the end of the second and fourth quarters) and on Part F of Form N-PORT (as of the end of the first and third quarters). Shareholders may view the Fund’s Forms N-CSR and Part F of N-PORT on the SEC’s website at sec.gov. A list of the Fund’s quarter-end holdings is also available at dodgeandcox.com on or about the 15th day following each quarter end and remains available on the website until the list is updated for the subsequent quarter.
Proxy Voting
For a free copy of the Fund’s proxy voting policies and procedures, please call 800-621-3979, visit the Fund’s website at dodgeandcox.com, or visit the SEC’s website at sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is also available at dodgeandcox.com or shareholders may view the Fund's Form N-PX at sec.gov.
Household Mailings
The Fund routinely mails shareholder reports and summary prospectuses to shareholders and, on occasion, proxy statements. In order to reduce the volume of mail, when possible, only one copy of these documents will be sent to shareholders who are part of the same family and share the same residential address.
If you have a direct account with the Funds and you do not want the mailing of shareholder reports and summary prospectuses combined with other members in your household, contact the Funds at 800-621-3979. Your request will be implemented within 30 days.
Dodge & Cox Stock Fund ■ PAGE 18
Dodge & Cox Funds — Executive Officer & Trustee Information
| Position with Trust
(Year of Election or
Appointment) | Principal Occupation During Past Five Years and Other Relevant Experience | Other Directorships of Public Companies Held
by Trustees |
Interested Trustees and Executive Officers |
| Chairman and Trustee
(since 2014) | Chairman and Director of Dodge & Cox; Chief Investment Officer and member of U.S. Equity Investment Committee (USEIC), Global Equity Investment Committee (GEIC), and International Equity Investment Committee (IEIC) | |
| President
(since 2014) and
Trustee (since 1993) | Chief Executive Officer, President, and Director of Dodge & Cox; member of U.S. Fixed Income Investment Committee (USFIIC) and Global Fixed Income Investment Committee (GFIIC) | |
| Senior Vice President
(since 2006) | Senior Vice President and Director of Dodge & Cox; Director of International Equity and member of GEIC and IEIC | |
| Chief Legal Officer
(since 2019) and Secretary (since 2017) | Vice President, General Counsel, and Secretary (since 2017) of Dodge & Cox | |
| | Vice President (since 2020) and Financial Oversight and Control Analyst (since 2017) of Dodge & Cox; Head of Fund Administration at RS Investments (2014-2016); Treasurer of RS Funds (2014-2016); Chief Financial Officer of RS Funds Distributor, LLC (2014-2016) | |
| Chief Compliance
Officer (since 2010) | Vice President and Chief Compliance Officer of Dodge & Cox | |
|
| | Professor of Economics, Stanford University; Director of the Economics of Education Program, National Bureau of Economic Research; Senior Fellow, Hoover Institution and Stanford Institute for Economic Policy Research | |
| | Senior Counsel of Arnold & Porter (law firm) (2013-2018); Partner of Arnold & Porter (until 2012); Director of Howard, Rice, Nemerovski, Canady, Falk & Rabkin (1977-2011) | |
| | CFO, Pixar Animation Studios (1999-2004) | Director, Airbnb (vacation rental online marketplace) (since 2018); Director, Alphabet Inc. (internet information services) (since 2005); Director, Glu Mobile, Inc. (multimedia software) (since 2004); Director, Netflix, Inc. (internet television) (since 2010); Director, Arista Networks (cloud networking) (since 2013) |
| | Advisory Director, The Presidio Group (2005-2016); Partner and Managing Director—Global Investment Research at Goldman Sachs (until 2001) | |
Gabriela Franco
Parcella (52) | | President (since 2020) and Executive Managing Director of Merlone Geier Partners (2018-2019); Chairman, President, and CEO, Mellon Capital (2011 to 2017); COO, Mellon Capital (1997 to 2011) | Director, Terreno Realty Corporation (since 2018) |
| | Robert and Marion Oster Distinguished Military Fellow, Hoover Institution (since 2012); Admiral, United States Navy (Ret.); U.S. Navy Chief of Naval Operations (2008-2011) | Director, Northrop Grumman Corp. (global security) (since 2012); Director, Maersk Line, Limited (shipping and transportation) (since 2016) |
| | Executive Vice President, Managing Director—Fixed Income at Loomis Sayles & Company, L.P. (2003-2011) | |
| Trustee
(since 2005)
(and 1995-2001) | Professor of Economics, Stanford University (since 1984); Senior Fellow, Hoover Institution (since 1996); Under Secretary for International Affairs, United States Treasury (2001-2005) | |
| The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all six series in the Dodge & Cox Funds complex and serves for an indefinite term. |
Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Funds’ website at dodgeandcox.com or calling 800-621-3979.
PAGE 19 ■ Dodge & Cox Stock Fund
dodgeandcox.com
For Fund literature, transactions, and account
information, please visit the Funds’ website.
or write or call:
Dodge & Cox Funds
c/o DST Asset Manager Solutions, Inc.
P.O. Box 219502
Kansas City, Missouri 64121-9502
(800) 621-3979
Investment Manager
Dodge & Cox
555 California Street, 40th Floor
San Francisco, California 94104
(415) 981-1710
This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.This report reflects our views, opinions, and portfolio holdings as of December 31, 2020, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.
Annual Report
December 31, 2020
Global Stock Fund
ESTABLISHED 2008
TICKER: DODWX
12/20 GSF AR Printed on recycled paper 
The Dodge & Cox Global Stock Fund had a total return of 6.0% for the year ended December 31, 2020, compared to 15.9% for the MSCI World Index.
Market Commentary
In 2020, global equity markets were extremely volatile. Global stocks fell sharply in the spring as the coronavirus (COVID-19) pandemic evolved, then rebounded quickly off March lows and performed well during the second and third quarters. After the successful development of effective COVID-19 vaccines, markets rebounded sharply again in November as investors looked forward to the potential for an economic recovery in 2021. The sudden market reversals this year illustrate the importance of having a long-term view and staying the course with one’s convictions. Markets can turn quickly, and history shows us that major market moves are episodic and unpredictable. Thus, missing even a few days in the market can make a big difference to overall returns.
The fourth quarter saw a change in fortunes for value stocks,a with the MSCI World Value Index up 16%, outperforming the MSCI World Growth Index, up 13%. The Fund is overweight value sectors such as Energy and Financials, market laggards that later became market leaders during the quarter as global equities surged. Given its value-oriented positioning, the Fund significantly outperformed the MSCI World by 10.1 percentage points and the MSCI World Value by 8.4 percentage points.
While value outperformed growth in the fourth quarter, value stocks still lagged growth significantly for the year—MSCI World Value was down 1% versus up 34% for the MSCI World Growth—and underperformed growth stocks by 142 percentage points over the last decade.b The Fund’s value-oriented portfolio similarly lagged the market for the year. Since inception, the Fund has outperformed the MSCI World Value by an average annualized return of 1.9% and has underperformed the broad-based MSCI World by 0.8% on average.
Investment Strategy
We believe we are still in the early innings of a reversal between value and growth performance, and a strong case can be made for investing in value stocks going forward.
First, starting valuations matter, and the valuation differential between value and growth stocks remains wide by historical standards, which creates ample opportunities for value-oriented investors like Dodge & Cox. The Fund trades at a significant discount to the broad-based market: 13.2 times forward earnings compared to 21.0 times for the MSCI World.c Historically, lower starting valuations have produced more attractive long-term returns.
Second, we are encouraged by the approval of COVID-19 vaccines. The areas of the market impacted by COVID should continue to recover as more of the population becomes vaccinated. There is also the possibility that interest rates increase as the economy recovers, which would further benefit many of the Fund’s holdings.
Third, history has indicated it is hard to stay a market leader. Several very large, high-valuation technology companies have had a
large influence on market returns. We believe many of them are overvalued and face significant challenges, not only in justifying their valuations but also because of mounting competitive and regulatory threats. In addition, they would be disadvantaged by higher interest rates.
We have strong conviction in our portfolio positioning. The portfolio is composed mainly of companies with strong franchises that benefit from long-term economic growth. About half the portfolio is invested in innovation-driven businesses in areas such as Internet & Direct Marketing Retail, Media, Communication Services, and Health Care. Given wide valuation gaps, the Fund also continues to have notable overweight positions in value parts of the market. Many stocks that were hit hard by the economic consequences of the pandemic—notably in the Financials, Energy, and Industrials sectors—were down significantly for the year, even after the fourth quarter rebound.
We continue to assess relative valuation opportunities, weighing long-term fundamentals against current prices. For example, while we added to Financials and other cyclicals earlier in the year, in the fourth quarter we trimmed Financials modestly on relative performance and added to Health Care. We discuss Financials and Health Care in more detail below.
Financials
After a rocky start, declining 32% in the first quarter, the MSCI World Financials sector appreciated in the second, third, and fourth quarters. Financials were especially strong in the fourth quarter, finishing up 24% and enabling the sector to end the year down just 3%. However, Financials had one of the lowest returns in the market for the year, amid concerns of a weak economy, high credit losses, and low interest rates driven by the pandemic. Additionally, regulators and central banks either explicitly or implicitly caused financial services companies to suspend dividends and share buyback programs that were expected to occur in 2020. In contrast to previous downturns, banks are in a much stronger position this time. In large part due to the effects of the 2008-09 financial crisis, banks entered the current crisis with low leverage, restrained risk taking, and well-diversified sources of revenue. Moreover, in anticipation of a sudden, pandemic driven downturn, many banks quickly set aside significant provisions for expected loan losses and remain broadly reserved for higher levels of joblessness than economies are currently experiencing. Finally, governments have provided unprecedented support to the economy to blunt the impact of potential credit losses. Despite this, valuations for Financials are near historic lows compared to the stock market as a whole. The MSCI World Banks industry trades at 12.8 times forward estimated earnings compared to 21.0 times for the broader MSCI World.
During the first part of the year, we added to the Fund’s Financials holdings, which traded at exceptionally low valuations in light of the pandemic. With the resolution of the health crisis, we see potential for a return to higher economic activity, unwinding of provisions, and strong levels of capital return. The Federal Reserve, for example, has allowed the large banks to resume dividend payments and share repurchases. The Fund remains overweight
PAGE 1 ■ Dodge & Cox Global Stock Fund
Financials: 28.4% of the Fund compared to 12.8% of the MSCI World and 21.5% of the MSCI World Value.
Capital Oned is an example of a stock we added to opportunistically in 2020. A leading financial services company trading at an attractive valuation, Capital One represents exceptional long-term value in our opinion. The bank’s most profitable business—credit cards—felt the impact of weaker consumer spending as the pandemic took its toll on the economy. Yet, like many other Financials, it is well positioned to benefit from a healthier economy that we believe should emerge once vaccinations become widespread. The company has a number of strengths: scale in credit cards and auto lending, robust deposits, an advanced digital banking platform, and a legacy of heavy investment in technology. Management is focused on the long term, committed to improving the bank’s expense efficiency, and has a track record of earning higher risk-adjusted margins than its peers. At 11.0 times forward earnings, Capital One is trading at a substantial discount to the overall market.
Health Care
As markets plunged earlier in the year and subsequently rebounded, we adjusted the Fund’s positioning in the Health Care sector based on its relative attractiveness. The Fund’s holdings in Health Care are largely comprised of pharmaceutical companies, whose earnings are generally stable and not sensitive to swings in the economy. Those defensive characteristics provided relative strength in the first quarter as pandemic worries hurt other areas of the market—such as Financials, Energy, Industrials, and Materials—much more. Companies in those sectors became exceptionally attractive, so we added to them by meaningfully trimming the Fund’s Health Care holdings. The Fund’s weighting in Health Care declined from 18.4% on March 31 to 14.5% on September 30.
However, while all sectors posted positive returns in the fourth quarter, Health Care underperformed the overall market by 7.2 percentage points. The Fund added back to Health Care, in particular in the Pharmaceuticals industry that now trades at an attractive 14.9 times estimated earnings. While an average valuation relative to history, it is in the bottom decile of its valuation relative to the market. We recognize concerns over drug pricing and uncertainty regarding the new Biden Administration’s policies in the United States. However, we believe the Fund’s Pharmaceuticals holdings have impressive innovation potential, global customer bases, and highly attractive valuations. In the fourth quarter, the combination of attractive fundamentals and valuations led us to begin to add back to many of the Fund’s holdings, including Sanofi and GlaxoSmithKline.
Sanofi is a French pharmaceutical company with particular expertise in rare diseases. In recent years the company has rebuilt its management team, replacing its Chief Executive Officer, Chief Financial Officer, and Head of Research and Development with executives that have a demonstrable track record of success. Moreover, while the company’s new drug pipeline shows promise, we believe the stock price only reflects the discounted value of the current portfolio of approved drugs, with little or no value ascribed to the new drug pipeline.
GlaxoSmithKline, a UK-based pharmaceutical company, is a leader in the attractive vaccines and consumer health care markets,
but its core pharmaceuticals business has struggled. A new management team joined in 2017-18 and has undertaken a turnaround plan, which includes divesting non-core businesses and rebuilding the company’s new drug pipeline, particularly around immunology and oncology. The implied value of its pharmaceutical business is low, indicating that investors are giving little credit for better prospects in the future.
In Closing
2020 was a difficult year for value investors. However, the tide started to turn dramatically in the fourth quarter, as the previous laggards—specifically Energy, Financials, and Industrials—became the market leaders. Going forward, we continue to believe this is an opportune time to invest in value stocks.
We have strong conviction in the Fund’s value-oriented portfolio, which is comprised mostly of companies with strong businesses that we believe would benefit from sustained economic growth. We remain optimistic about the outlook for the Fund and confident in our active investment approach. Since changes in valuations and share prices can happen swiftly and without warning, we encourage our shareholders to take a long-term view.
Thank you for your continued confidence in our firm. As always, we welcome your comments and questions.
For the Board of Trustees, | |
| |
| |
January 29, 2021
|
Value stocks are the lower valuation portion of the equity market, and growth stocks
are the higher valuation portion. |
| The MSCI World Value Index had a total return of 92.4% from December 31, 2010 through December 31, 2020 compared to 234.2% for the MSCI World Growth Index. |
| Unless otherwise specified, all weightings and characteristics are as of December 31, 2020. |
| The use of specific examples does not imply that they are more or less attractive investments than the portfolio’s other holdings |
Dodge & Cox Global Stock Fund ■ PAGE 2
2020 Performance Review
The Fund underperformed the MSCI World by 9.9 percentage points in 2020.
Key Detractors from Relative Results
■ The Fund’s average overweight position in the Financials sector (28% versus 13% for the MSCI World sector), combined with weaker relative returns (down 11% compared to down 3%), hurt results. Societe Generale, UniCredit, Standard Chartered, and Wells Fargo detracted from results.
■ Stock selection (up 27% compared to up 44% for the MSCI World sector), combined with the Fund’s average underweight position in the Information Technology sector (12% versus 20%), detracted from results.
■ Additional detractors included Occidental Petroleum and Suncor Energy.
Key Contributors to Relative Results
■ Relative returns in the Industrials sector (up 37% compared to up 12% for the MSCI World sector) had a positive impact. FedEx outperformed.
■ Strong returns in the Consumer Staples sector (up 55% compared to up 8% for the MSCI World sector) helped results.
■ Additional contributors included JD.com, Dell Technologies, Microchip Technologies, Sprint (prior to its merger with
T-Mobile US), Charter Communications, and Qurate Retail.
Key Characteristics of Dodge & Cox
Independent Organization
Dodge & Cox is one of the largest privately owned investment managers in the world. We remain committed to independence, with a goal of providing the highest quality investment management service to our existing clients.
90 Years of Investment Experience
Dodge & Cox was founded in 1930. We have a stable and well- qualified team of investment professionals, most of whom have spent their entire careers at Dodge & Cox.
Experienced Investment Team
The Global Equity Investment Committee, which is the decision-making body for the Global Stock Fund, is a seven- member committee with an average tenure at Dodge & Cox of 26 years.
One Business with a Single Research Office
Dodge & Cox manages equity (domestic, international, and global), fixed income (domestic and global), and balanced investments, operating from one office in San Francisco.
Consistent Investment Approach
Our team decision-making process involves thorough, bottom- up fundamental analysis of each investment.
Long-Term Focus and Low Expenses
We invest with a three- to five-year investment horizon, which has historically resulted in low turnover relative to our peers. We manage Funds that maintain low expense ratios.
Risks: The Fund is subject to market risk, meaning holdings in the Fund may decline in value for extended periods due to the financial prospects of individual companies, or due to general market and economic conditions. Investing in non-U.S. securities may entail risk due to foreign economic and political developments; this risk may be increased when investing in emerging markets. The Fund is also subject to currency risk. Please read the prospectus and summary prospectus for specific details regarding the Fund's risk profile.
PAGE 3 ■ Dodge & Cox Global Stock Fund
Growth of $10,000 Over 10 Years
For An Investment Made On December 31, 2010 
Average Annual Total Return
For Periods Ended December 31, 2020
| | | | |
Dodge & Cox Global Stock Fund | | | | |
| | | | |
Returns represent past performance and do not guarantee future results. Investment return and share price will fluctuate with market conditions, and investors may have a gain or loss when shares are sold. Fund performance changes over time and currently may be significantly lower than stated. Performance is updated and published monthly. Visit the Fund's website at dodgeandcox.com or call 800-621-3979 for current performance figures.
The Fund's total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include dividends but, unlike Fund returns, do not reflect fees or expenses. The MSCI World Index is a broad-based, unmanaged equity market index aggregated from 23 developed market country indices, including the United States. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World is a service mark of MSCI Barra.
Fund Expense Example
As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.
Actual Expenses
The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison with Other Mutual Funds
Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.
Six Months Ended
December 31, 2020 | Beginning Account Value
7/1/2020 | Ending Account Value
12/31/2020 | Expenses Paid
During Period* |
Based on Actual Fund Return | | | |
Based on Hypothetical 5% Yearly Return | | | |
| Expenses are equal to the Fund’s annualized expense ratio of 0.62%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. Though other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).
Dodge & Cox Global Stock Fund ■ PAGE 4
Portfolio Information (unaudited) December 31, 2020
Sector Diversification (%)(a) | |
| |
| |
Communication Services(b) | |
| |
| |
Consumer Discretionary(b) | |
| |
| |
| |
| |
Region Diversification (%)(a) | |
| |
Europe (excluding United Kingdom) | |
| |
Asia Pacific (excluding Japan) | |
| |
| |
| |
| |
|
Weights exclude the effect of the Fund’s derivative contracts.
|
| Total sector exposure, including the notional exposure of equity total return swaps, is Communication Services at 11.1% and Consumer Discretionary at 8.4%. |
PAGE 5 ■ Dodge & Cox Global Stock Fund
Consolidated Portfolio of Investments December 31, 2020
|
| | |
Communication Services: 12.2% |
Media & Entertainment: 12.2% |
Alphabet, Inc., Class C(a) (United States) | | |
Baidu, Inc. ADR(a) (Cayman Islands/China) | | |
Charter Communications, Inc., Class A(a) (United States) | | |
Comcast Corp., Class A (United States) | | |
DISH Network Corp., Class A(a) (United States) | | |
Facebook, Inc., Class A(a) (United States) | | |
Fox Corp., Class A (United States) | | |
Grupo Televisa SAB ADR(a) (Mexico) | | |
Television Broadcasts, Ltd. (Hong Kong) | | |
| | |
Consumer Discretionary: 7.2% |
Automobiles & Components: 1.8% |
Bayerische Motoren Werke AG (Germany) | | |
Honda Motor Co., Ltd. (Japan) | | |
| | |
|
Alibaba Group Holding, Ltd. ADR(a) (Cayman Islands/China) | | |
Booking Holdings, Inc.(a) (United States) | | |
JD.com, Inc. ADR(a) (Cayman Islands/China) | | |
Naspers, Ltd., Class N (South Africa) | | |
Prosus NV(a) (Netherlands) | | |
Qurate Retail, Inc., Series A (United States) | | |
| | |
| | |
|
Food & Staples Retailing: 0.5% |
| | |
Food, Beverage & Tobacco: 1.6% |
Anheuser-Busch InBev SA NV (Belgium) | | |
Molson Coors Beverage Company, Class B (United States) | | |
| | |
| | |
|
Apache Corp. (United States) | | |
Concho Resources, Inc. (United States) | | |
Hess Corp. (United States) | | |
Occidental Petroleum Corp. (United States) | | |
Occidental Petroleum Corp., Warrant(a) (United States) | | |
Ovintiv, Inc. (United States) | | |
|
| | |
Schlumberger, Ltd. (Curacao/United States) | | |
Suncor Energy, Inc. (Canada) | | |
| | |
|
|
Axis Bank, Ltd.(a) (India) | | |
Banco Santander SA(a) (Spain) | | |
Bank of America Corp. (United States) | | |
Barclays PLC(a) (United Kingdom) | | |
BNP Paribas SA(a) (France) | | |
| | |
ICICI Bank, Ltd.(a) (India) | | |
Mitsubishi UFJ Financial Group, Inc. (Japan) | | |
Societe Generale SA(a) (France) | | |
Standard Chartered PLC(a) (United Kingdom) | | |
Wells Fargo & Co. (United States) | | |
| | |
Diversified Financials: 7.6% |
Bank of New York Mellon Corp. (United States) | | |
Capital One Financial Corp. (United States) | | |
Charles Schwab Corp. (United States) | | |
Credit Suisse Group AG (Switzerland) | | |
UBS Group AG (Switzerland) | | |
| | |
|
| | |
Aviva PLC (United Kingdom) | | |
MetLife, Inc. (United States) | | |
Prudential PLC (United Kingdom) | | |
| | |
| | |
|
Health Care Equipment & Services: 3.3% |
Cigna Corp. (United States) | | |
CVS Health Corp. (United States) | | |
UnitedHealth Group, Inc. (United States) | | |
| | |
Pharmaceuticals, Biotechnology & Life Sciences: 11.0% |
Alnylam Pharmaceuticals, Inc.(a) (United States) | | |
AstraZeneca PLC (United Kingdom) | | |
| | |
BioMarin Pharmaceutical, Inc.(a) (United States) | | |
Bristol-Myers Squibb Co. (United States) | | |
GlaxoSmithKline PLC (United Kingdom) | | |
Novartis AG (Switzerland) | | |
Roche Holding AG (Switzerland) | | |
| | |
| | |
| | |
See accompanying Notes to Consolidated Financial StatementsDodge & Cox Global Stock Fund ■ PAGE 6
Consolidated Portfolio of Investments December 31, 2020
Common Stocks (continued) |
| | |
|
|
Carrier Global Corp. (United States) | | |
Johnson Controls International PLC (Ireland/United States) | | |
Mitsubishi Electric Corp. (Japan) | | |
Raytheon Technologies Corp. (United States) | | |
| | |
|
FedEx Corp. (United States) | | |
| | |
Information Technology: 10.7% |
Semiconductors & Semiconductor Equipment: 1.2% |
Microchip Technology, Inc. (United States) | | |
Software & Services: 2.9% |
Cognizant Technology Solutions Corp., Class A (United States) | | |
Micro Focus International PLC(a) (United Kingdom) | | |
Microsoft Corp. (United States) | | |
VMware, Inc., Class A(a) (United States) | | |
| | |
Technology, Hardware & Equipment: 6.6% |
Dell Technologies, Inc., Class C(a) (United States) | | |
Hewlett Packard Enterprise Co. (United States) | | |
| | |
Juniper Networks, Inc. (United States) | | |
Samsung Electronics Co., Ltd. (South Korea) | | |
TE Connectivity, Ltd. (Switzerland) | | |
| | |
| | |
|
Celanese Corp. (United States) | | |
Cemex SAB de CV ADR(a) (Mexico) | | |
Glencore PLC(a) (Jersey/United Kingdom) | | |
LafargeHolcim, Ltd. (Switzerland) | | |
LyondellBasell Industries NV, Class A (Netherlands) | | |
| | |
| | |
|
Daito Trust Construction Co., Ltd. (Japan) | | |
Hang Lung Group, Ltd. (Hong Kong) | | |
| | |
Total Common Stocks
(Cost $7,847,318,993) | | |
|
| | |
Consumer Discretionary: 0.1% |
|
Qurate Retail, Inc., 8.00%, 3/15/2031 (United States) | | |
|
|
Itau Unibanco Holding SA, Pfd (Brazil) | | |
Information Technology: 1.5% |
Technology, Hardware & Equipment: 1.5% |
Samsung Electronics Co., Ltd., Pfd (South Korea) | | |
Total Preferred Stocks
(Cost $178,235,538) | | |
Short-Term Investments: 1.5% |
| | |
Repurchase Agreements: 1.1% |
Fixed Income Clearing Corporation(b)
0.000%, dated 12/31/20, due 1/4/21, maturity value $120,299,000 | | |
|
State Street Institutional U.S. Government Money Market Fund | | |
Total Short-Term Investments
(Cost $161,847,244) | |
Total Investments In Securities
(Cost $8,187,401,775) | | |
Other Assets Less Liabilities | | |
| | |
| |
| Repurchase agreement is collateralized by U.S. Treasury Notes 2.00%, 10/31/21. Total collateral value is $122,705,036. |
| In determining a company’s country designation, the Fund generally references the country of incorporation. In cases where the Fund considers the country of incorporation to be a “jurisdiction of convenience” chosen primarily for tax purposes or in other limited circumstances, the Fund uses the country designation of an appropriate broad-based market index. In those cases, two countries are listed - the country of incorporation and the country designated by an appropriate index, respectively. |
| |
| |
ADR: American Depositary Receipt |
PAGE 7 ■ Dodge & Cox Global Stock FundSee accompanying Notes to Consolidated Financial Statements
Consolidated Portfolio of Investments December 31, 2020
Equity Total Return Swaps
| | | | | Value /
Unrealized Appreciation/
(Depreciation) |
Total Return on Prosus NV | | | | | |
Total Return on Prosus NV | | | | | |
Total Return on Prosus NV | | | | | |
Total Return on Prosus NV | | | | | |
Total Return on Prosus NV | | | | | |
Total Return on Naspers, Ltd. | | | | | |
| Total Return on Tencent Holdings, Ltd. | | | | |
| Total Return on Tencent Holdings, Ltd. | | | | |
| Total Return on Tencent Holdings, Ltd. | | | | |
| Total Return on Tencent Holdings, Ltd. | | | | |
| Total Return on Tencent Holdings, Ltd. | | | | |
| | | | | |
The combination of the equity total return swaps is designed to hedge Naspers, Ltd.'s and Prosus NV’s exposure to Tencent Holdings, Ltd. The swaps pay at maturity; no upfront payments were made. |
Futures Contracts
| | | | Value /
Unrealized
Appreciation/
(Depreciation) |
Euro Stoxx 50 Index— Long Position | | | | |
Yen Denominated Nikkei 225 Index— Long Position | | | | |
| | | | |
Currency Forward Contracts
| | | | Unrealized Appreciation
(Depreciation) |
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CNH: Chinese Yuan Renminbi |
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See accompanying Notes to Consolidated Financial StatementsDodge & Cox Global Stock Fund ■ PAGE 8
Consolidated Portfolio of Investments December 31, 2020
| | | | Unrealized Appreciation (Depreciation) |
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Unrealized gain on currency forward contracts | | | | | | |
Unrealized loss on currency forward contracts | | | | | | |
Net unrealized loss on currency forward contracts | | | | |
The listed counterparty may be the parent company or one of its subsidiaries.
PAGE 9 ■ Dodge & Cox Global Stock FundSee accompanying Notes to Consolidated Financial Statements
Consolidated
Statement of Assets and Liabilities
| |
|
Investments in securities, at value (cost $8,187,401,775) | |
Unrealized appreciation on swaps | |
Unrealized appreciation on currency forward contracts | |
Cash pledged as collateral for over-the-counter derivatives | |
| |
Cash denominated in foreign currency (cost $2,487) | |
Deposits with broker for futures contracts | |
Receivable for variation margin for futures contracts | |
Receivable for investments sold | |
Receivable for Fund shares sold | |
Dividends and interest receivable | |
Prepaid expenses and other assets | |
| |
|
Unrealized depreciation on swaps | |
Unrealized depreciation on currency forward contracts | |
Cash received as collateral for over-the-counter derivatives | |
Payable for investments purchased | |
Payable for Fund shares redeemed | |
Deferred foreign capital gains tax | |
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Fund shares outstanding (par value $0.01 each, unlimited shares authorized) | |
Net asset value per share | |
Consolidated
Statement of Operations
| Year Ended
December 31, 2020 |
| |
Dividends (net of foreign taxes of $8,962,059) | |
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Custody and fund accounting fees | |
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Realized and Unrealized Gain (Loss): | |
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Investments in securities (net of foreign capital gains tax of $7,835) | |
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Currency forward contracts | |
Foreign currency transactions | |
Net change in unrealized appreciation/depreciation | |
Investments in securities (net of change in deferred foreign capital gains tax of $4,239,732) | |
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Currency forward contracts | |
Foreign currency translation | |
Net realized and unrealized gain | |
Net Change in Net Assets From Operations | |
Consolidated
Statement of Changes in Net Assets
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Net change in unrealized appreciation/depreciation | | |
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Distributions to Shareholders: | | |
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Proceeds from sale of shares | | |
Reinvestment of distributions | | |
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Net change from Fund share transactions | | |
Total change in net assets | | |
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Net change in shares outstanding | | |
See accompanying Notes to Consolidated Financial StatementsDodge & Cox Global Stock Fund ■ PAGE 10
Notes to Consolidated Financial Statements
Note 1: Organization and Significant Accounting Policies
Dodge & Cox Global Stock Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund commenced operations on May 1, 2008, and seeks long-term growth of principal and income. The Fund invests primarily in a diversified portfolio of U.S. and foreign equity securities. Foreign investing, especially in developing countries, has special risks such as currency and market volatility and political and social instability. These and other risk considerations are discussed in the Fund’s Prospectus.
The Fund is an investment company and follows the accounting and reporting guidance issued in Topic 946 by the Financial Accounting Standards Board. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Actual results may differ from those estimates. Significant accounting policies are as follows:
Security valuation The Fund’s net assets are normally valued as of the scheduled close of trading on the New York Stock Exchange (NYSE), generally 4 p.m. Eastern Time, each day that the NYSE is open for business.
Portfolio holdings for which market quotes are readily available are valued at market value. Listed securities, for example, are generally valued using the official quoted close price or the last sale on the exchange that is determined to be the primary market for the security. Certain preferred stocks are valued using prices received from independent pricing services which utilize dealer quotes, recent transaction data, pricing models, and other inputs to arrive at market-based valuations. Pricing models may consider quoted prices for similar securities, interest rates, cash flows (including prepayment speeds), and credit risk. Equity total return swaps are valued using prices received from independent pricing services which utilize market quotes from underlying reference instruments. Exchange-traded derivatives are valued at the settlement price determined by the relevant exchange. Short-term securities less than 60 days to maturity may be valued at amortized cost if amortized cost approximates current value. Mutual funds are valued at their respective net asset values. Security values are not discounted based on the size of the Fund’s position and may differ from the value a Fund receives upon sale of the securities.
Investments initially valued in currencies other than the U.S. dollar are converted to the U.S. dollar using prevailing exchange rates. Currency forward contracts are valued based on the prevailing forward exchange rates of the underlying currencies. As a result, the Fund’s net assets may be affected by changes in the value of currencies in relation to the U.S. dollar.
If market quotations are not readily available or if normal valuation procedures produce valuations that are deemed unreliable or inappropriate under the circumstances existing at the time, the investment will be valued at fair value as determined in good faith by or under the direction of the Fund’s Board of Trustees. The Board of Trustees has appointed Dodge & Cox, the Fund’s investment man
ager, to make fair value determinations in accordance with the Dodge & Cox Funds Valuation Policies (“Valuation Policies”), subject to Board oversight. Dodge & Cox has established a Pricing Committee that is comprised of representatives from Treasury, Legal, Compliance, and Operations. The Pricing Committee is responsible for implementing the Valuation Policies, including determining the fair value of securities and other investments when necessary. The Pricing Committee considers relevant indications of value that are reasonably available to it in determining the fair value assigned to a particular security, such as the value of similar financial instruments, trading volumes, contractual restrictions on disposition, related corporate actions, and changes in economic conditions. In doing so, the Pricing Committee employs various methods for calibrating fair valuation approaches, including a regular review of key inputs and assumptions, back-testing, and review of any related market activity.
As trading in securities on most foreign exchanges is normally completed before the close of the NYSE, the value of non-U.S. securities can change by the time the Fund calculates its net asset value. To address these changes, the Fund may utilize adjustment factors provided by an independent pricing service to systematically value non-U.S. securities at fair value. These adjustment factors are based on statistical analyses of subsequent movements and changes in U.S. markets and financial instruments trading in U.S. markets that represent foreign securities or baskets of securities.
Valuing securities through a fair value determination involves greater reliance on judgment than valuation of securities based on readily available market quotations. In some instances, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a security’s value. When fair value pricing is employed, the prices of securities used by the Fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.
Dividend income and corporate action transactions are recorded on the ex-dividend date, or when the Fund first learns of the dividend/corporate action if the ex-dividend date has passed. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends characterized as return of capital for U.S. tax purposes are recorded as a reduction of cost of investments and/or realized gain. Interest income is recorded on the accrual basis.
Expenses are recorded on the accrual basis. Some expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust using methodologies determined by the nature of the expense.
Distributions to shareholders are recorded on the ex-dividend date.
Foreign taxes The Fund is subject to foreign taxes which may be imposed by certain countries in which the Fund invests. The Fund endeavors to record foreign taxes based on applicable foreign tax law. Withholding taxes are incurred on certain foreign dividends and
PAGE 11 ■ Dodge & Cox Global Stock Fund
Notes to Consolidated Financial Statements
are accrued at the time the associated dividend is recorded. The Fund files withholding tax reclaims in certain jurisdictions to recover a portion of amounts previously withheld. The Fund records a reclaim receivable based on, among other things, a jurisdiction’s legal obligation to pay reclaims as well as payment history and market convention. In consideration of recent decisions rendered by European courts, the Fund has filed for additional reclaims related to prior years. A corresponding receivable is established when both the amount is known and significant contingencies or uncertainties regarding collectability are removed. These amounts, if any, are reported in “dividends and interest receivable” in the Consolidated Statement of Assets and Liabilities.
Capital gains taxes are incurred upon disposition of certain foreign securities. Expected capital gains taxes on appreciated securities, if any, are accrued as unrealized losses and incurred capital gains taxes are reflected as realized losses upon the sale of the related security. Currency taxes may be incurred when the Fund purchases certain foreign currencies related to securities transactions
Foreign currency translation The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the prevailing exchange rates of such currencies against the U.S. dollar. The market value of investment securities and other assets and liabilities are translated at the exchange rate as of the valuation date. Purchases and sales of investment securities, income, and expenses are translated at the exchange rate prevailing on the transaction date.
Reported realized and unrealized gain (loss) on investments include foreign currency gain (loss) related to investment transactions.
Reported realized and unrealized gain (loss) on foreign currency transactions and translation include the following: disposing/holding of foreign currency, the difference in exchange rate between the trade and settlement dates on securities transactions, the difference in exchange rate between the accrual and payment dates on dividends, and currency losses on the purchase of foreign currency in certain countries that impose taxes on such transactions.
Repurchase agreements Repurchase agreements are transactions under which a Fund purchases a security from a dealer counterparty and agrees to resell the security to that counterparty on a specified future date at the same price, plus a specified interest rate. The Fund’s repurchase agreements are secured by U.S. government or agency securities. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the collateral securities and to apply the proceeds in satisfaction of the obligation.
Consolidation The Fund may invest in certain securities through its wholly owned subsidiary, Dodge & Cox Global Stock Fund Cayman, Ltd. (the “Subsidiary”). The Subsidiary is a Cayman Islands exempted company and invests in certain securities consistent with the investment objective of the Fund. The Fund’s Consolidated Financial Statements, including the Consolidated Portfolio of Investments, consist of the holdings and accounts of the Fund and the Subsidiary. All intercompany transactions and balances have been eliminated. At
December 31, 2020, the Subsidiary had net assets of $100, which represented less than 0.01% of the Fund’s consolidated net assets.
Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred.
Note 2: Valuation Measurements
Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below.
■ Level 1: Quoted prices in active markets for identical securities
■ Level 2: Other significant observable inputs (including quoted prices for similar securities, market indices, interest rates, credit risk, forward exchange rates, etc.)
■ Level 3: Significant unobservable inputs (including Fund management’s assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used to value the Fund’s holdings at December 31, 2020:
| | LEVEL 2
(Other Significant
Observable Inputs) |
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Dodge & Cox Global Stock Fund ■ PAGE 12
Notes to Consolidated Financial Statements
| | LEVEL 2 (Other Significant Observable Inputs) |
Equity Total Return Swaps |
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| | |
Currency Forward Contracts |
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| | |
Note 3: Derivative Instruments
The Fund may use derivatives either to minimize the impact of certain risks to one or more of its investments (as a ‘‘hedging technique’’) or to implement its investment strategy. A derivative is a financial instrument whose value is derived from a security, currency, interest rate, index, or other financial instrument.
Equity total return swaps Equity total return swaps are contracts that can create long or short economic exposure to an underlying equity security. Under such a contract, one party agrees to make payments to another based on the total return of a notional amount of the underlying security (including dividends and changes in market value), in return for an upfront or periodic payments from the other party based on a fixed or variable interest rate applied to the same notional amount. Equity total return swaps can also be used to hedge against exposure to specific risks associated with a particular issuer or with other companies owned by such an issuer. Investments in equity total return swaps may include certain risks including unfavorable price movements in the underlying reference instrument(s), or a default or failure by the counterparty.
Equity total return swaps are traded over-the-counter. The value of equity total return swaps changes daily based on the value of the underlying equity security. Changes in the market value of equity total return swaps are recorded as unrealized appreciation or depreciation in the Consolidated Statement of Operations. Realized gains and losses on equity total return swaps are recorded in the Consolidated Statement of Operations upon exchange of cash flows for periodic payments and upon the closing or expiration of the swaps.
Futures contracts Futures contracts involve an obligation to purchase or sell (depending on whether the Fund has entered a long or short futures contract, respectively) an asset at a future date, at a price set at the time of the contract. Futures contracts are exchange-traded. Upon entering into a futures contract, the Fund is required to deposit an amount of cash or liquid assets (referred to as "initial margin") in a segregated account with the clearing broker. Subsequent payments (referred to as "variation margin") to and from the clearing broker are made on a daily basis based on changes in the market value of the contract. Changes in the market value of open futures contracts are recorded as unrealized appreciation or depreciation in the Consolidated Statement of Operations. Realized gains and losses on futures contracts are recorded in the Consolidated Statement of Operations at the closing or expiration of the contracts. Cash deposited with a broker as initial margin is recorded in the Consolidated Statement of Assets and Liabilities. A receivable and/or payable to
brokers for daily variation margin is also recorded in the Consolidated Statement of Assets and Liabilities.
Investments in futures contracts may include certain risks, which may be different from, and potentially greater than, those of the underlying securities. To the extent the Fund uses futures, it is exposed to additional volatility and potential losses resulting from leverage.
Currency forward contracts Currency forward contracts are agreements to purchase or sell a specific currency at a specified future date and price. Currency forward contracts are traded over-the-counter. The values of currency forward contracts change daily based on the prevailing forward exchange rates of the underlying currencies. Changes in the value of open contracts are recorded as unrealized appreciation or depreciation in the Consolidated Statement of Operations. When a currency forward contract is closed, the Fund records a realized gain or loss in the Consolidated Statement of Operations equal to the difference between the value at the time the contract was opened and the value at the time it was closed.
Losses from these transactions may arise from unfavorable changes in currency values or if a counterparty does not perform under a contract’s terms.
Additional derivative information The following identifies the location on the Consolidated Statement of Assets and Liabilities and values of the Fund's derivative instruments categorized by primary underlying risk exposure.
| | Foreign
Exchange
Derivatives | |
| | | |
Unrealized appreciation on currency forward contracts | | | |
Unrealized appreciation on swaps | | | |
| | | |
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| | | |
Unrealized depreciation on currency forward contracts | | | |
Unrealized depreciation on swaps | | | |
| | | |
| Includes cumulative appreciation (depreciation). Only the current day’s variation margin is reported in the Consolidated Statement of Assets and Liabilities. |
PAGE 13 ■ Dodge & Cox Global Stock Fund
Notes to Consolidated Financial Statements
The following summarizes the effect of derivative instruments on the Consolidated Statement of Operations, categorized by primary underlying risk exposure.
| | Foreign
Exchange
Derivatives | |
| | | |
| | | |
| | | |
Currency forward contracts | | | |
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Net change in unrealized appreciation/depreciation |
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Currency forward contracts | | | |
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The following summarizes the range of volume in the Fund's derivative instruments during the year ended December 31, 2020.
