Redirection Confirmation

You'll be re-directed to the Financial Professional site.

For Financial Professionals

This site is owned and operated by Dodge & Cox on behalf of Dodge & Cox Worldwide Funds plc. Before continuing, please read the following important information and confirm that you have read and agree to these provisions and the Terms and Conditions of Use of this website.
 

This site is not intended for U.S. persons. If you are trying to find information about the Dodge & Cox Funds registered for sale in the United States or any other country, click on the country listing at the top of the page to change the country site version.

This site uses "cookies" as described in the Privacy Policy in order for Dodge & Cox to remember your personal preferences and to provide you with a better browsing experience. By continuing, you will be deemed to have accepted the site's use of cookies for this limited purpose. If you do not want this site to place cookies on your computing device, you can manage your web browser's cookie settings by navigating to the program's options menu.
 

TERMS & CONDITIONS OF USE

Use of the Dodge & Cox website ("Site"), owned and operated by Dodge & Cox®, signifies that you accept the following Terms of Use. Nothing contained in these Terms of Use is intended to modify or amend any other written agreement, if any, that may currently be in effect between you and Dodge & Cox or any funds managed by Dodge & Cox. Dodge & Cox may periodically modify these Terms of Use, and any such modifications will be effective immediately upon posting. We suggest that you periodically check these Terms of Use for modifications. If you do not agree to the Terms of Use, do not use this Site.

We suggest that you check the Terms of Use periodically for changes. The Terms of Use can be accessed from the link at the bottom of the Site pages. Dodge & Cox expressly reserves the right to monitor any and all use of this Site, without liability.


PRIVACY

Dodge & Cox expressly reserves the right to monitor any and all use of this Site; any such monitoring will be used for Dodge & Cox’s internal business purposes without liability. Dodge & Cox is committed to maintaining the confidentiality, integrity, and security of your personal and financial data. We consider this information to be private and held in confidence between you and Dodge & Cox. We would like you to know about our policies to protect the privacy of this information.

We may collect personal information about you from:

  • You or your representative in writing, electronically or by phone (e.g., in account applications or requests for forms or literature);
  • Transactions initiated by you or made on your behalf; and
  • Information we receive from third parties, such as financial advisers, consumer reporting agencies, consultants and custodians.

We do not disclose personal information about current or former clients or shareholders to any third parties except as necessary to effect a transaction, administer your account, or as otherwise permitted by law. For example, the Dodge & Cox Funds and Dodge & Cox Worldwide Funds use third-party transfer agents and third-party providers of systems who use your information only to process or analyze transactions you have requested. Contracts with these organizations contain provisions restricting their use of your personal information to those purposes for which they were hired.

We restrict access to personal information about you to those employees and service providers involved in administering or servicing your account(s) or helping us meet our regulatory obligations. We maintain physical, electronic, and procedural safeguards that comply with federal standards to protect your personal information. In addition, our Code of Ethics, which applies to all Dodge & Cox employees, restricts the use of your personal information.

For more information about privacy, please read the Dodge & Cox Privacy Policy.

LIMITED LICENSE AND RESTRICTIONS ON USE


Dodge & Cox grants you a limited, revocable, nonexclusive, nontransferable license to view, store, bookmark, download, and print the pages within this Site solely for your personal, informational, and noncommercial use or as expressly authorized by Dodge & Cox in writing. You are responsible for obtaining and maintaining all equipment, services, and other materials that you need to access this Site. Dodge & Cox reserves all rights not expressly granted in these Terms of Use. Except as otherwise stated in these Terms of Use as expressly authorized by Dodge & Cox in writing, you may not:

