Redirection Confirmation

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

For Financial Professionals

This website is for Italian professional investors/institutional investors, and not for the general public or retail investors. I confirm that I am an Italian professional/institutional investor, have read the important information and want to continue.  

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 Terms & Conditions of Use 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 POLICY

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 nonpublic 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 nonpublic 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 nonpublic personal information to those purposes for which they were hired.

We restrict access to nonpublic 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 nonpublic personal information. In addition, our Code of Ethics, which applies to all Dodge & Cox employees, restricts the use of your nonpublic personal information.

This privacy policy applies to Dodge & Cox, the Dodge & Cox Funds, and the Dodge & Cox Worldwide Funds.

COOKIES POLICY

What are cookies?
A "cookie" is a small text file of coded information that is stored in your web browser or locally on the memory of your computing device by a website. Cookies enable a website to identify your device, determine when you have visited, what pages you viewed, and can store personal settings or preferences. Cookies are intended to make the web browsing experience more efficient.

How does Dodge & Cox use cookies?
The cookie settings on this website are set to allow cookies. Dodge & Cox uses cookies to improve your browsing experience by remembering your personal preferences and that you have agreed to these Terms & Conditions of Use. We do not collect any personally identifiable information about you in a cookie.

Browser cookie control
All modern web browsers provide a level of control over cookies. Users can customize a browser to accept or reject cookies. Users can also remove any cookies that have been stored by a browser. To manage your browser cookie settings, navigate to the browser's privacy options, usually found within the Tools menu of the program. Please note that while many websites require cookies to be accepted in order to function correctly, this website will still function with cookies disabled, though in a less streamlined way.

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 [email protected]; 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 [email protected].


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

 

Paper

Reaffirming a Value Investor’s Case for European Financials

May 2020

 

Key Takeaways

  • Concerns about the impact of the global coronavirus (COVID-19) pandemic have roiled financial markets. Stock prices of European and UK Financials have declined substantially, stemming from fears about the depth and duration of the downturn in the real economy and its impact on the near-term prospects for financial services companies.
  • In contrast to the global financial crisis (2008-09) and European sovereign debt crisis (2011-12), we believe that the probability of permanent loss of capital (e.g., through liquidity/funding shortfalls or large dilutive capital raises) is low given the combination of stronger bank balance sheets, regulatory easing, and accommodative fiscal measures.
  • Conversely, current valuations are below prior crisis levels and imply structural impairment of the long-term earnings power of these companies, which we believe is overly pessimistic. While the economic downturn will hurt their near-term profitability, we believe that European and UK Financials with strong underlying fundamentals will be resilient during the current crisis and achieve higher profitability longer term. Even returning to 2018/2019 profitability levels (which banks had previously been targeting improvements upon) over the next three to five years could generate significant upside.
  • Dodge & Cox Worldwide Funds—U.S. Stock Fund and Global Stock Fund are overweight European and UK Financials. We have strong conviction in these holdings and believe their long-term risk-reward profiles are compelling at current valuation levels. 

Context

COVID-19 has evolved into a global pandemic that has disrupted all major economies, increased financial market volatility, and caused equity markets across the globe to decline precipitously. Stock prices of financial services companies have declined disproportionally. In the MSCI ACWI Index, Financials were down 32% compared to down 21% for the overall Index during the first quarter of 2020.
        The public health responses designed to slow the spread of COVID-19 have led to a dramatic reduction in economic activity around the world. Policymakers have responded with substantial amounts of fiscal and monetary stimulus, and the global scientific community is aggressively working on COVID-19 treatments and vaccines. Compared to the 2008-09 global financial crisis, the current crisis is medical in nature rather than one stemming from problems in the banking system. Banks entered this crisis in much stronger financial shape, which in our view makes them well positioned to help serve as part of the solution to the pandemic’s economic impact.