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Currency forward contracts | | |
The Fund may enter into various over-the-counter derivative contracts governed by International Swaps and Derivatives Association master agreements (“ISDA agreements”). The Fund’s ISDA agreements, which are separately negotiated with each dealer counterparty, specify (i) events of default and other events permitting a party to terminate some or all of the contracts thereunder and (ii) the process by which those contracts will be valued for purposes of determining termination payments. If some or all of the contracts under a master agreement are terminated because of an event of default or similar event, the values of all terminated contracts must be netted to determine a single payment owed by one party to the other. To the extent amounts owed to the Fund by its counterparties are not collateralized, the Fund is at risk of those counterparties’ non-performance. The Fund attempts to mitigate counterparty credit risk by entering into contracts only with counterparties it believes to be of good credit quality, by exchanging collateral, and by monitoring the financial stability of those counterparties.
For financial reporting purposes, the Fund does not offset assets and liabilities that are subject to a master netting arrangement in the Consolidated Statement of Assets and Liabilities.
The Fund’s ability to net assets and liabilities and to offset collateral pledged or received is based on contractual netting/offset provisions in the ISDA agreements. The following table presents the Fund’s net exposure to each counterparty for derivatives that are subject to enforceable master netting arrangements as of December 31, 2020.
| Gross
Amount of
Recognized
Assets | Gross
Amount of
Recognized
Liabilities | Cash
Collateral
Pledged /
(Received)1 | |
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| Cash collateral pledged/(received) in excess of derivative assets/liabilities is not presented in this table. The total cash collateral is presented on the Fund's Consolidated Statement of Assets and Liabilities. |
| Represents the net amount receivable from (payable to) the counterparty in the event of a default. |
Note 4: Related Party Transactions
Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays a management fee monthly at an annual rate of 0.60% of the Fund’s average daily net assets to Dodge & Cox, investment manager of the Fund.
Fund officers and trustees All officers and two of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.
Note 5: Income Tax Information and Distributions to Shareholders
A provision for federal income taxes is not required since the Fund intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, and such amounts may differ from net investment income and realized gains for financial reporting purposes. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes. Financial reporting records are adjusted for permanent book to tax differences at year end to reflect tax character. Book to tax differences are primarily due to differing treatments of wash sales, investments in passive foreign investment companies, foreign currency realized gain (loss), foreign capital gains tax, certain corporate action transactions, derivatives, and distributions.
Distributions during the years noted below were characterized as follows for federal income tax purposes:
| Year Ended
December 31, 2020 | Year Ended
December 31, 2019 |
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Dodge & Cox Global Stock Fund ■ PAGE 14
Notes to Consolidated Financial Statements
At December 31, 2020, the tax basis components of distributable earnings were as follows:
Capital loss carryforward1 | |
| Represents accumulated long-term capital loss as of December 31, 2020, which may be carried forward to offset future capital gains. |
At December 31, 2020, unrealized appreciation and depreciation for investments and derivatives based on cost for federal income tax purposes were as follows:
| |
| |
| |
Net unrealized appreciation | |
Fund management has reviewed the tax positions for open periods (three years and four years, respectively, from filing the Fund’s Federal and State tax returns) as applicable to the Fund, and has determined that no provision for income tax is required in the Fund’s financial statements.
Note 6: Loan Facilities
Pursuant to an exemptive order issued by the Securities and Exchange Commission (SEC), the Fund may participate in an interfund lending facility (Facility). The Facility allows the Fund to borrow money from or loan money to the Funds. Loans under the Facility are
made for temporary or emergency purposes, such as to fund shareholder redemption requests. Interest on borrowings is the average of the current repurchase agreement rate and the bank loan rate. There was no activity in the Facility during the year.
All Funds in the Trust participate in a $500 million committed credit facility (Line of Credit) with State Street Bank and Trust Company, to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The maximum amount available to the Fund is $250 million. Each Fund pays an annual commitment fee on its pro-rata portion of the Line of Credit. For the year ended December 31, 2020, the Fund’s commitment fee amounted to $51,235 and is reflected as a Miscellaneous Expense in the Consolidated Statement of Operations. Interest on borrowings is charged at the prevailing rate. There were no borrowings on the Line of Credit during the year.
Note 7: Purchases and Sales of Investments
For the year ended December 31, 2020, purchases and sales of securities, other than short-term securities, aggregated $2,944,747,189 and $3,290,050,342, respectively.
Note 8: Subsequent Events
Fund management has determined that no material events or transactions occurred subsequent to December 31, 2020, and through the date of the Fund’s financial statements issuance, which require additional disclosure in the Fund’s financial statements.
Consolidated Financial Highlights
Selected data and ratios
(for a share outstanding throughout each period) | |
| | | | | |
Net asset value, beginning of year | | | | | |
Income from investment operations: | | | | | |
| | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions to shareholders from: | | | | | |
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Net asset value, end of year | | | | | |
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Ratios/supplemental data: | | | | | |
Net assets, end of year (millions) | | | | | |
Ratio of expenses to average net assets | | | | | |
Ratio of net investment income to average net assets | | | | | |
| | | | | |
|
Net investment income per share includes significant amounts received for EU reclaims related to prior years, which amounted to approximately $0.01 per share. Excluding such
amounts, the ratio of net investment income to average net assets would have been 1.47%. |
See accompanying Notes to Consolidated Financial Statements
PAGE 15 ■ Dodge & Cox Global Stock Fund
Report Of Independent Registered Public Accounting Firm
To the Board of Trustees of the Dodge & Cox Funds and Shareholders of Dodge & Cox Global Stock Fund
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of assets and liabilities, including the consolidated portfolio of investments, of Dodge & Cox Global Stock Fund and its subsidiary (one of the funds constituting Dodge & Cox Funds, referred to hereafter as the "Fund") as of December 31, 2020, the related consolidated statement of operations for the year ended December 31, 2020, the consolidated statement of changes in net assets for each of the two years in the period ended December 31, 2020, including the related notes, and the financial highlights for each of the five years in the period ended December 31, 2020 (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2020, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended December 31, 2020 and the financial highlights for each of the five years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on the Fund's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our procedures included confirmation of securities owned as of December 31, 2020 by correspondence with the custodian, transfer agent and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
San Francisco, California
February 19, 2021
We have served as the auditor of one or more investment companies in the Dodge & Cox Funds since 1931.
Dodge & Cox Global Stock Fund ■ PAGE 16
Special 2020 Tax Information (unuadited)
The following information is provided pursuant to provisions of the Internal Revenue Code: In 2020, the Fund elected to pass through to shareholders foreign source income of $118,631,724 and foreign taxes paid of $0.
The Fund designates up to a maximum amount of $190,391,981 of its distributions paid to shareholders in 2020 as qualified dividends (treated for federal income tax purposes in the hands of shareholders as taxable at a maximum rate of 20%).
For shareholders that are corporations, the Fund designates 62% of its ordinary dividends paid to shareholders in 2020 as dividends from domestic corporations eligible for the corporate dividends received deduction, provided that the shareholder otherwise satisfies applicable requirements to claim that deduction.
Funds' Liquidity Risk Management Program
(unaudited)
The Funds have adopted and implemented a written liquidity risk management program (“Program”) as required by Rule 22e-4 under the Investment Company Act. The Program is reasonably designed to assess and manage the Fund’s liquidity risk, taking into consideration the Fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions; its short and long-term cash flow projections; and its cash holdings and access to other funding sources including the Funds’ interfund lending facility and line of credit.
The Funds’ Board of Trustees has approved the appointment of a Liquidity Risk Management Committee including representatives from Dodge & Cox’s Legal, Compliance, Treasury, Operations, Trading, and Portfolio Management departments, which is responsible for the Program’s administration and oversight and for reporting to the Board on at least an annual basis regarding the Program’s operation and effectiveness.
The Liquidity Risk Management Committee refreshed its assessment of the Funds’ liquidity risk profiles and considered the adequacy and effectiveness of the Program’s operations for the 12 months ended September 30, 2020 (the “covered period”) in order to prepare a written report to the Board of Trustees for consideration at its meeting held on December 16, 2020. The report concluded that (i) while market volatility and reduced liquidity created an unusually challenging liquidity environment during the second quarter of 2020, the Funds had sufficient liquidity to operate effectively throughout the covered period; (ii) each Fund’s investment strategy continues to be appropriate for an open end fund; and (iii) the Funds’ Program is reasonably designed to assess and manage its liquidity risk.
Board Approval of Funds' Investment Management Agreements and Management Fees
(unaudited)
The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 16, 2020, the Trustees, by a unanimous vote (including a
separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2021 with respect to each Fund. During the course of the year, the Board received extensive information and materials relating to the investment management and administrative services provided by Dodge & Cox and the performance of each of the Funds.
Information Received
Over the past several years, the Board has requested, received, and discussed a number of special presentations on topics relevant to their annual consideration of the proposed renewal of the Funds’ Agreements, including, in 2020, special presentations relating to trends in the asset management industry, the mutual fund competitive landscape, mutual fund ratings methodologies, fund distribution channels, and fund flows and performance analysis. In addition to the foregoing and in advance of the meetings referred to below, the Board, including the Independent Trustees, requested, received, and reviewed materials relating to the Agreements and the services provided by Dodge & Cox. The Independent Trustees retained Broadridge to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Broadridge. The Broadridge materials included information regarding advisory and administrative fee rates, expense ratios, and transfer agency, custodial, and distribution expenses, as well as performance comparisons to each Fund’s peer group and to a broad-based securities index or combination of indices. The Broadridge materials also included a comparison of expenses of various share classes offered by comparable funds. The materials reviewed by the Board contained information concerning, among other things, Dodge & Cox’s profitability, financial results and condition, management fee revenue, and separate account fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates, sales and redemption data, and the investment that Dodge & Cox makes in research used in managing the Funds. The Board received and reviewed memoranda and related materials addressing, among other things, Dodge & Cox’s services to the Funds; how Dodge & Cox Funds’ fees compare to fees of peer group funds; the different fees, services, costs, and risks associated with other accounts managed by Dodge & Cox as compared to the Dodge & Cox Funds; and the ways in which the Funds realize economies of scale. Throughout the process of reviewing the services provided by Dodge & Cox and preparing for the meeting, the Independent Trustees found Dodge & Cox to be open, forthright, detailed, and helpful in answering questions about all issues. The Board received copies of the Agreements and a memorandum from the independent legal counsel to the Independent Trustees discussing the factors generally regarded as appropriate to consider in evaluating mutual fund management arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the independent legal counsel on November 11, 2020 and again on December 16, 2020 to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements. In considering the Agreements, the Board, including the Independent Trustees, did not
PAGE 17 ■ Dodge & Cox Global Stock Fund
identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board considered several factors, discussed below, to be key factors and reached the conclusions described below.
Nature, Quality, and Extent of the Service
The Board considered that Dodge & Cox provides a range of services to the Funds in addition to portfolio management, including regulatory compliance, trading desks, proxy voting, transfer agent and custodian oversight, administration, regulatory filings, tax compliance and filings, website, and anti-money laundering. The nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality, and extent of portfolio management, administrative, and shareholder services performed by Dodge & Cox. With regard to portfolio management services, the Board considered Dodge & Cox’s established long-term history of care in the management of the Funds; its consistency in investment approach and depth; the background and experience of the Dodge & Cox U.S. Equity Investment Committee, International Equity Investment Committee, Global Equity Investment Committee, U.S. Fixed Income Investment Committee, and Global Fixed Income Investment Committee, and research analysts responsible for managing the Funds; Dodge & Cox’s methods for assessing the regulatory and investment climate in various jurisdictions; its overall level of attention to its core investment management function; and its commitment to the Funds and their shareholders. The Board reviewed information from Dodge & Cox describing conflicts of interest between the Funds and Dodge & Cox or its other clients, and how Dodge & Cox addresses those conflicts. The Board noted Dodge & Cox’s record of favorable press and industry coverage, as well as its good compliance record, and its reputation as a trusted, shareholder-friendly mutual fund family. In addition, the Board considered that Dodge & Cox manages approximately $202 billion in Fund assets (as of November 30, 2020) with fewer professionals than most comparable funds, and that on average these professionals have more experience and longer tenure than investment professionals at comparable funds. The Board also noted that Dodge & Cox is an investment research-oriented firm with no other business endeavors to distract management’s attention from its research efforts, that its investment professionals adhere to a consistent investment approach across the Funds, and that due to its deliberate strategy with respect to new products, Dodge & Cox has had stability in its mutual fund product offerings over the course of many years and has the fewest funds of any of the 25 largest mutual fund families by assets. The Board further considered the “Gold” analyst rating awarded by Morningstar to all of the Funds (other than the Balanced Fund, which has a “Silver” rating). The Board concluded that it was satisfied with the nature, extent, and quality of investment management and other services provided to the Funds by Dodge & Cox.
Investment Performance
The Board reviewed each Fund’s recent and long-term investment performance (including periods of outperformance and underperformance), as compared to relevant indices and the performance of such Fund’s peer group and broader Morningstar
category. In assessing the performance of the Funds, the Board considered the Funds’ investment returns over various periods and the volatility thereof and concluded that the levels experienced were consistent with Dodge & Cox’s long-term approach and active investment style. The Board also compared the short- and long-term investment performance of the equity funds to value-oriented indices, in recognition of the significant performance divergence between value and growth stocks that has persisted for the last several years. It was noted that equity performance has been consistent with the value oriented investment strategy employed by Dodge & Cox. The Board concluded that Dodge & Cox’s historic, long-term, team-oriented, bottom-up investment approach remains consistent and that Dodge & Cox continues to be distinguished by its integrity, transparency, and independence. The Board considered that the performance of the Funds is the result of a value-oriented investment management process that emphasizes a long-term investment horizon, independent research, a team approach, price discipline, low cost, and low portfolio turnover. The Board concluded that Dodge & Cox has delivered long-term performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.
Costs and Ancillary Benefits
Costs of Services to Funds: Fees and Expenses The Board considered each Fund’s management fee rate and net expense ratio relative to (1) a broad category of other mutual funds with similar portfolio characteristics and share class and expense structures and (2) a smaller group of peers selected by Broadridge based on investment style, share class characteristics, and asset levels. The Board also considered the management fees charged by Dodge & Cox to other clients. In particular, the Board noted that the management fee rate paid by each Fund compares favorably to its broad category and is competitive within the Fund’s peer group. The Board also evaluated the operating structures of the Funds and Dodge & Cox, noting that the Funds do not charge front-end sales commissions or distribution fees, and Dodge & Cox bears, among other things, the cost of most third-party research, reimbursement for shareholder recordkeeping and administrative costs to third-party retirement plan administrators, and administrative and office overhead. The Board noted that the Broadridge report shows that the net expense ratio of every Dodge & Cox Fund is in the least expensive quartile compared to its broad Morningstar category (taking into account, in the case of the Global Bond Fund, voluntary expense reimbursements by Dodge & Cox). The Board noted the Funds’ unusual single-share-class structure and reviewed Broadridge data (including asset-weighted average expense ratios) showing that most of the peer group funds offer several different classes of shares, with different expense ratios, to different categories of investors, and that the Broadridge expense comparisons described above generally compare the net expense ratio of each Dodge & Cox Fund’s single share class to one of the least expensive share classes of the peer fund, even though those share classes are often not available to retail investors. On an asset-weighted basis, each Fund ranks in the least expensive quartile of its Broadridge peer group (taking into account, in the case of the Global Bond Fund, voluntary expense reimbursements by Dodge & Cox). The Board noted that the Funds
Dodge & Cox Global Stock Fund ■ PAGE 18
provide access for small investors to quality investment management at a relatively low cost.
The Board also considered that the Funds are priced to scale, i.e., management fee rates begin at relatively low levels. Even without breakpoints, the Funds’ management fee rates are lower than those of many peer funds whose fee schedules include breakpoints. With respect to non-U.S. funds sponsored and managed by Dodge & Cox that are comparable to the Funds in many respects, the Board noted that the fee rates charged by Dodge & Cox are the same as or higher than the fee rates charged to the Funds. The Board reviewed information regarding the fee rates Dodge & Cox charges to separate accounts that have investment programs similar to those of the Funds, including instances where separate account fees are lower than Fund fees. The Board considered the differences in the nature and scope of services Dodge & Cox provides to the Funds as compared to other client accounts, as well as material differences in regulatory, litigation, and other risks as between the Dodge & Cox Funds and other types of clients. The Board noted that different markets exist for mutual fund and institutional separate account management services and that a comparison of Fund fee rates and separate account fee rates must consider the fact that separate account clients bear additional costs and responsibilities that are included in the cost of a Fund. After consideration of these matters, the Board concluded that the overall costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation, and performance of Dodge & Cox and the low overall expense ratios of the Funds.
Profitability and Costs of Services to Dodge & Cox; "Fall-out" Benefits The Board reviewed reports of Dodge & Cox’s financial position, profitability, and estimated overall value and considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the scope and quality of the services provided. The Board noted in particular that Dodge & Cox’s profits are not generated by high fee rates, but reflect a focused business approach toward investment management. The Board recognized the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that the compensation/profit structure at Dodge & Cox includes a return on shareholder employees’ investment in the firm, which is vital for remaining independent and facilitating retention of management and investment professionals. The Board also considered that Dodge & Cox has in the past closed some of the Funds to new investors to proactively manage growth in those Funds. While these actions are intended to benefit existing Fund shareholders, the effect is to reduce potential revenues to Dodge & Cox from new shareholders. The Board also considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers and reputational benefits to non-U.S. funds sponsored and managed by Dodge & Cox) that Dodge & Cox might receive as a result of its association with the Funds and determined that they are acceptable. The Board also noted that Dodge & Cox continues to invest in its business to provide enhanced services, systems, and research capabilities, all of which benefit the Funds. The Board concluded that Dodge & Cox’s profitability is the keystone of its
independence, stability, and long-term investment performance and that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) is fair and reasonable.
Economies of Scale
The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the level of Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee and expense structure and the fact that the Dodge & Cox Funds build economies of scale into their fee structures by charging low fees from a fund’s inception and keeping overall expenses down as a Fund grows, as compared to other fund complexes that employ fee “breakpoints” only after a fund reaches a certain scale. An assessment of economies of scale must also take into account that Dodge & Cox invests time and resources in each new Fund for months (and sometimes years) prior to launch; in addition, in a Fund’s early periods of operations, expenses are capped, which means that Dodge & Cox subsidizes the operations of a new Fund for a period of time until it reaches scale. The Board also observed that, while total Fund assets have grown over the long term, this growth has not been continuous or evenly distributed across all of the Funds. In addition, the Board noted that Dodge & Cox has shared the benefits of economies of scale with the Funds by adding services to the Funds over time, and that Dodge & Cox’s internal costs of providing investment management, technology, administrative, legal, and compliance services to the Funds continue to increase. For example, Dodge & Cox has increased its global research staff and investment resources over the years to add new capabilities for the benefit of Fund shareholders and to address the increased complexity of investing globally. In addition, Dodge & Cox has made expenditures in other staff, technology, and infrastructure to enable it to integrate credit and equity analyses and to implement its strategy in a more effective manner. Over the last ten years, Dodge & Cox has increased its spending on research, investment management, client servicing, cybersecurity, technology, third-party research, data services, and computer systems for trading, operations, compliance, accounting, and communications at a rate that has outpaced the Funds’ growth rate during the same period. The Board also observed that, even without fee breakpoints, the Funds are competitively priced in a competitive market and that having a low fee from inception is better for shareholders than starting with a higher fee and adding breakpoints. The Board also noted that there are certain diseconomies of scale associated with managing large funds, insofar as certain of the costs and risks associated with portfolio management increase disproportionately as assets grow. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately shares economies of scale that may exist.
Conclusion
Based on their evaluation of all material factors and assisted by the advice of independent legal counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the management fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that
PAGE 19 ■ Dodge & Cox Global Stock Fund
Dodge & Cox’s services have provided value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.
Fund Holdings
The Fund provides a complete list of its holdings on a quarterly basis by filing the lists with the SEC on Form N-CSR (as of the end of the second and fourth quarters) and on Part F of Form N-PORT (as of the end of the first and third quarters). Shareholders may view the Fund’s Forms N-CSR and Part F of N-PORT on the SEC’s website at sec.gov. A list of the Fund’s quarter-end holdings is also available at dodgeandcox.com on or about the 15th day following each quarter end and remains available on the website until the list is updated for the subsequent quarter.
Proxy Voting
For a free copy of the Fund’s proxy voting policies and procedures, please call 800-621-3979, visit the Fund’s website at dodgeandcox.com, or visit the SEC’s website at sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is also available at dodgeandcox.com or shareholders may view the Fund's Form N-PX at sec.gov.
Household Mailings
The Fund routinely mails shareholder reports and summary prospectuses to shareholders and, on occasion, proxy statements. In order to reduce the volume of mail, when possible, only one copy of these documents will be sent to shareholders who are part of the same family and share the same residential address.
If you have a direct account with the Funds and you do not want the mailing of shareholder reports and summary prospectuses combined with other members in your household, contact the Funds at 800-621-3979. Your request will be implemented within 30 days.
Dodge & Cox Global Stock Fund ■ PAGE 20
Dodge & Cox Funds — Executive Officer & Trustee Information
| Position with Trust
(Year of Election or
Appointment) | Principal Occupation During Past Five Years and Other Relevant Experience | Other Directorships of Public Companies Held
by Trustees |
Interested Trustees and Executive Officers |
|
Chairman and Trustee
(since 2014) |
Chairman and Director of Dodge & Cox; Chief Investment
Officer and member of U.S. Equity Investment Committee (USEIC), Global Equity Investment Committee (GEIC), and International Equity Investment Committee (IEIC) | |
|
President
(since 2014) and
Trustee (since 1993) |
Chief Executive Officer, President, and Director of
Dodge & Cox; member of U.S. Fixed Income Investment Committee (USFIIC) and Global Fixed Income Investment Committee (GFIIC) | |
|
Senior Vice President
(since 2006) |
Senior Vice President and Director of Dodge & Cox; Director
of International Equity and member of GEIC and IEIC | |
|
Chief Legal Officer
(since 2019) and Secretary (since 2017) |
Vice President, General Counsel, and Secretary (since 2017)
of Dodge & Cox | |
| |
Vice President (since 2020) and Financial Oversight and
Control Analyst (since 2017) of Dodge & Cox; Head of Fund Administration at RS Investments (2014-2016); Treasurer of RS Funds (2014-2016); Chief Financial Officer of RS Funds Distributor, LLC (2014-2016) | |
|
Chief Compliance
Officer (since 2010) |
Vice President and Chief Compliance Officer of Dodge & Cox
| |
|
| |
Professor of Economics, Stanford University; Director of the
Economics of Education Program, National Bureau of Economic Research; Senior Fellow, Hoover Institution and Stanford Institute for Economic Policy Research | |
| | Senior Counsel of Arnold & Porter (law firm) (2013-2018); Partner of Arnold & Porter (until 2012); Director of Howard, Rice, Nemerovski, Canady, Falk & Rabkin (1977-2011) | |
| |
CFO, Pixar Animation Studios (1999-2004)
|
Director, Airbnb (vacation rental online
marketplace) (since 2018); Director, Alphabet Inc. (internet information services) (since 2005); Director, Glu Mobile, Inc. (multimedia software) (since 2004); Director, Netflix, Inc. (internet television) (since 2010); Director, Arista Networks (cloud networking) (since 2013) |
| |
Advisory Director, The Presidio Group (2005-2016); Partner
and Managing Director—Global Investment Research at Goldman Sachs (until 2001) | |
Gabriela Franco
Parcella (52) | |
President (since 2020) and Executive Managing Director of
Merlone Geier Partners (2018-2019); Chairman, President, and CEO, Mellon Capital (2011 to 2017); COO, Mellon Capital (1997 to 2011) | Director, Terreno Realty Corporation (since 2018) |
| |
Robert and Marion Oster Distinguished Military Fellow,
Hoover Institution (since 2012); Admiral, United States Navy (Ret.); U.S. Navy Chief of Naval Operations (2008-2011) |
Director, Northrop Grumman Corp.
(global security) (since 2012); Director, Maersk Line, Limited (shipping and transportation) (since 2016) |
| |
Executive Vice President, Managing Director—Fixed Income
at Loomis Sayles & Company, L.P. (2003-2011) | |
|
Trustee
(since 2005)
(and 1995-2001) |
Professor of Economics, Stanford University (since 1984);
Senior Fellow, Hoover Institution (since 1996); Under Secretary for International Affairs, United States Treasury (2001-2005) | |
| The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all six series in the Dodge & Cox Funds complex and serves for an indefinite term. |
Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Funds’ website at dodgeandcox.com or calling 800-621-3979.
PAGE 21 ■ Dodge & Cox Global Stock Fund
dodgeandcox.com
For Fund literature, transactions, and account
information, please visit the Funds’ website.
or write or call:
Dodge & Cox Funds
c/o DST Asset Manager Solutions, Inc.
P.O. Box 219502
Kansas City, Missouri 64121-9502
(800) 621-3979
Investment Manager
Dodge & Cox
555 California Street, 40th Floor
San Francisco, California 94104
(415) 981-1710
This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.This report reflects our views, opinions, and portfolio holdings as of December 31, 2020, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.
Annual Report
December 31, 2020
International Stock Fund
ESTABLISHED 2001
TICKER: DODFX
12/20 ISF AR Printed on recycled paper 
The Dodge & Cox International Stock Fund had a total return of 2.1% for the year ended December 31, 2020, compared to a return of 7.8% for the MSCI EAFE (Europe, Australasia, Far East) Index.
Market Commentary
In 2020, global equity markets were extremely volatile. There was a severe drawdown in the spring as the coronavirus (COVID-19) pandemic evolved, followed by a rebound that accelerated in November with the promising news that vaccines would be available by year end. The vaccine availability signaled the potential for both an end to the pandemic-induced economic downturn and a meaningful recovery in 2021.
The market moves in November illustrate the importance of having a long-term view and staying the course with one’s convictions. History shows us that major market moves are episodic and unpredictable. Thus, missing even a few days in the market can make a big difference in your overall returns. As an example, the Fund outperformed the MSCI EAFE by over three percentage points in a single day on the news that Pfizer-BioNTech’s vaccine was effective.
In the fourth quarter, the Fund significantly outperformed: up 24.7% compared to up 16.0% for the MSCI EAFE. While the MSCI EAFE Value Index outperformed the MSCI EAFE Growth Index by 6.1 percentage points during the quarter, value stocksa still lagged growth stocks for the year. In fact, during 2020, the MSCI EAFE Value was down 2.6%, compared to up 18.3% for the MSCI EAFE Growth, continuing a decade-long period of underperformance by value stocks. The Fund, with its value-oriented portfolio, similarly lagged the overall market for the year.
We believe that we are in the early innings of a reversal between value and growth performance. Starting valuations matter, and the MSCI EAFE Value is reasonably valued at 13.0 times estimated earnings compared to a lofty 27.0 times estimated earnings for the MSCI EAFE Growth.b This 108% premium for growth stocks as of December 31 is similar to the extremely wide gap on September 30 and remarkably 3.5 standard deviations above average.
Investment Strategy
During the chaotic markets of 2020, we focused on what we always do: weighing a company’s valuation against its long-term fundamentals to discern where investors might be overly pessimistic or optimistic in their outlook. We look through an absolute lens: are the opportunities we see attractive enough in relation to the risks of owning this company? We also employ a relative lens: how does this investment compare to other opportunities in the Fund? The vantage point of relative attractiveness allows us to optimize the portfolio on a risk-adjusted basis.
Where are we seeing absolute and relative opportunities today? The market is pricing in some recovery—earnings estimates are rising and absolute valuations are elevated on depressed earnings. After the fourth quarter rally, few markets are inexpensive relative to their recent history on an absolute basis. However, there are many areas that are inexpensive relative to the overall market, especially
Financials, Energy, and Pharmaceuticals. We discuss Financials and Pharmaceuticals in greater detail below.
Financials
The Financials sector was among the hardest hit areas of the market in 2020. Concerns about the earnings impact of potential steep credit losses and low interest rates weighed on company valuations. Moreover, regulators and central banks either required or strongly suggested that financial services companies suspend dividends and share buyback programs that were expected to occur in 2020. During the first seven months of the year, we added to the Fund’s Financials holdings, which traded at exceptionally low valuations on COVID-depressed earnings. These valuations were compelling because of generous capital cushions and government policies and regulatory mechanisms to blunt the impact of potential credit losses. We also saw the potential for capital return to be restored with the resolution of the health crisis. As a result of our actions, the Fund remains overweight in Financials relative to the market.
Strong performance from the Fund’s holdings in Europe and the United Kingdom in the fourth quarter further increased the Fund’s relative overweight in Financials. We responded by modestly trimming to fund more attractive opportunities within Financials and elsewhere in the portfolio, notably in the Pharmaceuticals industry.
There were a variety of reasons we trimmed the Fund’s overall exposure in European Financials. In some cases, we were able to upgrade to stronger franchises at similar valuations. During 2020, valuations converged and correlations spiked, indicating that investors were painting the entire area with the same brush. We trimmed, and eventually sold Societe Generale,c a French multinational bank in which we first invested in 2015. Even though it is inexpensively valued at 11.7 times estimated earnings, we redeployed the proceeds partially into BNP Paribas and Banco Santander, both leading franchises with superior scale and capital generation, where we saw more attractive return prospects at similar valuations.
In other cases, strong performance reduced a holding’s relative attractiveness. UBS Group is a case in point. As the durability of UBS Group’s wealth management franchise, earnings power in its investment banking business, and resilience of its strong balance sheet became more apparent, the shares strongly outperformed the overall sector. As a result, its relative return prospects became less attractive, and we trimmed the holding.
We also diversified exposure by adding to the Fund’s emerging market Financials, comprised of market leaders with high growth potential at reasonable valuations. During the year, we added to Axis Bank and ICICI Bank in India, as well as Itau Unibanco in Brazil. We also started a new position in Credicorp, Peru’s largest bank. We had long admired Credicorp given its dominant positions in a growing market, attractive competitive landscape, and strong alignment with long-term shareholders. The Romero family has been involved with the bank for over a century and owns a substantial 13% stake. The sharp economic downturn and potential credit losses arising from the COVID-19 pandemic in Peru gave us the valuation opportunity to start a position in an institution with a history of successfully navigating
PAGE 1 ■ Dodge & Cox International Stock Fund
turbulence and preserving capital. Thus, the Fund is able to own a high-quality bank at a reasonable valuation.
Overall, we continue to see attractive returns in the Financials sector. While absolute valuation levels have risen to 11.8 times estimated earnings, a median valuation relative to history, we find them exceptionally attractive on a relative basis, in the bottom decile of their valuation versus the MSCI EAFE. Despite low interest rates, we believe earnings can grow as economic growth rebounds, credit provisions (which rose sharply in 2020 due to the COVID-19 crisis) normalize, and cost cutting resumes. We also see rising levels of capital return as the pandemic-induced dividend and buyback moratoria ebb. Finally, though not in our forecasts, higher interest rates would be another source of upside. At year end, the Fund’s 28.9% position in Financials was diversified across banks, diversified financials, and insurance companies in Europe, the United Kingdom, Asia, and Latin America.
Health Care
As markets plunged earlier in the year and subsequently rebounded, we adjusted the Fund’s positioning in the Health Care sector based on its relative attractiveness. The Fund’s holdings in Health Care are comprised entirely of pharmaceutical companies, whose earnings are generally stable and not sensitive to swings in the economy. Those defensive characteristics provided relative strength in the first quarter as pandemic worries hurt other areas of the market—such as Financials, Energy, Industrials, and Materials—much more. Companies in those sectors became exceptionally attractive, so we added to them by meaningfully trimming the Fund’s Health Care holdings. The Fund’s weighting in Health Care declined from 16.2% on March 31 to 12.9% on September 30.
However, Health Care’s relative performance took a dramatic turn and was the worst-performing sector of the market in the fourth quarter, up only 4.0%. Within Health Care, the Pharmaceuticals industry is especially attractive, trading at roughly 15.4 times estimated earnings. While an average valuation relative to history, it is in the bottom decile of its valuation relative to the market. We recognize concerns over drug pricing and uncertainty regarding the new Biden Administration’s policies in the United States. However, we believe the Fund’s Pharmaceuticals holdings have impressive innovation potential (the unprecedented speed of developing effective COVID-19 vaccines is a case in point), global customer bases, and highly attractive valuations. In the fourth quarter, this combination of attractive fundamentals and valuations led us to begin to add back to many of the Fund’s holdings, including Sanofi and GlaxoSmithKline.
Sanofi is a French pharmaceutical company with particular expertise in rare diseases. In recent years the company has rebuilt its management team, replacing its Chief Executive Officer, Chief Financial Officer, and Head of Research and Development with executives that have a demonstrable track record of success. Moreover, while the company’s new drug pipeline shows promise, we believe the stock price only reflects the discounted value of the current portfolio of approved drugs, with little or no value ascribed to the new drug pipeline.
GlaxoSmithKline, a UK-based pharmaceutical company, is a leader in the attractive vaccines and consumer health care markets,
but its core pharmaceuticals business has struggled. A new management team joined in 2017-18 and has undertaken a turnaround plan, which includes divesting non-core businesses and rebuilding the company’s new drug pipeline, particularly around immunology and oncology. The implied value of its pharmaceutical business is low, indicating that investors are giving little credit for better prospects in the future.
In Closing
2020 was another challenging year for international value investors. Nevertheless, we have strong conviction in our active, value-oriented investment approach and believe we are in the early innings of a reversal between value and growth performance. We believe our portfolio is well positioned, especially with the valuation gap between value and growth stocks as wide as it is today. Valuation changes can occur swiftly and without warning, like they did in November, so we encourage our shareholders to maintain a long-term perspective.
Thank you for your continued confidence in our firm. As always, we welcome your comments and questions.
For the Board of Trustees, | |
| |
| |
January 29, 2021
|
Value stocks are the lower valuation portion of the equity market, and growth stocks
are the higher valuation portion. |
| Unless otherwise specified, all weightings and characteristics are as of December 31, 2020. |
| The use of specific examples does not imply that they are more or less attractive investments than the portfolio’s other holdings. |
Dodge & Cox International Stock Fund ■ PAGE 2
2020 Performance Review
The Fund underperformed the MSCI EAFE by 5.7 percentage points in 2020.
Key Detractors from Relative Results
■ European and UK holdings Societe Generale, UniCredit, Standard Chartered, and Banco Santander, were weak performers. Emerging Market holdings Itau Unibanco and ICICI Bank, also lagged.
■ The Fund’s average overweight in Energy (8% versus 4% for the MSCI EAFE sector) led to underperformance. Suncor Energy, Schlumberger, Petrobras, and Ovintiv fared especially poorly.
■ The Fund’s holdings within the Communication Services sector, namely Grupo Televisa and Millicom International Cellular, detracted from performance.
■ The Fund’s stock selection in Health Care detracted from returns. In particular, GlaxoSmithKline and Bayer hindered performance.
Key Contributors to Relative Results
■ The Fund’s Internet and Direct Marketing segment holdings within the Consumer Discretionary sector, namely JD.com, Naspers, Prosus, and Booking Holdings, led to relative outperformance.
■ The Fund’s holdings in the Industrials sector boosted returns (down 4% versus down 13% for the MSCI EAFE). Schneider Electric and Mitsubishi Electric contributed to relative results.
■ The Fund’s holdings within the Industrials sector led to relative outperformance. Nidec, Schneider Electric, and Johnson Controls International were strong contributors.
■ The Fund’s strong stock selection in the Information Technology sector, especially Samsung Electronics, boosted relative returns.
■ Baidu was a strong individual contributor.
Key Characteristics of Dodge & Cox
Independent Organization
Dodge & Cox is one of the largest privately owned investment managers in the world. We remain committed to independence, with a goal of providing the highest quality investment management service to our existing clients.
90 Years of Investment Experience
Dodge & Cox was founded in 1930. We have a stable and well- qualified team of investment professionals, most of whom have spent their entire careers at Dodge & Cox.
Experienced Investment Team
The International Equity Investment Committee, which is the decision-making body for the International Stock Fund, is an eight-member at Dodge & Cox of 23 years. committee with average tenure
One Business with a Single Research Office
Dodge & Cox manages equity (domestic, international, and global), fixed income (domestic and global), and balanced investments, operating from one office in San Francisco.
Consistent Investment Approach
Our team decision-making process involves thorough, bottom-up fundamental analysis of each investment.
Long-Term Focus and Low Expenses
We invest with a three- to five-year investment horizon, which has historically resulted in low turnover relative to our peers. We manage Funds that maintain low expense ratios.
Risks: The Fund is subject to market risk, meaning holdings in the Fund may decline in value for extended periods due to the financial prospects of individual companies, or due to general market and economic conditions. Investing in non-U.S. securities may entail risk due to foreign economic and political developments; this risk may be increased when investing in emerging markets. The Fund is also subject to currency risk. Please read the prospectus and summary prospectus for specific details regarding the Fund's risk profile.
PAGE 3 ■ Dodge & Cox International Stock Fund
Growth of $10,000 Over 10 Years
For An Investment Made On December 31, 2010 
Average Annual Total Return
For Periods Ended December 31, 2020
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Dodge & Cox International Stock Fund | | | | |
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Returns represent past performance and do not guarantee future results. Investment return and share price will fluctuate with market conditions, and investors may have a gain or loss when shares are sold. Fund performance changes over time and currently may be significantly lower than stated. Performance is updated and published monthly. Visit the Fund's website at dodgeandcox.com or call 800-621-3979 for current performance figures.
The Fund’s total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include dividends but, unlike Fund returns, do not reflect fees or expenses. The MSCI EAFE (Europe, Australasia, Far East) Index is a broad-based, unmanaged equity market index aggregated from 21 developed market country indices, excluding the United States and Canada. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI EAFE is a service mark of MSCI Barra.
Fund Expense Example
As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.
Actual Expenses
The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison with Other Mutual Funds
Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.
Six Months Ended
December 31, 2020 | Beginning Account Value
7/1/2020 | Ending Account Value
12/31/2020 | Expenses Paid
During Period* |
Based on Actual Fund Return | | | |
Based on Hypothetical 5% Yearly Return | | | |
|
Expenses are equal to the Fund’s annualized expense ratio of 0.63%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year
period). |
The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. Though other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).
Dodge & Cox International Stock Fund ■ PAGE 4
Portfolio Information (unaudited) | |
Sector Diversification (%)(a) | |
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Consumer Discretionary(b) | |
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Communication Services(b) | |
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Region Diversification (%)(a) | |
Europe (excluding United Kingdom) | |
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Asia Pacific (excluding Japan) | |
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Weights exclude the effect of the Fund’s derivative contracts.
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Total sector exposure, including the notional exposure of equity total return swaps, is Consumer Discretionary at 12.9% and Communication Services at 4.2%.
