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FUNDS
A Slow Mover Takes Flight
by Steven Goldberg Dodge & Cox doesn't rush into things. The San Francisco money manager launched its first fund in 1931 and, until three years ago, had opened only two more. In 2001, it finally got around to adding a fourth, its first international fund. It was worth the wait. Dodge & Cox International Stock ranks in the top 8% of broad-based foreign funds over the past three years. The fund (symbol DODFX; 800-621-3979) returned an annualized 11% to September 1, whipping its peers by seven percentage points per year, on average. Annual expenses are a rock-bottom 0.82% -- less than half the category average.
Although International is the company's first purely foreign fund, its flagship fund, Dodge & Cox Stock, has been investing a chunk of assets abroad since the mid 1980s. At last report, 14% of Stock's assets were in foreign issues. Stock, which is closed to new investors, returned an annualized 15% over the past 20 years, making it the fifth-best diversified U.S. stock fund during that period.
Value hunters
Owning companies when they're cheap is the heart of the Dodge & Cox approach. The managers only buy a beaten-down stock when their analysis shows that the company has a clear path toward righting itself. Then they wait with the patience of Job. International unloaded just 11% of its holdings last year, compared with 91% for the average foreign fund. "We're focused on what a company will do over the next three to five years, not on the next quarter," says Diana Strandberg, one of the fund's six co-managers.
That's been a winning formula over the long run, as well as during the value-dominated market of the past several years. Be aware, though, that when investors favor growth stocks, Dodge & Cox International will fall behind. "I can promise you that there will be periods when we will trail the averages," Strandberg says. Indeed, Stock lagged Standard & Poor's 500-stock index every year from 1995 through 1999.
Recently, the fund's managers were uncovering bargains in Japan and Europe. Some of them are multinational companies that have been shunned largely because they're headquartered in slow-growth countries, even though they have operations and sales across the globe. Japanese giants, such as Honda and Sony, as well as European companies, such as Nestlé, Royal Dutch Petroleum and Rolls-Royce, were recently among the fund's 61 stock holdings. In Dodge & Cox's customary contrarian style, the fund picked up Royal Dutch after it was hammered for overstating oil reserves.
A canny crew
Dodge & Cox runs its funds by committee. Several of International's managers are also on the team that runs Stock. The committee approach means that "we have at least six different pairs of eyeballs looking at each stock," says Strandberg. International's managers have been at the firm for 17 years, on average. Supporting them are 19 analysts, who study stocks for all the firm's funds.
The analysts' reports must include both best- and worst-case scenarios. For instance, before the fund bought South Korea's Kookmin Bank, analysts studied what would happen to the troubled bank if borrowers defaulted en masse, as happened to Texas thrifts in the 1980s. The stock still looked cheap.
That kind of research "allows us to buy more when a stock goes down in price," Strandberg says. So far, the patience -- and guts -- has paid off.
--Research: Jessica Anderson | 
MAGAZINE