  • Modify, copy, distribute, transmit, post, display, perform, reproduce, publish, broadcast, license, create derivative works from, transfer, sell, or exploit any reports, data, information, content, software, RSS and podcast feeds, products, services, or other materials on, generated by or obtained from this Site, whether through links or otherwise (collectively, "Materials");
  • Redeliver any page, text, image or Materials on this Site using "framing" or other technology;
  • Engage in any conduct that could damage, disable, or overburden (i) this Site, (ii) any Materials or services provided through this Site, or (iii) any systems, networks, servers, or accounts related to this Site, including without limitation, using devices or software that provide repeated automated access to this Site, other than those made generally available by Dodge & Cox;
  • Probe, scan, or test the vulnerability of any Materials, services, systems, networks, servers, or accounts related to this Site or attempt to gain unauthorized access to Materials, services, systems, networks, servers, or accounts connected or associated with this Site through hacking, password or data mining, or any other means of circumventing any access-limiting, user authentication or security device of any Materials, services, systems, networks, servers, or accounts related to this Site;
  • Modify, copy, obscure, remove or display the Dodge & Cox, Dodge & Cox Funds, or Dodge & Cox Worldwide Funds name, logo, trademarks, text, notices, or images without Dodge & Cox’s express written permission. To obtain such permission, you may e-mail us at website@dodgeandcox.com; or
  • Include the term "Dodge & Cox®," or any Dodge & Cox trademark or executive's name, or any variation of the foregoing, as a meta-tag, hidden textual element, or any other indicator that creates an impression of affiliation, sponsorship, or endorsement by Dodge & Cox.

COPYRIGHT POLICY, NOTICE AND CLAIM INFORMATION

Dodge & Cox owns and operates this Site. All Materials on this Site, whether separate or compiled, including but not limited to, text, graphics, and audio clips. Logos, buttons, images, digital downloads, data compilations, software, icons, html code and xml code, as well as all copyright, patent, trademark, trade dress, and other rights therein, are owned or licensed by Dodge & Cox® and its third-party information providers, and are protected by United States and international intellectual property laws.

Pursuant to Section 512(c)(2) of the U.S. Copyright Revision Act, as enacted through the Digital Millennium Copyright Act, Dodge & Cox designates an agent as described below to receive notifications of claimed copyright infringement by mail: 
Roberta R. Kameda, Esquire, General Counsel, Dodge & Cox, 555 California Street, 40th Floor, San Francisco, CA 94104.

The designated copyright agent can also be reached by telephone at (800) 254-8494, by fax at (415) 986-1369, and by e-mail at website@dodgeandcox.com.


LINKING CONDITIONS

You may not link to this Site unless you comply with these linking conditions ("Linking Conditions"). Dodge & Cox grants you a limited, revocable, nonexclusive right to create a hyperlink to this Site ("Link"), provided you comply at all times with the following conditions:

  • The Link must be made to the Funds' home page at www.dodgeandcox.com.
  • The text of the Link must read either “Dodge & Cox”, “Dodge & Cox Funds”, “Dodge & Cox Worldwide Funds”,  or dodgeandcox.com. You may not use any Dodge & Cox logo or graphic or any other Dodge & Cox trademark, as part of the Link without Dodge & Cox's express written permission; and 
  • The Link and surrounding context on the linking site must not: (a) falsely represent or misrepresent any relationship between the linking site and Dodge & Cox, including suggestions of affiliation, endorsement, or sponsorship; (b) portray Dodge & Cox or its affiliates or their products or services, in a false, misleading, derogatory, or otherwise offensive manner; or (c) deliver the Materials in a framed environment or alter the layout, content, look, or feel of the Site.

If you have created a Link that conforms to these Linking Conditions, then you also may include one or more Links to any internal or subsidiary page of this Site that is located one or several levels down from the homepages (known as "deep links"), provided, however, that all such deep links must be in close physical proximity to the Link that conforms to the Linking Conditions. You may not maintain numerous or pervasive Links to this Site.

DATA, INFORMATION AND CONTENT

The Materials on this Site are for information, education, and noncommercial purposes only. Although Dodge & Cox may provide data, information, and content relating to investment approaches and opportunities to buy or sell securities and/or mutual funds, you should not construe any such information or other content available through this Site as legal or tax advice. You alone will bear the sole responsibility of evaluating the merits and risks associated with the use of any Materials on this Site before making any decisions based on such Materials. In exchange for using such Materials, you agree not to hold Dodge & Cox or its affiliates and their directors (trustees), officers, employees, or third-party information providers liable for any possible claim for damages arising from any decision you make based on the Materials made available to you through this Site. By providing access to other websites, neither Dodge & Cox nor any of its affiliates is recommending the purchase or sale of the stock issued by any company, nor are they endorsing services provided by any website's sponsoring organization.