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PAGE 5 ■ Dodge & Cox International Stock Fund
Consolidated Portfolio of Investments | |
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| | |
Communication Services: 6.4% |
Media & Entertainment: 2.6% |
Baidu, Inc. ADR(a) (Cayman Islands/China) | | |
Grupo Televisa SAB ADR(a) (Mexico) | | |
Television Broadcasts, Ltd.(b) (Hong Kong) | | |
| | |
Telecommunication Services: 3.8% |
America Movil SAB de CV, Series L (Mexico) | | |
Liberty Global PLC, Class A(a)(b) (United Kingdom) | | |
Liberty Global PLC, Class C(a) (United Kingdom) | | |
Millicom International Cellular SA SDR(a)(b) (Luxembourg) | | |
Vodafone Group PLC (United Kingdom) | | |
| | |
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Consumer Discretionary: 11.1% |
Automobiles & Components: 4.4% |
Bayerische Motoren Werke AG (Germany) | | |
Honda Motor Co., Ltd. (Japan) | | |
Yamaha Motor Co., Ltd. (Japan) | | |
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|
Alibaba Group Holding, Ltd. ADR(a) (Cayman Islands/China) | | |
Booking Holdings, Inc.(a) (United States) | | |
JD.com, Inc. ADR(a) (Cayman Islands/China) | | |
Naspers, Ltd., Class N (South Africa) | | |
Prosus NV(a) (Netherlands) | | |
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Food & Staples Retailing: 0.5% |
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Food, Beverage & Tobacco: 2.4% |
Anheuser-Busch InBev SA NV (Belgium) | | |
Imperial Brands PLC (United Kingdom) | | |
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Ovintiv, Inc.(b) (United States) | | |
Schlumberger, Ltd. (Curacao/United States) | | |
Suncor Energy, Inc. (Canada) | | |
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Axis Bank, Ltd.(a) (India) | | |
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Banco Santander SA(a) (Spain) | | |
Barclays PLC(a) (United Kingdom) | | |
BNP Paribas SA(a) (France) | | |
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ICICI Bank, Ltd.(a) (India) | | |
Mitsubishi UFJ Financial Group, Inc. (Japan) | | |
Standard Chartered PLC(a) (United Kingdom) | | |
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Diversified Financials: 5.6% |
Credit Suisse Group AG (Switzerland) | | |
UBS Group AG (Switzerland) | | |
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Aviva PLC (United Kingdom) | | |
Prudential PLC (United Kingdom) | | |
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Pharmaceuticals, Biotechnology & Life Sciences: 12.3% |
AstraZeneca PLC (United Kingdom) | | |
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GlaxoSmithKline PLC (United Kingdom) | | |
Novartis AG (Switzerland) | | |
Roche Holding AG (Switzerland) | | |
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Johnson Controls International PLC (Ireland/United States) | | |
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Mitsubishi Electric Corp. (Japan) | | |
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Schneider Electric SA (France) | | |
Smiths Group PLC(b) (United Kingdom) | | |
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Information Technology: 5.1% |
Software & Services: 0.3% |
Micro Focus International PLC(a)(b) (United Kingdom) | | |
Technology, Hardware & Equipment: 4.8% |
Brother Industries, Ltd. (Japan) | | |
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Murata Manufacturing Co., Ltd. (Japan) | | |
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TE Connectivity, Ltd. (Switzerland) | | |
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Akzo Nobel NV (Netherlands) | | |
Cemex SAB de CV ADR(a) (Mexico) | | |
Glencore PLC(a) (Jersey/United Kingdom) | | |
LafargeHolcim, Ltd. (Switzerland) | | |
See accompanying Notes to Consolidated Financial StatementsDodge & Cox International Stock Fund ■ PAGE 6
Consolidated Portfolio of Investments | |
Common Stocks (continued) |
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Linde PLC (Ireland/United States) | | |
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Teck Resources, Ltd., Class B (Canada) | | |
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CK Asset Holdings, Ltd. (Cayman Islands/Hong Kong) | | |
Daito Trust Construction Co., Ltd. (Japan) | | |
Hang Lung Group, Ltd.(b) (Hong Kong) | | |
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Total Common Stocks
(Cost $32,664,067,791) | | |
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Itau Unibanco Holding SA, Pfd (Brazil) | | |
Information Technology: 4.8% |
Technology, Hardware & Equipment: 4.8% |
Samsung Electronics Co., Ltd., Pfd (South Korea) | | |
Total Preferred Stocks
(Cost $1,459,471,298) | | |
Short-Term Investments: 1.9% |
| | |
Repurchase Agreements: 1.5% |
Fixed Income Clearing Corporation(c)
0.000%, dated 12/31/20, due 1/4/21, maturity value $609,099,000 | | |
|
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|
State Street Institutional U.S. Government Money Market Fund | | |
Total Short-Term Investments
(Cost $773,816,091) | |
Total Investments In Securities
(Cost $34,897,355,180) | | |
Other Assets Less Liabilities | | |
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| See below regarding holdings of 5% voting securities |
| Repurchase agreement is collateralized by U.S. Treasury Bills 5/13/21, U.S. Treasury Notes 1.50%-2.125%, 9/30/21-10/31/21 and U.S. Cash Management Bills 5/11/21- 5/18/21. Total collateral value is $621,281,077. |
| In determining a company’s country designation, the Fund generally references the country of incorporation. In cases where the Fund considers the country of incorporation to be a “jurisdiction of convenience” chosen primarily for tax purposes or in other limited circumstances, the Fund uses the country designation of an appropriate broad-based market index. In those cases, two countries are listed - the country of incorporation and the country designated by an appropriate index, respectively. |
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ADR: American Depositary Receipt |
SDR: Swedish Depository Receipt |
Equity Total Return Swaps
| | | | | Value /
Unrealized Appreciation/
(Depreciation) |
Total Return on Prosus NV | | | | | |
Total Return on Prosus NV | | | | | |
Total Return on Prosus NV | | | | | |
Total Return on Prosus NV | | | | | |
Total Return on Prosus NV | | | | | |
Total Return on Naspers, Ltd. | | | | | |
| Total Return on Tencent Holdings, Ltd. | | | | |
| Total Return on Tencent Holdings, Ltd. | | | | |
| Total Return on Tencent Holdings, Ltd. | | | | |
| Total Return on Tencent Holdings, Ltd. | | | | |
| Total Return on Tencent Holdings, Ltd. | | | | |
| | | | | |
The combination of the equity total return swaps is designed to hedge Naspers, Ltd.'s and Prosus NV’s exposure to Tencent Holdings, Ltd. The swaps pay at maturity; no upfront payments were made. |
PAGE 7 ■ Dodge & Cox International Stock FundSee accompanying Notes to Consolidated Financial Statements
Consolidated Portfolio of Investments | |
Futures Contracts
| | | | Value /
Unrealized
Appreciation/
(Depreciation) |
Euro Stoxx 50 Index— Long Position | | | | |
Yen Denominated Nikkei 225 Index— Long Position | | | | |
| | | | |
Currency Forward Contracts
| | | | Unrealized Appreciation
(Depreciation) |
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CNH: Chinese Yuan Renminbi |
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See accompanying Notes to Consolidated Financial StatementsDodge & Cox International Stock Fund ■ PAGE 8
Consolidated Portfolio of Investments | |
| | | | Unrealized Appreciation (Depreciation) |
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Unrealized gain on currency forward contracts | | | | | | |
Unrealized loss on currency forward contracts | | | | | | |
Net unrealized loss on currency forward contracts | | | | |
The listed counterparty may be the parent company or one of its subsidiaries.
Holdings of 5% Voting Securities
Each of the companies listed below was considered to be an affiliate of the Fund because the Fund owned 5% or more of the company’s voting securities during all or part of the year ended December 31, 2020. Further detail on these holdings and related activity during the year appear below.
| Value at
Beginning of Period | | | | Net Change in
Unrealized
Appreciation/
Depreciation | | Dividend
Income
(net of foreign
taxes, if any) |
| | | | | | | |
Communication Services 0.1% | | | | | | | |
Liberty Global PLC, Class A(a) | | | | | | | |
Millicom International Cellular SA SDR(a) | | | | | | | |
Television Broadcasts, Ltd. | | | | | | | |
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PAGE 9 ■ Dodge & Cox International Stock FundSee accompanying Notes to Consolidated Financial Statements
Consolidated Portfolio of Investments | |
| Value at Beginning of Period | | | | Net Change in Unrealized Appreciation/ Depreciation | | Dividend Income (net of foreign taxes, if any) |
| | | | | | | |
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Information Technology 0.3% | | | | | | | |
Micro Focus International PLC(a) | | | | | | | |
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| Company was not an affiliate at period end |
See accompanying Notes to Consolidated Financial StatementsDodge & Cox International Stock Fund ■ PAGE 10
Consolidated
Statement of Assets and Liabilities
| |
|
Investments in securities, at value | |
Unaffiliated issuers (cost $32,897,076,818) | |
Affiliated issuers (cost $2,000,278,362) | |
| |
Unrealized appreciation on swaps | |
Unrealized appreciation on currency forward contracts | |
Cash pledged as collateral for over-the-counter derivatives | |
| |
Cash denominated in foreign currency (cost $37,955,176) | |
Deposits with broker for futures contracts | |
Receivable for variation margin for futures contracts | |
Receivable for investments sold | |
Receivable for Fund shares sold | |
Dividends and interest receivable | |
Prepaid expenses and other assets | |
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|
Unrealized depreciation on swaps | |
Unrealized depreciation on currency forward contracts | |
Cash received as collateral for over-the-counter derivatives | |
Payable for investments purchased | |
Payable for Fund shares redeemed | |
Deferred foreign capital gains tax | |
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Fund shares outstanding (par value $0.01 each, unlimited shares authorized) | |
Net asset value per share | |
Consolidated
Statement of Operations
| Year Ended
December 31, 2020 |
| |
Dividends (net of foreign taxes of $89,702,448) | |
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Custody and fund accounting fees | |
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Realized and Unrealized Gain (Loss): | |
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Investments in securities of unaffiliated issuers (net of foreign capital gains taxes of $5,341,916) | |
Investments in securities of affiliated issuers | |
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Currency forward contracts | |
Foreign currency transactions | |
Net change in unrealized appreciation/depreciation | |
Investments in securities of unaffiliated issuers (net of change in deferred foreign capital gains tax of $(2,128,563)) | |
Investments in securities of affiliated issuers | |
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Currency forward contracts | |
Foreign currency translation | |
Net realized and unrealized loss | |
Net Change in Net Assets From Operations | |
PAGE 11 ■ Dodge & Cox International Stock FundSee accompanying Notes to Consolidated Financial Statements
Consolidated
Statement of Changes in Net Assets
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Net change in unrealized appreciation/depreciation | | |
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Distributions to Shareholders: | | |
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Proceeds from sale of shares | | |
Reinvestment of distributions | | |
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Net change from Fund share transactions | | |
Total change in net assets | | |
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Net change in shares outstanding | | |
See accompanying Notes to Consolidated Financial StatementsDodge & Cox International Stock Fund ■ PAGE 12
Notes to Consolidated Financial Statements
Note 1: Organization and Significant Accounting Policies
Dodge & Cox International Stock Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund commenced operations on May 1, 2001, and seeks long-term growth of principal and income. The Fund invests primarily in a diversified portfolio of foreign equity securities. Foreign investing, especially in developing countries, has special risks such as currency and market volatility and political and social instability. These and other risk considerations are discussed in the Fund’s Prospectus.
The Fund is an investment company and follows the accounting and reporting guidance issued in Topic 946 by the Financial Accounting Standards Board. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Actual results may differ from those estimates. Significant accounting policies are as follows:
Security valuation The Fund’s net assets are normally valued as of the scheduled close of trading on the New York Stock Exchange (NYSE), generally 4 p.m. Eastern Time, each day that the NYSE is open for business.
Portfolio holdings for which market quotes are readily available are valued at market value. Listed securities, for example, are generally valued using the official quoted close price or the last sale on the exchange that is determined to be the primary market for the security. Equity total return swaps are valued using prices received from independent pricing services which utilize market quotes from underlying reference instruments. Exchange-traded derivatives are valued at the settlement price determined by the relevant exchange. Short-term securities less than 60 days to maturity may be valued at amortized cost if amortized cost approximates current value. Mutual funds are valued at their respective net asset values. Security values are not discounted based on the size of the Fund’s position and may differ from the value a Fund receives upon sale of the securities.
Investments initially valued in currencies other than the U.S. dollar are converted to the U.S. dollar using prevailing exchange rates. Currency forward contracts are valued based on the prevailing forward exchange rates of the underlying currencies. As a result, the Fund’s net assets may be affected by changes in the value of currencies in relation to the U.S. dollar.
If market quotations are not readily available or if normal valuation procedures produce valuations that are deemed unreliable or inappropriate under the circumstances existing at the time, the investment will be valued at fair value as determined in good faith by or under the direction of the Fund’s Board of Trustees. The Board of Trustees has appointed Dodge & Cox, the Fund’s investment manager, to make fair value determinations in accordance with the Dodge & Cox Funds Valuation Policies (“Valuation Policies”), subject to Board oversight. Dodge & Cox has established a Pricing Committee that is comprised of representatives from Treasury, Legal, Compliance, and Operations. The Pricing Committee is responsible for implementing the Valuation Policies, including determining the fair
value of securities and other investments when necessary. The Pricing Committee considers relevant indications of value that are reasonably available to it in determining the fair value assigned to a particular security, such as the value of similar financial instruments, trading volumes, contractual restrictions on disposition, related corporate actions, and changes in economic conditions. In doing so, the Pricing Committee employs various methods for calibrating fair valuation approaches, including a regular review of key inputs and assumptions, back-testing, and review of any related market activity.
As trading in securities on most foreign exchanges is normally completed before the close of the NYSE, the value of non-U.S. securities can change by the time the Fund calculates its net asset value. To address these changes, the Fund may utilize adjustment factors provided by an independent pricing service to systematically value non-U.S. securities at fair value. These adjustment factors are based on statistical analyses of subsequent movements and changes in U.S. markets and financial instruments trading in U.S. markets that represent foreign securities or baskets of securities.
Valuing securities through a fair value determination involves greater reliance on judgment than valuation of securities based on readily available market quotations. In some instances, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a security’s value. When fair value pricing is employed, the prices of securities used by the Fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.
Dividend income and corporate action transactions are recorded on the ex-dividend date, or when the Fund first learns of the dividend/corporate action if the ex-dividend date has passed. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends characterized as return of capital for U.S. tax purposes are recorded as a reduction of cost of investments and/or realized gain. Interest income is recorded on the accrual basis.
Expenses are recorded on the accrual basis. Some expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust using methodologies determined by the nature of the expense.
Distributions to shareholders are recorded on the ex-dividend date.
Foreign taxes The Fund is subject to foreign taxes which may be imposed by certain countries in which the Fund invests. The Fund endeavors to record foreign taxes based on applicable foreign tax law. Withholding taxes are incurred on certain foreign dividends and are accrued at the time the associated dividend is recorded. The Fund files withholding tax reclaims in certain jurisdictions to recover a portion of amounts previously withheld. The Fund records a reclaim receivable based on, among other things, a jurisdiction’s legal obligation to pay reclaims as well as payment history and market convention. In consideration of recent decisions rendered by European
PAGE 13 ■ Dodge & Cox International Stock Fund
Notes to Consolidated Financial Statements
courts, the Fund has filed for additional reclaims ("EU reclaims") related to prior years. A corresponding receivable is established when both the amount is known and significant contingencies or uncertainties regarding collectability are removed. These amounts, if any, are reported in “dividends and interest receivable” in the Consolidated Statement of Assets and Liabilities. During the year ended December 31, 2020, the Fund received $185,158,995 in reclaims and $56,588,904 in interest (net of estimated tax liability and the effect of realized loss from foreign currency translation) related to EU reclaims, which is reported in dividend income and interest income, respectively, in the Consolidated Statement of Operations.
Capital gains taxes are incurred upon disposition of certain foreign securities. Expected capital gains taxes on appreciated securities, if any, are accrued as unrealized losses and incurred capital gains taxes are reflected as realized losses upon the sale of the related security. Currency taxes may be incurred when the Fund purchases certain foreign currencies related to securities transactions and are recorded as realized losses on foreign currency transactions.
Foreign currency translation The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the prevailing exchange rates of such currencies against the U.S. dollar. The market value of investment securities and other assets and liabilities are translated at the exchange rate as of the valuation date. Purchases and sales of investment securities, income, and expenses are translated at the exchange rate prevailing on the transaction date.
Reported realized and unrealized gain (loss) on investments include foreign currency gain (loss) related to investment transactions.
Reported realized and unrealized gain (loss) on foreign currency transactions and translation include the following: disposing/holding of foreign currency, the difference in exchange rate between the trade and settlement dates on securities transactions, the difference in exchange rate between the accrual and payment dates on dividends, and currency losses on the purchase of foreign currency in certain countries that impose taxes on such transactions.
Repurchase agreements Repurchase agreements are transactions under which a Fund purchases a security from a dealer counterparty and agrees to resell the security to that counterparty on a specified future date at the same price, plus a specified interest rate. The Fund’s repurchase agreements are secured by U.S. government or agency securities. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the collateral securities and to apply the proceeds in satisfaction of the obligation.
Consolidation The Fund may invest in certain securities through its wholly owned subsidiary, Dodge & Cox International Stock Fund Cayman, Ltd. (the “Subsidiary”). The Subsidiary is a Cayman Islands exempted company and invests in certain securities consistent with the investment objective of the Fund. The Fund’s Consolidated Financial Statements, including the Consolidated Portfolio of Investments, consist of the holdings and accounts of the Fund and the Subsidiary. All intercompany transactions and balances have
been eliminated. At December 31, 2020, the Subsidiary had net assets of $100, which represented less than 0.01% of the Fund’s consolidated net assets.
Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred.
Note 2: Valuation Measurements
Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below.
■ Level 1: Quoted prices in active markets for identical securities
■ Level 2: Other significant observable inputs (including quoted prices for similar securities, market indices, interest rates, credit risk, forward exchange rates, etc.)
■ Level 3: Significant unobservable inputs (including Fund management’s assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used to value the Fund’s holdings at December 31, 2020:
| | LEVEL 2
(Other Significant
Observable Inputs) |
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Dodge & Cox International Stock Fund ■ PAGE 14
Notes to Consolidated Financial Statements
| | LEVEL 2 (Other Significant Observable Inputs) |
|
| | |
Equity Total Return Swaps |
| | |
| | |
Currency Forward Contracts |
| | |
| | |
Note 3: Derivative Instruments
The Fund may use derivatives either to minimize the impact of certain risks to one or more of its investments (as a ‘‘hedging technique’’) or to implement its investment strategy. A derivative is a financial instrument whose value is derived from a security, currency, interest rate, index, or other financial instrument.
Equity total return swaps Equity total return swaps are contracts that can create long or short economic exposure to an underlying equity security. Under such a contract, one party agrees to make payments to another based on the total return of a notional amount of the underlying security (including dividends and changes in market value), in return for an upfront or periodic payments from the other party based on a fixed or variable interest rate applied to the same notional amount. Equity total return swaps can also be used to hedge against exposure to specific risks associated with a particular issuer or with other companies owned by such an issuer. Investments in equity total return swaps may include certain risks including unfavorable price movements in the underlying reference instrument(s), or a default or failure by the counterparty.
Equity total return swaps are traded over-the-counter. The value of equity total return swaps changes daily based on the value of the underlying equity security. Changes in the market value of equity total return swaps are recorded as unrealized appreciation or depreciation in the Consolidated Statement of Operations. Realized gains and losses on equity total return swaps are recorded in the Consolidated Statement of Operations upon exchange of cash flows for periodic payments and upon the closing or expiration of the swaps.
Futures contracts Futures contracts involve an obligation to purchase or sell (depending on whether the Fund has entered a long or short futures contract, respectively) an asset at a future date, at a price set at the time of the contract. Futures contracts are exchange-traded. Upon entering into a futures contract, the Fund is required to deposit an amount of cash or liquid assets (referred to as "initial margin") in a segregated account with the clearing broker. Subsequent payments (referred to as "variation margin") to and from the clearing broker are made on a daily basis based on changes in the market value of the contract. Changes in the market value of open futures contracts are recorded as unrealized appreciation or depreciation in the Consolidated Statement of Operations. Realized gains and losses on futures contracts are recorded in the Consolidated Statement of Operations at the closing or expiration of the contracts. Cash deposited with a broker as initial margin is recorded in the Consolidated
Statement of Assets and Liabilities. A receivable and/or payable to brokers for daily variation margin is also recorded in the Consolidated Statement of Assets and Liabilities.
Investments in futures contracts may include certain risks, which may be different from, and potentially greater than, those of the underlying securities. To the extent the Fund uses futures, it is exposed to additional volatility and potential losses resulting from leverage.
Currency forward contracts Currency forward contracts are agreements to purchase or sell a specific currency at a specified future date and price. Currency forward contracts are traded over-the-counter. The values of currency forward contracts change daily based on the prevailing forward exchange rates of the underlying currencies. Changes in the value of open contracts are recorded as unrealized appreciation or depreciation in the Consolidated Statement of Operations. When a currency forward contract is closed, the Fund records a realized gain or loss in the Consolidated Statement of Operations equal to the difference between the value at the time the contract was opened and the value at the time it was closed.
Losses from these transactions may arise from unfavorable changes in currency values or if a counterparty does not perform under a contract’s terms.
Additional derivative information The following identifies the location on the Consolidated Statement of Assets and Liabilities and values of the Fund's derivative instruments categorized by primary underlying risk exposure.
| | Foreign
Exchange
Derivatives | |
| | | |
Unrealized appreciation on currency forward contracts | | | |
Unrealized appreciation on swaps | | | |
| | | |
| | | |
| | | |
Unrealized depreciation on currency forward contracts | | | |
Unrealized depreciation on swaps | | | |
| | | |
| Includes cumulative appreciation (depreciation). Only the current day’s variation margin is reported in the Consolidated Statement of Assets and Liabilities. |
PAGE 15 ■ Dodge & Cox International Stock Fund
Notes to Consolidated Financial Statements
The following summarizes the effect of derivative instruments on the Consolidated Statement of Operations, categorized by primary underlying risk exposure.
| | Foreign
Exchange
Derivatives | |
| | | |
| | | |
| | | |
Currency forward contracts | | | |
| | | |
Net change in unrealized appreciation/depreciation |
| | | |
| | | |
Currency forward contracts | | | |
| | | |
The following summarizes the range of volume in the Fund's derivative instruments during the year ended December 31, 2020.
| | |
| | |
| | |
| | |
Currency forward contracts | | |
The Fund may enter into various over-the-counter derivative contracts governed by International Swaps and Derivatives Association master agreements (“ISDA agreements”). The Fund’s ISDA agreements, which are separately negotiated with each dealer counterparty, specify (i) events of default and other events permitting a party to terminate some or all of the contracts thereunder and (ii) the process by which those contracts will be valued for purposes of determining termination payments. If some or all of the contracts under a master agreement are terminated because of an event of default or similar event, the values of all terminated contracts must be netted to determine a single payment owed by one party to the other. To the extent amounts owed to the Fund by its counterparties are not collateralized, the Fund is at risk of those counterparties’ non-performance. The Fund attempts to mitigate counterparty credit risk by entering into contracts only with counterparties it believes to be of good credit quality, by exchanging collateral, and by monitoring the financial stability of those counterparties.
For financial reporting purposes, the Fund does not offset assets and liabilities that are subject to a master netting arrangement in the Consolidated Statement of Assets and Liabilities.
The Fund’s ability to net assets and liabilities and to offset collateral pledged or received is based on contractual netting/offset provisions in the ISDA agreements. The following table presents the Fund’s net exposure to each counterparty for derivatives that are subject to enforceable master netting arrangements as of December 31, 2020.
| Gross
Amount of
Recognized
Assets | Gross
Amount of
Recognized
Liabilities | Cash
Collateral
Pledged /
(Received)1 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Cash collateral pledged/(received) in excess of derivative assets/liabilities is not presented in this table. The total cash collateral is presented on the Fund's Consolidated Statement of Assets and Liabilities. |
| Represents the net amount receivable from (payable to) the counterparty in the event of a default. |
Note 4: Related Party Transactions
Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays a management fee monthly at an annual rate of 0.60% of the Fund’s average daily net assets to Dodge & Cox, investment manager of the Fund.
Fund officers and trustees All officers and two of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.
Note 5: Income Tax Information and Distributions to Shareholders
A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, and such amounts may differ from net investment income and realized gains for financial reporting purposes. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes. Financial reporting records are adjusted for permanent book to tax differences at year end to reflect tax character. Book to tax differences are primarily due to differing treatments of wash sales, expenses, investments in passive foreign investment companies, foreign currency realized gain (loss), foreign capital gains tax, certain corporate action transactions, derivatives, and distributions.
Distributions during the years noted below were characterized as follows for federal income tax purposes.
| Year Ended
December 31, 2020 | Year Ended
December 31, 2019 |
| | |
| | |
Dodge & Cox International Stock Fund ■ PAGE 16
Notes to Consolidated Financial Statements
At December 31, 2020, the tax basis components of distributable earnings were as follows:
Undistributed ordinary income | |
Capital loss carryforward1 | |
| Represents accumulated short term and long-term capital loss as of December 31, 2020, which may be carried forward to offset future capital gains. |
At December 31, 2020, unrealized appreciation and depreciation for investments and derivatives based on cost for federal income tax purposes were as follows:
| |
| |
| |
Net unrealized appreciation | |
Fund management has reviewed the tax positions for open periods (three years and four years, respectively, from filing the Fund’s Federal and State tax returns) as applicable to the Fund, and has determined that no provision for income tax is required in the Fund’s financial statements.
For U.S. income tax purposes, EU reclaims received by the Fund reduce the amounts of foreign taxes that the Fund passes through to shareholders. In the event that EU reclaims received by the Fund during the year exceed foreign withholding taxes paid, and the Fund previously passed foreign tax credit on to its shareholders, the Fund will enter into a closing agreement with the Internal Revenue Service (IRS) in order to pay the associated tax liability on behalf of the Fund's shareholders. During the year ended December 31, 2020, the Fund received EU reclaims in excess of the foreign taxes paid. The Fund determined to enter into a closing agreement with the IRS and recorded the estimated tax as a reduction to dividend and interest income in the Consolidated Statement of Operations.
Note 6: Loan Facilities
Pursuant to an exemptive order issued by the Securities and Exchange Commission (SEC), the Fund may participate in an inter
fund lending facility (Facility). The Facility allows the Fund to borrow money from or loan money to the Funds. Loans under the Facility are made for temporary or emergency purposes, such as to fund shareholder redemption requests. Interest on borrowings is the average of the current repurchase agreement rate and the bank loan rate. There was no activity in the Facility during the year.
All Funds in the Trust participate in a $500 million committed credit facility (Line of Credit) with State Street Bank and Trust Company, to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The maximum amount available to the Fund is $250 million. Each Fund pays an annual commitment fee on its pro-rata portion of the Line of Credit. For the year ended December 31, 2020, the Fund’s commitment fee amounted to $218,128 and is reflected as a Miscellaneous Expense in the Consolidated Statement of Operations. Interest on borrowings is charged at the prevailing rate. There were no borrowings on the Line of Credit during the year.
Note 7: Purchases and Sales of Investments
For the year ended December 31, 2020, purchases and sales of securities, other than short-term securities, aggregated $7,655,078,720 and $15,848,947,636, respectively.
Note 8: Subsequent Events
Subsequent to December 31, 2020, the Fund recognized $20,109,392 in reclaims and $408,287 in interest income on January 29, 2021 related to EU reclaims of taxes previously withheld on certain foreign dividends. Fund management has determined that no other material events or transactions occurred subsequent to December 31, 2020, and through the date of the Fund’s financial statements issuance, which require additional disclosure in the Fund’s financial statements.
PAGE 17 ■ Dodge & Cox International Stock Fund
Consolidated Financial Highlights
Selected data and ratios
(for a share outstanding throughout each period) | |
| | | | | |
Net asset value, beginning of year | | | | | |
Income from investment operations: | | | | | |
| | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions to shareholders from: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Net asset value, end of year | | | | | |
| | | | | |
Ratios/supplemental data: | | | | | |
Net assets, end of year (millions) | | | | | |
Ratio of expenses to average net assets | | | | | |
Ratio of net investment income to average net assets | | | | | |
| | | | | |
|
Net investment income per share includes significant amounts received for EU reclaims related to prior years, which amounted to approximately $0.28 per share. Excluding such
amounts, the ratio of net investment income to average net assets would have been 1.73% and total return would have been approximately 1.55%. |
See accompanying Notes to Consolidated Financial Statements
Dodge & Cox International Stock Fund ■ PAGE 18
Report Of Independent Registered Public Accounting Firm
To the Board of Trustees of the Dodge & Cox Funds and Shareholders of Dodge & Cox International Stock Fund
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of assets and liabilities, including the consolidated portfolio of investments, of Dodge & Cox International Stock Fund and its subsidiary (one of the funds constituting Dodge & Cox Funds, referred to hereafter as the "Fund") as of December 31, 2020, the related consolidated statement of operations for the year ended December 31, 2020, the consolidated statement of changes in net assets for each of the two years in the period ended December 31, 2020, including the related notes, and the financial highlights for each of the five years in the period ended December 31, 2020 (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2020, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended December 31, 2020 and the financial highlights for each of the five years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on the Fund's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our procedures included confirmation of securities owned as of December 31, 2020 by correspondence with the custodian, transfer agent and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
San Francisco, California
February 19, 2021
We have served as the auditor of one or more investment companies in the Dodge & Cox Funds since 1931.
PAGE 19 ■ Dodge & Cox International Stock Fund
Special 2020 Tax Information (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code:
In 2020, the Fund elected to pass through to shareholders foreign source income of $1,318,952,251 and foreign taxes paid of $0.
The Fund designates up to a maximum of $940,369,511 of its distributions paid to shareholders in 2020 as qualified dividends (treated for federal income tax purposes in the hands of shareholders as taxable at a maximum rate of 20%).
For shareholders that are corporations, the Fund designates 1% of its ordinary dividends paid to shareholders in 2020 as dividends from domestic corporations eligible for the corporate dividends received deduction, provided that the shareholder otherwise satisfies applicable requirements to claim that deduction.
Funds' Liquidity Risk Management Program
(unaudited)
The Funds have adopted and implemented a written liquidity risk management program (“Program”) as required by Rule 22e-4 under the Investment Company Act. The Program is reasonably designed to assess and manage the Fund’s liquidity risk, taking into consideration the Fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions; its short and long-term cash flow projections; and its cash holdings and access to other funding sources including the Funds’ interfund lending facility and line of credit.
The Funds’ Board of Trustees has approved the appointment of a Liquidity Risk Management Committee including representatives from Dodge & Cox’s Legal, Compliance, Treasury, Operations, Trading, and Portfolio Management departments, which is responsible for the Program’s administration and oversight and for reporting to the Board on at least an annual basis regarding the Program’s operation and effectiveness.
The Liquidity Risk Management Committee refreshed its assessment of the Funds’ liquidity risk profiles and considered the adequacy and effectiveness of the Program’s operations for the 12 months ended September 30, 2020 (the “covered period”) in order to prepare a written report to the Board of Trustees for consideration at its meeting held on December 16, 2020. The report concluded that (i) while market volatility and reduced liquidity created an unusually challenging liquidity environment during the second quarter of 2020, the Funds had sufficient liquidity to operate effectively throughout the covered period; (ii) each Fund’s investment strategy continues to be appropriate for an open end fund; and (iii) the Funds’ Program is reasonably designed to assess and manage its liquidity risk.
Board Approval of Funds' Investment Management Agreements and Management Fees
(unaudited)
The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on
December 16, 2020, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2021 with respect to each Fund. During the course of the year, the Board received extensive information and materials relating to the investment management and administrative services provided by Dodge & Cox and the performance of each of the Funds.
Information Received
Over the past several years, the Board has requested, received, and discussed a number of special presentations on topics relevant to their annual consideration of the proposed renewal of the Funds’ Agreements, including, in 2020, special presentations relating to trends in the asset management industry, the mutual fund competitive landscape, mutual fund ratings methodologies, fund distribution channels, and fund flows and performance analysis. In addition to the foregoing and in advance of the meetings referred to below, the Board, including the Independent Trustees, requested, received, and reviewed materials relating to the Agreements and the services provided by Dodge & Cox. The Independent Trustees retained Broadridge to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Broadridge. The Broadridge materials included information regarding advisory and administrative fee rates, expense ratios, and transfer agency, custodial, and distribution expenses, as well as performance comparisons to each Fund’s peer group and to a broad-based securities index or combination of indices. The Broadridge materials also included a comparison of expenses of various share classes offered by comparable funds. The materials reviewed by the Board contained information concerning, among other things, Dodge & Cox’s profitability, financial results and condition, management fee revenue, and separate account fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates, sales and redemption data, and the investment that Dodge & Cox makes in research used in managing the Funds. The Board received and reviewed memoranda and related materials addressing, among other things, Dodge & Cox’s services to the Funds; how Dodge & Cox Funds’ fees compare to fees of peer group funds; the different fees, services, costs, and risks associated with other accounts managed by Dodge & Cox as compared to the Dodge & Cox Funds; and the ways in which the Funds realize economies of scale. Throughout the process of reviewing the services provided by Dodge & Cox and preparing for the meeting, the Independent Trustees found Dodge & Cox to be open, forthright, detailed, and helpful in answering questions about all issues. The Board received copies of the Agreements and a memorandum from the independent legal counsel to the Independent Trustees discussing the factors generally regarded as appropriate to consider in evaluating mutual fund management arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the independent legal counsel on November 11, 2020 and again on December 16, 2020 to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements. In considering the
Dodge & Cox International Stock Fund ■ PAGE 20
Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board considered several factors, discussed below, to be key factors and reached the conclusions described below.
Nature, Quality, and Extent of the Service
The Board considered that Dodge & Cox provides a range of services to the Funds in addition to portfolio management, including regulatory compliance, trading desks, proxy voting, transfer agent and custodian oversight, administration, regulatory filings, tax compliance and filings, website, and anti-money laundering. The nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality, and extent of portfolio management, administrative, and shareholder services performed by Dodge & Cox. With regard to portfolio management services, the Board considered Dodge & Cox’s established long-term history of care in the management of the Funds; its consistency in investment approach and depth; the background and experience of the Dodge & Cox U.S. Equity Investment Committee, International Equity Investment Committee, Global Equity Investment Committee, U.S. Fixed Income Investment Committee, and Global Fixed Income Investment Committee, and research analysts responsible for managing the Funds; Dodge & Cox’s methods for assessing the regulatory and investment climate in various jurisdictions; its overall level of attention to its core investment management function; and its commitment to the Funds and their shareholders. The Board reviewed information from Dodge & Cox describing conflicts of interest between the Funds and Dodge & Cox or its other clients, and how Dodge & Cox addresses those conflicts. The Board noted Dodge & Cox’s record of favorable press and industry coverage, as well as its good compliance record, and its reputation as a trusted, shareholder-friendly mutual fund family. In addition, the Board considered that Dodge & Cox manages approximately $202 billion in Fund assets (as of November 30, 2020) with fewer professionals than most comparable funds, and that on average these professionals have more experience and longer tenure than investment professionals at comparable funds. The Board also noted that Dodge & Cox is an investment research-oriented firm with no other business endeavors to distract management’s attention from its research efforts, that its investment professionals adhere to a consistent investment approach across the Funds, and that due to its deliberate strategy with respect to new products, Dodge & Cox has had stability in its mutual fund product offerings over the course of many years and has the fewest funds of any of the 25 largest mutual fund families by assets. The Board further considered the “Gold” analyst rating awarded by Morningstar to all of the Funds (other than the Balanced Fund, which has a “Silver” rating). The Board concluded that it was satisfied with the nature, extent, and quality of investment management and other services provided to the Funds by Dodge & Cox.
Investment Performance
The Board reviewed each Fund’s recent and long-term investment performance (including periods of outperformance and underperformance), as compared to relevant indices and the
performance of such Fund’s peer group and broader Morningstar category. In assessing the performance of the Funds, the Board considered the Funds’ investment returns over various periods and the volatility thereof and concluded that the levels experienced were consistent with Dodge & Cox’s long-term approach and active investment style. The Board also compared the short- and long-term investment performance of the equity funds to value-oriented indices, in recognition of the significant performance divergence between value and growth stocks that has persisted for the last several years. It was noted that equity performance has been consistent with the value oriented investment strategy employed by Dodge & Cox. The Board concluded that Dodge & Cox’s historic, long-term, team-oriented, bottom-up investment approach remains consistent and that Dodge & Cox continues to be distinguished by its integrity, transparency, and independence. The Board considered that the performance of the Funds is the result of a value-oriented investment management process that emphasizes a long-term investment horizon, independent research, a team approach, price discipline, low cost, and low portfolio turnover. The Board concluded that Dodge & Cox has delivered long-term performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.
Costs and Ancillary Benefits
Costs of Services to Funds: Fees and Expenses The Board considered each Fund’s management fee rate and net expense ratio relative to (1) a broad category of other mutual funds with similar portfolio characteristics and share class and expense structures and (2) a smaller group of peers selected by Broadridge based on investment style, share class characteristics, and asset levels. The Board also considered the management fees charged by Dodge & Cox to other clients. In particular, the Board noted that the management fee rate paid by each Fund compares favorably to its broad category and is competitive within the Fund’s peer group. The Board also evaluated the operating structures of the Funds and Dodge & Cox, noting that the Funds do not charge front-end sales commissions or distribution fees, and Dodge & Cox bears, among other things, the cost of most third-party research, reimbursement for shareholder recordkeeping and administrative costs to third-party retirement plan administrators, and administrative and office overhead. The Board noted that the Broadridge report shows that the net expense ratio of every Dodge & Cox Fund is in the least expensive quartile compared to its broad Morningstar category (taking into account, in the case of the Global Bond Fund, voluntary expense reimbursements by Dodge & Cox). The Board noted the Funds’ unusual single-share-class structure and reviewed Broadridge data (including asset-weighted average expense ratios) showing that most of the peer group funds offer several different classes of shares, with different expense ratios, to different categories of investors, and that the Broadridge expense comparisons described above generally compare the net expense ratio of each Dodge & Cox Fund’s single share class to one of the least expensive share classes of the peer fund, even though those share classes are often not available to retail investors. On an asset-weighted basis, each Fund ranks in the least expensive quartile of its Broadridge peer group (taking into account, in the case of the Global Bond Fund, voluntary expense reimbursements by Dodge & Cox). The Board noted that the Funds
PAGE 21 ■ Dodge & Cox International Stock Fund
provide access for small investors to quality investment management at a relatively low cost.
The Board also considered that the Funds are priced to scale, i.e., management fee rates begin at relatively low levels. Even without breakpoints, the Funds’ management fee rates are lower than those of many peer funds whose fee schedules include breakpoints. With respect to non-U.S. funds sponsored and managed by Dodge & Cox that are comparable to the Funds in many respects, the Board noted that the fee rates charged by Dodge & Cox are the same as or higher than the fee rates charged to the Funds. The Board reviewed information regarding the fee rates Dodge & Cox charges to separate accounts that have investment programs similar to those of the Funds, including instances where separate account fees are lower than Fund fees. The Board considered the differences in the nature and scope of services Dodge & Cox provides to the Funds as compared to other client accounts, as well as material differences in regulatory, litigation, and other risks as between the Dodge & Cox Funds and other types of clients. The Board noted that different markets exist for mutual fund and institutional separate account management services and that a comparison of Fund fee rates and separate account fee rates must consider the fact that separate account clients bear additional costs and responsibilities that are included in the cost of a Fund. After consideration of these matters, the Board concluded that the overall costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation, and performance of Dodge & Cox and the low overall expense ratios of the Funds.
Profitability and Costs of Services to Dodge & Cox; "Fall-out" Benefits The Board reviewed reports of Dodge & Cox’s financial position, profitability, and estimated overall value and considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the scope and quality of the services provided. The Board noted in particular that Dodge & Cox’s profits are not generated by high fee rates, but reflect a focused business approach toward investment management. The Board recognized the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that the compensation/profit structure at Dodge & Cox includes a return on shareholder employees’ investment in the firm, which is vital for remaining independent and facilitating retention of management and investment professionals. The Board also considered that Dodge & Cox has in the past closed some of the Funds to new investors to proactively manage growth in those Funds. While these actions are intended to benefit existing Fund shareholders, the effect is to reduce potential revenues to Dodge & Cox from new shareholders. The Board also considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers and reputational benefits to non-U.S. funds sponsored and managed by Dodge & Cox) that Dodge & Cox might receive as a result of its association with the Funds and determined that they are acceptable. The Board also noted that Dodge & Cox continues to invest in its business to provide enhanced services, systems, and research capabilities, all of which benefit the Funds. The Board concluded that Dodge & Cox’s profitability is the keystone of its
independence, stability, and long-term investment performance and that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) is fair and reasonable.
Economies of Scale
The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the level of Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee and expense structure and the fact that the Dodge & Cox Funds build economies of scale into their fee structures by charging low fees from a fund’s inception and keeping overall expenses down as a Fund grows, as compared to other fund complexes that employ fee “breakpoints” only after a fund reaches a certain scale. An assessment of economies of scale must also take into account that Dodge & Cox invests time and resources in each new Fund for months (and sometimes years) prior to launch; in addition, in a Fund’s early periods of operations, expenses are capped, which means that Dodge & Cox subsidizes the operations of a new Fund for a period of time until it reaches scale. The Board also observed that, while total Fund assets have grown over the long term, this growth has not been continuous or evenly distributed across all of the Funds. In addition, the Board noted that Dodge & Cox has shared the benefits of economies of scale with the Funds by adding services to the Funds over time, and that Dodge & Cox’s internal costs of providing investment management, technology, administrative, legal, and compliance services to the Funds continue to increase. For example, Dodge & Cox has increased its global research staff and investment resources over the years to add new capabilities for the benefit of Fund shareholders and to address the increased complexity of investing globally. In addition, Dodge & Cox has made expenditures in other staff, technology, and infrastructure to enable it to integrate credit and equity analyses and to implement its strategy in a more effective manner. Over the last ten years, Dodge & Cox has increased its spending on research, investment management, client servicing, cybersecurity, technology, third-party research, data services, and computer systems for trading, operations, compliance, accounting, and communications at a rate that has outpaced the Funds’ growth rate during the same period. The Board also observed that, even without fee breakpoints, the Funds are competitively priced in a competitive market and that having a low fee from inception is better for shareholders than starting with a higher fee and adding breakpoints. The Board also noted that there are certain diseconomies of scale associated with managing large funds, insofar as certain of the costs and risks associated with portfolio management increase disproportionately as assets grow. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately shares economies of scale that may exist.
Conclusion
Based on their evaluation of all material factors and assisted by the advice of independent legal counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the management fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that
Dodge & Cox International Stock Fund ■ PAGE 22
Dodge & Cox’s services have provided value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.
