Jeremy Glaser: From Morningstar I am Jeremy Glaser. It's Beat the Market Week on Morningstar.com, and one of the teams we are featuring is from Dodge & Cox Stock, a gold rated fund. I am here today with Morningstar analyst Laura Lallos to look at what makes it tick.
Laura, thanks so much for joining me.
Laura Lallos: Glad to be here.
Glaser: What really is the secret sauce behind Dodge & Cox Stock? It's had great long-term performance. Is it the strategy? Is it execution? Is it a combination of both?
Lallos: It's definitely a combination. The strategy on the surface sounds like what most people want to do. They look for fundamentally sound companies with great management teams and a competitive edge. But their advantage is in their research and in their willingness to take a little bit of a contrarian bent.
What sets them apart for example is their willingness to buy early, at times when other people maybe fearful of a stock, and an example of that would be going back to the financial crisis. They took that opportunity to build up their financials stake, and added again in 2011 when financials stumbled again. They bought JPMorgan in 2012 during the London Whale trading scandal.
Hewlett-Packard is a classic example of their willingness to be contrarian. It's their research and their conviction and their willingness to be early and to stay put for a while.
Glaser: If they have that contrarian streak, how good was 2013 for them in a period where the whole market seemed to be off to the races? How did that strategy perform?
Lallos: They shone in 2013. They outperformed their benchmarks and most of their peers; it was one of the best large-value funds that we cover last year. I think what must have been pleasing to them was that was because some of their contrarian picks really did pay off. Hewlett-Packard being up more than 100%. Nokia is another one that they stuck with through thick and thin, a lot of thin, and that was also up more than 100% last year. Sprint, with the partial acquisition by SoftBank, is another vindication for them.
So a lot of their picks did very well after some slow years. They also had some great financials holdings, and technology was an area for them. So they shone last year.
Glaser: What are the type of market environments where the fund's not going to do so well? When would you expect it to lag?
Lallos: That’s a hard question to answer with this fund because this fund looks different at different times. The managers think stock by stock and to some extent sector stakes fall where they may. So, in some markets, they've had a lot in financials; that can be in detriment. They may not have a stake like that at other times. We wouldn't expect a fund like this to keep up in a great strong market, and yet it did in 2013. I think what people have to be aware of is when they get it wrong, it can be painful, and certainly this was one of the poorest performers in the large-value category in 2008. And I think that took some shareholders by surprise. They thought they were thinking of this kind of strategy as one that would hold up well, and it didn't.
Glaser: What kind of investor is this fund for? Who should be purchasing it or putting their money to work in it?
Lallos: You have to be willing to stick it out. It's basically for someone who thinks [highly of] this team; they are great stock-pickers. I trust them because what we saw after the financial crisis is that assets flew out of the fund. A lot of people left, and we were seeing that in investor returns. We track how the average performer does in a fund. And this fund started to rebound, but the average performer was not keeping up because they had left too soon. It's a question of being willing to stick with it really.
Glaser: What would some alternatives be, for whatever reason, you weren't interested in Dodge & Cox Stock?
Lallos: If you are looking for large-cap value fund and thinking of that in terms of this as something that's maybe a little more conservative or lower-risk, then Dodge & Cox Stock would not be the right fund for you. In that case you might want to look at some of the equity-income funds. T. Rowe Price Equity Income fund, Vanguard, JPMorgan, these are all funds that have more of the steady profile that I think some investors are looking for in a large-cap value fund, or something like American Funds Washington Mutual which has a value orientation but not that contrarian bent to it. That's something that would provide a smoother ride.
Glaser: Laura, thanks so much for your analysis today.
Lallos: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser.