OWNERSHIP OF OTHER MATERIALS

All trademarks, service marks, and logos appearing on this Site are the exclusive property of their respective owners.

All Dodge & Cox graphics, logos, page headers, and service names are trademarks, service marks, or trade dress of Dodge & Cox. Dodge & Cox's trademarks, service marks and trade dress may not be used in connection with any product or service that is not Dodge & Cox's, in any manner that is likely to cause confusion among customers or investors, or in any manner that disparages or discredits Dodge & Cox. Nothing contained on this Site should be construed as granting any license or right in or to any trademarks, service marks, or trade dress of Dodge & Cox.


THIRD-PARTY CONTENT

Data and other materials appearing on this Site that are provided by third parties are believed by Dodge & Cox to be obtained from reliable sources, but Dodge & Cox cannot guarantee and is not responsible for their accuracy, timeliness, completeness, or suitability for use. Dodge & Cox is not responsible for, and does not prepare, edit, or endorse, the content, advertising, products, or other materials on or available from any website owned or operated by a third party that is linked to this Site via hyperlink. The fact that Dodge & Cox has provided a link to a third party's website does not constitute an implicit or explicit endorsement, authorization, sponsorship, or affiliation by Dodge & Cox with respect to such website, its owners, providers, or services.  You will use any such third-party content at your own risk.
 

WARRANTY DISCLAIMERS

YOU EXPRESSLY UNDERSTAND AND AGREE THAT:

THERE ARE NO IMPLIED OR EXPRESSED WARRANTIES ON THE MATERIALS IN THIS SITE; THE MATERIALS ARE PROVIDED "AS IS" AND "AS AVAILABLE BASIS." DODGE & COX, AFFILIATES, AGENTS, DIRECTORS (AND TRUSTEES), OFFICERS, EMPLOYEES, LICENSORS AND ANY THIRD-PARTY INFORMATION PROVIDERS AND VENDORS DISCLAIM, TO THE FULLEST EXTENT UNDER APPLICABLE LAW, ANY WARRANTY OF ANY KIND, WHETHER EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER RELATING TO THIS SERVICE, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, AND ALL WARRANTIES REGARDING SECURITY, CURRENCY, CORRECTNESS, QUALITY, ACCURACY, COMPLETENESS, RELIABILITY, PERFORMANCE, TIMELINESS, OR CONTINUED AVAILABILITY, WITH RESPECT TO (I) THE SITE; (II) ANY MATERIALS, PRODUCTS, OR SERVICES AVAILABLE ON OR THROUGH THE SITE; (III) USE OF THE SITE, MATERIALS, PRODUCTS, OR SERVICES; AND (IV) THE RESULTS OF THE USE OF THE SITE, MATERIALS, PRODUCTS, OR SERVICES. FURTHER, DODGE & COX, AFFILIATES, DIRECTORS (AND TRUSTEES), OFFICERS, EMPLOYEES, AGENTS, LICENSORS, AND ANY THIRD-PARTY INFORMATION PROVIDERS AND VENDORS EXPRESSLY DISCLAIM ALL WARRANTIES WITH RESPECT TO ANY DELAYS OR ERRORS IN THE TRANSMISSION OR DELIVERY OF ANY MATERIALS, PRODUCTS, OR SERVICES AVAILABLE THROUGH THIS SITE. EXCEPT AS PROVIDED BY LAW, NEITHER DODGE & COX NOR ITS THIRD-PARTY INFORMATION PROVIDERS AND VENDORS HAS ANY RESPONSIBILITY TO MAINTAIN THE MATERIALS, PRODUCTS, OR SERVICES OFFERED ON THE SITE OR TO SUPPLY CORRECTIONS, UPDATES, OR RELEASES FOR THE SAME. USE OF THIS SERVICE IS AT YOUR OWN RISK. REFERENCE TO A FUND OR SECURITY ANYWHERE ON THIS WEB SITE IS NOT A RECOMMENDATION TO BUY, SELL, OR HOLD THAT OR ANY OTHER SECURITY. IF YOU LIVE IN A STATE THAT DOES NOT ALLOW DISCLAIMERS OF CERTAIN WARRANTIES, SOME OF THE ABOVE EXCLUSIONS MAY NOT APPLY TO YOU. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS, AND MAY HAVE OTHER RIGHTS, WHICH VARY FROM JURISDICTION TO JURISDICTION.