Fund Holdings
The Fund provides a complete list of its holdings on a quarterly basis by filing the lists with the SEC on Form N-CSR (as of the end of the second and fourth quarters) and on Part F of Form N-PORT (as of the end of the first and third quarters). Shareholders may view the Fund’s Forms N-CSR and Part F of N-PORT on the SEC’s website at sec.gov. A list of the Fund’s quarter-end holdings is also available at dodgeandcox.com on or about the 15th day following each quarter end and remains available on the website until the list is updated for the subsequent quarter.
Proxy Voting
For a free copy of the Fund's proxy voting policies and procedures, please call 800-621-3979, or visit the Fund’s website at dodgeandcox.com, or visit the SEC’s website at sec.gov.Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is also available at dodgeandcox.com or shareholders may view the Fund's Form N-PX at sec.gov.
Household Mailings
The Fund routinely mails shareholder reports and summary prospectuses to shareholders and, on occasion, proxy statements. In order to reduce the volume of mail, when possible, only one copy of these documents will be sent to shareholders who are part of the same family and share the same residential address.
If you have a direct account with the Funds and you do not want the mailing of shareholder reports and summary prospectuses combined with other members in your household, contact the Funds at 800-621-3979. Your request will be implemented within 30 days.
PAGE 23 ■ Dodge & Cox International Stock Fund
Dodge & Cox Funds — Executive Officer & Trustee Information
| Position with Trust
(Year of Election or
Appointment) | Principal Occupation During Past Five Years and Other Relevant Experience | Other Directorships of Public Companies Held
by Trustees |
Interested Trustees and Executive Officers
|
|
Chairman and Trustee
(since 2014) |
Chairman and Director of Dodge & Cox; Chief Investment
Officer and member of U.S. Equity Investment Committee (USEIC), Global Equity Investment Committee (GEIC), and International Equity Investment Committee (IEIC) | |
|
President
(since 2014) and
Trustee (since 1993) |
Chief Executive Officer, President, and Director of
Dodge & Cox; member of U.S. Fixed Income Investment Committee (USFIIC) and Global Fixed Income Investment Committee (GFIIC) | |
|
Senior Vice President
(since 2006) |
Senior Vice President and Director of Dodge & Cox; Director
of International Equity and member of GEIC and IEIC | |
|
Chief Legal Officer
(since 2019) and Secretary (since 2017) |
Vice President, General Counsel, and Secretary (since 2017)
of Dodge & Cox | |
| |
Vice President (since 2020) and Financial Oversight and
Control Analyst (since 2017) of Dodge & Cox; Head of Fund Administration at RS Investments (2014-2016); Treasurer of RS Funds (2014-2016); Chief Financial Officer of RS Funds Distributor, LLC (2014-2016) | |
|
Chief Compliance
Officer (since 2010) |
Vice President and Chief Compliance Officer of Dodge & Cox
| |
|
| |
Professor of Economics, Stanford University; Director of the
Economics of Education Program, National Bureau of Economic Research; Senior Fellow, Hoover Institution and Stanford Institute for Economic Policy Research | |
| |
Senior Counsel of Arnold & Porter (law firm) (2013-2018);
Partner of Arnold & Porter (until 2012); Director of Howard, Rice, Nemerovski, Canady, Falk & Rabkin (1977-2011) | |
| |
CFO, Pixar Animation Studios (1999-2004)
|
Director, Airbnb (vacation rental online
marketplace) (since 2018); Director, Alphabet Inc. (internet information services) (since 2005); Director, Glu Mobile, Inc. (multimedia software) (since 2004); Director, Netflix, Inc. (internet television) (since 2010); Director, Arista Networks (cloud networking) (since 2013) |
| |
Advisory Director, The Presidio Group (2005-2016); Partner
and Managing Director—Global Investment Research at Goldman Sachs (until 2001) | |
Gabriela Franco
Parcella (52) | |
President (since 2020) and Executive Managing Director of
Merlone Geier Partners (2018-2019); Chairman, President, and CEO, Mellon Capital (2011 to 2017); COO, Mellon Capital (1997 to 2011) |
Director, Terreno Realty Corporation
(since 2018) |
| |
Robert and Marion Oster Distinguished Military Fellow,
Hoover Institution (since 2012); Admiral, United States Navy (Ret.); U.S. Navy Chief of Naval Operations (2008-2011) |
Director, Northrop Grumman Corp.
(global security) (since 2012); Director, Maersk Line, Limited (shipping and transportation) (since 2016) |
| |
Executive Vice President, Managing Director—Fixed Income
at Loomis Sayles & Company, L.P. (2003-2011) | |
|
Trustee
(since 2005)
(and 1995-2001) |
Professor of Economics, Stanford University (since 1984);
Senior Fellow, Hoover Institution (since 1996); Under Secretary for International Affairs, United States Treasury (2001-2005) | |
| The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all six series in the Dodge & Cox Funds complex and serves for an indefinite term. |
Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Funds’ website at dodgeandcox.com or calling 800-621-3979.
Dodge & Cox International Stock Fund ■ PAGE 24
dodgeandcox.com
For Fund literature, transactions, and account
information, please visit the Funds’ website.
or write or call:
Dodge & Cox Funds
c/o DST Asset Manager Solutions, Inc.
P.O. Box 219502
Kansas City, Missouri 64121-9502
(800) 621-3979
Investment Manager
Dodge & Cox
555 California Street, 40th Floor
San Francisco, California 94104
(415) 981-1710
This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.This report reflects our views, opinions, and portfolio holdings as of December 31, 2020, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.
Annual Report
December 31, 2020
Balanced Fund
ESTABLISHED 1931
TICKER: DODBX
12/20 BF AR Printed on recycled paper 
The Dodge & Cox Balanced Fund had a total return of 7.9% for the year ended December 31, 2020, compared to a return of 14.7% for the Combined Index (a 60/40 blend of stocks and fixed income securities).
Market Commentary
The U.S. equity market was extremely volatile in 2020. In the first quarter, the coronavirus (COVID-19) evolved into a global pandemic, disrupting major economies around the world and abruptly ending the longest stock market bull run in U.S. history. U.S. equities fell sharply, then quickly rebounded off their March lows and performed strongly for the remainder of the year. A combination of depressed valuations, substantial fiscal and monetary stimulus, and a robust recovery in corporate earnings buoyed the U.S. equity market. After the successful development of effective COVID-19 vaccines in the fourth quarter, segments of the market that had previously lagged—such as Energy, Financials, and Industrials—outperformed as the U.S. stock market surged to an all-time high in December. This rapid and dramatic reversal illustrates the importance of having a long-term view and staying the course with one’s convictions.
Looking back on 2020, we think it is helpful to categorize companies into two groups: businesses largely immune to the economic impact of the pandemic (we describe them as “COVID defensive”) and those hit hard by the economic consequences of the pandemic (“COVID cyclical”). Approximately 70%a of the S&P 500 is in COVID-defensive businesses, mainly those in the Information Technology, Health Care, Consumer Staples, and Utilities sectors. Large technology-related companies have surged, especially the FAANGM stocks—Facebook, Amazon, Apple, Netflix, Google (Alphabet), and Microsoft. In contrast, the other 30% of the S&P 500 is comprised of COVID-cyclical companies—largely in the Financials, Energy, Industrials, and Real Estate sectors—that have not fared well. For example, Energy (down 34%) was the worst-performing sector of the S&P 500 in 2020, reflecting an unprecedented decline in demand due to worldwide stay-at-home orders and the ensuing global economic slowdown.
The U.S. investment-grade fixed income market posted a strong return, fueled by falling U.S. Treasury yields. In late March, yield premiumsb on investment-grade corporate bonds reached levels not seen since the 2008-09 global financial crisis. However, the Federal Reserve’s support of the market through various lending facilities largely calmed fears surrounding liquidity and potential defaults, and Corporate spreads tightened dramatically. Later in 2020, the corporate bond market benefited from better-than-expected corporate earnings, robust investor demand for yield, and expectations that the vaccine rollout and additional stimulus will help normalize economic activity.
Investment Strategy
In response to the rapidly evolving landscape—particularly in March and April—our integrated investment team worked together to stress test the Fund’s holdings and evaluate new investment opportunities. We also reassessed the appropriate asset allocation for the Fund, which we set based on our long-term outlook for the Fund’s equity,
fixed income, and hybrid securities (e.g., preferred stock). In the midst of the market selloff, we added modestly to the Fund’s equity holdings and reduced the Fund’s fixed income weighting in light of incredibly attractive equity valuations.
While we build the portfolio on a bottom-up basis, part of our process in determining the optimal allocation includes modeling expected return and risk (or variability of return) for each broad asset class and for the Fund’s holdings by asset class. Reflecting our more positive outlook for equities than fixed income, the Fund holds 63.3% in unhedged equities, 6.6% in hedged equities, 26.8% in fixed income securities, and 2.3% in hybrid securities (e.g., preferred stock).
We also regularly estimate the Fund’s “effective equity exposure” and attempt to hedge the unwanted equity risk. Common stock allocation is not always the best guide for measuring how the Fund’s portfolio risk compares to its 60/40 benchmark. The Fund’s equity positions, for example, are more pro-cyclical than the S&P 500 benchmark. The Fund also has equity risk from its preferred stock holdings and credit tilt within the bond portfolio. Given our analysis, we initiated a short S&P 500 futures position in the first half of 2020 which had a notional value of approximately -6.6% of the Fund’s total net assets by year end. We are excited about the prospects for the Fund's equity portfolio, but less excited about the overall equity market (e.g., the S&P 500). In shorting equity index futures, we are able to manage the overall equity exposure of the Fund while still maintaining idiosyncratic exposure to the companies we favor.
Equity Strategy
While the value-oriented equity portfolio underperformed the broad-based S&P 500 over the past decade, it outperformed the Russell 1000 Value. Over the same period, U.S. value stocksc underperformed growth stocks by 218 percentage points.d In September 2020, however, the market started to shift in value’s favor, but it is too soon to know whether this could be the beginning of a major reversal in market leadership.
We believe a strong case can be made for investing in value stocks going forward for a number of reasons. First, the valuation differential between value and growth stocks remains wide by historical standards, which creates ample opportunities for value-oriented investors like Dodge & Cox. Second, we are encouraged by the approval of effective COVID-19 vaccines. The COVID-cyclical areas of the market should continue to recover as more of the population becomes vaccinated. Third, history has indicated it is hard to stay a market leader. Several very large, high-valuation technology companies have had a large influence on market returns. We believe many of them are overvalued and face significant challenges, not only in justifying their valuations but also because of mounting competitive and regulatory threats.
The portfolio leans heavily toward COVID-cyclical and value sectors, with notable overweight positions in Financials and Energy. We continue to look for opportunities to optimize the portfolio based on our long-term outlook for each company and assessment of the valuation and market’s expectations. During 2020, we added
PAGE 1 ■ Dodge & Cox Balanced Fund
significantly to various financial services, energy, and low-valuation technology companies.
In Energy, oil prices have started to recover from a low of $20/barrel in the spring to $50/barrel on December 31. We believe there is an opportunity for further price increases as demand continues to recover and supply is impacted by the low investment in oil exploration and production. While Energy led market returns in the fourth quarter, the valuations are still quite depressed in our opinion.
Many of the U.S. growth stocks are expensive technology-related companies. Especially after their strong 2020 performance, Information Technology sector valuations are approaching year 2000-type levels by some measures, and unprofitable technology stocks now account for 32% of total technology stocks, which is close to the March 2000 level of 36%. Given such stretched valuations, the portfolio remains underweight the overall Information Technology sector and is primarily invested in lower-valuation technology stocks. Our view on Financials is highlighted in more detail below.
Financials
In 2020, Financials was one of the worst-performing sectors of the market amid concerns that a weaker economy would lead to increases in credit losses for U.S. banks and lower interest rates would reduce profit margins. However, we believe the large U.S. banks are in a much stronger position compared to past downturns. During the 2008-09 global financial crisis, U.S. banks were at the epicenter of the downturn because of their heavy exposure to the troubled housing market. In contrast, the COVID-19 pandemic is a health crisis that has led to a sudden decline in economic activity. Most U.S. banks entered the current crisis with low leverage, restrained risk taking, and well-diversified sources of revenue. Moreover, in anticipation of a sharper downturn, many banks have set aside significant provisions for expected loan losses and remain broadly reserved for higher levels of joblessness than the United States is current experiencing.
U.S. Financials’ valuations are near historic lows compared to the stock market as a whole. Specifically, the S&P 500 Banks industry trades at 13.4 times forward estimated earnings compared to 23.7 times for the broader S&P 500. This sizeable discount does not fully reflect the banks’ underlying strength, in our opinion. Looking ahead, we believe large banks are well positioned to benefit from the vaccine rollout and anticipated economic rebound, which should lead to better growth and lower credit costs in 2021. We expect capital returns to increase, as the Federal Reserve has allowed all the large banks to resume paying dividends and buying back their shares.
On December 31, the portfolio had significant exposure to Financials: 21.6% compared to 10.4% for the S&P 500 and 19.6% for the Russell 1000 Value. Capital One Financiale was the equity portfolio’s largest holding at year end.
Capital One Financial
Capital One is a leading financial services company trading at an attractive valuation and, in our opinion, it represents exceptional long-term value. The bank’s most profitable business—credit cards—felt the impact of weaker consumer spending as the pandemic took its toll on the economy. Yet, like many other Financials, it is well positioned
to benefit from a healthier economy that we believe should emerge once vaccinations become widespread. The company has a number of strengths: scale in credit cards and auto lending, robust deposits, advanced digital banking platform, and a legacy of heavy investment in technology. Management is focused on the long term, committed to improving the bank’s expense efficiency, and has a track record of earning higher risk-adjusted margins than its peers. At 11 times forward earnings, Capital One is trading at a substantial discount to the overall market, and we opportunistically added to the portfolio’s position in this stock during 2020.
Fixed Income Strategy
Over the course of the year, we made significant changes to portfolio positioning in response to rapid fluctuations in valuations. Our experienced investment team, with its knowledge of companies and industries and how they perform through economic and capital market cycles, was critical in fostering the confidence necessary to lean heavily into an extremely challenging environment.
The Credit Sector: Market Volatility Creates Opportunity
Credit investors faced three distinct environments in 2020, essentially requiring us to navigate an entire credit cycle over the course of one calendar year. As we alternated between trim and accumulation mode, based on valuations, the portfolio’s creditf weighting shifted significantly throughout the year.
First, in January and early February, with credit yield premiums near their narrowest levels in years, we reduced the portfolio’s credit exposure, continuing a process that began in mid-2019. Over this period, we gradually trimmed exposure to issuers with less compelling risk/reward prospects.
This strict price discipline provided significant dry powder that we were able to deploy during the opportunity-rich second phase of the 2020 credit environment. As the crisis unfolded in March, many high-quality, fundamentally creditworthy companies issued long-term debt to extend maturity profiles and weather the uncertain environment, and they did so at yield premiums more commonly associated with lower-rated credits. This provided a very attractive entry point for us to selectively invest in leading companies with solid business franchises and balance sheets. Drawing on the depth and breadth of our global industry analyst team, we added 17 carefully selected new corporate issuers to the portfolio across a range of industries. Examples include Anheuser-Busch InBev, Coca-Cola, Exxon Mobile, FedEx, Oracle, and T-Mobile.
The year’s third credit environment was defined by a stretch of narrowing credit yield premiums that unfolded through the second half of the year. With spreads declining to pre-pandemic levels, we thought it was prudent to dial back some of the portfolio’s overweight to credit. We reduced the portfolio’s exposure to certain issuers that had performed exceptionally well, leaving their valuations less attractive on a go-forward basis.
We continue to view the credit sector positively for several reasons. Corporate America, broadly speaking, weathered the 2020 storm and is in good financial shape. We expect economic growth to rebound in 2021 as more people are vaccinated and begin to resume their normal lives. Further stimulus seems likely to offer additional
Dodge & Cox Balanced Fund ■ PAGE 2
support with President Joe Biden taking office alongside the newly Democratic-controlled Congress. Global central bank liquidity is abundant, and the Fed may reestablish corporate credit facilities if market conditions deteriorate, providing an implicit level of support for the sector. Finally, the portfolio’s credit holdings are differentiated from the market as a whole, grounded in the in-depth research of our investment team, and feature a substantially wider yield premium than the broad credit market.
The Securitized Sector: Recrafting the Agency MBS Portfolio
The portfolio’s holdings in the Securitized sector consist predominantly of Agencyg MBS, with a small weighting in primarily AAA-rated asset-backed securities. As a group, these securities can provide attractive total-return cash flows in the front to intermediate part of the yield curve. They can also play an important role in the overall portfolio because of their dependable liquidity and high credit quality. We relied particularly on the portfolio’s Agency MBS as a durably liquid source of funds for other investment opportunities amidst the market turmoil in March.
It was likewise an active year for us in repositioning the MBS portfolio. For example, we trimmed a large portion of the portfolio’s 30-year 4.5% coupon MBS holdings in the first half of the year in light of our appraisal that valuations did not adequately reflect the future prepayment picture. We invested these proceeds in 30-year 2% and 2.5% coupon securities as relative pricing for these securities became more attractive and we believed they offered better prepayment protection.
Going forward, we anticipate somewhat elevated prepayment activity with mortgage rates near record lows. Mortgage originators have proven remarkably adept at refinancing borrowers even with elevated unemployment and shelter-in-place restrictions. As market participants compete for share, mortgage rates may continue to decline even if U.S. Treasury rates remain stable.
Defensive Duration: Mitigating Effect of Rising Long-Term Treasury Yields over Time
We extended the portfolio’s durationh modestly over the year, but maintained its lower duration position versus the Bloomberg Barclays U.S. Agg. We believe a modest rise in longer-term rates—a rise that is slightly higher than what forward markets predict—is likely over the next year or two as more people are vaccinated, economic activity normalizes, and inflation picks up. Reflecting this, we’ve positioned the portfolio with less exposure to the longer maturity (10+ year) part of the market where we think more risk resides. Given our view, we believe it is important to remain defensive in order to mitigate the negative effect of any bond market price declines that could stem from potential increases in long-term interest rates over time.
In Closing
We remain optimistic about the long-term outlook for our value-oriented Fund. We have strong conviction in the equity portfolio, which is comprised mostly of companies with strong businesses that we believe would benefit from sustained economic growth. Within the fixed income portfolio, we continue to seek opportunities to build yield through our bottom-up, research-driven investment approach. In
addition, the Fund is broadly diversified with exposure to many different investment drivers.
Thank you for your continued confidence in our firm. As always, we welcome your comments and questions.
For the Board of Trustees, | |
| |
| |
January 29, 2021
|
Unless otherwise specified, all weightings and characteristics are as of
December 31, 2020. |
| Yield premiums are one way to measure a security’s valuation. Narrowing yield premiums results in a higher valuation. Widening yield premiums results in a lower valuation. |
| Value stocks are the lower valuation portion of the equity market, and growth stocks are the higher valuation portion. |
| The Russell 1000 Value Index had a total return of 171.3% from December 31, 2010 through December 31, 2020 compared to 389.3% for the Russell 1000 Growth Index. |
| The use of specific examples does not imply that they are more or less attractive investments than the portfolio’s other holdings. |
| Credit securities refers to corporate bonds and government-related securities, as classified by Bloomberg, as well as Rio Oil Finance Trust, an asset-backed security that we group as a credit investment. |
| The U.S. Government does not guarantee the Fund’s shares, yield, or net asset value. The agency guarantee (by, for example, Ginnie Mae, Fannie Mae, or Freddie Mac) does not eliminate market risk. |
| Duration is a measure of a bond’s (or a bond portfolio’s) price sensitivity to changes in interest rates. |
PAGE 3 ■ Dodge & Cox Balanced Fund
2020 Performance Review
The Fund underperformed the Combined Index by 6.9 percentage points in 2020. The positive relative impact of the Fund’s lower allocation to fixed income and higher allocation to equities was more than offset by the equity portfolio’s significant underperformance.
Equity Investments*
■ Relative results were hurt by strong returns from a small group of large internet- and technology-related companies not held in the portfolio.
■ Returns from holdings in the Information Technology sector (up 22% versus up 44% for the S&P 500 sector) detracted. Hewlett Packard Enterprise was weak.
■ The portfolio’s overweight position and holdings in the Energy sector (down 40% versus down 34% for the S&P 500 sector) hindered performance. Occidental Petroleum lagged.
Fixed Income Investments
■ Asset allocation was significantly positive. The substantial increase we made to the portfolio’s corporate sector weighting amid the market volatility in March and April and the subsequent outperformance of credit contributed to relative returns.
■ Security selection within credit was positive as several issuers outperformed, most notably Pemex, Petrobras, and Imperial Brands.
■ The portfolio’s below-benchmark duration position (74%** of the Bloomberg Barclays U.S. Agg’s duration) hampered relative returns as Treasury yields declined significantly in the first half of the year.
* Excludes the Fund’s hybrid securities.
** Denotes Fund positioning at the beginning of the period
Key Characteristics of Dodge & Cox
Independent Organization
Dodge & Cox is one of the largest privately owned investment managers in the world. We remain committed to independence, with a goal of providing the highest quality investment management service to our existing clients.
90 Years of Investment Experience
Dodge & Cox was founded in 1930. We have a stable and well- qualified team of investment professionals, most of whom have spent their entire careers at Dodge & Cox.
Experienced Investment Team
The U.S. Equity Investment Committee, which is responsible for determining the asset allocation of the Balanced Fund and managing the equity portion of the Balanced Fund, is an eight-member committee with an average tenure at Dodge & Cox of 23 years. The U.S. Fixed Income Investment Committee, which is responsible for managing the debt portion of the Balanced Fund, is a nine-member committee with an average tenure of 21 years.
One Business with a Single Research Office
Dodge & Cox manages equity (domestic, international, and global), fixed income (domestic and global), and balanced investments, operating from one office in San Francisco.
Consistent Investment Approach
Our team decision-making process involves thorough, bottom- up fundamental analysis of each investment.
Long-Term Focus and Low Expenses
We invest with a three- to five-year investment horizon, which has historically resulted in low turnover relative to our peers. We manage Funds that maintain low expense ratios.
Risks: The Fund is subject to market risk, meaning holdings in the Fund may decline in value for extended periods due to the financial prospects of individual companies or due to general market and economic conditions. The Fund also invests in individual bonds whose yields and market values fluctuate, so that an investment may be worth more or less than its original cost. Debt securities are subject to interest rate risk, credit risk, and prepayment and call risk, all of which could have adverse effects on the value of the Fund. A low interest rate environment creates an elevated risk of future negative returns. Financial intermediaries may restrict their market making activities for certain debt securities, which may reduce the liquidity and increase the volatility of such securities. Please read the prospectus and summary prospectus for specific details regarding the Fund's risk profile.
Dodge & Cox Balanced Fund ■ PAGE 4
Growth of $10,000 Over 10 Years
For An Investment Made On December 31, 2010 
Average Annual Total Return
For Periods Ended December 31, 2020
| | | | |
Dodge & Cox Balanced Fund | | | | |
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Bloomberg Barclays U.S. Aggregate Bond Index | | | | |
| | | | |
Returns represent past performance and do not guarantee future results. Investment return and share price will fluctuate with market conditions, and investors may have a gain or loss when shares are sold. Fund performance changes over time and currently may be significantly lower than stated. Performance is updated and published monthly. Visit the Fund’s website at dodgeandcox.com or call 800-621-3979 for current performance figures.
The Fund's total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include dividends and/or interest income but, unlike Fund returns, do not reflect fees or expenses.
Standard & Poor’s, Standard & Poor’s 500, and S&P 500® are trademarks of S&P Global Inc. Bloomberg is a registered trademark of Bloomberg Finance L.P. and its affiliates. Barclays® is a trademark of Barclays Bank PLC.
(a) The Combined Index reflects an unmanaged portfolio (rebalanced monthly) of 60% of the S&P 500 Index, which is a market capitalization-weighted index of 500 large-capitalization stocks commonly used to represent the U.S. equity market, and 40% of the Bloomberg Barclays U.S. Aggregate Bond Index (Bloomberg Barclays U.S. Agg), which is a widely recognized, unmanaged index of U.S. dollar-denominated, investment-grade, taxable fixed income securities. The Fund may, however, invest up to 75% of its total assets in equity securities.
Fund Expense Example
As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.
Actual Expenses
The first line of the table below provides information about actual account values and expenses based on the Fund's actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period.
Hypothetical Example For Comparison With Other Mutual Funds
Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund's actual return). The amount under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.
Six Months Ended
December 31, 2020 | Beginning Account Value
7/1/2020 | Ending Account Value
12/31/2020 | Expenses Paid
During Period* |
Based on Actual Fund Return | | | |
Based on Hypothetical 5% Yearly Return | | | |
| Expenses are equal to the Fund’s annualized expense ratio of 0.53%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. Though other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).
PAGE 5 ■ Dodge & Cox Balanced Fund
Portfolio Information (unaudited) December 31, 2020
Equity Sector Diversification (%) | |
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Fixed Income Sector Diversification (%) | |
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The Fund holds a short S&P 500 futures position with a notional value of approximately -6.6% of the Fund’s total net assets. This position is intended to reduce the exposure of the
Fund’s equity allocation to a general downturn in the equity markets, but if the S&P 500 index increases in value, the position will cause a loss for the Fund, which could be in addition to losses suffered in respect to its stock holdings. |
| Net Cash & Other includes cash, short-term investments, derivatives, receivables, and payables. |
Dodge & Cox Balanced Fund ■ PAGE 6
Portfolio of Investments December 31, 2020
|
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Communication Services: 8.7% |
Media & Entertainment: 8.6% |
Alphabet, Inc., Class A(a) | | |
Alphabet, Inc., Class C(a) | | |
Charter Communications, Inc., Class A(a) | | |
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DISH Network Corp., Class A(a) | | |
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Telecommunication Services: 0.1% |
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Consumer Discretionary: 1.7% |
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Booking Holdings, Inc.(a) | | |
Qurate Retail, Inc., Series A | | |
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Food, Beverage & Tobacco: 0.9% |
Molson Coors Beverage Company, Class B | | |
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Baker Hughes Co., Class A | | |
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National Oilwell Varco, Inc. | | |
Occidental Petroleum Corp. | | |
Occidental Petroleum Corp., Warrant(a) | | |
Schlumberger, Ltd. (Curacao/United States) | | |
The Williams Companies, Inc. | | |
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Diversified Financials: 10.7% |
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Bank of New York Mellon Corp. | | |
Capital One Financial Corp. | | |
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Goldman Sachs Group, Inc. | | |
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Aegon NV, NY Shs (Netherlands) | | |
Brighthouse Financial, Inc.(a) | | |
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Health Care Equipment & Services: 4.1% |
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Medtronic PLC (Ireland/United States) | | |
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Pharmaceuticals, Biotechnology & Life Sciences: 7.4% |
Alnylam Pharmaceuticals, Inc.(a) | | |
AstraZeneca PLC ADR (United Kingdom) | | |
BioMarin Pharmaceutical, Inc.(a) | | |
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GlaxoSmithKline PLC ADR (United Kingdom) | | |
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Novartis AG ADR (Switzerland) | | |
Roche Holding AG ADR (Switzerland) | | |
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Johnson Controls International PLC (Ireland/United States) | | |
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Raytheon Technologies Corp. | | |
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Information Technology: 13.2% |
Semiconductors & Semiconductor Equipment: 1.5% |
Microchip Technology, Inc. | | |
Software & Services: 3.6% |
Cognizant Technology Solutions Corp., Class A | | |
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Micro Focus International PLC ADR(a) (United Kingdom) | | |
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Technology, Hardware & Equipment: 8.1% |
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Dell Technologies, Inc., Class C(a) | | |
Hewlett Packard Enterprise Co. | | |
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TE Connectivity, Ltd. (Switzerland) | | |
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PAGE 7 ■ Dodge & Cox Balanced FundSee accompanying Notes to Financial Statements
Portfolio of Investments December 31, 2020
Common Stocks (continued) |
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LyondellBasell Industries NV, Class A (Netherlands) | | |
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Total Common Stocks
(Cost $6,579,071,100) | | |
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Communication Services: 0.4% |
Media & Entertainment: 0.4% |
NBCUniversal Enterprise, Inc. 5.25%(b)(c) | | |
Consumer Discretionary: 0.1% |
|
Qurate Retail, Inc., 8.00%, 3/15/2031 | | |
|
|
Bank of America Corp. 6.10%(b)(d) | | |
Bank of America Corp. 6.25%(b)(d) | | |
Citigroup, Inc. 5.95%(b)(d) | | |
Citigroup, Inc. 5.95%(b)(d) | | |
Citigroup, Inc. 6.25%(b)(d) | | |
JPMorgan Chase & Co. 6.10%(b)(d) | | |
Wells Fargo & Co. 5.875%(b)(d) | | |
| | |
Total Preferred Stocks
(Cost $286,905,069) | | |
|
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|
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|
|
Petroleo Brasileiro SA (Brazil) | | |
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| | |
Petroleos Mexicanos (Mexico) | | |
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| | |
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|
L.A. Unified School District GO | | |
|
| | |
| | |
New Jersey Turnpike Authority RB | | |
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| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
|
|
Small Business Admin. - 504 Program | | |
Series 2001-20E 1, 6.34%, 5/1/21 | | |
Series 2001-20G 1, 6.625%, 7/1/21 | | |
Series 2003-20J 1, 4.92%, 10/1/23 | | |
Series 2007-20F 1, 5.71%, 6/1/27 | | |
| | |
|
Rio Oil Finance Trust (Brazil) | | |
| | |
| | |
| | |
| | |
|
Navient Student Loan Trust | | |
| | |
+1.30%, 1.448%, 3/25/66(c) | | |
+0.80%, 0.948%, 7/26/66(c) | | |
+1.15%, 1.298%, 7/26/66(c) | | |
+1.05%, 1.198%, 12/27/66(c) | | |
+0.75%, 0.898%, 3/25/67(c) | | |
+1.00%, 1.148%, 2/27/68(c) | | |
+0.70%, 0.848%, 2/25/70(c) | | |
| | |
| | |
| | |
+0.55%, 0.765%, 10/25/64(c) | | |
SMB Private Education Loan Trust (Private Loans) | | |
Series 2018-B A2A, 3.60%, 1/15/37(c) | | |
| | |
| | |
|
|
Fannie Mae Multifamily DUS | | |
Pool AL8144, 2.63%, 10/1/22(e) | | |
Pool AL9086, 2.30%, 7/1/23(e) | | |
Freddie Mac Multifamily Interest Only | | |
Series K055 X1, 1.362%, 3/25/26(e) | | |
Series K056 X1, 1.261%, 5/25/26(e) | | |
Series K064 X1, 0.605%, 3/25/27(e) | | |
Series K065 X1, 0.671%, 4/25/27(e) | | |
Series K066 X1, 0.75%, 6/25/27(e) | | |
Series K069 X1, 0.363%, 9/25/27(e) | | |
Series K090 X1, 0.705%, 2/25/29(e) | | |
| | |
| | |
See accompanying Notes to Financial StatementsDodge & Cox Balanced Fund ■ PAGE 8
Portfolio of Investments December 31, 2020
Debt Securities (continued) |
| | |
|
Federal Agency CMO & REMIC: 2.3% |
Dept. of Veterans Affairs | | |
Series 1995-1 1, 6.193%, 2/15/25(e) | | |
Series 1995-2C 3A, 8.793%, 6/15/25 | | |
Series 2002-1 2J, 6.50%, 8/15/31 | | |
| | |
Trust 2002-33 A1, 7.00%, 6/25/32 | | |
Trust 2009-30 AG, 6.50%, 5/25/39 | | |
Trust 2009-66 ET, 6.00%, 5/25/39 | | |
Trust 2001-T7 A1, 7.50%, 2/25/41 | | |
Trust 2001-T5 A3, 7.50%, 6/19/41(e) | | |
Trust 2001-T4 A1, 7.50%, 7/25/41 | | |
Trust 2001-T8 A1, 7.50%, 7/25/41 | | |
Trust 2001-W3 A, 7.00%, 9/25/41(e) | | |
Trust 2001-T10 A2, 7.50%, 12/25/41 | | |
Trust 2013-106 MA, 4.00%, 2/25/42 | | |
Trust 2002-W6 2A1, 7.00%, 6/25/42(e) | | |
Trust 2002-W8 A2, 7.00%, 6/25/42 | | |
Trust 2003-W2 1A2, 7.00%, 7/25/42 | | |
Trust 2003-W2 1A1, 6.50%, 7/25/42 | | |
Trust 2003-W4 4A, 6.147%, 10/25/42(e) | | |
Trust 2012-121 NB, 7.00%, 11/25/42 | | |
Trust 2004-T1 1A2, 6.50%, 1/25/44 | | |
Trust 2004-W2 5A, 7.50%, 3/25/44 | | |
Trust 2004-W8 3A, 7.50%, 6/25/44 | | |
Trust 2005-W4 1A2, 6.50%, 8/25/45 | | |
Trust 2009-11 MP, 7.00%, 3/25/49 | | |
| | |
| | |
| | |
Series 16 PK, 7.00%, 8/25/23 | | |
Series T-48 1A4, 5.538%, 7/25/33 | | |
Series T-51 1A, 6.50%, 9/25/43(e) | | |
Series T-59 1A1, 6.50%, 10/25/43 | | |
Series 4281 BC, 4.50%, 12/15/43(e) | | |
| | |
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| | |
Federal Agency Mortgage Pass-Through: 7.9% |
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| | |
| | |
| | |
| | |
2.795%, 7/1/39 - 12/1/44(e) | | |
| | |
| | |
| | |
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| | |
| | |
| | |
Freddie Mac Gold, 15 Year | | |
| | |
PAGE 9 ■ Dodge & Cox Balanced FundSee accompanying Notes to Financial Statements
Portfolio of Investments December 31, 2020
Debt Securities (continued) |
| | |
Freddie Mac Gold, 20 Year | | |
| | |
| | |
Freddie Mac Gold, 30 Year | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Freddie Mac Pool, 30 Year | | |
| | |
| | |
| | |
7.50%, 11/15/24 - 10/15/25 | | |
| | |
| | |
| | |
|
|
| | |
| | |
| | |
| | |
| | |
| | |
Barclays PLC (United Kingdom) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Capital One Financial Corp. | | |
| | |
| | |
| | |
| | |
+6.37%, 6.584%, 10/30/40(b) | | |
| | |
| | |
| | |
HSBC Holdings PLC (United Kingdom) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Lloyds Banking Group PLC (United Kingdom) | | |
| | |
| | |
NatWest Group PLC (United Kingdom) | | |
| | |
| | |
| | |
|
| | |
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|
| | |
| | |
| | |
Anheuser-Busch InBev SA/NV (Belgium) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
British American Tobacco PLC (United Kingdom) | | |
| | |
| | |
| | |
| | |
Burlington Northern Santa Fe LLC(g) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Charter Communications, Inc. | | |
| | |
| | |
| | |
| | |
| | |
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| | |
| | |
| | |
| | |
| | |
Elanco Animal Health, Inc. | | |
| | |
| | |
See accompanying Notes to Financial StatementsDodge & Cox Balanced Fund ■ PAGE 10
Portfolio of Investments December 31, 2020
Debt Securities (continued) |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Ford Motor Credit Co. LLC(g) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Imperial Brands PLC (United Kingdom) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Occidental Petroleum Corp. | | |
| | |
| | |
| | |
| | |
Prosus NV(g) (Netherlands) | | |
| | |
| | |
RELX PLC (United Kingdom) | | |
| | |
| | |
| | |
| | |
| | |
Telecom Italia SPA (Italy) | | |
| | |
| | |
| | |
| | |
| | |
The Williams Companies, Inc. | | |
| | |
| | |
| | |
| | |
| | |
Ultrapar Participacoes SA (Brazil) | | |
| | |
| | |
| | |
| | |
Verizon Communications, Inc. | | |
| | |
Vodafone Group PLC (United Kingdom) | | |
| | |
|
| | |
| | |
| | |
| | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Total Debt Securities
(Cost $3,491,972,905) | |
Equity-Linked Notes: 1.0% |
| | |
Communication Services: 0.6% |
Media & Entertainment: 0.6% |
Facebook, Inc., 1/25/2022(a)(c)(h) | | |
Information Technology: 0.4% |
Software & Services: 0.4% |
Microsoft Corp., 1/25/2022(a)(c)(h) | | |
Total Equity-Linked Notes
(Cost $141,851,545) | | |
Short-Term Investments: 2.1% |
| | |
Repurchase Agreements: 1.7% |
Fixed Income Clearing Corporation(i)
0.000%, dated 12/31/20, due 1/4/21, maturity value $240,734,000 | | |
|
State Street Institutional U.S. Government Money Market Fund | | |
Total Short-Term Investments
(Cost $297,038,666) | |
Total Investments In Securities
(Cost $10,796,839,285) | | |
Other Assets Less Liabilities | | |
| | |
PAGE 11 ■ Dodge & Cox Balanced FundSee accompanying Notes to Financial Statements
Portfolio of Investments December 31, 2020
| |
| Hybrid security: characteristics of both a debt and equity security. |
| Security exempt from registration under Rule 144A of the Securities Act of 1933. The security may be resold in transactions exempt from registration, normally to qualified institutional buyers. |
| Variable rate security: fixed-to-float security pays an initial fixed interest rate and will pay a floating interest rate established at a predetermined time in the future. The interest rate shown is the rate as of period end. |
| Variable rate security: interest rate is determined by the interest rates of underlying pool of assets that collateralize the security. The interest rate of the security may change due to a change in the interest rates or the composition of underlying pool of assets. The interest rate shown is the rate as of period end. |
| The security was purchased on a to-be-announced (TBA) when-issued basis. |
| |
| Equity-linked notes issued by Goldman Sachs. The Facebook, Inc. and Microsoft Corp. equity-linked notes provide exposure to the price of their underlying common stock, subject to a cap of $340.00 and $250.00 respectively. |
| Repurchase agreement is collateralized by U.S. Treasury Note 1.75%, 11/30/21 and Treasury Bills, 12/30/21. Total collateral value is $245,548,725. |
| |
| In determining a company’s country designation, the Fund generally references the country of incorporation. In cases where the Fund considers the country of incorporation to be a “jurisdiction of convenience” chosen primarily for tax purposes or in other limited circumstances, the Fund uses the country designation of an appropriate broad-based market index. In those cases, two countries are listed—the country of incorporation and the country designated by an appropriate index, respectively. |
| Debt securities are grouped by parent company unless otherwise noted. Actual securities may be issued by the listed parent company or one of its subsidiaries. |
| Debt securities with floating interest rates are linked to the referenced benchmark; the interest rate shown is the rate as of period end. |
ADR: American Depositary Receipt |
ARM: Adjustable Rate Mortgage |
CMBS: Commercial Mortgage-Backed Security |
CMO: Collateralized Mortgage Obligation |
DUS: Delegated Underwriting and Servicing |
|
|
REMIC: Real Estate Mortgage Investment Conduit |
Futures Contracts
| | | | Value /
Unrealized
Appreciation/
(Depreciation) |
E-Mini S&P 500 Index— Short Position | | | | |
See accompanying Notes to Financial StatementsDodge & Cox Balanced Fund ■ PAGE 12
Statement of Assets and Liabilities
| |
|
Investments in securities, at value (cost $10,796,839,285) | |
Deposits with broker for futures contracts | |
Receivable for investments sold | |
Receivable for Fund shares sold | |
Dividends and interest receivable | |
Prepaid expenses and other assets | |
| |
|
Cash received as collateral for TBA securities | |
Payable for variation margin for futures contracts | |
Payable for investments purchased | |
Payable for Fund shares redeemed | |
| |
| |
| |
| |
|
| |
| |
| |
Fund shares outstanding (par value $0.01 each, unlimited shares authorized) | |
Net asset value per share | |
Statement of Operations
| Year Ended
December 31, 2020 |
| |
Dividends (net of foreign taxes of $3,463,242) | |
| |
| |
| |
| |
Custody and fund accounting fees | |
| |
| |
| |
| |
| |
| |
| |
| |
Realized and Unrealized Gain (Loss): | |
| |
Investments in securities | |
| |
Foreign currency transactions | |
Net change in unrealized appreciation/depreciation | |
Investments in securities | |
| |
Net realized and unrealized gain | |
Net Change in Net Assets From Operations | |
Statement of Changes in Net Assets
| | |
| | |
| | |
| | |
| | |
Net change in unrealized appreciation/depreciation | | |
| | |
Distributions to Shareholders: | | |
| | |
| | |
Proceeds from sale of shares | | |
Reinvestment of distributions | | |
| | |
Net change from Fund share transactions | | |
Total change in net assets | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Net change in shares outstanding | | |
PAGE 13 ■ Dodge & Cox Balanced FundSee accompanying Notes to Financial Statements
Notes to Financial Statements
Note 1: Organization and Significant Accounting Policies
Dodge & Cox Balanced Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund commenced operations on June 26, 1931, and seeks regular income, conservation of principal, and an opportunity for long-term growth of principal and income. Risk considerations and investment strategies of the Fund are discussed in the Fund’s Prospectus.
