Russel Kinnel, director of fund research for Morningstar, and analyst Greg Carlson find a balanced fund from a venerable firm that can be surprisingly adventurous.
79-year-old Dodge & Cox Balanced fund (DODBX) looks bold these days, but its proven strategy and long-term appeal are very much intact.
A large, veteran crew steers this fund. Seven of the 18 portfolio managers have been on the fund for at least 14 years, and they’re supported by many analysts.
The strategy is patient and fundamentally grounded. The fund’s equity weighting is often close to 60%, but it has occasionally strayed north of 70% (as it has recently) when the managers see more value in stocks than in bonds.
In the equity portfolio, they prefer companies in relatively sturdy financial shape that are trading at cheap valuations that they expect to rise within four to five years. The fund typically holds 70–90 stocks and is pretty diversified across sectors.
This portfolio mirrors that of Dodge & Cox Stock (DODGX). Within fixed income, the team tends to play to its strength in analyzing companies by holding a sizable stake in corporate bonds. This portion of the fund resembles Dodge & Cox Income (DODIX).
Although this is an excellent fund, its recent performance has been mixed. The team had several misfires in the financial sector in 2007 and 2008 (particularly on the equity side) and finished in or near the category’s bottom decile both years. However, the fund showed resilience in the 2000–2002 bear market.
But although the team made some mistakes (it owned both Wachovia and Fannie Mae FNMA before they imploded in September 2008), its determination to stick to its guns in other cases fueled a strong 2009 as the market rebounded. And the fund’s longer-term returns are still superb—it’s beaten more than 90% of its category peers over the trailing ten and 15 years.
The fund has struggled before. In the late 1990s, for example, the managers grew wary of valuations in tech, telecom, and media. As a result, the fund lagged badly in 1998 and looked so-so in 1999, but the team’s caution served shareholders extremely well in the ensuing bear market.
This fund’s against-the-grain approach has worked extremely well over the long haul and has reduced volatility at times. Thus, we wouldn’t expect the ups and downs here to be quite so pronounced over the long haul. Nevertheless, patience is required for investors to reap the fund’s potentially substantial rewards.
[Dodge & Cox] has allowed its assets under management to grow quite large at times, but it has closed the doors to its funds when it felt capacity was an issue. And managers are substantially invested alongside shareholders.
This has long been one of the moderate-allocation category’s cheapest options. Its 0.53% expense ratio is lower than those of 95% of its category peers.
Editor’s Note: Hewlett-Packard (NYSE: HPQ), Wells Fargo (NYSE: WFC), and Comcast (Nasdaq: CMCSA) were among the fund’s largest holdings as of March 31st.