LIABILITY AND INDEMNITY

ANY MATERIALS DOWNLOADED OR OTHERWISE OBTAINED THROUGH THIS SITE ARE DONE AT YOUR OWN RISK. YOU ARE SOLELY RESPONSIBLE FOR ANY DAMAGE TO YOUR COMPUTER SYSTEM OR OTHER EQUIPMENT, OR LOSS OF DOWNLOADED OR OBTAINED DATA THAT RESULTS FROM SUCH DOWNLOAD.

NEITHER DODGE & COX NOR ITS AFFILIATES, DIRECTORS (AND TRUSTEES), OFFICERS, EMPLOYEES, AGENTS, LICENSORS, OR ANY THIRD-PARTY INFORMATION PROVIDERS AND VENDORS WILL BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, PUNITIVE, OR EXEMPLARY DAMAGES, INCLUDING BUT NOT LIMITED TO, DAMAGES FOR LOSS OF PROFITS, REVENUE, INCOME, GOODWILL, USE, DATA, OR OTHER INTANGIBLE LOSSES, OR DAMAGES CAUSED BY THEFT, UNAUTHORIZED ACCESS, SYSTEMS FAILURE, OR COMMUNICATIONS LINE FAILURE, OR THE COST OR PROCURING SUBSTITUTE GOODS OR SERVICES, CAUSED BY THE USE OF OR INABILITY TO USE THE SITE, MATERIALS OR ANY PRODUCTS OR SERVICES PROVIDED HEREIN, OR ANY OTHER MATTER RELATING TO THIS SITE, EVEN IF DODGE & COX HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THE ABOVE EXCLUSIONS OR LIMITATIONS MAY NOT APPLY TO YOU. TO THE EXTENT THAT A JURISDICTION DOES NOT PERMIT THE EXCLUSION OR LIMITATION OF LIABILITY AS SET FORTH HEREIN, THE LIABILITY OF DODGE & COX AND ITS AFFILIATES, SUBSIDIARIES, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, LICENSORS, AND ANY THIRD-PARTY INFORMATION PROVIDERS AND VENDORS IS LIMITED TO THE EXTENT PERMITTED BY LAW IN SUCH JURISDICTIONS.

You agree to indemnify, defend, and hold harmless Dodge & Cox, its affiliates, and each of its and their officers, directors (and trustees), employees, and agents, from and against all claims, demands, liabilities, damages, losses, or expenses, including attorney's fees and costs, arising out of or related to your improper access to or use of this Site, or any violation by you of these Terms of Use.

Dodge & Cox does not claim that materials in this Site are appropriate or available for use in all locations. Because of the global nature of the Internet, you agree to comply with all local rules with respect to your online conduct, including all laws, rules, codes, and regulations of the country in which you reside and the country from which you access this Site, including without limitation, all laws, rules, codes, regulations, decrees, acts, orders, directives, legislation, bills, and statutes pertaining to tax, contracts, intellectual property, securities, e-commerce, banking, technology, computers, fraud, and privacy.

Each investment product and service referred to on this Site is intended to be made available only to persons where that product or service is registered and/or licensed for sale or where such registration or licensing is not required. This Site will not be considered a solicitation for or offering of any investment product or service to any person in any jurisdiction where such solicitation or offering would be illegal.

TIMELINESS OF CONTENT

All content on this Site is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. In addition, you are responsible for setting the cache settings on your browser to ensure you are receiving the most recent data.


TERMINATION

The rights granted to you herein terminate immediately if you fail to comply with the Terms of Use. Dodge & Cox, in its sole discretion, reserves the right to temporarily or permanently terminate your access to and use of this Site at any time and for any reason whatsoever, without notice or liability. Dodge & Cox will not be liable to you or any third party for any termination of your access to or use of this Site.
 