The Fund is an investment company and follows the accounting and reporting guidance issued in Topic 946 by the Financial Accounting Standards Board. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Actual results may differ from those estimates. Significant accounting policies are as follows:
Security valuation The Fund’s net assets are normally valued as of the scheduled close of trading on the New York Stock Exchange (NYSE), generally 4 p.m. Eastern Time, each day that the NYSE is open for business.
Portfolio securities for which market quotes are readily available are valued at market value. Listed securities, for example, are generally valued using the official quoted close price or the last sale on the exchange that is determined to be the primary market for the security. Equity-linked notes are valued using prices received from independent pricing services which utilize market quotes from underlying reference instruments.
Debt securities and certain preferred stocks are valued using prices received from independent pricing services which utilize dealer quotes, recent transaction data, pricing models, and other inputs to arrive at market-based valuations. Pricing models may consider quoted prices for similar securities, interest rates, cash flows (including prepayment speeds), and credit risk. Exchange-traded derivatives are valued at the settlement price determined by the relevant exchange. Short-term securities less than 60 days to maturity may be valued at amortized cost if amortized cost approximates current value. Mutual funds are valued at their respective net asset values. Security values are not discounted based on the size of the Fund’s position and may differ from the value a Fund receives upon sale of the securities. All securities held by the Fund are denominated in U.S. dollars.
If market quotations are not readily available or if normal valuation procedures produce valuations that are deemed unreliable or inappropriate under the circumstances existing at the time, the investment will be valued at fair value as determined in good faith by or under the direction of the Fund’s Board of Trustees. The Board of Trustees has appointed Dodge & Cox, the Fund’s investment manager, to make fair value determinations in accordance with the Dodge & Cox Funds Valuation Policies (“Valuation Policies”), subject to Board oversight. Dodge & Cox has established a Pricing Committee that is comprised of representatives from Treasury, Legal, Compliance, and Operations. The Pricing Committee is responsible for implementing the Valuation Policies, including determining the fair
value of securities and other investments when necessary. The Pricing Committee considers relevant indications of value that are reasonably available to it in determining the fair value assigned to a particular security, such as the value of similar financial instruments, trading volumes, contractual restrictions on disposition, related corporate actions, and changes in economic conditions. In doing so, the Pricing Committee employs various methods for calibrating fair valuation approaches, including a regular review of key inputs and assumptions, back-testing, and review of any related market activity.
Valuing securities through a fair value determination involves greater reliance on judgment than valuation of securities based on readily available market quotations. In some instances, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a security’s value. When fair value pricing is employed, the prices of securities used by the Fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.
Dividend income and corporate action transactions are recorded on the ex-dividend date, or when the Fund first learns of the dividend/corporate action if the ex-dividend date has passed. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends characterized as return of capital for U.S. tax purposes are recorded as a reduction of cost of investments and/or realized gain.
Interest income is recorded on the accrual basis. Interest income includes coupon interest, amortization of premium and accretion of discount on debt securities, and gain/loss on paydowns. The ability of the issuers of the debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry, state, or region. Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectibility of interest is reasonably assured.
Expenses are recorded on the accrual basis. Some expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust using methodologies determined by the nature of the expense.
Distributions to shareholders are recorded on the ex-dividend date.
Foreign taxes The Fund may be subject to foreign taxes which may be imposed by certain countries in which the Fund invests. The Fund endeavors to record foreign taxes based on applicable foreign tax law. Withholding taxes are incurred on certain foreign dividends and are accrued at the time the associated dividend is recorded. The Fund files withholding tax reclaims in certain jurisdictions to recover a portion of amounts previously withheld. The Fund records a reclaim
Dodge & Cox Balanced Fund ■ PAGE 14
Notes to Financial Statements
receivable based on, among other things, a jurisdiction’s legal obligation to pay reclaims as well as payment history and market convention. In consideration of recent decisions rendered by European courts, the Fund has filed for additional reclaims related to prior years. A corresponding receivable is established when both the amount is known and significant contingencies or uncertainties regarding collectability are removed. These amounts, if any, are reported in “dividends and interest receivable” in the Statement of Assets and Liabilities.
Repurchase agreements Repurchase agreements are transactions under which a Fund purchases a security from a dealer counterparty and agrees to resell the security to that counterparty on a specified future date at the same price, plus a specified interest rate. The Fund’s repurchase agreements are secured by U.S. government or agency securities. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the collateral securities and to apply the proceeds in satisfaction of the obligation.
Equity-linked note An equity-linked note is a structured security with a return linked to one or more underlying reference equity securities. Changes in the market value of equity-linked notes are recorded as unrealized appreciation or depreciation and realized gains or losses are recorded upon the sale or maturity of the notes in the Statement of Operations within investments in securities. The risks of investing in equity-linked notes include unfavorable price movements in the underlying securities and the credit risk of the issuing financial institution. Equity-linked notes may be more volatile and less liquid than other investments held by the Fund.
To-Be-Announced securities The Fund may purchase mortgage-related securities on a to-be-announced (“TBA”) basis at a fixed price, with payment and delivery on a scheduled future date beyond the customary settlement period for such securities. The Fund may choose to extend the settlement through a “dollar roll” transaction in which it sells the mortgage-related securities to a dealer and simultaneously agrees to purchase similar securities for future delivery at a predetermined price. The Fund accounts for TBA dollar rolls as purchase and sale transactions.
Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred.
Note 2: Valuation Measurements
Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below.
■ Level 1: Quoted prices in active markets for identical securities
■ Level 2: Other significant observable inputs (including quoted prices for similar securities, market indices, interest rates, credit risk, forward exchange rates, etc.)
■ Level 3: Significant unobservable inputs (including Fund management’s assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used to value the Fund’s holdings at December 31, 2020:
| | LEVEL 2
(Other Significant
Observable Inputs) |
|
|
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|
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|
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|
|
| | |
Note 3: Derivative Instruments
The Fund may use derivatives either to minimize the impact of certain risks to one or more of its investments (as a ‘‘hedging technique’’) or
PAGE 15 ■ Dodge & Cox Balanced Fund
Notes to Financial Statements
to implement its investment strategy. A derivative is a financial instrument whose value is derived from a security, currency, interest rate, index, or other financial instrument.
Futures contracts Futures contracts involve an obligation to purchase or sell (depending on whether the Fund has entered a long or short futures contract, respectively) an asset at a future date, at a price set at the time of the contract. Futures contracts are exchange-traded. Upon entering into a futures contract, the Fund is required to deposit an amount of cash or liquid assets (referred to as "initial margin") in a segregated account with the clearing broker. Subsequent payments (referred to as "variation margin") to and from the clearing broker are made on a daily basis based on changes in the market value of the contract. Changes in the market value of open futures contracts are recorded as unrealized appreciation or depreciation in the Statement of Operations. Realized gains and losses on futures contracts are recorded in the Statement of Operations at the closing or expiration of the contracts. Cash deposited with a broker as initial margin is recorded in the Statement of Assets and Liabilities. A receivable and/or payable to brokers for daily variation margin is also recorded in the Statement of Assets and Liabilities.
Investments in futures contracts may include certain risks, which may be different from, and potentially greater than, those of the underlying securities. To the extent the Fund uses futures, it is exposed to additional volatility and potential losses resulting from leverage.
Additional derivative information The following identifies the location on the Statement of Assets and Liabilities and values of the Fund's derivative instruments categorized by primary underlying risk exposure.
| Includes cumulative appreciation (depreciation). Only the current day’s variation margin is reported in the Statement of Assets and Liabilities. |
The following summarizes the effect of derivative instruments on the Statement of Operations, categorized by primary underlying risk exposure.
| |
| |
| |
Net change in unrealized appreciation/depreciation |
| |
The following summarizes the range of volume in the Fund's derivative instruments during the year ended December 31, 2020.
Note 4: Related Party Transactions
Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays a management fee monthly at an annual rate of 0.50% of the Fund’s average daily net assets to Dodge & Cox, investment manager of the Fund.
Fund officers and trustees All officers and two of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.
Note 5: Income Tax Information and Distributions to Shareholders
A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, and such amounts may differ from net investment income and realized gains for financial reporting purposes. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes. Financial reporting records are adjusted for permanent book to tax differences at year end to reflect tax character. Book to tax differences are primarily due to differing treatments of wash sales, foreign currency realized gain (loss), U.S. Treasury inflation-protected securities, certain corporate action transactions, derivatives, and distributions.
Distributions during the years noted below were characterized as follows for federal income tax purposes:
| Year Ended
December 31, 2020 | Year Ended
December 31, 2019 |
| | |
| | |
| | |
| | |
At December 31, 2020, the tax basis components of distributable earnings were as follows:
Undistributed ordinary income | |
Undistributed long-term capital gain | |
At December 31, 2020, unrealized appreciation and depreciation for investments and derivatives based on cost for federal income tax purposes were as follows:
| |
| |
| |
Net unrealized appreciation | |
Fund management has reviewed the tax positions for open periods (three years and four years, respectively, from filing the Fund’s Federal and State tax returns) as applicable to the Fund, and has determined that no provision for income tax is required in the Fund’s financial statements.
Dodge & Cox Balanced Fund ■ PAGE 16
Notes to Financial Statements
Note 6: Loan Facilities
Pursuant to an exemptive order issued by the Securities and Exchange Commission (SEC), the Fund may participate in an interfund lending facility (Facility). The Facility allows the Fund to borrow money from or loan money to the Funds. Loans under the Facility are made for temporary or emergency purposes, such as to fund shareholder redemption requests. Interest on borrowings is the average of the current repurchase agreement rate and the bank loan rate. There was no activity in the Facility during the year.
All Funds in the Trust participate in a $500 million committed credit facility (Line of Credit) with State Street Bank and Trust Company, to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The maximum amount available to the Fund is $250 million. Each Fund pays an annual commitment fee on its pro-rata portion of the Line of Credit. For the year ended December 31, 2020, the Fund’s commitment fee amounted to $78,904 and is reflected as a Miscellaneous Expense in the Statement of Operations. Interest on borrowings is charged at the prevailing rate. There were no borrowings on the Line of Credit during the year.
Note 7: Purchases and Sales of Investments
For the year ended December 31, 2020, purchases and sales of securities, other than short-term securities and U.S. government securi
ties, aggregated $3,793,556,274 and $5,227,921,080, respectively. For the year ended December 31, 2020, purchases and sales of U.S. government securities aggregated $3,362,093,061 and $4,227,943,404, respectively.
Note 8: New Accounting Guidance
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in the ASU provide optional temporary financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the London Interbank Offered Rate and other interbank-offered based reference rates as of the end of 2021. The ASU is effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.
Note 9: Subsequent Events
Fund management has determined that no material events or transactions occurred subsequent to December 31, 2020, and through the date of the Fund’s financial statements issuance, which require additional disclosure in the Fund’s financial statements.
Financial Highlights
Selected data and ratios
(for a share outstanding throughout each period) | |
| | | | | |
Net asset value, beginning of year | | | | | |
Income from investment operations: | | | | | |
| | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions to shareholders from: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Net asset value, end of year | | | | | |
| | | | | |
Ratios/supplemental data: | | | | | |
Net assets, end of year (millions) | | | | | |
Ratio of expenses to average net assets | | | | | |
Ratio of net investment income to average net assets | | | | | |
| | | | | |
| Net investment income per share includes significant amounts received for EU reclaims related to prior years, which amounted to approximately $0.11 per share. Excluding such amounts, the ratio of net investment income to average net assets would have been 2.17%. |
See accompanying Notes to Financial Statements
PAGE 17 ■ Dodge & Cox Balanced Fund
Report Of Independent Registered Public Accounting Firm
To the Board of Trustees of the Dodge & Cox Funds and Shareholders of Dodge & Cox Balanced Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Dodge & Cox Balanced Fund and its subsidiary (one of the funds constituting Dodge & Cox Funds, referred to hereafter as the "Fund") as of December 31, 2020, the related statement of operations for the year ended December 31, 2020, the statement of changes in net assets for each of the two years in the period ended December 31, 2020, including the related notes, and the financial highlights for each of the five years in the period ended December 31, 2020 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2020, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended December 31, 2020 and the financial highlights for each of the five years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on the Fund's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2020 by correspondence with the custodian, transfer agent and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
San Francisco, California
February 19, 2021
We have served as the auditor of one or more investment companies in the Dodge & Cox Funds since 1931.
Dodge & Cox Balanced Fund ■ PAGE 18
Special 2020 Tax Information (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code:
The Fund designates $641,661,608 as long-term capital gain distributions in 2020.
The Fund designates $235,909,634 of its distributions paid to shareholders in 2020 as qualified dividends (treated for federal income tax purposes in the hands of shareholders as taxable at a maximum rate of 20%).
For shareholders that are corporations, the Fund designates 46% of its ordinary dividends paid to shareholders in 2020 as dividends from domestic corporations eligible for the corporate dividends received deduction, provided that the shareholder otherwise satisfies applicable requirements to claim that deduction.
For shareholders that are corporations, the Fund designates 31% of its ordinary dividends paid to shareholders in 2020 as Section 163(j) interest dividends.
Funds' Liquidity Risk Management Program
(unaudited)
The Funds have adopted and implemented a written liquidity risk management program (“Program”) as required by Rule 22e-4 under the Investment Company Act. The Program is reasonably designed to assess and manage the Fund’s liquidity risk, taking into consideration the Fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions; its short and long-term cash flow projections; and its cash holdings and access to other funding sources including the Funds’ interfund lending facility and line of credit.
The Funds’ Board of Trustees has approved the appointment of a Liquidity Risk Management Committee including representatives from Dodge & Cox’s Legal, Compliance, Treasury, Operations, Trading, and Portfolio Management departments, which is responsible for the Program’s administration and oversight and for reporting to the Board on at least an annual basis regarding the Program’s operation and effectiveness.
The Liquidity Risk Management Committee refreshed its assessment of the Funds’ liquidity risk profiles and considered the adequacy and effectiveness of the Program’s operations for the 12 months ended September 30, 2020 (the “covered period”) in order to prepare a written report to the Board of Trustees for consideration at its meeting held on December 16, 2020. The report concluded that (i) while market volatility and reduced liquidity, especially in the fixed income markets, created an unusually challenging liquidity environment during the second quarter of 2020, the Funds had sufficient liquidity to operate effectively throughout the covered period; (ii) each Fund’s investment strategy continues to be
appropriate for an open end fund; and (iii) the Funds’ Program is reasonably designed to assess and manage its liquidity risk.
Board Approval of Funds' Investment Management Agreements and Management Fees
(unaudited)
The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 16, 2020, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2021 with respect to each Fund. During the course of the year, the Board received extensive information and materials relating to the investment management and administrative services provided by Dodge & Cox and the performance of each of the Funds.
Information Received
Over the past several years, the Board has requested, received, and discussed a number of special presentations on topics relevant to their annual consideration of the proposed renewal of the Funds’ Agreements, including, in 2020, special presentations relating to trends in the asset management industry, the mutual fund competitive landscape, mutual fund ratings methodologies, fund distribution channels, and fund flows and performance analysis. In addition to the foregoing and in advance of the meetings referred to below, the Board, including the Independent Trustees, requested, received, and reviewed materials relating to the Agreements and the services provided by Dodge & Cox. The Independent Trustees retained Broadridge to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Broadridge. The Broadridge materials included information regarding advisory and administrative fee rates, expense ratios, and transfer agency, custodial, and distribution expenses, as well as performance comparisons to each Fund’s peer group and to a broad-based securities index or combination of indices. The Broadridge materials also included a comparison of expenses of various share classes offered by comparable funds. The materials reviewed by the Board contained information concerning, among other things, Dodge & Cox’s profitability, financial results and condition, management fee revenue, and separate account fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates, sales and redemption data, and the investment that Dodge & Cox makes in research used in managing the Funds. The Board received and reviewed memoranda and related materials addressing, among other things, Dodge & Cox’s services to the Funds; how Dodge & Cox Funds’ fees compare to fees of peer group funds; the different fees, services, costs, and risks associated with other accounts managed by Dodge & Cox as compared to the Dodge & Cox Funds; and the ways in which the Funds realize economies of scale. Throughout the process of reviewing the services provided by Dodge & Cox and preparing for the meeting, the
PAGE 19 ■ Dodge & Cox Balanced Fund
Independent Trustees found Dodge & Cox to be open, forthright, detailed, and helpful in answering questions about all issues. The Board received copies of the Agreements and a memorandum from the independent legal counsel to the Independent Trustees discussing the factors generally regarded as appropriate to consider in evaluating mutual fund management arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the independent legal counsel on November 11, 2020 and again on December 16, 2020 to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements. In considering the Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board considered several factors, discussed below, to be key factors and reached the conclusions described below.
Nature, Quality, and Extent of the Service
The Board considered that Dodge & Cox provides a range of services to the Funds in addition to portfolio management, including regulatory compliance, trading desks, proxy voting, transfer agent and custodian oversight, administration, regulatory filings, tax compliance and filings, website, and anti-money laundering. The nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality, and extent of portfolio management, administrative, and shareholder services performed by Dodge & Cox. With regard to portfolio management services, the Board considered Dodge & Cox’s established long-term history of care in the management of the Funds; its consistency in investment approach and depth; the background and experience of the Dodge & Cox U.S. Equity Investment Committee, International Equity Investment Committee, Global Equity Investment Committee, U.S. Fixed Income Investment Committee, and Global Fixed Income Investment Committee, and research analysts responsible for managing the Funds; Dodge & Cox’s methods for assessing the regulatory and investment climate in various jurisdictions; its overall level of attention to its core investment management function; and its commitment to the Funds and their shareholders. The Board reviewed information from Dodge & Cox describing conflicts of interest between the Funds and Dodge & Cox or its other clients, and how Dodge & Cox addresses those conflicts. The Board noted Dodge & Cox’s record of favorable press and industry coverage, as well as its good compliance record, and its reputation as a trusted, shareholder-friendly mutual fund family. In addition, the Board considered that Dodge & Cox manages approximately $202 billion in Fund assets (as of November 30, 2020) with fewer professionals than most comparable funds, and that on average these professionals have more experience and longer tenure than investment professionals at comparable funds. The Board also noted that Dodge & Cox is an investment research-oriented firm with no other business endeavors to distract management’s attention from its research efforts, that its investment professionals adhere to a consistent investment approach across the Funds, and that due to its deliberate strategy with respect to new products, Dodge & Cox has had stability in its mutual fund product offerings over the course of
many years and has the fewest funds of any of the 25 largest mutual fund families by assets. The Board further considered the “Gold” analyst rating awarded by Morningstar to all of the Funds (other than the Balanced Fund, which has a “Silver” rating). The Board concluded that it was satisfied with the nature, extent, and quality of investment management and other services provided to the Funds by Dodge & Cox.
Investment Performance
The Board reviewed each Fund’s recent and long-term investment performance (including periods of outperformance and underperformance), as compared to relevant indices and the performance of such Fund’s peer group and broader Morningstar category. In assessing the performance of the Funds, the Board considered the Funds’ investment returns over various periods and the volatility thereof and concluded that the levels experienced were consistent with Dodge & Cox’s long-term approach and active investment style. The Board also compared the short- and long-term investment performance of the equity funds to value-oriented indices, in recognition of the significant performance divergence between value and growth stocks that has persisted for the last several years. It was noted that equity performance has been consistent with the value oriented investment strategy employed by Dodge & Cox. The Board concluded that Dodge & Cox’s historic, long-term, team-oriented, bottom-up investment approach remains consistent and that Dodge & Cox continues to be distinguished by its integrity, transparency, and independence. The Board considered that the performance of the Funds is the result of a value-oriented investment management process that emphasizes a long-term investment horizon, independent research, a team approach, price discipline, low cost, and low portfolio turnover. The Board concluded that Dodge & Cox has delivered long-term performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.
Costs and Ancillary Benefits
Costs of Services to Funds: Fees and Expenses The Board considered each Fund’s management fee rate and net expense ratio relative to (1) a broad category of other mutual funds with similar portfolio characteristics and share class and expense structures and (2) a smaller group of peers selected by Broadridge based on investment style, share class characteristics, and asset levels. The Board also considered the management fees charged by Dodge & Cox to other clients. In particular, the Board noted that the management fee rate paid by each Fund compares favorably to its broad category and is competitive within the Fund’s peer group. The Board also evaluated the operating structures of the Funds and Dodge & Cox, noting that the Funds do not charge front-end sales commissions or distribution fees, and Dodge & Cox bears, among other things, the cost of most third-party research, reimbursement for shareholder recordkeeping and administrative costs to third-party retirement plan administrators, and administrative and office overhead. The Board noted that the Broadridge report shows that the net expense ratio of every Dodge & Cox Fund is in the least expensive quartile compared to its broad Morningstar category (taking into account, in the case of the Global Bond Fund, voluntary expense reimbursements by Dodge & Cox). The Board noted the Funds’
Dodge & Cox Balanced Fund ■ PAGE 20
unusual single-share-class structure and reviewed Broadridge data (including asset-weighted average expense ratios) showing that most of the peer group funds offer several different classes of shares, with different expense ratios, to different categories of investors, and that the Broadridge expense comparisons described above generally compare the net expense ratio of each Dodge & Cox Fund’s single share class to one of the least expensive share classes of the peer fund, even though those share classes are often not available to retail investors. On an asset-weighted basis, each Fund ranks in the least expensive quartile of its Broadridge peer group (taking into account, in the case of the Global Bond Fund, voluntary expense reimbursements by Dodge & Cox). The Board noted that the Funds provide access for small investors to quality investment management at a relatively low cost.
The Board also considered that the Funds are priced to scale, i.e., management fee rates begin at relatively low levels. Even without breakpoints, the Funds’ management fee rates are lower than those of many peer funds whose fee schedules include breakpoints. With respect to non-U.S. funds sponsored and managed by Dodge & Cox that are comparable to the Funds in many respects, the Board noted that the fee rates charged by Dodge & Cox are the same as or higher than the fee rates charged to the Funds. The Board reviewed information regarding the fee rates Dodge & Cox charges to separate accounts that have investment programs similar to those of the Funds, including instances where separate account fees are lower than Fund fees. The Board considered the differences in the nature and scope of services Dodge & Cox provides to the Funds as compared to other client accounts, as well as material differences in regulatory, litigation, and other risks as between the Dodge & Cox Funds and other types of clients. The Board noted that different markets exist for mutual fund and institutional separate account management services and that a comparison of Fund fee rates and separate account fee rates must consider the fact that separate account clients bear additional costs and responsibilities that are included in the cost of a Fund. After consideration of these matters, the Board concluded that the overall costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation, and performance of Dodge & Cox and the low overall expense ratios of the Funds.
Profitability and Costs of Services to Dodge & Cox; "Fall-out" Benefits The Board reviewed reports of Dodge & Cox’s financial position, profitability, and estimated overall value and considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the scope and quality of the services provided. The Board noted in particular that Dodge & Cox’s profits are not generated by high fee rates, but reflect a focused business approach toward investment management. The Board recognized the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that the compensation/profit structure at Dodge & Cox includes a return on shareholder employees’ investment in the firm, which is vital for remaining independent and facilitating retention of management and investment professionals. The Board also considered that Dodge & Cox has in the past closed some of the
Funds to new investors to proactively manage growth in those Funds. While these actions are intended to benefit existing Fund shareholders, the effect is to reduce potential revenues to Dodge & Cox from new shareholders. The Board also considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers and reputational benefits to non-U.S. funds sponsored and managed by Dodge & Cox) that Dodge & Cox might receive as a result of its association with the Funds and determined that they are acceptable. The Board also noted that Dodge & Cox continues to invest in its business to provide enhanced services, systems, and research capabilities, all of which benefit the Funds. The Board concluded that Dodge & Cox’s profitability is the keystone of its independence, stability, and long-term investment performance and that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) is fair and reasonable.
Economies of Scale
The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the level of Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee and expense structure and the fact that the Dodge & Cox Funds build economies of scale into their fee structures by charging low fees from a fund’s inception and keeping overall expenses down as a Fund grows, as compared to other fund complexes that employ fee “breakpoints” only after a fund reaches a certain scale. An assessment of economies of scale must also take into account that Dodge & Cox invests time and resources in each new Fund for months (and sometimes years) prior to launch; in addition, in a Fund’s early periods of operations, expenses are capped, which means that Dodge & Cox subsidizes the operations of a new Fund for a period of time until it reaches scale. The Board also observed that, while total Fund assets have grown over the long term, this growth has not been continuous or evenly distributed across all of the Funds. In addition, the Board noted that Dodge & Cox has shared the benefits of economies of scale with the Funds by adding services to the Funds over time, and that Dodge & Cox’s internal costs of providing investment management, technology, administrative, legal, and compliance services to the Funds continue to increase. For example, Dodge & Cox has increased its global research staff and investment resources over the years to add new capabilities for the benefit of Fund shareholders and to address the increased complexity of investing globally. In addition, Dodge & Cox has made expenditures in other staff, technology, and infrastructure to enable it to integrate credit and equity analyses and to implement its strategy in a more effective manner. Over the last ten years, Dodge & Cox has increased its spending on research, investment management, client servicing, cybersecurity, technology, third-party research, data services, and computer systems for trading, operations, compliance, accounting, and communications at a rate that has outpaced the Funds’ growth rate during the same period. The Board also observed that, even without fee breakpoints, the Funds are competitively priced in a competitive market and that having a low fee from inception is better for shareholders than starting with a higher fee and adding breakpoints. The Board also noted that there are certain
PAGE 21 ■ Dodge & Cox Balanced Fund
diseconomies of scale associated with managing large funds, insofar as certain of the costs and risks associated with portfolio management increase disproportionately as assets grow. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately shares economies of scale that may exist.
Conclusion
Based on their evaluation of all material factors and assisted by the advice of independent legal counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the management fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that Dodge & Cox’s services have provided value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.
Fund Holdings
The Fund provides a complete list of its holdings on a quarterly basis by filing the lists with the SEC on Form N-CSR (as of the end of the second and fourth quarters) and on Part F of Form N-PORT (as of the end of the first and third quarters). Shareholders may view the Fund’s Forms N-CSR and Part F of N-PORT on the SEC’s website at sec.gov. A list of the Fund’s quarter-end holdings is also available at dodgeandcox.com on or about the 15th day following each quarter end and remains available on the website until the list is updated for the subsequent quarter.
Proxy Voting
For a free copy of the Fund’s proxy voting policies and procedures, please call 800-621-3979, visit the Fund’s website at dodgeandcox.com, or visit the SEC’s website at sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is also available at dodgeandcox.com or shareholders may view the Fund's Form N-PX at sec.gov.
Household Mailings
The Fund routinely mails shareholder reports and summary prospectuses to shareholders and, on occasion, proxy statements. In order to reduce the volume of mail, when possible, only one copy of these documents will be sent to shareholders who are part of the same family and share the same residential address.
If you have a direct account with the Funds and you do not want the mailing of shareholder reports and summary prospectuses combined with other members in your household, contact the Funds at 800-621-3979. Your request will be implemented within 30 days.
Dodge & Cox Balanced Fund ■ PAGE 22
Dodge & Cox Funds — Executive Officer & Trustee Information
| Position with Trust
(Year of Election or
Appointment) | Principal Occupation During Past Five Years and Other Relevant Experience | Other Directorships of Public Companies Held
by Trustees |
Interested Trustees and Executive Officers |
| Chairman and Trustee
(since 2014) | Chairman and Director of Dodge & Cox; Chief Investment Officer and member of U.S. Equity Investment Committee (USEIC), Global Equity Investment Committee (GEIC), and International Equity Investment Committee (IEIC) | |
| President
(since 2014) and
Trustee (since 1993) | Chief Executive Officer, President, and Director of Dodge & Cox; member of U.S. Fixed Income Investment Committee (USFIIC) and Global Fixed Income Investment Committee (GFIIC) | |
| Senior Vice President
(since 2006) | Senior Vice President and Director of Dodge & Cox; Director of International Equity and member of GEIC and IEIC | |
| Chief Legal Officer
(since 2019) and Secretary (since 2017) | Vice President, General Counsel, and Secretary (since 2017) of Dodge & Cox | |
| | Vice President (since 2020) and Financial Oversight and Control Analyst (since 2017) of Dodge & Cox; Head of Fund Administration at RS Investments (2014-2016); Treasurer of RS Funds (2014-2016); Chief Financial Officer of RS Funds Distributor, LLC (2014-2016) | |
| Chief Compliance
Officer (since 2010) | Vice President and Chief Compliance Officer of Dodge & Cox | |
|
| | Professor of Economics, Stanford University; Director of the Economics of Education Program, National Bureau of Economic Research; Senior Fellow, Hoover Institution and Stanford Institute for Economic Policy Research | |
| | Senior Counsel of Arnold & Porter (law firm) (2013-2018); Partner of Arnold & Porter (until 2012); Director of Howard, Rice, Nemerovski, Canady, Falk & Rabkin (1977-2011) | |
| | CFO, Pixar Animation Studios (1999-2004) | Director, Airbnb (vacation rental online marketplace) (since 2018); Director, Alphabet Inc. (internet information services) (since 2005); Director, Glu Mobile, Inc. (multimedia software) (since 2004); Director, Netflix, Inc. (internet television) (since 2010); Director, Arista Networks (cloud networking) (since 2013) |
| | Advisory Director, The Presidio Group (2005-2016); Partner and Managing Director—Global Investment Research at Goldman Sachs (until 2001) | |
Gabriela Franco
Parcella (52) | | President (since 2020) and Executive Managing Director of Merlone Geier Partners (2018-2019); Chairman, President, and CEO, Mellon Capital (2011 to 2017); COO, Mellon Capital (1997 to 2011) | Director, Terreno Realty Corporation (since 2018) |
| | Robert and Marion Oster Distinguished Military Fellow, Hoover Institution (since 2012); Admiral, United States Navy (Ret.); U.S. Navy Chief of Naval Operations (2008-2011) | Director, Northrop Grumman Corp. (global security) (since 2012); Director, Maersk Line, Limited (shipping and transportation) (since 2016) |
| | Executive Vice President, Managing Director—Fixed Income at Loomis Sayles & Company, L.P. (2003-2011) | |
| Trustee
(since 2005)
(and 1995-2001) | Professor of Economics, Stanford University (since 1984); Senior Fellow, Hoover Institution (since 1996); Under Secretary for International Affairs, United States Treasury (2001-2005) | |
| The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all six series in the Dodge & Cox Funds complex and serves for an indefinite term. |
Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Funds’ website at dodgeandcox.com or calling 800-621-3979.
PAGE 23 ■ Dodge & Cox Balanced Fund
dodgeandcox.com
For Fund literature, transactions, and account
information, please visit the Funds’ website.
or write or call:
Dodge & Cox Funds
c/o DST Asset Manager Solutions, Inc.
P.O. Box 219502
Kansas City, Missouri 64121-9502
(800) 621-3979
Investment Manager
Dodge & Cox
555 California Street, 40th Floor
San Francisco, California 94104
(415) 981-1710
This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.This report reflects our views, opinions, and portfolio holdings as of December 31, 2020, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.
Annual Report
December 31, 2020
Income Fund
ESTABLISHED 1989
TICKER: DODIX
12/20 IF AR Printed on recycled paper 
The Dodge & Cox Income Fund had a total return of 9.5% for the year ended December 31, 2020, compared to a return of 7.5% for the Bloomberg Barclays U.S. Aggregate Bond Index (Bloomberg Barclays U.S. Agg).
Market Commentary
The coronavirus (COVID-19) pandemic and its devastating health, social, and economic impacts heavily influenced market performance in 2020. While financial markets were volatile, the broad decline in interest rates led to strong fixed income returns. Risk assets, including equities and corporate bonds, plummeted at the end of the first quarter over concerns about the virus and its uncertain economic implications. As the pandemic unfolded, jobless claims surged to record levels, economic activity plunged, and consumer and business confidence indicators fell to near-decade lows.
But markets staged a remarkable recovery starting in April as investors were heartened by the rapid and unprecedented monetary and fiscal policy response from the U.S. government. The Federal Reserve cut short-term interest rates by 150 basis pointsa to a range of 0% to 0.25% and buttressed this action with a massive securities purchase program (i.e., quantitative easing). Meanwhile, Congress passed a $2 trillion economic stimulus bill in March followed by a $900 billion stimulus bill in December. Confidence was soon bolstered by improving economic data. For example, the unemployment rate, which shot up to 14.8% in April, the highest level since the Great Depression, declined to 6.7% by year end. The development (and distribution plans) of two effective vaccines buoyed markets at year’s end, and Joe Biden’s victory in the Presidential election raised hopes for additional fiscal stimulus in 2021.
Amid this uncertain environment, the investment-grade Corporate bond sector returned 9.9%b for the year, ultimately outperforming comparable-durationc Treasuries by 0.5 percentage points despite a rollercoaster year for valuations. In late March, yield premiumsd on investment-grade corporate bonds spiked to levels not seen since the 2008-09 global financial crisis as investors grew increasingly concerned about the depth and duration of the economic slowdown and its ramifications for corporate earnings and creditworthiness. However, the Fed’s support of the market through various lending facilities, most notably the Secondary Market Corporate Credit Facility, largely calmed fears surrounding liquidity and potential defaults, and Corporate spreads tightened dramatically. Later in 2020, the corporate bond market benefited from better-than-expected corporate earnings, robust investor demand for yield, and expectations that the vaccine rollout and additional stimulus will help normalize economic activity.
Agencye MBS returned 3.9%, underperforming comparable short-duration Treasuries by 0.2 percentage points. Agency MBS valuations held up well despite a dramatic increase in mortgage prepayments in 2020.
Investment Strategy
While it was an unusually volatile and unpredictable year for financial markets, we are pleased with the Fund’s strong absolute and relative
performance in 2020. Over the course of the year, we made significant changes to portfolio positioning in response to rapid fluctuations in valuations. Our experienced investment team, with its knowledge of companies and industries and how they perform through economic and capital market cycles, was critical in fostering the confidence to lean heavily into an extremely challenging environment. We also used a number of tactics to improve performance potential of the portfolio without straying from our long-held investment principles.
The Credit Sector: Market Volatility Creates Opportunity
Credit investors faced three distinct environments in 2020, essentially requiring us to navigate an entire credit cycle over the course of one calendar year. We worked diligently to optimize portfolio positioning amid the constantly shifting valuation, risk, and corporate supply backdrop. As we alternated between trim and accumulation mode, based on valuations, the Fund’s creditf weighting shifted significantly throughout the year.
First, in January and early February, with credit yield premiums near their narrowest levels in years, we reduced the Fund’s credit exposure, continuing a process that began in early 2019. As we gradually trimmed exposure to issuers with less compelling risk/reward prospects, these sales brought the Fund’s weighting in credit down to 37% at the end of February compared to 50% in early 2019.
This strict price discipline, a key tenet of our investment philosophy, provided significant dry powder that we were able to deploy during the opportunity-rich second phase of the 2020 credit environment. Financial markets stumbled mightily in March as the coronavirus began to spread around the globe. Over a mere three-week period in March, corporate bond yield premiums nearly tripled. As the crisis unfolded, many high quality, fundamentally creditworthy companies issued long-term debt to extend maturity profiles and weather the uncertain environment, and they did so at yield premiums more commonly associated with lower-rated credits. This provided a very attractive entry point for us to selectively invest in leading companies with solid business franchises and balance sheets. Drawing on the depth and breadth of our global industry analyst team, we added 16 carefully selected new corporate issuers to the portfolio across a range of industries. Examples include Anheuser-Busch InBev, Coca-Cola, Exxon Mobile, FedEx, Oracle, and T-Mobile.g
In the midst of the market volatility, we also invested for the first time in an investment-grade corporate bond ETF as well as index credit default swaps, establishing a 3.5% combined position. These tools enabled us to quickly increase the Fund’s credit exposure at what we believed were very compelling prices. In aggregate, we boosted the Fund’s credit weighting from the pre-crisis level of 37% in February to over 53% by the end of May.
The year’s third credit environment was defined by a stretch of narrowing credit yield premiums that unfolded through the second half of the year. With spreads declining to pre-pandemic levels, we thought it was prudent to dial back some of the Fund’s overweight to credit. As always, our sell decisions were based on careful evaluation of security-level return prospects. We reduced the Fund’s exposure to
PAGE 1 ■ Dodge & Cox Income Fund
issuers such as AbbVie, Bank of America, Cigna, and State of California. Each of them had performed exceptionally well, leaving their valuations less attractive on a go-forward basis. This pruning reduced the Fund’s credit exposure to 46% by year end. While we continue to have a favorable view of the credit sector and the Fund’s remaining holdings within it, the risk/reward equation did not support the more substantial overweight from earlier in the year.
We continue to view the credit sector positively for several reasons. Corporate America, broadly speaking, weathered the 2020 storm and is in good financial shape. We expect economic growth to rebound in 2021 as more people are vaccinated and begin to resume their normal lives. Further stimulus seems likely to offer additional support with President Joe Biden taking office alongside the newly Democratic-controlled Congress. Global central bank liquidity is abundant, and the Fed may reestablish corporate credit facilities if market conditions deteriorate, providing an implicit level of support for the sector. Finally, the Fund’s credit holdings are differentiated from the market as a whole, grounded in the in-depth research of our investment team, and feature a yield premium of 182 basis points versus 92 basis points for the broad investment-grade Credit Index.h
The Securitized Sector: Recrafting the Agency MBS Portfolio
The Fund’s holdings in the Securitized sector consist predominantly of Agency MBS (39%i), with a smaller weighting (5%) in primarily AAA-rated asset-backed securities. As a group, these securities can provide attractive total-return cash flows in the front to intermediate part of the yield curve. They can also play an important role in the overall portfolio because of their dependable liquidity and high credit quality. We relied particularly on the portfolio’s Agency MBS as a durably liquid source of funds for other investment opportunities amidst the market turmoil in March.
It was likewise an active year for us in repositioning the MBS portfolio. The Fund entered 2020 with a somewhat greater emphasis on higher coupon 30-year Agency MBS. Given the likelihood of a significant increase in prepayments because of the dramatic decline in interest rates, we trimmed a large portion of the portfolio’s 30-year 4.5% coupon MBS holdings in the first half of the year in light of our appraisal that valuations did not adequately reflect the future prepayment picture.
We invested these proceeds in 30-year 2% and 2.5% coupon securities as relative pricing for these securities became more attractive. We believe low coupon, low loan balance Agency MBS offer attractive prepayment protection for two main reasons. First, given the low interest rate environment and low initial note rates of the mortgages underlying these MBS, attractive refinancing options for borrowers will likely be muted. Second, low loan balance borrowers lack sufficient financial incentives needed to offset the upfront fixed costs of refinancing, adding additional prepayment protection to the portfolio’s position.
We also initiated a mortgage to-be-announced (TBA) roll position in the portfolio to take advantage of a technical distortion in Agency MBS bolstered by the Fed’s asset purchase program. The Fed's purchases have contributed to a supply/demand imbalance so that purchasing for settlement in the current month is significantly more expensive than the forward month. To take advantage of this
mispricing, we established a 6% position in forward settle, TBA Agency 30-year 2% and 2.5% coupon pass-through securities. This trade is referred to in the marketplace as the “roll” because, as long as the pricing of the underlying MBS remains favorable, we would continue to swap—or roll—our position forward (to later dates) as the current contract’s maturity date nears. This position demonstrates one of the unique ways we successfully added yield to the Fund during the year.
Going forward, we anticipate somewhat elevated prepayment activity with mortgage rates near record lows. Mortgage originators have proven remarkably adept at refinancing borrowers even with elevated unemployment and shelter-in-place restrictions. As market participants compete for share, mortgage rates may continue to decline even if U.S. Treasury rates remain stable. With that backdrop, we continue to find opportunities in securities we believe have more moderate prepayment risk, specifically lower balance, lower coupon securities. In addition to individually selected Agency MBS pass-throughs, the Fund holds Ginnie Mae-guaranteed Home Equity Conversion Mortgages (also known as reverse mortgages). These floating-rate securities offer attractive spreads and low prepayment risk.
Defensive Duration: Mitigating Effect of Rising Long-Term Treasury Yields over Time
We extended the Fund’s duration modestly over the year, but maintained its lower duration position versus the Bloomberg Barclays U.S. Agg (4.9 years or 79% of Index duration as of December 31), reflecting our expectation that longer-term interest rates will rise from today’s exceptionally low levels over our investment horizon.