INTEGRATION AND SEVERABILITY

If any provision of these Terms of Use is deemed unlawful, void, or for any reason unenforceable, then that provision will be deemed severable from these Terms of Use and will not affect the validity and enforceability of the remaining provisions. The preceding Terms of Use represent the entire agreement between Dodge & Cox and the user relating to the subject matter herein.

Terms of Use as of: February 2022

Skip to main content
 

Paper

U.S. Banks: A Compelling Long-Term Value Opportunity

January 2021

 

Key Takeaways

  • Financial stocks lagged the U.S. stock market in 2020 on concerns that a weaker economy and lower interest rates would lead to higher credit losses and narrower profit margins for U.S. banks.
  • Compared to past downturns, we believe the large U.S. banks are in much stronger shape, aided by their solid capital positions and prudent risk taking, as well as robust government support for businesses and consumers.
  • The market has heavily discounted the valuations of U.S. Financials, which do not reflect their 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. Low interest rates will likely be a diminishing headwind to earnings 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.
  • The Dodge & Cox Worldwide Funds—U.S. Stock Fund and Global Stock Fund are overweight U.S. Financials. We have strong conviction in these holdings1 and believe their long-term risk-reward profiles are compelling at current valuation levels.

In the U.S. equity market, the Financials sector was one of the worst performers in 2020. While the overall market posted double-digit returns, Financials declined amid concerns over credit and interest rate risk. When the economy faltered in the spring under the weight of global coronavirus (COVID-19) pandemic lockdowns, many investors made two assumptions: 1) that banks would suffer significant credit losses, and 2) that the ultra-low interest rates would squeeze margins.
        However, in our view, those investors overestimated the damage the recession would cause financial services companies and underestimated the underlying strength of their businesses and potential to deliver strong returns in a post-pandemic economic recovery. In this paper, we will explain why the Dodge & Cox Stock Fund, Global Stock Fund, and Balanced Fund have significant exposure to U.S. Financials (see Figure 1), even at a time of prolonged low-interest rates. We will use the Funds’ holdings of large U.S. banks to make that case.

Figure 1: Funds Are Overweight U.S. Financials2

Source: FactSet, LSE Group, MSCI, and S&P.

Why This Downturn Is Different

The last time the U.S. economy contracted—during the 2008- 2009 global financial crisis—bank stocks fell sharply. Many were heavily exposed to the housing market, which was the epicenter of the downturn. In subsequent years, regulatory changes in response to the crisis led to a step-function decline in return on equity across the sector.
        In contrast, most U.S. banks entered 2020 with low leverage, restrained risk taking, and well-diversified revenue sources. The banking industry’s resilient profitability through the downturn validated post-crisis reforms.
        But that is not the only contrast between now and then. The nature of the downturn itself is different and so have been the policy responses. Fundamentally, the pandemic is a health crisis that led to a sudden stop in economic activity. The U.S. government stepped in quickly with the CARES Act, a $2.2 trillion relief package to help struggling businesses and consumers, and passed a $900 billion second round of stimulus in December. By all accounts, the U.S. economy shrank in 2020 but not nearly as much as forecasters originally feared. The upshot: U.S. banks overall have remained profitable, built capital levels, and supported the real economy through the crisis.
        In anticipation of a sharper downturn, many banks set aside significant provisions for expected credit losses in 2020. As a result, they are broadly reserved for higher levels of joblessness than the United States is currently experiencing. Unless the economic outlook deteriorates, that should mean large banks will not have to build additional reserves and, in fact, some could release reserves in 2021. In December, all large U.S. banks passed the Federal Reserve’s off-cycle stress test and were granted permission to return 100% of their average last four quarters’ profits through dividends and share buybacks in the first quarter of 2021.
        Finally, the large banks have benefited from unexpected strength in a number of business lines. Revenues from capital markets trading and mortgage banking have been robust. In terms of collateral backing loans, price levels for homes, used cars, and equities have all remained resilient.
        Suffice it to say this has been an unusual economic crisis, and the large banks are, in our opinion, positioned to emerge from it much stronger than they did following the global financial crisis. 

Why We Are Optimistic About The Funds' U.S. Financials Holdings

We believe that market views of banks will change for several reasons.