The Fed is likely to keep the federal funds rate at its current near-zero level for an extended period, as a full recovery from the economic devastation of the pandemic may take years. This should keep short- and intermediate-term yields (0-10 years) relatively low. On the other hand, longer-term yields (10+ years) are more affected by the whims of the market, valuations, flows, and inflation, and that is where we believe interest rate risk is most pronounced. We believe a modest rise in longer-term rates—a rise that is slightly higher than what forward markets predict—is likely over the next year or two as more people are vaccinated, economic activity normalizes, and inflation picks up. Reflecting this dichotomy, we’ve positioned the portfolio with a similar interest rate exposure to the Index through the 10-year part of the yield curve; however, the portfolio has less exposure to the longer maturity (10+ year) part of the market where we think more risk resides. Given our view, we believe it is important to remain defensive in order to mitigate the negative effect of any bond market price declines that could stem from potential increases in long-term interest rates over time.
In Closing
While we are pleased with the Fund’s recent results, we caution shareholders not to expect a repeat of the exceptional performance from fixed income markets or the Fund that we saw in 2019 and 2020. Today’s low yields are likely to constrain fixed income returns over the intermediate term.
Dodge & Cox Income Fund ■ PAGE 2
That said, we believe bonds continue to serve a vital role in a broad portfolio, providing liquidity, income generation, downside protection, and low correlation to riskier asset classes. We continue to seek opportunities to build portfolio yield through our bottom-up, research-driven investment approach, and we are optimistic about the long-term prospects for the Fund.
Thank you for your continued confidence in our firm. As always, we welcome your comments and questions.
For the Board of Trustees, | |
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January 29, 2021
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One basis point is equal to 1/100th of 1%.
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| Sector returns as calculated and reported by Bloomberg. |
| Duration is a measure of a bond’s (or a bond portfolio’s) price sensitivity to changes in interest rates. |
| Yield premiums are one way to measure a security’s valuation. Narrowing yield premiums result in a higher valuation. Widening yield premiums result in a lower valuation. |
| The U.S. Government does not guarantee the Fund’s shares, yield, or net asset value. The agency guarantee (by, for example, Ginnie Mae, Fannie Mae, or Freddie Mac) does not eliminate market risk. |
| Credit securities refers to corporate bonds and government-related securities, as classified by Bloomberg, as well as Rio Oil Finance Trust, an asset-backed security that we group as a credit investment. |
| The use of specific examples does not imply that they are more or less attractive investments than the Fund’s other holdings. |
| Credit Index refers to the Bloomberg Barclays U.S. Credit Index. |
| Unless otherwise specified, all weightings and characteristics are as of December 31, 2020. |
PAGE 3 ■ Dodge & Cox Income Fund
2020 Performance Review
The Fund outperformed the Bloomberg Barclays U.S. Agg by 1.9 percentage points in 2020.
Key Contributors to Relative Results
■ Asset allocation was significantly positive. The substantial increase we made to the Fund’s corporate sector weighting amid the market volatility in March and April and the subsequent outperformance of credit contributed to relative returns.
■ Security selection within credit was positive as several issuers outperformed, most notably Pemex, Petrobras, and Imperial Brands.
■ The Fund’s overweight to Agency MBS and selection within the sector contributed to relative returns.
■ The Fund’s nominal yield advantage benefited returns.
Key Detractors from Relative Results
■ The Fund’s below-benchmark duration position (73%* of the Bloomberg Barclays U.S. Agg’s duration) hampered relative returns as Treasury yields declined significantly in the first half of the year.
■ While security selection was positive overall, certain corporate holdings underperformed, including Wells Fargo, Macy’s, Bank of America, and Kinder Morgan.
* Figures in this section denote Fund positioning at the beginning of
the period.
Key Characteristics of Dodge & Cox
Independent Organization
Dodge & Cox is one of the largest privately owned investment managers in the world. We remain committed to independence, with a goal of providing the highest quality investment management service to our existing clients.
90 Years of Investment Experience
Dodge & Cox was founded in 1930. We have a stable and well-qualified team of investment professionals, most of whom have spent their entire careers at Dodge & Cox.
Experienced Investment Team
The U.S. Fixed Income Investment Committee, which is the decision-making body for the Income Fund, is a nine-member committee with an average tenure at Dodge & Cox of 21 years.
One Business with a Single Research Office
Dodge & Cox manages equity (domestic, international, and global), fixed income (domestic and global), and balanced investments, operating from one office in San Francisco.
Consistent Investment Approach
Our team decision-making process involves thorough, bottom- up fundamental analysis of each investment.
Long-Term Focus and Low Expenses
We invest with a three- to five-year investment horizon, which has historically resulted in low turnover relative to our peers. We manage Funds that maintain low expense ratios.
Risks: The Fund invests in individual bonds whose yields and market values fluctuate, so that an investment may be worth more or less than its original cost. Debt securities are subject to interest rate risk, credit risk, and prepayment and call risk, all of which could have adverse effects on the value of the Fund. A low interest rate environment creates an elevated risk of future negative returns. Financial intermediaries may restrict their market making activities for certain debt securities, which may reduce the liquidity and increase the volatility of such securities. Please read the prospectus and summary prospectus for specific details regarding the Fund’s risk profile.
Dodge & Cox Income Fund ■ PAGE 4
Growth of $10,000 Over 10 Years
For An Investment Made On December 31, 2010 
Average Annual Total Return
For Periods Ended December 31, 2020
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Bloomberg Barclays U.S. Aggregate Bond Index | | | | |
Returns represent past performance and do not guarantee future results. Investment return and share price will fluctuate with market conditions, and investors may have a gain or loss when shares are sold. Fund performance changes over time and currently may be significantly lower than stated. Performance is updated and published monthly. Visit the Fund’s website at dodgeandcox.com or call 800-621-3979 for current performance figures.
The Fund’s total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include interest income but, unlike Fund returns, do not reflect fees or expenses. The Bloomberg Barclays U.S. Aggregate Bond Index (Bloomberg Barclays U.S. Agg) is a widely recognized, unmanaged index of U.S. dollar-denominated, investment-grade, taxable debt securities.
Bloomberg is a registered trademark of Bloomberg Finance L.P. and its affiliates. Barclays® is a trademark of Barclays Bank PLC.
Fund Expense Example
As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.
Actual Expenses
The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison with Other Mutual Funds
Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.
Six Months Ended
December 31, 2020 | Beginning Account Value
7/1/2020 | Ending Account Value
12/31/2020 | Expenses Paid
During Period* |
Based on Actual Fund Return | | | |
Based on Hypothetical 5% Yearly Return | | | |
| Expenses are equal to the Fund’s annualized expense ratio of 0.42%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. Though other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).
PAGE 5 ■ Dodge & Cox Income Fund
Portfolio Information (unaudited) December 31, 2020
Sector Diversification (%) | |
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Net Cash & Other includes cash, short-term investments, derivatives, receivables, and payables.
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Dodge & Cox Income Fund ■ PAGE 6
Portfolio of Investments December 31, 2020
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Petroleo Brasileiro SA (Brazil) | | |
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Petroleos Mexicanos (Mexico) | | |
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L.A. Unified School District GO | | |
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New Jersey Turnpike Authority RB | | |
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Small Business Admin. - 504 Program | | |
Series 2001-20G 1, 6.625%, 7/1/21 | | |
Series 2001-20L 1, 5.78%, 12/1/21 | | |
Series 2002-20A 1, 6.14%, 1/1/22 | | |
Series 2002-20L 1, 5.10%, 12/1/22 | | |
Series 2003-20G 1, 4.35%, 7/1/23 | | |
Series 2004-20L 1, 4.87%, 12/1/24 | | |
Series 2005-20B 1, 4.625%, 2/1/25 | | |
Series 2005-20D 1, 5.11%, 4/1/25 | | |
Series 2005-20E 1, 4.84%, 5/1/25 | | |
Series 2005-20G 1, 4.75%, 7/1/25 | | |
Series 2005-20H 1, 5.11%, 8/1/25 | | |
Series 2005-20I 1, 4.76%, 9/1/25 | | |
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Series 2006-20A 1, 5.21%, 1/1/26 | | |
Series 2006-20B 1, 5.35%, 2/1/26 | | |
Series 2006-20C 1, 5.57%, 3/1/26 | | |
Series 2006-20G 1, 6.07%, 7/1/26 | | |
Series 2006-20H 1, 5.70%, 8/1/26 | | |
Series 2006-20I 1, 5.54%, 9/1/26 | | |
Series 2006-20J 1, 5.37%, 10/1/26 | | |
Series 2006-20L 1, 5.12%, 12/1/26 | | |
Series 2007-20A 1, 5.32%, 1/1/27 | | |
Series 2007-20C 1, 5.23%, 3/1/27 | | |
Series 2007-20D 1, 5.32%, 4/1/27 | | |
Series 2007-20G 1, 5.82%, 7/1/27 | | |
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Rio Oil Finance Trust (Brazil) | | |
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Navient Student Loan Trust | | |
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+1.05%, 1.198%, 6/25/69(a) | | |
+0.90%, 1.04%, 8/26/69(a) | | |
+1.25%, 1.398%, 6/25/65(a) | | |
+1.15%, 1.298%, 3/25/66(a) | | |
+1.30%, 1.448%, 3/25/66(a) | | |
+0.80%, 0.948%, 7/26/66(a) | | |
+1.05%, 1.198%, 7/26/66(a) | | |
+1.15%, 1.298%, 7/26/66(a) | | |
+1.00%, 1.148%, 9/27/66(a) | | |
+1.05%, 1.198%, 12/27/66(a) | | |
+0.72%, 0.868%, 3/25/67(a) | | |
+0.80%, 0.948%, 3/25/67(a) | | |
+0.68%, 0.828%, 6/27/67(a) | | |
+1.00%, 1.148%, 2/27/68(a) | | |
+0.83%, 0.978%, 7/25/68(a) | | |
+0.81%, 0.958%, 7/25/68(a) | | |
+0.70%, 0.848%, 2/25/70(a) | | |
Navient Student Loan Trust (Private Loans) | | |
Series 2014-AA A2A, 2.74%, 2/15/29(a) | | |
Series 2017-A A2A, 2.88%, 12/16/58(a) | | |
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+0.63%, 0.845%, 1/25/40(a) | | |
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+0.55%, 0.765%, 10/25/64(a) | | |
+0.55%, 0.765%, 10/25/64(a) | | |
SMB Private Education Loan Trust (Private Loans) | | |
Series 2017-A A2A, 2.88%, 9/15/34(a) | | |
Series 2017-B A2A, 2.82%, 10/15/35(a) | | |
PAGE 7 ■ Dodge & Cox Income FundSee accompanying Notes to Financial Statements
Portfolio of Investments December 31, 2020
Debt Securities (continued) |
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Series 2018-A A2A, 3.50%, 2/15/36(a) | | |
Series 2018-B A2A, 3.60%, 1/15/37(a) | | |
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Fannie Mae Multifamily DUS | | |
Pool AL6455, 2.765%, 11/1/21(b) | | |
Freddie Mac Multifamily Interest Only | | |
Series K055 X1, 1.362%, 3/25/26(b) | | |
Series K056 X1, 1.261%, 5/25/26(b) | | |
Series K062 X1, 0.305%, 12/25/26(b) | | |
Series K064 X1, 0.605%, 3/25/27(b) | | |
Series K065 X1, 0.671%, 4/25/27(b) | | |
Series K066 X1, 0.75%, 6/25/27(b) | | |
Series K067 X1, 0.577%, 7/25/27(b) | | |
Series K069 X1, 0.363%, 9/25/27(b) | | |
Series K070 X1, 0.326%, 11/25/27(b) | | |
Series K071 X1, 0.29%, 11/25/27(b) | | |
Series K089 X1, 0.54%, 1/25/29(b) | | |
Series K091 X1, 0.559%, 3/25/29(b) | | |
Series K092 X1, 0.709%, 4/25/29(b) | | |
Series K093 X1, 0.952%, 5/25/29(b) | | |
Series K094 X1, 0.88%, 6/25/29(b) | | |
Series K095 X1, 0.948%, 6/25/29(b) | | |
Series K096 X1, 1.126%, 7/25/29(b) | | |
Series K097 X1, 1.089%, 7/25/29(b) | | |
Series K098 X1, 1.145%, 8/25/29(b) | | |
Series K099 X1, 0.886%, 9/25/29(b) | | |
Series K101 X1, 0.836%, 10/25/29(b) | | |
Sereis K102 X1, 0.825%, 10/25/29(b) | | |
Series K152 X1, 0.956%, 1/25/31(b) | | |
Series K154 X1, 0.307%, 11/25/32(b) | | |
Series K-1511 X1, 0.778%, 3/25/34(b) | | |
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Federal Agency CMO & REMIC: 4.5% |
Dept. of Veterans Affairs | | |
Series 1995-2D 4A, 9.293%, 5/15/25 | | |
Series 1997-2 Z, 7.50%, 6/15/27 | | |
Series 1998-2 2A, 8.639%, 8/15/27(b) | | |
Series 1998-1 1A, 8.293%, 3/15/28(b) | | |
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Trust 1998-58 PX, 6.50%, 9/25/28 | | |
Trust 1998-58 PC, 6.50%, 10/25/28 | | |
Trust 2001-69 PQ, 6.00%, 12/25/31 | | |
Trust 2002-33 A1, 7.00%, 6/25/32 | | |
Trust 2002-69 Z, 5.50%, 10/25/32 | | |
Trust 2008-24 GD, 6.50%, 3/25/37 | | |
Trust 2007-47 PE, 5.00%, 5/25/37 | | |
Trust 2009-53 QM, 5.50%, 5/25/39 | | |
Trust 2009-30 AG, 6.50%, 5/25/39 | | |
Trust 2009-40 TB, 6.00%, 6/25/39 | | |
Trust 2001-T3 A1, 7.50%, 11/25/40 | | |
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Trust 2010-123 WT, 7.00%, 11/25/40 | | |
Trust 2001-T7 A1, 7.50%, 2/25/41 | | |
Trust 2001-T5 A2, 6.977%, 6/19/41(b) | | |
Trust 2001-T5 A3, 7.50%, 6/19/41(b) | | |
Trust 2001-T4 A1, 7.50%, 7/25/41 | | |
Trust 2011-58 AT, 4.00%, 7/25/41 | | |
Trust 2001-T10 A1, 7.00%, 12/25/41 | | |
Trust 2013-106 MA, 4.00%, 2/25/42 | | |
Trust 2002-W6 2A1, 7.00%, 6/25/42(b) | | |
Trust 2002-W8 A2, 7.00%, 6/25/42 | | |
Trust 2002-90 A1, 6.50%, 6/25/42 | | |
Trust 2002-T16 A3, 7.50%, 7/25/42 | | |
Trust 2003-W2 1A2, 7.00%, 7/25/42 | | |
Trust 2003-W4 3A, 5.571%, 10/25/42(b) | | |
Trust 2012-121 NB, 7.00%, 11/25/42 | | |
Trust 2003-W1 2A, 5.663%, 12/25/42(b) | | |
Trust 2003-7 A1, 6.50%, 12/25/42 | | |
Trust 2004-T1 1A2, 6.50%, 1/25/44 | | |
Trust 2004-W2 2A2, 7.00%, 2/25/44 | | |
Trust 2004-W2 5A, 7.50%, 3/25/44 | | |
Trust 2004-W8 3A, 7.50%, 6/25/44 | | |
Trust 2004-W15 1A2, 6.50%, 8/25/44 | | |
Trust 2005-W1 1A3, 7.00%, 10/25/44 | | |
Trust 2001-79 BA, 7.00%, 3/25/45 | | |
Trust 2006-W1 1A1, 6.50%, 12/25/45 | | |
Trust 2006-W1 1A2, 7.00%, 12/25/45 | | |
Trust 2006-W1 1A3, 7.50%, 12/25/45 | | |
Trust 2006-W1 1A4, 8.00%, 12/25/45 | | |
Trust 2007-W10 1A, 6.213%, 8/25/47(b) | | |
Trust 2007-W10 2A, 6.301%, 8/25/47(b) | | |
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Series 2456 CJ, 6.50%, 6/15/32 | | |
Series 3312 AB, 6.50%, 6/15/32 | | |
Series T-41 2A, 5.169%, 7/25/32(b) | | |
Series 2587 ZU, 5.50%, 3/15/33 | | |
Series 2610 UA, 4.00%, 5/15/33 | | |
Series T-48 1A, 4.778%, 7/25/33(b) | | |
Series 2708 ZD, 5.50%, 11/15/33 | | |
Series 3204 ZM, 5.00%, 8/15/34 | | |
Series 3330 GZ, 5.50%, 6/15/37 | | |
Series 3427 Z, 5.00%, 3/15/38 | | |
Series T-51 1A, 6.50%, 9/25/43(b) | | |
Series 4283 DW, 4.50%, 12/15/43(b) | | |
Series 4283 EW, 4.50%, 12/15/43(b) | | |
Series 4281 BC, 4.50%, 12/15/43(b) | | |
Series 4319 MA, 4.50%, 3/15/44(b) | | |
See accompanying Notes to Financial StatementsDodge & Cox Income Fund ■ PAGE 8
Portfolio of Investments December 31, 2020
Debt Securities (continued) |
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Federal Agency Mortgage Pass-Through: 33.9% |
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3.098%, 7/1/34 - 1/1/48(b) | | |
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| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
2.295%, 10/1/35 - 9/1/42(b) | | |
| | |
| | |
PAGE 9 ■ Dodge & Cox Income FundSee accompanying Notes to Financial Statements
Portfolio of Investments December 31, 2020
Debt Securities (continued) |
| | |
| | |
| | |
| | |
| | |
2.638%, 11/1/36 - 7/1/46(b) | | |
| | |
| | |
| | |
| | |
| | |
| | |
2.772%, 11/1/37 - 12/1/44(b) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
2.26%, 12/1/39 - 12/1/46(b) | | |
| | |
| | |
| | |
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| | |
| | |
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| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
2.737%, 4/1/44 - 9/1/44(b) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
2.732%, 10/1/44 - 4/1/46(b) | | |
| | |
| | |
|
| | |
| | |
2.887%, 10/1/44 - 10/1/47(b) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
2.722%, 12/1/44 - 6/1/46(b) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
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| | |
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| | |
| | |
See accompanying Notes to Financial StatementsDodge & Cox Income Fund ■ PAGE 10
Portfolio of Investments December 31, 2020
Debt Securities (continued) |
| | |
| | |
| | |
| | |
| | |
| | |
3.625%, 1/1/35 - 4/1/35(b) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
2.215%, 8/1/36 - 10/1/43(b) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
3.097%, 1/1/44 - 1/1/45(b) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
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| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| | |
| | |
| | |
2.941%, 11/1/44 - 12/1/44(b) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
2.745%, 8/1/45 - 5/1/46(b) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Freddie Mac Gold, 15 Year | | |
| | |
| | |
| | |
Freddie Mac Gold, 20 Year | | |
| | |
| | |
| | |
| | |
Freddie Mac Gold, 30 Year | | |
| | |
| | |
| | |
| | |
| | |
| | |
Freddie Mac Pool, 15 Year | | |
| | |
Freddie Mac Pool, 20 Year | | |
| | |
Freddie Mac Pool, 30 Year | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
7.50%, 12/15/23 - 5/15/25 | | |
| | |
| | |
Private Label CMO & REMIC: 0.0%* |
GSMPS Mortgage Loan Trust | | |
Series 2004-4 1A4, 8.50%, 6/25/34(a) | | |
PAGE 11 ■ Dodge & Cox Income FundSee accompanying Notes to Financial Statements
Portfolio of Investments December 31, 2020
Debt Securities (continued) |
| | |
Seasoned Credit Risk Transfer Trust | | |
Series 2017-4 M45T, 4.50%, 6/25/57 | | |
| | |
| | |
| | |
|
|
| | |
| | |
| | |
| | |
| | |
| | |
Barclays PLC (United Kingdom) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Capital One Financial Corp. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
+6.37%, 6.584%, 10/30/40(e) | | |
| | |
| | |
| | |
| | |
HSBC Holdings PLC (United Kingdom) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| | |
| | |
| | |
| | |
| | |
Lloyds Banking Group PLC (United Kingdom) | | |
| | |
| | |
| | |
| | |
NatWest Group PLC (United Kingdom) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| | |
| | |
| | |
Anheuser-Busch InBev SA/NV (Belgium) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
British American Tobacco PLC (United Kingdom) | | |
| | |
| | |
| | |
| | |
Burlington Northern Santa Fe LLC(f) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
See accompanying Notes to Financial StatementsDodge & Cox Income Fund ■ PAGE 12
Portfolio of Investments December 31, 2020
Debt Securities (continued) |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Charter Communications, Inc. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
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| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Elanco Animal Health, Inc. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Ford Motor Credit Co. LLC(f) | | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Imperial Brands PLC (United Kingdom) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
LyondellBasell Industries NV (Netherlands) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Occidental Petroleum Corp. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Prosus NV(f) (Netherlands) | | |
| | |
| | |
| | |
RELX PLC (United Kingdom) | | |
| | |
| | |
| | |
| | |
| | |
| | |
Telecom Italia SPA (Italy) | | |
| | |
| | |
| | |
| | |
PAGE 13 ■ Dodge & Cox Income FundSee accompanying Notes to Financial Statements
Portfolio of Investments December 31, 2020
Debt Securities (continued) |
| | |
| | |
| | |
| | |
| | |
The Williams Companies, Inc. | | |
| | |
| | |
| | |
| | |
| | |
Ultrapar Participacoes SA (Brazil) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Verizon Communications, Inc. | | |
| | |
Vodafone Group PLC (United Kingdom) | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Total Debt Securities
(Cost $63,152,335,018) | |
Short-Term Investments: 7.0% |
| | |
Repurchase Agreements: 6.6% |
Fixed Income Clearing Corporation(g)
0.000%, dated 12/31/20, due 1/4/21, maturity value $4,560,470,000 | | |
|
| | |
|
State Street Institutional U.S. Government Money Market Fund | | |
Total Short-Term Investments
(Cost $4,836,135,884) | |
Total Investments In Securities
(Cost $67,988,470,902) | | |
Other Assets Less Liabilities | | |
| | |
| Security exempt from registration under Rule 144A of the Securities Act of 1933. The security may be resold in transactions exempt from registration, normally to qualified institutional buyers. |
| Variable rate security: interest rate is determined by the interest rates of underlying pool of assets that collateralize the security. The interest rate of the security may change due to a change in the interest rates or the composition of underlying pool of assets. The interest rate shown is the rate as of period end. |
| The security was purchased on a to-be-announced (TBA) when-issued basis. |
| Variable rate security: fixed-to-float security pays an initial fixed interest rate and will pay a floating interest rate established at a predetermined time in the future. The interest rate shown is the rate as of period end. |
| Hybrid security: characteristics of both a debt and equity security. |
| |
| Repurchase agreement is collateralized by U.S. Treasury Bills, 5/27/21-7/1/21, U.S. Treasury Inflation Indexed Notes 0.625%, 7/15/21, U.S. Treasury Notes 1.625%- 2.875%, 6/30/21-11/30/21 and Cash Management Bills 5/11/21-5/25/21. Total collateral value is $4,651,679,904. |
| |
| Debt securities are grouped by parent company unless otherwise noted. Actual securities may be issued by the listed parent company or one of its subsidiaries.
In determining a parent company’s country designation, the Fund generally references the country of incorporation. |
| Debt securities with floating interest rates are linked to the referenced benchmark; the interest rate shown is the rate as of period end. |
| |
ARM: Adjustable Rate Mortgage |
CMBS: Commercial Mortgage-Backed Security |
CMO: Collateralized Mortgage Obligation |
DUS: Delegated Underwriting and Servicing |
|
|
REMIC: Real Estate Mortgage Investment Conduit |
See accompanying Notes to Financial StatementsDodge & Cox Income Fund ■ PAGE 14
Statement of Assets and Liabilities
| |
|
Investments in securities, at value (cost $67,988,470,902) | |
Receivable for investments sold | |
Receivable for Fund shares sold | |
Dividends and interest receivable | |
Prepaid expenses and other assets | |
| |
|
Cash received as collateral for TBA securities | |
Payable for investments purchased | |
Payable for Fund shares redeemed | |
| |
| |
| |
| |
|
| |
| |
| |
Fund shares outstanding (par value $0.01 each, unlimited shares authorized) | |
Net asset value per share | |
Statement of Operations
| Year Ended
December 31, 2020 |
| |
| |
| |
| |
| |
| |
Custody and fund accounting fees | |
| |
| |
| |
| |
| |
| |
| |
| |
Realized and Unrealized Gain (Loss): | |
| |
Investments in securities (Note 6) | |
| |
Net change in unrealized appreciation/depreciation | |
Investments in securities | |
Net realized and unrealized gain | |
Net Change in Net Assets From Operations | |
Statement of Changes in Net Assets
| | |
| | |
| | |
| | |
| | |
Net change in unrealized appreciation/depreciation | | |
| | |
Distributions to Shareholders: | | |
| | |
| | |
Proceeds from sale of shares | | |
Reinvestment of distributions | | |
| | |
Net change from Fund share transactions | | |
Total change in net assets | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Net change in shares outstanding | | |
PAGE 15 ■ Dodge & Cox Income FundSee accompanying Notes to Financial Statements
Notes to Financial Statements
Note 1: Organization and Significant Accounting Policies
Dodge & Cox Income Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund commenced operations on January 3, 1989, and seeks high and stable current income consistent with long-term preservation of capital. Risk considerations and investment strategies of the Fund are discussed in the Fund’s Prospectus.
The Fund is an investment company and follows the accounting and reporting guidance issued in Topic 946 by the Financial Accounting Standards Board. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Actual results may differ from those estimates. Significant accounting policies are as follows:
Security valuation The Fund’s net assets are normally valued as of the scheduled close of trading on the New York Stock Exchange (NYSE), generally 4 p.m. Eastern Time, each day that the NYSE is open for business.
Debt securities and derivatives traded over the counter are valued using prices received from independent pricing services which utilize dealer quotes, recent transaction data, pricing models, and other inputs to arrive at market-based valuations. Pricing models may consider quoted prices for similar securities, interest rates, cash flows (including prepayment speeds), and credit risk. Exchange-traded derivatives are valued at the settlement price determined by the relevant exchange. Short-term securities less than 60 days to maturity may be valued at amortized cost if amortized cost approximates current value. Mutual funds are valued at their respective net asset values. Security values are not discounted based on the size of the Fund’s position and may differ from the value a Fund receives upon sale of the securities. All securities held by the Fund are denominated in U.S. dollars.
If market quotations are not readily available or if normal valuation procedures produce valuations that are deemed unreliable or inappropriate under the circumstances existing at the time, the investment will be valued at fair value as determined in good faith by or under the direction of the Fund’s Board of Trustees. The Board of Trustees has appointed Dodge & Cox, the Fund’s investment manager, to make fair value determinations in accordance with the Dodge & Cox Funds Valuation Policies (“Valuation Policies”), subject to Board oversight. Dodge & Cox has established a Pricing Committee that is comprised of representatives from Treasury, Legal, Compliance, and Operations. The Pricing Committee is responsible for implementing the Valuation Policies, including determining the fair value of securities and other investments when necessary. The Pricing Committee considers relevant indications of value that are reasonably available to it in determining the fair value assigned to a particular security, such as the value of similar financial instruments, trading volumes, contractual restrictions on disposition, related corporate actions, and changes in economic conditions. In doing so, the Pricing Committee employs various methods for calibrating fair valuation
approaches, including a regular review of key inputs and assumptions, back-testing, and review of any related market activity.
Valuing securities through a fair value determination involves greater reliance on judgment than valuation of securities based on readily available market quotations. In some instances, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a security’s value. When fair value pricing is employed, the prices of securities used by the Fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.
Interest income is recorded on the accrual basis. Interest income includes coupon interest, amortization of premium and accretion of discount on debt securities, and gain/loss on paydowns. The ability of the issuers of the debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry, state, or region. Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectibility of interest is reasonably assured. Dividend income is recorded on the ex-dividend date.
Expenses are recorded on the accrual basis. Some expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust using methodologies determined by the nature of the expense.
Distributions to shareholders are recorded on the ex-dividend date.
Repurchase agreements Repurchase agreements are transactions under which a Fund purchases a security from a dealer counterparty and agrees to resell the security to that counterparty on a specified future date at the same price, plus a specified interest rate. The Fund’s repurchase agreements are secured by U.S. government or agency securities. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the collateral securities and to apply the proceeds in satisfaction of the obligation.
To-Be-Announced securities The Fund may purchase mortgage-related securities on a to-be-announced (“TBA”) basis at a fixed price, with payment and delivery on a scheduled future date beyond the customary settlement period for such securities. The Fund may choose to extend the settlement through a “dollar roll” transaction in which it sells the mortgage-related securities to a dealer and simultaneously agrees to purchase similar securities for future delivery at a predetermined price. The Fund accounts for TBA dollar rolls as purchase and sale transactions.
Dodge & Cox Income Fund ■ PAGE 16
Notes to Financial Statements
Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred.
Note 2: Valuation Measurements
Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below.
■ Level 1: Quoted prices in active markets for identical securities
■ Level 2: Other significant observable inputs (including quoted prices for similar securities, market indices, interest rates, credit risk, forward exchange rates, etc.)
■ Level 3: Significant unobservable inputs (including Fund management’s assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used to value the Fund’s holdings at December 31, 2020:
| | LEVEL 2
(Other Significant
Observable Inputs) |
|
|
| | |
| | |
| | |
| | |
|
| | |
| | |
| | |
Note 3: Derivative Instruments
The Fund may use derivatives either to minimize the impact of certain risks to one or more of its investments (as a ‘‘hedging technique’’) or to implement its investment strategy. A derivative is a financial instrument whose value is derived from a security, currency, interest rate, index, or other financial instrument.
Index credit default swaps Index credit default swaps are agreements under which a credit protection buyer makes periodic payments to the seller in exchange for credit protection in respect of an equally weighted index of corporate issuers. If a credit event occurs with respect to any issuer in the index, the buyer receives a payment equal to the difference between par and the market value of the issuer’s debt, applied to the portion of the swap represented by that issuer.
Upon entering into centrally cleared index credit default swaps, the Fund is required to post an amount of cash or liquid assets (referred to as initial margin) in a segregated account with the clearing broker. Subsequent payments (referred to as variation margin) to and from its clearing broker are made on a daily basis based on changes in the market value of the swap. Changes in the market value of credit default swaps are recorded as unrealized appreciation or depreciation on the Statement of Operations. Realized gains and losses on swaps are recorded on the Statement of Operations upon exchange of cash flows for periodic payments and upon the closing or maturity of the swaps. Cash deposited with the clearing broker as initial margin is recorded in the Statement of Assets and Liabilities. A receivable and/or payable to brokers for daily variation margin is also recorded in the Statement of Assets and Liabilities.
Investments in index credit default swaps may include certain risks, which may be different from, and potentially greater than, investing directly in debt issued by the index constituents.
The Fund did not hold index credit default swaps at December 31, 2020.
Additional derivative information The following summarizes the effect of derivative instruments on the Statement of Operations, categorized by primary underlying risk exposure.
The following summarizes the range of volume in the Fund's derivative instruments during the year ended December 31, 2020.
The Fund may enter into various derivative contracts governed by International Swaps and Derivatives Association master agreements (“ISDA agreements”). The Fund’s ISDA agreements, which are separately negotiated with each dealer counterparty, specify (i) events of default and other events permitting a party to terminate some or all of the contracts thereunder and (ii) the process by which those contracts will be valued for purposes of determining termination payments. If some or all of the contracts under a master agreement are terminated because of an event of default or similar event, the values of all terminated contracts must be netted to determine a single payment owed by one party to the other. To the extent amounts owed to the Fund by its counterparties are not collateralized, the Fund is at risk of those counterparties’ non-performance. The Fund attempts to mitigate counterparty credit risk by entering into contracts only with counterparties it believes to be of good credit quality, by exchanging collateral, and by monitoring the financial stability of those counterparties.
For financial reporting purposes, the Fund does not offset assets and liabilities that are subject to a master netting arrangement in the Statement of Assets and Liabilities.
The Fund’s ability to net assets and liabilities and to offset collateral pledged or received is based on contractual netting/offset
PAGE 17 ■ Dodge & Cox Income Fund
Notes to Financial Statements
provisions in the ISDA agreements. The Fund did not hold derivatives that are subject to enforceable master netting arrangements at December 31, 2020.
Note 4: Related Party Transactions
Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays a management fee monthly at an annual rate of 0.50% of the Fund’s average daily net assets up to $100 million and 0.40% of the Fund’s average daily net assets in excess of $100 million to Dodge & Cox, investment manager of the Fund. The agreement further provides that Dodge & Cox shall waive its fee to the extent that such fee plus all other ordinary operating expenses of the Fund exceed 1% of the average daily net assets for the year.
Fund officers and trustees All officers and two of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.
Note 5: Income Tax Information and Distributions to Shareholders
A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, and such amounts may differ from net investment income and realized gains for financial reporting purposes. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes. Financial reporting records are adjusted for permanent book to tax differences at year end to reflect tax character. Book to tax differences are primarily due to differing treatments of redemptions in-kind, wash sales, U.S. Treasury inflation-protected securities, derivatives, and distributions.
Distributions during the years noted below were characterized as follows for federal income tax purposes:
| Year Ended
December 31, 2020 | Year Ended
December 31, 2019 |
| | |
| | |
| | |
| | |
At December 31, 2020, the tax basis components of distributable earnings were as follows:
Undistributed ordinary income | |
Undistributed long-term capital gain | |
At December 31, 2020, unrealized appreciation and depreciation for investments and derivatives based on cost for federal income tax purposes were as follows:
| |
| |
| |
Net unrealized appreciation | |
Fund management has reviewed the tax positions for open periods (three years and four years, respectively, from filing the Fund’s Federal and State tax returns) as applicable to the Fund, and has determined that no provision for income tax is required in the Fund’s financial statements.
Note 6: Redemptions In-Kind
During the year ended December 31, 2020, the Fund distributed securities and cash as payment for a redemption of Fund shares. For financial reporting purposes, the Fund realized a net gain of $47,442,259 attributable to the redemption in-kind. For tax purposes, no capital gain on the redemption in-kind was recognized.
Note 7: Loan Facilities
Pursuant to an exemptive order issued by the Securities and Exchange Commission (SEC), the Fund may participate in an interfund lending facility (Facility). The Facility allows the Fund to borrow money from or loan money to the Funds. Loans under the Facility are made for temporary or emergency purposes, such as to fund shareholder redemption requests. Interest on borrowings is the average of the current repurchase agreement rate and the bank loan rate. There was no activity in the Facility during the year.
All Funds in the Trust participate in a $500 million committed credit facility (Line of Credit) with State Street Bank and Trust Company, to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The maximum amount available to the Fund is $250 million. Each Fund pays an annual commitment fee on its pro-rata portion of the Line of Credit. For the year ended December 31, 2020, the Fund’s commitment fee amounted to $399,036 and is reflected as a Miscellaneous Expense in the Statement of Operations. Interest on borrowings is charged at the prevailing rate. There were no borrowings on the Line of Credit during the year.
Note 8: Purchases and Sales of Investments
For the year ended December 31, 2020, purchases and sales of securities, other than short-term securities and U.S. government securities, aggregated $11,463,507,312 and $8,556,404,176, respectively. For the year ended December 31, 2020, purchases and sales of U.S. government securities aggregated $50,465,246,192 and $51,168,355,817, respectively.
Note 9: New Accounting Guidance
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate
Dodge & Cox Income Fund ■ PAGE 18
Notes to Financial Statements
Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in the ASU provide optional temporary financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the London Interbank Offered Rate and other interbank-offered based reference rates as of the end of 2021. The ASU is effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.
Note 10: Subsequent Events
Fund management has determined that no material events or transactions occurred subsequent to December 31, 2020, and through the date of the Fund’s financial statements issuance, which require additional disclosure in the Fund’s financial statements.
Financial Highlights
Selected data and ratios
(for a share outstanding throughout each period) | |
| | | | | |
Net asset value, beginning of year | | | | | |
Income from investment operations: | | | | | |
| | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions to shareholders from: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Net asset value, end of year | | | | | |
| | | | | |
Ratios/supplemental data: | | | | | |
Net assets, end of year (millions) | | | | | |
Ratio of expenses to average net assets | | | | | |
Ratio of net investment income to average net assets | | | | | |
| | | | | |
See accompanying Notes to Financial Statements
PAGE 19 ■ Dodge & Cox Income Fund
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of the Dodge & Cox Funds and Shareholders of Dodge & Cox Income Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Dodge & Cox Income Fund (one of the funds constituting Dodge & Cox Funds, referred to hereafter as the "Fund") as of December 31, 2020, the related statement of operations for the year ended December 31, 2020, the statement of changes in net assets for each of the two years in the period ended December 31, 2020, including the related notes, and the financial highlights for each of the five years in the period ended December 31, 2020 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2020, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended December 31, 2020 and the financial highlights for each of the five years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on the Fund's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2020 by correspondence with the custodian, transfer agent and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
San Francisco, California
February 19, 2021
We have served as the auditor of one or more investment companies in the Dodge & Cox Funds since 1931.
Dodge & Cox Income Fund ■ PAGE 20
Special 2020 Tax Information (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code:
The Fund designates $624,027,446 as long-term capital gain distributions in 2020.
For shareholders that are corporations, the Fund designates 64% of its ordinary dividends paid to shareholders in 2020 as Section 163(j) interest dividends.
Funds' Liquidity Risk Management Program
(unaudited)
The Funds have adopted and implemented a written liquidity risk management program (“Program”) as required by Rule 22e-4 under the Investment Company Act. The Program is reasonably designed to assess and manage the Fund’s liquidity risk, taking into consideration the Fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions; its short and long-term cash flow projections; and its cash holdings and access to other funding sources including the Funds’ interfund lending facility and line of credit.
The Funds’ Board of Trustees has approved the appointment of a Liquidity Risk Management Committee including representatives from Dodge & Cox’s Legal, Compliance, Treasury, Operations, Trading, and Portfolio Management departments, which is responsible for the Program’s administration and oversight and for reporting to the Board on at least an annual basis regarding the Program’s operation and effectiveness.
The Liquidity Risk Management Committee refreshed its assessment of the Funds’ liquidity risk profiles and considered the adequacy and effectiveness of the Program’s operations for the 12 months ended September 30, 2020 (the “covered period”) in order to prepare a written report to the Board of Trustees for consideration at its meeting held on December 16, 2020. The report concluded that (i) while market volatility and reduced liquidity, especially in the fixed income markets, created an unusually challenging liquidity environment during the second quarter of 2020, the Funds had sufficient liquidity to operate effectively throughout the covered period; (ii) each Fund’s investment strategy continues to be appropriate for an open end fund; and (iii) the Funds’ Program is reasonably designed to assess and manage its liquidity risk.
Board Approval of Funds' Investment Management Agreements and Management Fees
(unaudited)
The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 16, 2020, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2021 with respect to each Fund.
During the course of the year, the Board received extensive information and materials relating to the investment management and administrative services provided by Dodge & Cox and the performance of each of the Funds.
Information Received
Over the past several years, the Board has requested, received, and discussed a number of special presentations on topics relevant to their annual consideration of the proposed renewal of the Funds’ Agreements, including, in 2020, special presentations relating to trends in the asset management industry, the mutual fund competitive landscape, mutual fund ratings methodologies, fund distribution channels, and fund flows and performance analysis. In addition to the foregoing and in advance of the meetings referred to below, the Board, including the Independent Trustees, requested, received, and reviewed materials relating to the Agreements and the services provided by Dodge & Cox. The Independent Trustees retained Broadridge to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Broadridge. The Broadridge materials included information regarding advisory and administrative fee rates, expense ratios, and transfer agency, custodial, and distribution expenses, as well as performance comparisons to each Fund’s peer group and to a broad-based securities index or combination of indices. The Broadridge materials also included a comparison of expenses of various share classes offered by comparable funds. The materials reviewed by the Board contained information concerning, among other things, Dodge & Cox’s profitability, financial results and condition, management fee revenue, and separate account fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates, sales and redemption data, and the investment that Dodge & Cox makes in research used in managing the Funds. The Board received and reviewed memoranda and related materials addressing, among other things, Dodge & Cox’s services to the Funds; how Dodge & Cox Funds’ fees compare to fees of peer group funds; the different fees, services, costs, and risks associated with other accounts managed by Dodge & Cox as compared to the Dodge & Cox Funds; and the ways in which the Funds realize economies of scale. Throughout the process of reviewing the services provided by Dodge & Cox and preparing for the meeting, the Independent Trustees found Dodge & Cox to be open, forthright, detailed, and helpful in answering questions about all issues. The Board received copies of the Agreements and a memorandum from the independent legal counsel to the Independent Trustees discussing the factors generally regarded as appropriate to consider in evaluating mutual fund management arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the independent legal counsel on November 11, 2020 and again on December 16, 2020 to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements. In considering the Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board considered several factors, discussed below, to be key factors and reached the conclusions described below.