  • Earnings are bottoming out: As we have noted, banks front-loaded loan loss provisions in 2020 to levels that now appear conservative. We believe that low U.S. interest rates should be a diminishing headwind in 2021, unless the yield curve were to reverse course from its recent steepening.
  • U.S. Financials are trading at inexpensive valuations: Financials’ valuations are near historic lows compared to the stock market as a whole (see Figure 2). 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 Index. This large discount supports the value case for bank stocks.

Figure 2: The U.S. Financials Sector Is Trading Near Its Lowest Relative P/E Ratio

Source: FactSet.

  • Potential for capital returns to increase significantly: Amid the pandemic-induced downturn in early 2020, the Federal Reserve temporarily restricted bank payouts by barring stock buybacks and capping dividends. Now that those restrictions have been largely lifted, banks are better positioned to deliver high total yields through a combination of rising earnings and high dividend and buyback payouts. In a low-rate environment, high absolute yields support a valuation re-rating.
  • Optimism that vaccines will boost the economy: As more Americans get vaccinated in 2021, the potential exists for a virtuous cycle of rising consumer demand and stronger corporate investment. This, in turn, could lead to a steeper yield curve, which would benefit bank net interest margins.
  • Ability for strong banks to become stronger: We generally invest in leading franchises, many of which have 0.5x 0.6x 0.7x 0.8x 0.9x 1.0x 1.1x 1.2x 2005 2008 2011 2014 2017 2020 Figure 2: The U.S. Financials Sector Is Trading Near Its Lowest Relative P/E Ratio Source: FactSet, LSE Group, MSCI, and S&P. 0% 5% 10% 15% 20% 25% 30% Stock Fund S&P 500 Index Russell 1000 Value Index Global Stock Fund MSCI World Index MSCI ACWI Index Balanced Fund Combined Index U.S. Financials Weight U.S. BANKS: A COMPELLING LONG-TERM VALUE OPPORTUNIT Y 3 Complete transparency and accuracy in disclosures gained deposit market share and improved efficiency in recent years (see Capital One3 sidebar). Their advantage stems in part from heavy investments in technology. Bank of America and J.P. Morgan, for example, have both spent over $10 billion a year on technology to meet the evolving digital needs of their customers. These two banks and many others have navigated the pandemic well, as digitization accelerated, and we expect them to continue to gain share in the recovery. 

The Role of ESG

As fundamental investors, we are focused on all factors that can affect a company’s performance. Therefore, environmental, social, and governance issues (ESG) are an important part of our analysis. In the banking realm, Wells Fargo, one of the Funds’ largest positions, is an example of how we integrate ESG factors into our research process.
        In 2016, reports surfaced alleging that Wells Fargo had created accounts without the consent of customers. The reports drew the attention of politicians and regulators and resulted in substantial fines, tougher regulatory scrutiny, and significant turnover in the bank’s executive ranks and board of directors. Wells Fargo’s management team is almost entirely new and 11 of the 13 current directors have joined the board since the problems arose. The bank subsequently revamped its compensation and incentive systems, centralized its risk functions, and flattened its operating structure. We remain in continuous contact with the company to maintain a clear understanding of the management team’s priorities and developments. In our judgement, the bank now has the right leadership team, with a strong sense of urgency to return the business segments to best-in-class over time. We remain investors in Wells Fargo’s stock, and we continue to monitor management’s progress closely. 

Political Risk

The new Biden Administration has taken office in Washington, which could affect U.S. banks. As a candidate, President Biden supported higher corporate taxes, which would be negative for the Financials sector. It remains to be seen whether Biden will prioritize tax reform, and if so, whether Congress will pass related legislation. We are closely watching the administration’s personnel decisions, which will shape regulatory oversight. In the meantime, the $900 billion COVID-relief bill passed by Congress in December should help the economy and U.S. banks.

Our Rigorous Investment Process

In keeping with our well-established processes, we have examined and reevaluated the Funds’ financial services holdings continuously throughout the pandemic to retest our investment theses. We have explored the impact of low-interest rates, higher credit losses, and the resilience of capital ratios at each company in which we invest. We have also stress tested each holding under a range of scenarios.