PAGE 21 ■ Dodge & Cox Income Fund
Nature, Quality, and Extent of the Service
The Board considered that Dodge & Cox provides a range of services to the Funds in addition to portfolio management, including regulatory compliance, trading desks, proxy voting, transfer agent and custodian oversight, administration, regulatory filings, tax compliance and filings, website, and anti-money laundering. The nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality, and extent of portfolio management, administrative, and shareholder services performed by Dodge & Cox. With regard to portfolio management services, the Board considered Dodge & Cox’s established long-term history of care in the management of the Funds; its consistency in investment approach and depth; the background and experience of the Dodge & Cox U.S. Equity Investment Committee, International Equity Investment Committee, Global Equity Investment Committee, U.S. Fixed Income Investment Committee, and Global Fixed Income Investment Committee, and research analysts responsible for managing the Funds; Dodge & Cox’s methods for assessing the regulatory and investment climate in various jurisdictions; its overall level of attention to its core investment management function; and its commitment to the Funds and their shareholders. The Board reviewed information from Dodge & Cox describing conflicts of interest between the Funds and Dodge & Cox or its other clients, and how Dodge & Cox addresses those conflicts. The Board noted Dodge & Cox’s record of favorable press and industry coverage, as well as its good compliance record, and its reputation as a trusted, shareholder-friendly mutual fund family. In addition, the Board considered that Dodge & Cox manages approximately $202 billion in Fund assets (as of November 30, 2020) with fewer professionals than most comparable funds, and that on average these professionals have more experience and longer tenure than investment professionals at comparable funds. The Board also noted that Dodge & Cox is an investment research-oriented firm with no other business endeavors to distract management’s attention from its research efforts, that its investment professionals adhere to a consistent investment approach across the Funds, and that due to its deliberate strategy with respect to new products, Dodge & Cox has had stability in its mutual fund product offerings over the course of many years and has the fewest funds of any of the 25 largest mutual fund families by assets. The Board further considered the “Gold” analyst rating awarded by Morningstar to all of the Funds (other than the Balanced Fund, which has a “Silver” rating). The Board concluded that it was satisfied with the nature, extent, and quality of investment management and other services provided to the Funds by Dodge & Cox.
Investment Performance
The Board reviewed each Fund’s recent and long-term investment performance (including periods of outperformance and underperformance), as compared to relevant indices and the performance of such Fund’s peer group and broader Morningstar category. In assessing the performance of the Funds, the Board considered the Funds’ investment returns over various periods and the volatility thereof and concluded that the levels experienced were consistent with Dodge & Cox’s long-term approach and active investment style. The Board also compared the short- and long-term
investment performance of the equity funds to value-oriented indices, in recognition of the significant performance divergence between value and growth stocks that has persisted for the last several years. It was noted that equity performance has been consistent with the value oriented investment strategy employed by Dodge & Cox. The Board concluded that Dodge & Cox’s historic, long-term, team-oriented, bottom-up investment approach remains consistent and that Dodge & Cox continues to be distinguished by its integrity, transparency, and independence. The Board considered that the performance of the Funds is the result of a value-oriented investment management process that emphasizes a long-term investment horizon, independent research, a team approach, price discipline, low cost, and low portfolio turnover. The Board concluded that Dodge & Cox has delivered long-term performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.
Costs and Ancillary Benefits
Costs of Services to Funds: Fees and Expenses The Board considered each Fund’s management fee rate and net expense ratio relative to (1) a broad category of other mutual funds with similar portfolio characteristics and share class and expense structures and (2) a smaller group of peers selected by Broadridge based on investment style, share class characteristics, and asset levels. The Board also considered the management fees charged by Dodge & Cox to other clients. In particular, the Board noted that the management fee rate paid by each Fund compares favorably to its broad category and is competitive within the Fund’s peer group. The Board also evaluated the operating structures of the Funds and Dodge & Cox, noting that the Funds do not charge front-end sales commissions or distribution fees, and Dodge & Cox bears, among other things, the cost of most third-party research, reimbursement for shareholder recordkeeping and administrative costs to third-party retirement plan administrators, and administrative and office overhead. The Board noted that the Broadridge report shows that the net expense ratio of every Dodge & Cox Fund is in the least expensive quartile compared to its broad Morningstar category (taking into account, in the case of the Global Bond Fund, voluntary expense reimbursements by Dodge & Cox). The Board noted the Funds’ unusual single-share-class structure and reviewed Broadridge data (including asset-weighted average expense ratios) showing that most of the peer group funds offer several different classes of shares, with different expense ratios, to different categories of investors, and that the Broadridge expense comparisons described above generally compare the net expense ratio of each Dodge & Cox Fund’s single share class to one of the least expensive share classes of the peer fund, even though those share classes are often not available to retail investors. On an asset-weighted basis, each Fund ranks in the least expensive quartile of its Broadridge peer group (taking into account, in the case of the Global Bond Fund, voluntary expense reimbursements by Dodge & Cox). The Board noted that the Funds provide access for small investors to quality investment management at a relatively low cost.
The Board also considered that the Funds are priced to scale, i.e., management fee rates begin at relatively low levels. Even without breakpoints, the Funds’ management fee rates are lower than those of many peer funds whose fee schedules include breakpoints. With
Dodge & Cox Income Fund ■ PAGE 22
respect to non-U.S. funds sponsored and managed by Dodge & Cox that are comparable to the Funds in many respects, the Board noted that the fee rates charged by Dodge & Cox are the same as or higher than the fee rates charged to the Funds. The Board reviewed information regarding the fee rates Dodge & Cox charges to separate accounts that have investment programs similar to those of the Funds, including instances where separate account fees are lower than Fund fees. The Board considered the differences in the nature and scope of services Dodge & Cox provides to the Funds as compared to other client accounts, as well as material differences in regulatory, litigation, and other risks as between the Dodge & Cox Funds and other types of clients. The Board noted that different markets exist for mutual fund and institutional separate account management services and that a comparison of Fund fee rates and separate account fee rates must consider the fact that separate account clients bear additional costs and responsibilities that are included in the cost of a Fund. After consideration of these matters, the Board concluded that the overall costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation, and performance of Dodge & Cox and the low overall expense ratios of the Funds.
Profitability and Costs of Services to Dodge & Cox; "Fall-out" Benefits The Board reviewed reports of Dodge & Cox’s financial position, profitability, and estimated overall value and considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the scope and quality of the services provided. The Board noted in particular that Dodge & Cox’s profits are not generated by high fee rates, but reflect a focused business approach toward investment management. The Board recognized the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that the compensation/profit structure at Dodge & Cox includes a return on shareholder employees’ investment in the firm, which is vital for remaining independent and facilitating retention of management and investment professionals. The Board also considered that Dodge & Cox has in the past closed some of the Funds to new investors to proactively manage growth in those Funds. While these actions are intended to benefit existing Fund shareholders, the effect is to reduce potential revenues to Dodge & Cox from new shareholders. The Board also considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers and reputational benefits to non-U.S. funds sponsored and managed by Dodge & Cox) that Dodge & Cox might receive as a result of its association with the Funds and determined that they are acceptable. The Board also noted that Dodge & Cox continues to invest in its business to provide enhanced services, systems, and research capabilities, all of which benefit the Funds. The Board concluded that Dodge & Cox’s profitability is the keystone of its independence, stability, and long-term investment performance and that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) is fair and reasonable.
Economies of Scale
The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the level of Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee and expense structure and the fact that the Dodge & Cox Funds build economies of scale into their fee structures by charging low fees from a fund’s inception and keeping overall expenses down as a Fund grows, as compared to other fund complexes that employ fee “breakpoints” only after a fund reaches a certain scale. An assessment of economies of scale must also take into account that Dodge & Cox invests time and resources in each new Fund for months (and sometimes years) prior to launch; in addition, in a Fund’s early periods of operations, expenses are capped, which means that Dodge & Cox subsidizes the operations of a new Fund for a period of time until it reaches scale. The Board also observed that, while total Fund assets have grown over the long term, this growth has not been continuous or evenly distributed across all of the Funds. In addition, the Board noted that Dodge & Cox has shared the benefits of economies of scale with the Funds by adding services to the Funds over time, and that Dodge & Cox’s internal costs of providing investment management, technology, administrative, legal, and compliance services to the Funds continue to increase. For example, Dodge & Cox has increased its global research staff and investment resources over the years to add new capabilities for the benefit of Fund shareholders and to address the increased complexity of investing globally. In addition, Dodge & Cox has made expenditures in other staff, technology, and infrastructure to enable it to integrate credit and equity analyses and to implement its strategy in a more effective manner. Over the last ten years, Dodge & Cox has increased its spending on research, investment management, client servicing, cybersecurity, technology, third-party research, data services, and computer systems for trading, operations, compliance, accounting, and communications at a rate that has outpaced the Funds’ growth rate during the same period. The Board also observed that, even without fee breakpoints, the Funds are competitively priced in a competitive market and that having a low fee from inception is better for shareholders than starting with a higher fee and adding breakpoints. The Board also noted that there are certain diseconomies of scale associated with managing large funds, insofar as certain of the costs and risks associated with portfolio management increase disproportionately as assets grow. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately shares economies of scale that may exist.
Conclusion
Based on their evaluation of all material factors and assisted by the advice of independent legal counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the management fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that Dodge & Cox’s services have provided value for Fund shareholders
PAGE 23 ■ Dodge & Cox Income Fund
over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.
Fund Holdings
The Fund provides a complete list of its holdings on a quarterly basis by filing the lists with the SEC on Form N-CSR (as of the end of the second and fourth quarters) and on Part F of Form N-PORT (as of the end of the first and third quarters). Shareholders may view the Fund’s Forms N-CSR and Part F of N-PORT on the SEC’s website at sec.gov. A list of the Fund’s quarter-end holdings is also available at dodgeandcox.com on or about the 15th day following each quarter end and remains available on the website until the list is updated for the subsequent quarter.
Proxy Voting
For a free copy of the Fund's proxy voting policies and procedures, please call 800-621-3979, visit the Fund’s website at dodgeandcox.com, or visit the SEC’s website at sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is also available at dodgeandcox.com or shareholders may view the Fund's Form N-PX at sec.gov.
Household Mailings
The Fund routinely mails shareholder reports and summary prospectuses to shareholders and, on occasion, proxy statements. In order to reduce the volume of mail, when possible, only one copy of these documents will be sent to shareholders who are part of the same family and share the same residential address.
If you have a direct account with the Funds and you do not want the mailing of shareholder reports and summary prospectuses combined with other members in your household, contact the Funds at 800-621-3979. Your request will be implemented within 30 days.
Dodge & Cox Income Fund ■ PAGE 24
Dodge & Cox Funds — Executive Officer & Trustee Information
| Position with Trust
(Year of Election or
Appointment) | Principal Occupation During Past Five Years and Other Relevant Experience | Other Directorships of Public Companies Held
by Trustees |
Interested Trustees and Executive Officers |
| Chairman and Trustee
(since 2014) | Chairman and Director of Dodge & Cox; Chief Investment Officer and member of U.S. Equity Investment Committee (USEIC), Global Equity Investment Committee (GEIC), and International Equity Investment Committee (IEIC) | |
| President
(since 2014) and
Trustee (since 1993) | Chief Executive Officer, President, and Director of Dodge & Cox; member of U.S. Fixed Income Investment Committee (USFIIC) and Global Fixed Income Investment Committee (GFIIC) | |
| Senior Vice President
(since 2006) | Senior Vice President and Director of Dodge & Cox; Director of International Equity and member of GEIC and IEIC | |
| Chief Legal Officer
(since 2019) and Secretary (since 2017) | Vice President, General Counsel, and Secretary (since 2017) of Dodge & Cox | |
| | Vice President (since 2020) and Financial Oversight and Control Analyst (since 2017) of Dodge & Cox; Head of Fund Administration at RS Investments (2014-2016); Treasurer of RS Funds (2014-2016); Chief Financial Officer of RS Funds Distributor, LLC (2014-2016) | |
| Chief Compliance
Officer (since 2010) | Vice President and Chief Compliance Officer of Dodge & Cox | |
|
| | Professor of Economics, Stanford University; Director of the Economics of Education Program, National Bureau of Economic Research; Senior Fellow, Hoover Institution and Stanford Institute for Economic Policy Research | |
| | Senior Counsel of Arnold & Porter (law firm) (2013-2018); Partner of Arnold & Porter (until 2012); Director of Howard, Rice, Nemerovski, Canady, Falk & Rabkin (1977-2011) | |
| | CFO, Pixar Animation Studios (1999-2004) | Director, Airbnb (vacation rental online marketplace) (since 2018); Director, Alphabet Inc. (internet information services) (since 2005); Director, Glu Mobile, Inc. (multimedia software) (since 2004); Director, Netflix, Inc. (internet television) (since 2010); Director, Arista Networks (cloud networking) (since 2013) |
| | Advisory Director, The Presidio Group (2005-2016); Partner and Managing Director—Global Investment Research at Goldman Sachs (until 2001) | |
Gabriela Franco
Parcella (52) | | President (since 2020) and Executive Managing Director of Merlone Geier Partners (2018-2019); Chairman, President, and CEO, Mellon Capital (2011 to 2017); COO, Mellon Capital (1997 to 2011) | Director, Terreno Realty Corporation (since 2018) |
| | Robert and Marion Oster Distinguished Military Fellow, Hoover Institution (since 2012); Admiral, United States Navy (Ret.); U.S. Navy Chief of Naval Operations (2008-2011) | Director, Northrop Grumman Corp. (global security) (since 2012); Director, Maersk Line, Limited (shipping and transportation) (since 2016) |
| | Executive Vice President, Managing Director—Fixed Income at Loomis Sayles & Company, L.P. (2003-2011) | |
| Trustee
(since 2005)
(and 1995-2001) | Professor of Economics, Stanford University (since 1984); Senior Fellow, Hoover Institution (since 1996); Under Secretary for International Affairs, United States Treasury (2001-2005) | |
| The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all six series in the Dodge & Cox Funds complex and serves for an indefinite term. |
Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Funds’ website at dodgeandcox.com or calling 800-621-3979.
PAGE 25 ■ Dodge & Cox Income Fund
dodgeandcox.com
For Fund literature, transactions, and account
information, please visit the Funds’ website.
or write or call:
Dodge & Cox Funds
c/o DST Asset Manager Solutions, Inc.
P.O. Box 219502
Kansas City, Missouri 64121-9502
(800) 621-3979
Investment Manager
Dodge & Cox
555 California Street, 40th Floor
San Francisco, California 94104
(415) 981-1710
This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.This report reflects our views, opinions, and portfolio holdings as of December 31, 2020, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.
Annual Report
December 31, 2020
Global Bond Fund
ESTABLISHED 2014
TICKER: DODLX
12/20 GBF AR Printed on recycled paper 
The Dodge & Cox Global Bond Fund had a total return of 11.9% for the year ended December 31, 2020, compared to 5.6% for the Bloomberg Barclays Global Aggregate Bond Index (USD Hedged).
Market Commentary
The financial markets were volatile over the course of 2020. The coronavirus (COVID-19) pandemic hit in the spring, causing a rapid and large sell-off in risk assets, such as corporate bonds, equities, and commodities, and a flight to safe-haven assets, such as U.S. Treasuries. To bolster the economy and markets, global policymakers swiftly took actions—cutting interest rates, expanding asset purchase programs, and enacting substantial fiscal stimulus packages. The markets rebounded rapidly, and continued to strengthen throughout the second half of the year, bolstered by improved prospects for a COVID-19 vaccine and hope for a revival of economic activity in 2021. Bond market returns were strong in this environment, driven primarily by price gains from falling interest rates.
Despite the vibrant mood of the market, the economic and human toll of the pandemic remains severe. The IMF projects that world output declined by more than 4% in 2020, with negative growth from virtually all major countries (except China). Given this backdrop and the fragility of the economic recovery, global policymakers have been exceptionally active. Since cutting the policy rate to effectively zero in March and expanding its asset purchase program (including corporate bond purchases), the U.S. Federal Reserve (Fed) has signaled that it does not plan to increase the policy rate until at least 2024. The European Central Bank initiated and subsequently expanded its Pandemic Emergency Purchase Program, while the Bank of England cut rates and expanded its quantitative easing measures too. On the fiscal front, U.S. and European Union policymakers put in place significant stimulus measures. Notably, the extraordinary policy support was not restricted to developed countries. Emerging market policymakers also embraced such programs, cutting rates to historic lows, launching quantitative easing programs, and boosting government spending.
The tepid outlook for economic growth and inflation, coupled with extremely accommodative monetary policies, have left global interest rates quite low. At year end, 10-year yields of all G-10 countries were under 1%, and there was nearly $18 trillion of negative-yielding debt outstanding globally. During the year, U.S. and Canadian 10-year rates fell the most (around 100 basis pointsa each) among developed markets. In emerging markets, 10-year rates in economies like Peru, the Philippines, Indonesia, and Mexico declined even more. However, interest rates for a handful of countries with more challenged political and economic environments (e.g., Brazil, Turkey, South Africa) actually rose slightly. This dichotomy reflects the wide differentials in economic fundamentals and pandemic responses across countries, and underscores the importance of country selection in managing a global portfolio.
The moves in creditb markets during the early part of the year were extraordinary. During the first quarter, investment-grade yield premiumsc tripled in less than a month, a pace that exceeded that of the 2008-09 financial crisis. However, the tide turned starting in April, and corporate yield premiums went on to recover to near pre-
pandemic levels. Corporate bond issuance hit record-highs, enabling many companies to improve their liquidity positions and balance sheets. Furthermore, central banks also remain committed to supporting fixed income markets through a suite of corporate credit and liquidity facilities.
Currency markets also fluctuated significantly. In the depth of the market panic, investors flocked to safe havens like the U.S. dollar, while currencies of economies with weak fundamentals or those dependent on commodity exports fell dramatically. However, as investor sentiment improved, these trends generally reversed course. After peaking in March, the U.S. dollar fell nearly 12% through year end, closing at levels not seen since early 2018. From a regional standpoint, European and Asian currencies tended to appreciate to a greater extent, while Latin American currencies lagged. Given the significant fall in oil prices during the year (down 20%), the currencies of oil exporters like Russia and Colombia depreciated. In addition, the Turkish lira and Brazilian real both fell over 20% as these countries contended with unique political, economic, and pandemic-related challenges.
Investment Strategy
The significant volatility and uncertainty that characterized 2020 provided a fertile environment for Dodge & Cox’s active and price-disciplined approach to investing in global bonds. All three of the primary return levers that we use in the Fund—credit, rates, and currencies—contributed to the Fund’s strong performance. During the year, as asset prices/valuations shifted, we made several changes to portfolio positioning—significantly increasing the Fund’s credit holdings during the market sell-off in the spring (and subsequently trimming some of them), moderately increasing the Fund’s non-U.S. currency exposure, and incrementally increasing the Fund’s duration.d
Credit: Don’t Sit Still
While credit valuations started and ended the year at similar levels, the journey between those two points was a wild one, in which our valuation discipline and security selection skills added significant value. The Fund’s credit holdings were the largest contributors to the Fund’s overall return. We came into the year having reduced the Fund’s credit exposure by 18 percentage points in 2019 and continued trimming early in 2020. In March and April, when valuations fell to exceptional levels, we purchased the bonds of a number of strong, highly rated companies that were trading at valuations typically associated with high-yield issuers. Examples include Coca-Cola, Exxon, State of California, Exelon, and Wells Fargo.e Overall, these purchases performed phenomenally, in a surprisingly brief timeframe. As valuations recovered, we unwound many of these additions, reducing the Fund’s credit holdings from a peak of 62% in March, to 48% at year end. These sales were based primarily on valuation considerations, rather than concerns about the issuers’ fundamentals. Overall corporate fundamentals are fairly healthy, as many companies have recently boosted liquidity, increased focus on reducing debt, and benefited from low debt costs. Although valuations are less attractive than they were in the spring, we continue
PAGE 1 ■ Dodge & Cox Global Bond Fund
to have conviction in the Fund’s carefully researched 59 credit issuers, which offer significantly more yield than “risk-free” government securities.
One issuer that we added to during the year was Prosus, a global consumer internet group with equity stakes in several technology companies, including an approximately $200 billion investment in Tencent, a dominant Chinese internet company. Though subject to bouts of volatility because of its China and emerging markets exposure, we believe Prosus is a sound credit, with an asset value that more than adequately covers its ~$6 billion of debt. Further, Prosus bonds offer substantial incremental yield relative to comparably rated corporate bonds. In addition to purchasing more bonds in the midst of the March sell-off, we replaced some of the Fund’s U.S. dollar bonds with euro-denominated debt during the fourth quarter. This swap allowed us to pick up additional yield premium.
We reinvested proceeds from credit sales primarily into attractively priced generic Agencyf-guaranteed mortgage securities, which are highly liquid and highly rated (with negligible credit risk), and offer an attractive risk/return profile. If credit or other areas of the market become more compelling, we will be ready to redeploy this capital, just as we did when the crisis unfolded in 2020.
Currency: The Winds Are Changing
Since the Fund’s inception in 2014 the U.S. dollar has generally been strong, creating a headwind to the returns of the Fund’s non-dollar holdings. That tide may have started to turn in 2020. As mentioned above, while the U.S. dollar surged in the midst of the market panic in March, it has since declined nearly 12%. Our expectation is that it will continue to weaken, albeit more modestly. This view is driven by several factors including overvaluation (based on metrics like purchasing power parity), sizable and growing U.S. fiscal and current account deficits, diminished growth and interest rate differentials between the United States and other countries, and the global recovery from COVID-19. In aggregate, the Fund’s non-U.S. dollar holdings contributed modestly to 2020 performance. In a low-yield world, especially one in which the dollar may be weakening, we see value in having currency as an additional and diverse source of return in a global bond portfolio.
During the year, we added approximately three percentage points in non-U.S. currency exposure, bringing the aggregate exposure to 19%g of the Fund. Employing our fundamentals-based, long-term, and selective approach to currency management, we established new positions in bonds denominated in four currencies—the Swedish krona, Norwegian krone, Russian ruble, and Malaysian ringgit. The investment thesis for each of these currencies is a unique combination of valuation and fundamentals. For example, our investment in Malaysia hinges on a positive outlook for both the currency and interest rates. The ringgit has lagged the recovery in other Asian currencies, despite Malaysia’s diversified and fundamentally sound economy and resilient export sector. While ongoing uncertainty over the nation’s political leadership has weighed on the currency, we believe risks of material changes in economic policy are limited and the currency valuation is attractive.
Rates: Low For a While
The significant move lower in interest rates, especially in the United States, Mexico, and Indonesia, boosted performance. Looking ahead, we are broadly aligned with consensus in expecting the Fed and other major central banks to refrain from raising policy rates until at least 2024. In the United States, we believe long-term rates will rise modestly more than what is priced in, based on hope for successful vaccine rollouts, sizable policy support, prospects for additional fiscal stimulus, and stronger growth and inflation outlooks. We lengthened the duration of the portfolio from 3.3 to 4.0 years over the course of the year, primarily by extending U.S. duration.
Outside of the United States, we continue to avoid certain markets, such as Germany, Japan, and the United Kingdom, with negative or historically low yield levels. In these markets, even a tiny rise in interest rates could lead to negative returns. Instead, we have invested in carefully selected emerging markets bonds (e.g., Indonesia, Mexico, India) to add non-U.S. interest rate exposure to the Fund. Indonesia is one of the Fund’s larger government-bond exposures (4%), and performed strongly this year. As of year end, the Fund’s holding in Indonesia bonds maturing in 2036 yielded 7% (4% on an inflation-adjusted basis), significantly higher than what is available in the majority of the bond market. We believe this valuation level, combined with Indonesia’s fundamental strengths—strong growth prospects, prudent fiscal and monetary policy—make it an attractive investment.
In Closing
We are extremely pleased with the Fund’s performance this year. On the heels of a 12% return in 2019, we came into 2020 cautiously optimistic about return prospects in a low-yield environment. However, in navigating markets through the pandemic, we identified numerous pockets of opportunity to again generate a double-digit return. We believe this highlights the benefit of applying a flexible investment approach to a broad global investment universe—something that benchmark-oriented and/or domestic-oriented strategies cannot do.
As we look ahead, we are cognizant of the challenging aspects of the outlook. Broadly speaking, interest rates and credit yield premiums are low, and this tempers our return expectations. In addition, we are in uncharted territory with the pandemic and the expansive set of policies in place, which brings a wide range of potential risks. Mutations in the virus or challenges with vaccine distribution could derail the global recovery. Moreover, the unprecedented monetary and fiscal measures taken by governments and central banks around the world have provided vital support for financial markets and the real economy, but these may have longer-term negative consequences.
Nonetheless, we are confident that our experienced investment team is well positioned to deal with these challenges and seize on opportunities. Our broad investment universe enables us to search for promising investments across global credit, currency, and rate markets. We have constructed a diverse portfolio that is not overly exposed to any particular outcome and with sufficient “dry powder” to
Dodge & Cox Global Bond Fund ■ PAGE 2
capitalize on attractive investments that we may identify. Above all, we retain conviction in our long-term, disciplined investment approach.
Thank you for your continued confidence in our firm. As always, we welcome your comments and questions.
For the Board of Trustees, | |
| |
| |
January 29, 2021
|
One basis point is equal to 1/100th of 1%.
|
| Credit securities refers to corporate bonds and government-related securities, as classified by Bloomberg. |
| Yield premiums are one way to measure a security’s valuation. Narrowing yield premiums result in a higher valuation. Widening yield premiums result in a lower valuation. |
| Duration is a measure of a bond’s (or a bond portfolio’s) price sensitivity to changes in interest rates. |
| The use of specific examples does not imply that they are more or less attractive investments than the Fund’s other holdings. |
| The U.S. Government does not guarantee the Fund’s shares, yield, or net asset value. The agency guarantee (by, for example, Ginnie Mae, Fannie Mae, or Freddie Mac) does not eliminate market risk. |
| Unless otherwise specified, all weightings and characteristics are as of December 31, 2020. |
PAGE 3 ■ Dodge & Cox Global Bond Fund
2020 Performance Review
The Fund returned 11.9% during 2020.
Key Contributors
■ The Fund’s high allocation to Corporate bonds contributed significantly to returns. In March, we increased the corporate bond weighting of the Fund from 38% to 55% via purchases of a number of credits at depressant valuations. Many of these investments, including Wells Fargo, Exelon, and Berkshire Hathaway Energy, subsequently performed well. Concho Resources also performed strongly, following the announcement that it would be acquired by ConocoPhillips.
■ The Fund benefited from its exposure to U.S. interest rates as Treasury yields declined over the year. Exposure to interest rates in several emerging market countries also added to returns, led by Indonesia, Mexico, and India.
■ The Fund’s holdings of government-related credits in Latin America, including Petrobras and Colombia sovereign debt, performed well.
Key Detractors
■ The Fund’s holdings denominated in certain emerging market currencies in Latin America, including the Brazilian real and
Colombian peso, detracted from returns.
Key Characteristics of Dodge & Cox
Independent Organization
Dodge & Cox is one of the largest privately owned investment managers in the world. We remain committed to independence, with a goal of providing the highest quality investment management service to our existing clients.
90 Years of Investment Experience
Dodge & Cox was founded in 1930. We have a stable and well-qualified team of investment professionals, most of whom have spent their entire careers at Dodge & Cox.
Experienced Investment Team
The Global Fixed Income Investment Committee, which is the decision-making body for the Global Bond Fund, is a seven-member committee with an average tenure at Dodge & Cox of 20 years.
One Business with a Single Research Office
Dodge & Cox manages equity (domestic, international, and global), fixed income (domestic and global), and balanced investments, operating from one office in San Francisco.
Consistent Investment Approach
Our team decision-making process involves thorough, bottom-up fundamental analysis of each investment.
Long-Term Focus and Low Expenses
We invest with a three- to five-year investment horizon, which has historically resulted in low turnover relative to our peers. We manage Funds that maintain low expense ratios.
Risks: The yields and market values of the instruments in which the Fund invests may fluctuate. Accordingly, an investment may be worth more or less than its original cost. Debt securities are subject to interest rate risk, credit risk, and prepayment and call risk, all of which could have adverse effects on the value of the Fund. A low interest rate environment creates an elevated risk of future negative returns. Financial intermediaries may restrict their market making activities for certain debt securities, which may reduce the liquidity and increase the volatility of such securities. Investing in non-U.S. securities may entail risk due to foreign economic and political developments; this risk may be increased when investing in emerging markets. The Fund is also subject to currency risk. Please read the prospectus and summary prospectus for specific details regarding the Fund's risk profile.
Dodge & Cox Global Bond Fund ■ PAGE 4
Growth of $10,000 Since Inception
For an Investment Made on December 5, 2012 
Average Annual Total Return
For Periods Ended December 31, 2020
| | | | |
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| | | | |
Dodge & Cox Global Bond Fund | | | | |
Bloomberg Barclays Global Aggregate Bond Index (USD Hedged) | | | | |
Bloomberg Barclays Global Aggregate Bond Index (Unhedged) | | | | |
Returns represent past performance and do not guarantee future results. Investment return and share price will fluctuate with market conditions, and investors may have a gain or loss when shares are sold. Fund performance changes over time and currently may be significantly lower than stated. Performance is updated and published monthly. Visit the Fund's website at dodgeandcox.com or call 800-621-3979 for current performance figures.
A private fund managed and funded by Dodge & Cox (the "Private Fund") was reorganized into the Fund and the Fund commenced operations on May 1, 2014. The Private Fund commenced operations on December 5, 2012 and had an investment objective, policies, and strategies that were, in all material respects, the same as those of the Fund, and was managed in a manner that, in all material respects, complied with the investment guidelines and restrictions of the Fund. However, the Private Fund was not registered as an investment company under the Investment Company Act of 1940 (the "1940 Act"), and therefore was not subject to certain investment limitations, diversification requirements, liquidity requirements, and other restrictions imposed by the 1940 Act and the Internal Revenue Code, which, if applicable, may have adversely affected its performance.
The Fund's total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include interest income but, unlike Fund returns, do not reflect fees or expenses. The Bloomberg Barclays Global Aggregate Bond Index (Bloomberg Barclays Global Agg) is a widely recognized, unmanaged index of multi-currency, investment-grade debt securities. As of January 15, 2021, the Fund’s benchmark index was changed from the Bloomberg Barclays Global Aggregate Bond Index (unhedged) to the Bloomberg Barclays Global Aggregate Bond Index (hedged). The Fund’s investment manager believes that the hedged index is a more appropriate index against which to measure performance in light of the Fund’s investment philosophy; however, the Fund does not hedge all of its non-U.S. dollar currency exposure.
Bloomberg is a registered trademark of Bloomberg Finance L.P. and its affiliates. Barclays® is a trademark of Barclays Bank PLC.
Fund Expense Example
As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.
Actual Expenses
The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison with Other Mutual Funds
Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.
Six Months Ended
December 31, 2020 | Beginning Account Value
7/1/2020 | Ending Account Value
12/31/2020 | Expenses Paid
During Period* |
Based on Actual Fund Return | | | |
Based on Hypothetical 5% Yearly Return | | | |
| Expenses are equal to the Fund’s annualized expense ratio of 0.45%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. Though other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).
PAGE 5 ■ Dodge & Cox Global Bond Fund
Portfolio Information (unaudited) December 31, 2020
Sector Diversification (%)(a) | |
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Region Diversification (%)(a) | |
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Europe (excluding United Kingdom) | |
Asia Pacific (excluding Japan) | |
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| Weights exclude the effect of the Fund’s derivative contracts. |
| Net Cash & Other includes cash, short-term investments, derivatives, receivables, and payables. |
Dodge & Cox Global Bond Fund ■ PAGE 6
Consolidated Portfolio of Investments December 31, 2020
|
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Brazil Government (Brazil) | | |
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Colombia Government (Colombia) | | |
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Indonesia Government (Indonesia) | | |
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Malaysia Government (Malaysia) | | |
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Mexico Government (Mexico) | | |
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Norway Government (Norway) | | |
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Poland Government (Poland) | | |
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Russia Government (Russia) | | |
| | | |
Thailand Government (Thailand) | | |
| | | |
U.S. Treasury Note/Bond (United States) | | |
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| | | |
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|
Chicago Transit Authority RB (United States) | | |
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Colombia Government International (Colombia) | | |
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Kommuninvest Cooperative Society (Sweden) | | |
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Petroleo Brasileiro SA (Brazil) | | |
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Petroleos Mexicanos (Mexico) | | |
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Province of Buenos Aires Argentina (Argentina) | | |
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State of California GO (United States) | | |
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|
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State of Illinois GO (United States) | | |
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Rio Oil Finance Trust (Brazil) | | |
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|
Navient Student Loan Trust (United States) | | |
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+1.25% 1.398%, 6/25/65(b) | | | |
+1.35% 1.498%, 6/25/65(b) | | | |
+1.00% 1.148%, 9/27/66(b) | | | |
Navient Student Loan Trust (Private Loans) (United States) | | |
Series 2017-A B, 3.91%, 12/16/58(b) | | | |
Series 2020-A B, 3.16%, 11/15/68(b) | | | |
SLM Student Loan Trust (United States) | | |
| |
| | | |
| |
+0.11% 0.327%, 12/15/32(b) | | | |
+0.45% 0.667%, 12/15/32(b) | | | |
SMB Private Education Loan Trust (Private Loans) (United States) | | |
Series 2017-B A2A, 2.82%, 10/15/35(b) | | | |
Series 2018-C B, 4.00%, 11/17/42(b) | | | |
| | | |
| | | |
|
|
Freddie Mac Military Housing Trust Multifamily (United States) | | |
| | | |
| | | |
| | | |
|
Federal Agency CMO & REMIC: 0.9% |
Fannie Mae (United States) | | |
Trust 2004-W9 1A3, 6.05%, 2/25/44 | | | |
Freddie Mac (United States) | | |
Series 4283 EW, 4.50%, 12/15/43(c) | | | |
Series 4319 MA, 4.50%, 3/15/44(c) | | | |
Ginnie Mae (United States) | | |
Series 2010-169 JZ, 4.00%, 12/20/40 | | | |
| |
PAGE 7 ■ Dodge & Cox Global Bond FundSee accompanying Notes to Consolidated Financial Statements
Consolidated Portfolio of Investments December 31, 2020
Debt Securities (continued) |
| | | |
| | | |
| |
| | | |
| | | |
Federal Agency Mortgage Pass-Through: 21.5% |
Fannie Mae, 15 Year (United States) |
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Fannie Mae, 30 Year (United States) |
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| | | |
| | | |
Fannie Mae, Hybrid ARM (United States) |
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Fannie Mae Pool, 30 Year (United States) |
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Freddie Mac, Hybrid ARM (United States) |
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| | | |
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Freddie Mac Gold, 30 Year (United States) |
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Freddie Mac Pool, 30 Year (United States) |
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|
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Bank of America Corp. (United States) | | |
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Barclays PLC (United Kingdom) | | |
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| | | |
Boston Properties, Inc. (United States) | | |
| | | |
Citigroup, Inc. (United States) | | |
| |
+6.37%,6.584%, 10/30/40(e) | | | |
HSBC Holdings PLC (United Kingdom) | | |
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JPMorgan Chase & Co. (United States) | | |
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Lloyds Banking Group PLC (United Kingdom) | | |
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NatWest Group PLC (United Kingdom) | | |
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Wells Fargo & Co. (United States) | | |
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AbbVie, Inc. (United States) | | |
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Anheuser-Busch InBev SA/NV (Belgium) | | |
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AT&T, Inc. (United States) | | |
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British American Tobacco PLC (United Kingdom) | | |
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Carrier Global Corp. (United States) | | |
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Charter Communications, Inc. (United States) | | |
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Concho Resources, Inc. (United States) | | |
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Cox Enterprises, Inc. (United States) | | |
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| | | |
CSX Corp. (United States) | | |
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CVS Health Corp. (United States) | | |
| | | |
See accompanying Notes to Consolidated Financial StatementsDodge & Cox Global Bond Fund ■ PAGE 8
Consolidated Portfolio of Investments December 31, 2020
Debt Securities (continued) |
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Dell Technologies, Inc. (United States) | | |
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Dow, Inc. (United States) | | |
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Elanco Animal Health, Inc. (United States) | | |
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Exxon Mobil Corp. (United States) | | |
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Ford Motor Credit Co. LLC(g) (United States) | | |
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Grupo Televisa SAB (Mexico) | | |
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HCA Healthcare, Inc. (United States) | | |
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Imperial Brands PLC (United Kingdom) | | |
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Kinder Morgan, Inc. (United States) | | |
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LafargeHolcim, Ltd. (Switzerland) | | |
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Macy's, Inc. (United States) | | |
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Millicom International Cellular SA (Luxembourg) | | |
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MTN Group, Ltd. (South Africa) | | |
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Occidental Petroleum Corp. (United States) | | |
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Prosus NV(g) (Netherlands) | | |
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QVC, Inc.(g) (United States) | | |
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Telecom Italia SPA (Italy) | | |
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The Kraft Heinz Co. (United States) | | |
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The Williams Companies, Inc. (United States) | | |
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T-Mobile U.S., Inc. (United States) | | |
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Ultrapar Participacoes SA (Brazil) | | |
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Vodafone Group PLC (United Kingdom) | | |
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Dominion Energy, Inc. (United States) | | |
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Exelon Corp. (United States) | | |
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NextEra Energy, Inc. (United States) | | |
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The Southern Co. (United States) | | |
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| | | |
Total Debt Securities
(Cost $895,977,609) | | | |
Short-Term Investments: 13.6% |
| | | |
Repurchase Agreements: 13.2% |
Fixed Income Clearing Corporation(h)
0.000%, dated 12/31/20,
due 1/4/21, maturity value $129,678,000 | | | |
|
State Street Institutional U.S. Government Money Market Fund
| | | |
Total Short-term Investments
(Cost $133,553,206) | |
Total Investments in Securities
(Cost $1,029,530,815) | | | |
Other Assets Less Liabilities | | | |
| | | |
PAGE 9 ■ Dodge & Cox Global Bond FundSee accompanying Notes to Consolidated Financial Statements
Consolidated Portfolio of Investments December 31, 2020
| |
| Security exempt from registration under Rule 144A of the Securities Act of 1933. The security may be resold in transactions exempt from registration, normally to qualified institutional buyers. |
| Variable rate security: interest rate is determined by the interest rates of underlying pool of assets that collateralize the security. The interest rate of the security may change due to a change in the interest rates or the composition of underlying pool of assets. The interest rate shown is the rate as of period end. |
| The security was purchased on a to-be-announced (TBA) when-issued basis. |
| Hybrid security: characteristics of both a debt and equity security. |
| Variable rate security: fixed-to-float security pays an initial fixed interest rate and will pay a floating interest rate established at a predetermined time in the future. The interest rate shown is the rate as of period end. |
| |
| Repurchase agreement is collateralized by U.S. Cash Management Bills 5/11/21. Total collateral value is $132,271,618. |
| Debt securities are grouped by parent company unless otherwise noted. Actual securities may be issued by the listed parent company or one of its subsidiaries.
In determining a parent company’s country designation, the Fund generally references the country of incorporation. |
| Debt securities with floating interest rates are linked to the referenced benchmark; the interest rate shown is the rate as of period end. |
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ARM: Adjustable Rate Mortgage |
CMBS: Commercial Mortgage-Backed Security |
CMO: Collateralized Mortgage Obligation |
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REMIC: Real Estate Mortgage Investment Conduit |
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USD: United States Dollar |
Futures Contracts
| | | | Value /
Unrealized
Appreciation/
(Depreciation) |
10 Year U.S. Treasury Note— Short Position | | | | |
Euro-Bobl Future— Short Position | | | | |
Euro-Bund Future— Short Position | | | | |
Euro-Buxl Future— Short Position | | | | |
Long-Term U.S. Treasury Bond— Short Position | | | | |
UK-Gilt Future— Short Position | | | | |
Ultra Long-Term U.S. Treasury Bond— Short Position | | | | |
| | | | |
Currency Forward Contracts
| | | | Unrealized Appreciation
(Depreciation) |
|
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| | | | | | |
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Unrealized gain on currency forward contracts | | | | | | |
Unrealized loss on currency forward contracts | | | | | | |
Net unrealized loss on currency forward contracts | | | | |
The listed counterparty may be the parent company or one of its subsidiaries.
See accompanying Notes to Consolidated Financial StatementsDodge & Cox Global Bond Fund ■ PAGE 10
Consolidated
Statement of Assets and Liabilities
| |
|
Investments in securities, at value (cost $1,029,530,815) | |
Cash pledged as collateral for currency forward contracts | |
| |
Cash denominated in foreign currency (cost $1,280) | |
Deposits with broker for futures contracts | |
Receivable for investments sold | |
Receivable for Fund shares sold | |
Dividends and interest receivable | |
Expense reimbursement receivable | |
Prepaid expenses and other assets | |
| |
|
Unrealized depreciation on currency forward contracts | |
Payable for variation margin for futures contracts | |
Payable for investments purchased | |
Payable for Fund shares redeemed | |
Deferred foreign capital gains tax | |
| |
| |
| |
| |
|
| |
| |
| |
Fund shares outstanding (par value $0.01 each, unlimited shares authorized) | |
Net asset value per share | |
Consolidated
Statement of Operations
| Year Ended
December 31, 2020 |
| |
| |
Interest (net of foreign taxes of $293,808) | |
| |
| |
| |
Custody and fund accounting fees | |
| |
| |
| |
| |
| |
| |
| |
Expenses reimbursed by investment manager | |
| |
| |
Realized and Unrealized Gain (Loss): | |
| |
Investments in securities (net of foreign capital gains tax of $110,304) | |
| |
| |
Currency forward contracts | |
Foreign currency transactions | |
Net change in unrealized appreciation/depreciation | |
Investments in securities (net of change in deferred foreign capital gains tax of $409,983) | |
| |
| |
Currency forward contracts | |
Foreign currency translation | |
Net realized and unrealized gain | |
Net Change in Net Assets From Operations | |
PAGE 11 ■ Dodge & Cox Global Bond FundSee accompanying Notes to Consolidated Financial Statements
Consolidated
Statement of Changes in Net Assets
| | |
| | |
| | |
| | |
| | |
Net change in unrealized appreciation/depreciation | | |
| | |
Distributions to Shareholders: | | |
| | |
| | |
Proceeds from sale of shares | | |
Reinvestment of distributions | | |
| | |
Net change from Fund share transactions | | |
Total change in net assets | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Net change in shares outstanding | | |
See accompanying Notes to Consolidated Financial StatementsDodge & Cox Global Bond Fund ■ PAGE 12
Notes to Consolidated Financial Statements
Note 1: Organization and Significant Accounting Policies
Dodge & Cox Global Bond Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund seeks a high rate of total return consistent with long-term preservation of capital. Foreign investing, especially in developing countries, has special risks such as currency and market volatility and political and social instability. These and other risk considerations are discussed in the Fund’s Prospectus.
The Fund is an investment company and follows the accounting and reporting guidance issued in Topic 946 by the Financial Accounting Standards Board. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Actual results may differ from those estimates. Significant accounting policies are as follows:
Security valuation The Fund’s net assets are normally valued as of the scheduled close of trading on the New York Stock Exchange (NYSE), generally 4 p.m. Eastern Time, each day that the NYSE is open for business.
Debt securities and derivatives traded over the counter are valued using prices received from independent pricing services which utilize dealer quotes, recent transaction data, pricing models, and other inputs to arrive at market-based valuations. Pricing models may consider quoted prices for similar securities, interest rates, cash flows (including prepayment speeds), and credit risk. Exchange-traded derivatives are valued at the settlement price determined by the relevant exchange. Other financial instruments for which market quotes are readily available are valued at market value. Short-term securities less than 60 days to maturity may be valued at amortized cost if amortized cost approximates current value. Mutual funds are valued at their respective net asset values. Security values are not discounted based on the size of the Fund’s position and may differ from the value a Fund receives upon sale of the securities.
Investments initially valued in currencies other than the U.S. dollar are converted to the U.S. dollar using prevailing exchange rates. Currency forward contracts are valued based on the prevailing forward exchange rates of the underlying currencies. As a result, the Fund’s net assets may be affected by changes in the value of currencies in relation to the U.S. dollar.
If market quotations are not readily available or if normal valuation procedures produce valuations that are deemed unreliable or inappropriate under the circumstances existing at the time, the investment will be valued at fair value as determined in good faith by or under the direction of the Fund’s Board of Trustees. The Board of Trustees has appointed Dodge & Cox, the Fund’s investment manager, to make fair value determinations in accordance with the Dodge & Cox Funds Valuation Policies (“Valuation Policies”), subject to Board oversight. Dodge & Cox has established a Pricing Committee that is comprised of representatives from Treasury, Legal, Compliance, and Operations. The Pricing Committee is responsible for implementing the Valuation Policies, including determining the fair
value of securities and other investments when necessary. The Pricing Committee considers relevant indications of value that are reasonably available to it in determining the fair value assigned to a particular security, such as the value of similar financial instruments, trading volumes, contractual restrictions on disposition, related corporate actions, and changes in economic conditions. In doing so, the Pricing Committee employs various methods for calibrating fair valuation approaches, including a regular review of key inputs and assumptions, back-testing, and review of any related market activity.
Valuing securities through a fair value determination involves greater reliance on judgment than valuation of securities based on readily available market quotations. In some instances, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a security’s value. When fair value pricing is employed, the prices of securities used by the Fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.
Interest income is recorded on the accrual basis. Interest income includes coupon interest, amortization of premium and accretion of discount on debt securities, gain/loss on paydowns, and inflation adjustments to the principal amount of inflation-indexed securities. The ability of the issuers of the debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry, state, region, or country. Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectability of interest is reasonably assured. Dividend income is recorded on the ex-dividend date.
Expenses are recorded on the accrual basis. Some expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust using methodologies determined by the nature of the expense.
Distributions to shareholders are recorded on the ex-dividend date.
Foreign taxes The Fund is subject to foreign taxes which may be imposed by certain countries in which the Fund invests. The Fund endeavors to record foreign taxes based on applicable foreign tax law. Withholding taxes are incurred on certain foreign receipts and are accrued at the time the associated interest income is recorded.
Capital gains taxes are incurred upon disposition of certain foreign securities. Expected capital gains taxes on appreciated securities, if any, are accrued as unrealized losses and incurred capital gains taxes are reflected as realized losses upon the sale of the related security. Currency taxes may be incurred when the Fund purchases certain foreign currencies related to securities transactions and are recorded as realized losses on foreign currency transactions.
PAGE 13 ■ Dodge & Cox Global Bond Fund
Notes to Consolidated Financial Statements
Foreign currency translation The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the prevailing exchange rates of such currencies against the U.S. dollar. The market value of investment securities and other assets and liabilities are translated at the exchange rate as of the valuation date. Purchases and sales of investment securities, income, and expenses are translated at the exchange rate prevailing on the transaction date.
Reported realized and unrealized gain (loss) on investments include foreign currency gain (loss) related to investment transactions.
Reported realized and unrealized gain (loss) on foreign currency transactions and translation include the following: holding/disposing of foreign currency, the difference in exchange rate between the trade and settlement dates on securities transactions, the difference in exchange rate between the accrual and payment dates on interest, and currency losses on the purchase of foreign currency in certain countries that impose taxes on such transactions.
Repurchase agreements Repurchase agreements are transactions under which a Fund purchases a security from a dealer counterparty and agrees to resell the security to that counterparty on a specified future date at the same price, plus a specified interest rate. The Fund’s repurchase agreements are secured by U.S. government or agency securities. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the securities and to apply the proceeds in satisfaction of the obligation.
To-Be-Announced securities The Fund may purchase mortgage-related securities on a to-be-announced (“TBA”) basis at a fixed price, with payment and delivery on a scheduled future date beyond the customary settlement period for such securities. The Fund may choose to extend the settlement through a “dollar roll” transaction in which it sells the mortgage-related securities to a dealer and simultaneously agrees to purchase similar securities for future delivery at a predetermined price. The Fund accounts for TBA dollar rolls as purchase and sale transactions.
Consolidation The Fund may invest in certain securities through its wholly owned subsidiary, Dodge & Cox Global Bond Fund Cayman, Ltd. (the “Subsidiary”). The Subsidiary is a Cayman Islands exempted company and invests in certain securities consistent with the investment objective of the Fund. The Fund’s Consolidated Financial Statements, including the Consolidated Portfolio of Investments, consist of the holdings and accounts of the Fund and the Subsidiary. All intercompany transactions and balances have been eliminated. At December 31, 2020, the Subsidiary had net assets of $100, which represented less than 0.01% of the Fund’s consolidated net assets.
Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum expo
sure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred.
Note 2: Valuation Measurements
Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below.
■ Level 1: Quoted prices in active markets for identical securities
■ Level 2: Other significant observable inputs (including quoted prices for similar securities, market indices, interest rates, credit risk, forward exchange rates, etc.)
■ Level 3: Significant unobservable inputs (including Fund management’s assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used to value the Fund’s holdings at December 31, 2020:
| | LEVEL 2
(Other Significant
Observable Inputs) |
|
|
| | |
| | |
| | |
| | |
|
| | |
| | |
| | |
|
|
| | |
| | |
Currency Forward Contracts |
| | |
Note 3: Derivative Instruments
The Fund may use derivatives either to minimize the impact of certain risks to one or more of its investments (as a ‘‘hedging technique’’) or to implement its investment strategy. A derivative is a financial instrument whose value is derived from a security, currency, interest rate, index, or other financial instrument.
Futures contracts Futures contracts involve an obligation to purchase or sell (depending on whether the Fund has entered a long or short futures contract, respectively) an asset at a future date, at a price set at the time of the contract. Futures contracts are exchange-traded. Upon entering into a futures contract, the Fund is required to deposit an amount of cash or liquid assets (referred to as "initial margin") in a segregated account with the clearing broker. Subsequent
Dodge & Cox Global Bond Fund ■ PAGE 14
Notes to Consolidated Financial Statements
payments (referred to as "variation margin") to and from the clearing broker are made on a daily basis based on changes in the market value of the contract. Changes in the market value of open futures contracts are recorded as unrealized appreciation or depreciation in the Consolidated Statement of Operations. Realized gains and losses on futures contracts are recorded in the Consolidated Statement of Operations at the closing or expiration of the contracts. Cash deposited with a broker as initial margin is recorded in the Consolidated Statement of Assets and Liabilities. A receivable and/or payable to brokers for daily variation margin is also recorded in the Consolidated Statement of Assets and Liabilities.
Investments in futures contracts may include certain risks, which may be different from, and potentially greater than, those of the underlying securities. To the extent the Fund uses futures, it is exposed to additional volatility and potential losses resulting from leverage.
Interest rate swaps Interest rate swaps are agreements that obligate two parties to exchange a series of cash flows at specified payment dates calculated by reference to specified interest rates, such as an exchange of floating rate payments for fixed rate payments. Upon entering into a centrally cleared interest rate swap, the Fund is required to post an amount of cash or liquid assets (referred to as initial margin) in a segregated account with the clearing broker. Subsequent payments (referred to as variation margin) to and from the clearing broker are made on a daily basis based on changes in the market value of the swap. Changes in the market value of open interest rate swaps are recorded as unrealized appreciation or depreciation in the Consolidated Statement of Operations. Realized gains and losses on interest rate swaps are recorded in the Consolidated Statement of Operations, both upon the exchange of cash flows on each specified payment date and upon the closing or expiration of the swap. Cash deposited with the clearing broker as initial margin is recorded in the Consolidated Statement of Assets and Liabilities. A receivable and/or payable to brokers for daily variation margin is also recorded in the Consolidated Statement of Assets and Liabilities.
Investments in interest rate swaps may include certain risks including unfavorable changes in interest rates, or a default or failure by the clearing broker or clearinghouse.
Currency forward contracts Currency forward contracts are agreements to purchase or sell a specific currency at a specified future date and price. Currency forward contracts are traded over-the-counter. The values of currency forward contracts change daily based on the prevailing forward exchange rates of the underlying currencies. Changes in the value of open contracts are recorded as unrealized appreciation or depreciation in the Consolidated Statement of Operations. When a currency forward contract is closed, the Fund records a realized gain or loss in the Consolidated Statement of Operations equal to the difference between the value at the time the contract was opened and the value at the time it was closed.
Losses from these transactions may arise from unfavorable changes in currency values or if a counterparty does not perform under a contract’s terms.
Additional derivative information The following identifies the location on the Consolidated Statement of Assets and Liabilities and
values of the Fund's derivative instruments categorized by primary underlying risk exposure.
| | Foreign
Exchange
Derivatives | |
| | | |
| | | |
| | | |
Unrealized depreciation on currency forward contracts | | | |
| | | |
| | | |
| Includes cumulative appreciation (depreciation). Only the current day’s variation margin is reported in the Consolidated Statement of Assets and Liabilities. |
The following summarizes the effect of derivative instruments on the Consolidated Statement of Operations, categorized by primary underlying risk exposure.
| | Foreign
Exchange
Derivatives | |
| | | |
| | | |
| | | |
Currency forward contracts | | | |
| | | |
Net change in unrealized appreciation/depreciation |
| | | |
| | | |
Currency forward contracts | | | |
| | | |
The following summarizes the range of volume in the Fund's derivative instruments during the year ended December 31, 2020.
| | |
| | |
| | |
Currency forward contracts | | |
The Fund may enter into various over-the-counter derivative contracts governed by International Swaps and Derivatives Association master agreements (“ISDA agreements”). The Fund’s ISDA agreements, which are separately negotiated with each dealer counterparty, specify (i) events of default and other events permitting a party to terminate some or all of the contracts thereunder and (ii) the process by which those contracts will be valued for purposes of determining termination payments. If some or all of the contracts under a master agreement are terminated because of an event of default or similar event, the values of all terminated contracts must be netted to determine a single payment owed by one party to the other. To the extent amounts owed to the Fund by its counterparties are not collateralized, the Fund is at risk of those counterparties’ non-performance. The Fund attempts to mitigate counterparty credit risk by entering into contracts only with counterparties it believes to be of
PAGE 15 ■ Dodge & Cox Global Bond Fund
Notes to Consolidated Financial Statements
good credit quality, by exchanging collateral, and by monitoring the financial stability of those counterparties.
For financial reporting purposes, the Fund does not offset assets and liabilities that are subject to a master netting arrangement in the Consolidated Statement of Assets and Liabilities.
The Fund’s ability to net assets and liabilities and to offset collateral pledged or received is based on contractual netting/offset provisions in the ISDA agreements. The following table presents the Fund’s net exposure to each counterparty for derivatives that are subject to enforceable master netting arrangements as of December 31, 2020.
| Gross
Amount of
Recognized
Assets | Gross
Amount of
Recognized
Liabilities | Cash
Collateral
Pledged /
(Received)1 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Cash collateral pledged/(received) in excess of derivative assets/liabilities is not presented in this table. The total cash collateral is presented on the Fund's Consolidated Statement of Assets and Liabilities. |
| Represents the net amount receivable from (payable to) the counterparty in the event of a default. |
Note 4: Related Party Transactions
Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays a management fee monthly at an annual rate of 0.50% of the Fund’s average daily net assets to Dodge & Cox, investment manager of the Fund. Dodge & Cox has contractually agreed to reimburse the Fund for all ordinary expenses to the extent necessary to maintain the ratio of total operating expenses to average net assets (“net expense ratio”) at 0.45% through April 30, 2021. The term of the agreement is renewable annually thereafter unless terminated with 30 days’ written notice by either party prior to the end of the term.
Fund officers and trustees All officers and two of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.
Note 5: Income Tax Information and Distributions to Shareholders
A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, and such amounts may differ from net investment income and realized gains for financial reporting purposes. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes. Financial reporting records are adjusted for permanent book to tax differences at year end to reflect tax character. Book to tax differ
ences are primarily due to differing treatments of wash sales, foreign currency realized gain (loss), foreign capital gains tax, straddles, derivatives, and distributions.
Distributions during the years noted below were characterized as follows for federal income tax purposes:
| Year Ended
December 31, 2020 | Year Ended
December 31, 2019 |
| | |
| | |
At December 31, 2020, the tax basis components of distributable earnings were as follows:
Undistributed ordinary income | |
At December 31, 2020, unrealized appreciation and depreciation for investments and derivatives based on cost for federal income tax purposes were as follows:
| |
| |
| |
Net unrealized appreciation | |
Fund management has reviewed the tax positions for open periods (three years and four years, respectively, from filing the Fund’s Federal and State tax returns) as applicable to the Fund, and has determined that no provision for income tax is required in the Fund’s financial statements.
Note 6: Loan Facilities
Pursuant to an exemptive order issued by the Securities and Exchange Commission (SEC), the Fund may participate in an interfund lending facility (Facility). The Facility allows the Fund to borrow money from or loan money to the Funds. Loans under the Facility are made for temporary or emergency purposes, such as to fund shareholder redemption requests. Interest on borrowings is the average of the current repurchase agreement rate and the bank loan rate. There was no activity in the Facility during the year.
All Funds in the Trust participate in a $500 million committed credit facility (Line of Credit) with State Street Bank and Trust Company, to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The maximum amount available to the Fund is $250 million. Each Fund pays an annual commitment fee on its pro-rata portion of the Line of Credit. For the year ended December 31, 2020, the Fund’s commitment fee amounted to $4,138 and is reflected as a Miscellaneous Expense in the Consolidated Statement of Operations. Interest on borrowings is charged at the prevailing rate. There were no borrowings on the Line of Credit during the year.
Note 7: Purchases and Sales of Investments
For the year ended December 31, 2020, purchases and sales of securities, other than short-term securities and U.S. government securi
Dodge & Cox Global Bond Fund ■ PAGE 16
Notes to Consolidated Financial Statements
ties, aggregated $548,119,115 and $209,942,362, respectively. For the year ended December 31, 2020, purchases and sales of U.S. government securities aggregated $629,534,280 and $496,233,397, respectively.
Note 8: New Accounting Guidance
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in the ASU provide optional temporary financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of
the London Interbank Offered Rate and other interbank-offered based reference rates as of the end of 2021. The ASU is effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.
Note 9: Subsequent Events
Fund management has determined that no material events or transactions occurred subsequent to December 31, 2020, and through the date of the Fund’s financial statements issuance, which require additional disclosure in the Fund’s financial statements.
Consolidated Financial Highlights
Selected data and ratios
(for a share outstanding throughout each period) | |
| | | | | |
Net asset value, beginning of year | | | | | |
Income from investment operations: | | | | | |
| | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions to shareholders from: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Net asset value, end of year | | | | | |
| | | | | |
Ratios/supplemental data: | | | | | |
Net assets, end of year (millions) | | | | | |
Ratio of expenses to average net assets | | | | | |
Ratio of expenses to average net assets, before reimbursement by investment manager | | | | | |
Ratio of net investment income to average net assets | | | | | |
| | | | | |
See accompanying Notes to Consolidated Financial Statements
PAGE 17 ■ Dodge & Cox Global Bond Fund
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of the Dodge & Cox Funds and Shareholders of Dodge & Cox Global Bond Fund
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of assets and liabilities, including the consolidated portfolio of investments, of Dodge & Cox Global Bond Fund and its subsidiary (one of the funds constituting Dodge & Cox Funds, referred to hereafter as the "Fund") as of December 31, 2020, the related consolidated statement of operations for the year ended December 31, 2020, the consolidated statement of changes in net assets for each of the two years in the period ended December 31, 2020, including the related notes, and the financial highlights for each of the five years in the period ended December 31, 2020 (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2020, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended December 31, 2020 and the financial highlights for each of the five years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on the Fund's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our procedures included confirmation of securities owned as of December 31, 2020 by correspondence with the custodian, transfer agent and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
San Francisco, California
February 19, 2021
We have served as the auditor of one or more investment companies in the Dodge & Cox Funds since 1931.
Dodge & Cox Global Bond Fund ■ PAGE 18
Special 2020 Tax Information (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code:
For shareholders that are corporations, the Fund designates 81% of its ordinary dividends paid to shareholders in 2020 as Section 163(j) interest dividends.
Funds' Liquidity Risk Management Program
(unaudited)
The Funds have adopted and implemented a written liquidity risk management program (“Program”) as required by Rule 22e-4 under the Investment Company Act. The Program is reasonably designed to assess and manage the Fund’s liquidity risk, taking into consideration the Fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions; its short and long-term cash flow projections; and its cash holdings and access to other funding sources including the Funds’ interfund lending facility and line of credit.
The Funds’ Board of Trustees has approved the appointment of a Liquidity Risk Management Committee including representatives from Dodge & Cox’s Legal, Compliance, Treasury, Operations, Trading, and Portfolio Management departments, which is responsible for the Program’s administration and oversight and for reporting to the Board on at least an annual basis regarding the Program’s operation and effectiveness.
The Liquidity Risk Management Committee refreshed its assessment of the Funds’ liquidity risk profiles and considered the adequacy and effectiveness of the Program’s operations for the 12 months ended September 30, 2020 (the “covered period”) in order to prepare a written report to the Board of Trustees for consideration at its meeting held on December 16, 2020. The report concluded that (i) while market volatility and reduced liquidity, especially in the fixed income markets, created an unusually challenging liquidity environment during the second quarter of 2020, the Funds had sufficient liquidity to operate effectively throughout the covered period; (ii) each Fund’s investment strategy continues to be appropriate for an open end fund; and (iii) the Funds’ Program is reasonably designed to assess and manage its liquidity risk.
Board Approval of Funds' Investment Management Agreements and Management Fees
(unaudited)
The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 16, 2020, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2021 with respect to each Fund. During the course of the year, the Board received extensive information and materials relating to the investment management and
administrative services provided by Dodge & Cox and the performance of each of the Funds.
Information Received
Over the past several years, the Board has requested, received, and discussed a number of special presentations on topics relevant to their annual consideration of the proposed renewal of the Funds’ Agreements, including, in 2020, special presentations relating to trends in the asset management industry, the mutual fund competitive landscape, mutual fund ratings methodologies, fund distribution channels, and fund flows and performance analysis. In addition to the foregoing and in advance of the meetings referred to below, the Board, including the Independent Trustees, requested, received, and reviewed materials relating to the Agreements and the services provided by Dodge & Cox. The Independent Trustees retained Broadridge to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Broadridge. The Broadridge materials included information regarding advisory and administrative fee rates, expense ratios, and transfer agency, custodial, and distribution expenses, as well as performance comparisons to each Fund’s peer group and to a broad-based securities index or combination of indices. The Broadridge materials also included a comparison of expenses of various share classes offered by comparable funds. The materials reviewed by the Board contained information concerning, among other things, Dodge & Cox’s profitability, financial results and condition, management fee revenue, and separate account fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates, sales and redemption data, and the investment that Dodge & Cox makes in research used in managing the Funds. The Board received and reviewed memoranda and related materials addressing, among other things, Dodge & Cox’s services to the Funds; how Dodge & Cox Funds’ fees compare to fees of peer group funds; the different fees, services, costs, and risks associated with other accounts managed by Dodge & Cox as compared to the Dodge & Cox Funds; and the ways in which the Funds realize economies of scale. Throughout the process of reviewing the services provided by Dodge & Cox and preparing for the meeting, the Independent Trustees found Dodge & Cox to be open, forthright, detailed, and helpful in answering questions about all issues. The Board received copies of the Agreements and a memorandum from the independent legal counsel to the Independent Trustees discussing the factors generally regarded as appropriate to consider in evaluating mutual fund management arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the independent legal counsel on November 11, 2020 and again on December 16, 2020 to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements. In considering the Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board considered several factors, discussed below, to be key factors and reached the conclusions described below.
PAGE 19 ■ Dodge & Cox Global Bond Fund
Nature, Quality, and Extent of the Service
The Board considered that Dodge & Cox provides a range of services to the Funds in addition to portfolio management, including regulatory compliance, trading desks, proxy voting, transfer agent and custodian oversight, administration, regulatory filings, tax compliance and filings, website, and anti-money laundering. The nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality, and extent of portfolio management, administrative, and shareholder services performed by Dodge & Cox. With regard to portfolio management services, the Board considered Dodge & Cox’s established long-term history of care in the management of the Funds; its consistency in investment approach and depth; the background and experience of the Dodge & Cox U.S. Equity Investment Committee, International Equity Investment Committee, Global Equity Investment Committee, U.S. Fixed Income Investment Committee, and Global Fixed Income Investment Committee, and research analysts responsible for managing the Funds; Dodge & Cox’s methods for assessing the regulatory and investment climate in various jurisdictions; its overall level of attention to its core investment management function; and its commitment to the Funds and their shareholders. The Board reviewed information from Dodge & Cox describing conflicts of interest between the Funds and Dodge & Cox or its other clients, and how Dodge & Cox addresses those conflicts. The Board noted Dodge & Cox’s record of favorable press and industry coverage, as well as its good compliance record, and its reputation as a trusted, shareholder-friendly mutual fund family. In addition, the Board considered that Dodge & Cox manages approximately $202 billion in Fund assets (as of November 30, 2020) with fewer professionals than most comparable funds, and that on average these professionals have more experience and longer tenure than investment professionals at comparable funds. The Board also noted that Dodge & Cox is an investment research-oriented firm with no other business endeavors to distract management’s attention from its research efforts, that its investment professionals adhere to a consistent investment approach across the Funds, and that due to its deliberate strategy with respect to new products, Dodge & Cox has had stability in its mutual fund product offerings over the course of many years and has the fewest funds of any of the 25 largest mutual fund families by assets. The Board further considered the “Gold” analyst rating awarded by Morningstar to all of the Funds (other than the Balanced Fund, which has a “Silver” rating). The Board concluded that it was satisfied with the nature, extent, and quality of investment management and other services provided to the Funds by Dodge & Cox.
Investment Performance
The Board reviewed each Fund’s recent and long-term investment performance (including periods of outperformance and underperformance), as compared to relevant indices and the performance of such Fund’s peer group and broader Morningstar category. In assessing the performance of the Funds, the Board considered the Funds’ investment returns over various periods and the volatility thereof and concluded that the levels experienced were consistent with Dodge & Cox’s long-term approach and active investment style. The Board also compared the short- and long-term
investment performance of the equity funds to value-oriented indices, in recognition of the significant performance divergence between value and growth stocks that has persisted for the last several years. It was noted that equity performance has been consistent with the value oriented investment strategy employed by Dodge & Cox. The Board concluded that Dodge & Cox’s historic, long-term, team-oriented, bottom-up investment approach remains consistent and that Dodge & Cox continues to be distinguished by its integrity, transparency, and independence. The Board considered that the performance of the Funds is the result of a value-oriented investment management process that emphasizes a long-term investment horizon, independent research, a team approach, price discipline, low cost, and low portfolio turnover. The Board concluded that Dodge & Cox has delivered long-term performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.
Costs and Ancillary Benefits
Costs of Services to Funds: Fees and Expenses The Board considered each Fund’s management fee rate and net expense ratio relative to (1) a broad category of other mutual funds with similar portfolio characteristics and share class and expense structures and (2) a smaller group of peers selected by Broadridge based on investment style, share class characteristics, and asset levels. The Board also considered the management fees charged by Dodge & Cox to other clients. In particular, the Board noted that the management fee rate paid by each Fund compares favorably to its broad category and is competitive within the Fund’s peer group. The Board also evaluated the operating structures of the Funds and Dodge & Cox, noting that the Funds do not charge front-end sales commissions or distribution fees, and Dodge & Cox bears, among other things, the cost of most third-party research, reimbursement for shareholder recordkeeping and administrative costs to third-party retirement plan administrators, and administrative and office overhead. The Board noted that the Broadridge report shows that the net expense ratio of every Dodge & Cox Fund is in the least expensive quartile compared to its broad Morningstar category (taking into account, in the case of the Global Bond Fund, voluntary expense reimbursements by Dodge & Cox). The Board noted the Funds’ unusual single-share-class structure and reviewed Broadridge data (including asset-weighted average expense ratios) showing that most of the peer group funds offer several different classes of shares, with different expense ratios, to different categories of investors, and that the Broadridge expense comparisons described above generally compare the net expense ratio of each Dodge & Cox Fund’s single share class to one of the least expensive share classes of the peer fund, even though those share classes are often not available to retail investors. On an asset-weighted basis, each Fund ranks in the least expensive quartile of its Broadridge peer group (taking into account, in the case of the Global Bond Fund, voluntary expense reimbursements by Dodge & Cox). The Board noted that the Funds provide access for small investors to quality investment management at a relatively low cost.
The Board also considered that the Funds are priced to scale, i.e., management fee rates begin at relatively low levels. Even without breakpoints, the Funds’ management fee rates are lower than those of many peer funds whose fee schedules include breakpoints. With
Dodge & Cox Global Bond Fund ■ PAGE 20
respect to non-U.S. funds sponsored and managed by Dodge & Cox that are comparable to the Funds in many respects, the Board noted that the fee rates charged by Dodge & Cox are the same as or higher than the fee rates charged to the Funds. The Board reviewed information regarding the fee rates Dodge & Cox charges to separate accounts that have investment programs similar to those of the Funds, including instances where separate account fees are lower than Fund fees. The Board considered the differences in the nature and scope of services Dodge & Cox provides to the Funds as compared to other client accounts, as well as material differences in regulatory, litigation, and other risks as between the Dodge & Cox Funds and other types of clients. The Board noted that different markets exist for mutual fund and institutional separate account management services and that a comparison of Fund fee rates and separate account fee rates must consider the fact that separate account clients bear additional costs and responsibilities that are included in the cost of a Fund. After consideration of these matters, the Board concluded that the overall costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation, and performance of Dodge & Cox and the low overall expense ratios of the Funds.
Profitability and Costs of Services to Dodge & Cox; "Fall-out" Benefits The Board reviewed reports of Dodge & Cox’s financial position, profitability, and estimated overall value and considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the scope and quality of the services provided. The Board noted in particular that Dodge & Cox’s profits are not generated by high fee rates, but reflect a focused business approach toward investment management. The Board recognized the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that the compensation/profit structure at Dodge & Cox includes a return on shareholder employees’ investment in the firm, which is vital for remaining independent and facilitating retention of management and investment professionals. The Board also considered that Dodge & Cox has in the past closed some of the Funds to new investors to proactively manage growth in those Funds. While these actions are intended to benefit existing Fund shareholders, the effect is to reduce potential revenues to Dodge & Cox from new shareholders. The Board also considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers and reputational benefits to non-U.S. funds sponsored and managed by Dodge & Cox) that Dodge & Cox might receive as a result of its association with the Funds and determined that they are acceptable. The Board also noted that Dodge & Cox continues to invest in its business to provide enhanced services, systems, and research capabilities, all of which benefit the Funds. The Board concluded that Dodge & Cox’s profitability is the keystone of its independence, stability, and long-term investment performance and that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) is fair and reasonable.
Economies of Scale
The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the level of Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee and expense structure and the fact that the Dodge & Cox Funds build economies of scale into their fee structures by charging low fees from a fund’s inception and keeping overall expenses down as a Fund grows, as compared to other fund complexes that employ fee “breakpoints” only after a fund reaches a certain scale. An assessment of economies of scale must also take into account that Dodge & Cox invests time and resources in each new Fund for months (and sometimes years) prior to launch; in addition, in a Fund’s early periods of operations, expenses are capped, which means that Dodge & Cox subsidizes the operations of a new Fund for a period of time until it reaches scale. The Board also observed that, while total Fund assets have grown over the long term, this growth has not been continuous or evenly distributed across all of the Funds. In addition, the Board noted that Dodge & Cox has shared the benefits of economies of scale with the Funds by adding services to the Funds over time, and that Dodge & Cox’s internal costs of providing investment management, technology, administrative, legal, and compliance services to the Funds continue to increase. For example, Dodge & Cox has increased its global research staff and investment resources over the years to add new capabilities for the benefit of Fund shareholders and to address the increased complexity of investing globally. In addition, Dodge & Cox has made expenditures in other staff, technology, and infrastructure to enable it to integrate credit and equity analyses and to implement its strategy in a more effective manner. Over the last ten years, Dodge & Cox has increased its spending on research, investment management, client servicing, cybersecurity, technology, third-party research, data services, and computer systems for trading, operations, compliance, accounting, and communications at a rate that has outpaced the Funds’ growth rate during the same period. The Board also observed that, even without fee breakpoints, the Funds are competitively priced in a competitive market and that having a low fee from inception is better for shareholders than starting with a higher fee and adding breakpoints. The Board also noted that there are certain diseconomies of scale associated with managing large funds, insofar as certain of the costs and risks associated with portfolio management increase disproportionately as assets grow. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately shares economies of scale that may exist.
Conclusion
Based on their evaluation of all material factors and assisted by the advice of independent legal counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the management fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that Dodge & Cox’s services have provided value for Fund shareholders
PAGE 21 ■ Dodge & Cox Global Bond Fund
over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.
Fund Holdings
The Fund provides a complete list of its holdings on a quarterly basis by filing the lists with the SEC on Form N-CSR (as of the end of the second and fourth quarters) and on Part F of Form N-PORT (as of the end of the first and third quarters). Shareholders may view the Fund’s Forms N-CSR and Part F of N-PORT on the SEC’s website at sec.gov. A list of the Fund’s quarter-end holdings is also available at dodgeandcox.com on or about the 15th day following each quarter end and remains available on the website until the list is updated for the subsequent quarter.
Proxy Voting
For a free copy of the Fund’s proxy voting policies and procedures, please call 800-621-3979, visit the Fund’s website at www.dodgeandcox.com, or visit the SEC’s website at sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is also available at dodgeandcox.com or shareholders may view the Fund's Form N-PX at sec.gov.
Household Mailings
The Fund routinely mails shareholder reports and summary prospectuses to shareholders and, on occasion, proxy statements. In order to reduce the volume of mail, when possible, only one copy of these documents will be sent to shareholders who are part of the same family and share the same residential address.
If you have a direct account with the Funds and you do not want the mailing of shareholder reports and summary prospectuses combined with other members in your household, contact the Funds at 800-621-3979. Your request will be implemented within 30 days.
Dodge & Cox Global Bond Fund ■ PAGE 22
Dodge & Cox Funds — Executive Officer & Trustee Information
| Position with Trust
(Year of Election or
Appointment) | Principal Occupation During Past Five Years and Other Relevant Experience | Other Directorships of Public Companies Held
by Trustees |
Interested Trustees and Executive Officers
|
|
Chairman and Trustee
(since 2014) |
Chairman and Director of Dodge & Cox; Chief Investment
Officer and member of U.S. Equity Investment Committee (USEIC), Global Equity Investment Committee (GEIC), and International Equity Investment Committee (IEIC) | |
|
President
(since 2014) and
Trustee (since 1993) |
Chief Executive Officer, President, and Director of
Dodge & Cox; member of U.S. Fixed Income Investment Committee (USFIIC) and Global Fixed Income Investment Committee (GFIIC) | |
|
Senior Vice President
(since 2006) |
Senior Vice President and Director of Dodge & Cox; Director
of International Equity and member of GEIC and IEIC | |
|
Chief Legal Officer
(since 2019) and Secretary (since 2017) |
Vice President, General Counsel, and Secretary (since 2017)
of Dodge & Cox | |
| |
Vice President (since 2020) and Financial Oversight and
Control Analyst (since 2017) of Dodge & Cox; Head of Fund Administration at RS Investments (2014-2016); Treasurer of RS Funds (2014-2016); Chief Financial Officer of RS Funds Distributor, LLC (2014-2016) | |
|
Chief Compliance
Officer (since 2010) |
Vice President and Chief Compliance Officer of Dodge & Cox
| |
|
| |
Professor of Economics, Stanford University; Director of the
Economics of Education Program, National Bureau of Economic Research; Senior Fellow, Hoover Institution and Stanford Institute for Economic Policy Research | |
| |
Senior Counsel of Arnold & Porter (law firm) (2013-2018);
Partner of Arnold & Porter (until 2012); Director of Howard, Rice, Nemerovski, Canady, Falk & Rabkin (1977-2011) | |
| |
CFO, Pixar Animation Studios (1999-2004)
|
Director, Airbnb (vacation rental online
marketplace) (since 2018); Director, Alphabet Inc. (internet information services) (since 2005); Director, Glu Mobile, Inc. (multimedia software) (since 2004); Director, Netflix, Inc. (internet television) (since 2010); Director, Arista Networks (cloud networking) (since 2013) |
| |
Advisory Director, The Presidio Group (2005-2016); Partner
and Managing Director—Global Investment Research at Goldman Sachs (until 2001) | |
Gabriela Franco
Parcella (52) | |
President (since 2020) and Executive Managing Director of
Merlone Geier Partners (2018-2019); Chairman, President, and CEO, Mellon Capital (2011 to 2017); COO, Mellon Capital (1997 to 2011) |
Director, Terreno Realty Corporation
(since 2018) |
| |
Robert and Marion Oster Distinguished Military Fellow,
Hoover Institution (since 2012); Admiral, United States Navy (Ret.); U.S. Navy Chief of Naval Operations (2008-2011) |
Director, Northrop Grumman Corp.
(global security) (since 2012); Director, Maersk Line, Limited (shipping and transportation) (since 2016) |
| |
Executive Vice President, Managing Director—Fixed Income
at Loomis Sayles & Company, L.P. (2003-2011) | |
|
Trustee
(since 2005)
(and 1995-2001) |
Professor of Economics, Stanford University (since 1984);
Senior Fellow, Hoover Institution (since 1996); Under Secretary for International Affairs, United States Treasury (2001-2005) | |
|
The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all six series in the Dodge & Cox
Funds complex and serves for an indefinite term. |
Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Funds’ website at dodgeandcox.com or calling 800-621-3979.
PAGE 23 ■ Dodge & Cox Global Bond Fund
dodgeandcox.com
For Fund literature, transactions, and account
information, please visit the Funds’ website.
or write or call:
Dodge & Cox Funds
c/o DST Asset Manager Solutions, Inc.
P.O. Box 219502
Kansas City, Missouri 64121-9502
(800) 621-3979
Investment Manager
Dodge & Cox
555 California Street, 40th Floor
San Francisco, California 94104
(415) 981-1710
This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.This report reflects our views, opinions, and portfolio holdings as of December 31, 2020, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.
(b) Not applicable.
ITEM 2. CODE OF ETHICS.
A code of ethics, as defined in Item 2 of Form N-CSR, adopted by the registrant and applicable to the registrant’s principal executive officer and principal financial officer was in effect during the entire period covered by this report. A copy of the code of ethics as revised May 1, 2014 is filed as an exhibit to this Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the period covered by this report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Trustees of the registrant has determined that Ann Mather, Robert B. Morris III, Gabriela Franco Parcella and Mark E. Smith, members of the registrant’s Audit and Compliance Committee, are each an “audit committee financial expert” and are “independent”, as defined in Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) – (d) Aggregate fees billed to the registrant for the fiscal years ended December 31, 2020 and December 31, 2019 for professional services rendered by the registrant’s principal accountant were as follows:
| | | | | | | | |
| | | 2020 | | | 2019 | |
(a) Audit Fees | | $ | 384,400 | | | $ | 376,900 | |
(b) Audit-Related Fees | | | — | | | | — | |
(c) Tax Fees | | | 305,322 | | | | 230,740 | |
(d) All Other Fees | | | — | | | | — | |
Audit fees include amounts related to the audit of the registrant’s annual financial statements and services normally provided by the accountant in connection with statutory and regulatory filings. Tax fees include amounts related to tax advice and tax return preparation, compliance, and reviews.
(e)(1) The registrant’s Audit and Compliance Committee has adopted policies and procedures (“Policies”) which require the registrant’s Audit and Compliance Committee to pre-approve all audit and non-audit services provided by the principal accountant to the registrant. The policies also require the Audit and Compliance Committee to pre-approve any engagement of the principal accountant to provide non-audit services to the registrant’s investment adviser, if the services directly impact the registrant’s operations and financial reporting. The Policies do not apply in the case of audit services that the principal accountant provides to the registrant’s adviser. If a service (other than the engagement of the principal accountant to audit the registrant’s financial statements) is required to be pre-approved under the Policies between regularly scheduled Audit and Compliance Committee meetings, pre-approval may be authorized by a designated Audit and Compliance Committee member with ratification at the next scheduled Audit and Compliance Committee meeting.
(e)(2) No services included in (b) - (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Less than 50% of the hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees.
(g) For the fiscal years ended December 31, 2020 and December 31, 2019, the aggregate fees billed by the registrant’s principal accountant for non-audit services rendered to the registrant, for non-audit services rendered to the registrant’s investment adviser, and for non-audit services rendered to entities controlled by the adviser were $726,082 and $732,040, respectively.
(h) All non-audit services described under (g) above that were not pre-approved by the registrant’s Audit and Compliance Committee were considered by the registrant’s Audit and Compliance Committee and found to be compatible with maintaining the principal accountant’s independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) The complete schedule of investments is included in Item 1(a) of this Form N-CSR.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant’s Board of Trustees.
ITEM 11. CONTROLS AND PROCEDURES.
(a) An evaluation was performed within 90 days of the filing of this report, under the supervision and with the participation of the registrant’s management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures. Based on that evaluation, the principal executive officer and principal financial officer concluded that the registrant’s disclosure controls and procedures were effective.
(b) The registrant’s principal executive officer and principal financial officer are aware of no changes in the registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
ITEM 12. DISCLOSURE OF SECURITIES LENDING ACTIVITIES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 13. EXHIBITS.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dodge & Cox Funds
| | |
By | | /s/ Charles F. Pohl |
| | Charles F. Pohl |
| | Chairman - Principal Executive Officer |
Date March 1, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dodge & Cox Funds
| | |
| By | | /s/ Charles F. Pohl |
| | Charles F. Pohl |
| | Chairman - Principal Executive Officer |
| |
| By | | /s/ Shelly Chu |
| | Shelly Chu |
| | Treasurer – Principal Financial Officer |
| |
Date | | March 1, 2021 |