Capital One Financial

Capital One, the Stock Fund’s largest holding, fits the mold of what we are seeing across the Financials sector. It is a leading franchise trading at an attractive valuation and, in our opinion, represents exceptional long-term value.
        Capital One’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, a robust deposit business, and advanced digital banking platform due to its 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. If history is a guide, this low valuation is good news for investors. In the past when Capital One has been unusually inexpensive— e.g., in 2002 when the credit card industry faced subprime challenges, and in 2009 during the global financial crisis—it strongly outperformed when the economy rebounded.

In our Sector and Investment Committee meetings, we have held rigorous debates, employing a devil’s advocate to challenge our investment theses. All of these steps have reinforced our confidence in the strength of the Funds’ U.S. Financials holdings.

In Closing

We cannot say with any precision when other investors will come around to our view of U.S. financial services stocks. But we are confident that the U.S. banks held in the Funds represent attractive long-term investments for the reasons we have outlined: valuations are inexpensive, fundamentals are resilient, capital returns will potentially rise, and there is optimism that widespread vaccination will lead to a stronger economy and a better operating environment for the banks, especially the industry-leading franchises that we favor.

Disclosures

This information should not be considered a solicitation or an offer to purchase shares of Dodge & Cox Worldwide Funds plc or a solicitation or an offer by Dodge & Cox Worldwide Investments and its affiliates to provide any services in any jurisdiction. The views expressed herein represent the opinions of Dodge & Cox Worldwide Investments and its affiliates and are not intended as a forecast or guarantee of future results for any product or service. To obtain more information about the Funds, please refer to the Funds' prospectus at dodgeandcoxworldwide.com.

The above information is not a complete analysis of every material fact concerning any market, industry, or investment. Data has been obtained from sources considered reliable, but Dodge & Cox makes no representations as to the completeness or accuracy of such information. Opinions expressed are subject to change without notice. 

The information provided is historical and does not predict future results or profitability. This is not a recommendation to buy, sell, or hold any security and is not indicative of Dodge & Cox’s current or future trading activity. Any securities identified are subject to change without notice and do not represent a Fund’s entire holdings.

The S&P 500 Index is a market capitalization-weighted index of 500 large-capitalization stocks commonly used to represent the U.S. equity market. The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Dodge & Cox. Copyright 2020 S&P Dow Jones Indices LLC, a division of S&P Global, Inc. and/or its affiliates.  

The Russell 1000 Value Index is a broad-based, unmanaged equity market index composed of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2020. FTSE Russell is a trading name of certain of the LSE Group companies. “Russell®” and The Yield Book®” are a trade mark(s) of the relevant LSE Group companies and is/are used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company's express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

Endnotes

1  As of 31 December 2020. Dodge & Cox Stock Fund (% of Fund’s net assets):    American Express (1.5%), Bank of America (2.8%), Bank of New York Mellon  (2.3%), Brighthouse Financial (0.3%), Capital One Financial (4.3%), Charles    Schwab (3.9%), Goldman Sachs (2.2%), JPMorgan Chase (1.4%), Lincoln National (0.3%), MetLife (2.8%), State Street (1.4%), Truist Financial (1.0%), and Wells Fargo (3.7%). Dodge & Cox Global Stock Fund (% of Fund’s net assets): Bank of America (0.9%), Bank of New York Mellon (0.8%), Capital One Financial (2.2%), Charles Schwab (1.5%), MetLife (0.7%), and Wells Fargo (2.7%). Dodge & Cox Balanced Fund (% of Fund’s net assets): American Express (1.1%), Bank of America (2.6%), Bank of New York Mellon (1.5%), Brighthouse Financial (0.3%), Capital One Financial (3.1%), Charles Schwab (2.8%), Citigroup (1.1%), Goldman Sachs (1.4%), JPMorgan Chase (1.7%), Lincoln National (0.3%), MetLife (2.0%), State Street (0.9%), Truist Financial (0.7%), Unum (0.1%), and Wells Fargo (3.1%).
2  Unless otherwise specified, all weightings and characteristics are as of 31 December 2020.
3  The use of specific examples does not imply that they are more or less attractive investments than the portfolio’s other holdings.