We Have Stress Tested the Fund's Holdings

Our global industry analysts continue to have frequent discussions with management teams and industry experts to gauge downside risks and current operating conditions. In addition, they have continued to work closely with our fixed income credit analysts to stress test the Funds’ European and UK Financials holdings1 at extreme conditions, including negative benchmark yields, credit losses similar to those experienced during the global financial and European sovereign debt crises, large equity market drawdowns, and significant declines in investment banking and trading revenue. Furthermore, we have examined the economic impact of past disease outbreaks to understand various possible economic outcomes.
        We model a wide range of scenarios to 1) understand if the Funds’ holdings can adequately withstand short-term credit and interest rate pressures (“play defense”) and 2) compare what current valuations imply versus our forecasted long-term fundamentals to evaluate if we are presented with an attractive risk-adjusted return opportunity (“play offense”). Our ongoing due diligence leads us to believe that the Funds’ European and UK Financials holdings have sufficient capital and liquidity to weather the current storm. The International Stock Fund and Global Stock Fund remain overweight European and UK Financials (shown in Figure 1).2

 

Figure 1: Funds Are Overweight European and UK Financials

Source: MSCI via FactSet.

Improved Balanced Sheets Provide Downside Mitigation

Over the past decade, fundamentals have improved across the Funds’ current European and UK Financials holdings, driven by management actions to bolster balance sheets, build capital, and increase profitability. In particular, balance sheets are far more resilient today.
        As illustrated in Figure 2, funding models have substantially improved as loan-to-deposit ratios have declined and more stable customer deposits have replaced short-term wholesale funding. In addition, capital levels have more than doubled over the last decade (see Figure 3), driven by tighter regulatory standards. Strong balance sheets are a critical source of downside mitigation for investors, as they reduce the probability of permanent loss of invested capital (e.g., through liquidity/funding shortfalls or large dilutive capital raises).

Figure 2: Funding Models Have Vastly Improved

Source: J.P. Morgan Equity Strategy, European Central Bank.

Figure 3: Capital Ratios Have More Than Doubled3

Source: European Central Bank.

        Furthermore, European private sector credit growth has been close to zero over the last decade. Low interest rates have been used to reduce private sector leverage and support debt serviceability, which in turn have enabled banks to improve their asset quality and reduce non-performing loans. While credit losses will almost certainly increase due to the recessionary impact of COVID-19, banks are entering this period after a decade of risk reduction. This is in stark contrast to the global financial crisis, which banks entered on the back of rapid credit expansion that drove subsequent large losses.

Unprecedented Fiscal, Monetary, and Regulatory Responses

To date, regulators and government agencies have taken unprecedented measures to support the banking system in order to ensure continual supply of credit to the economy.

Fiscal policy: Governments across Europe have created large fiscal stimulus plans to mitigate the impact of COVID-19 on the economy. In addition to providing direct payments to individuals and enabling loan service holidays, the fiscal measures include support for corporations and small-to-medium sized enterprises (SMEs) through government-guaranteed loan programs that will be intermediated by the banks. While the magnitude of the programs and credit guarantees vary by country, they create a critical credit loss-sharing mechanism between banks and government.

Monetary policy: European and UK central banks have expanded their asset purchase programs and are providing long-term loans to banks at very cheap rates. For example, the European Central Bank has increased its long-term refinancing operation program from 30% of banks’ loan books to 50% and is charging a negative 75 basis points4 interest rate for it.

Regulatory policy: European and UK bank regulators have temporarily reduced banks’ capital and liquidity requirements, and are allowing banks to fill a part of their capital requirements with junior debt instruments instead of common equity. In addition, they have postponed 2020 stress tests and guided banks to use qualitative overlays to dampen pro-cyclical accounting rules. In exchange, banks have been asked to temporarily halt dividends and share repurchases until October 1, 2020. This accommodative behavior and flexibility on behalf of regulators differs drastically from prior downturns; in past crises, banks were forced to issue large amounts of equity as regulatory standards tightened. 

The Opportunity: Compelling Valuations Relative to Longer-Term Earnings Power

Current European bank valuations are below prior crisis levels at 0.4 times book value and imply structural impairment of banks’ earnings power. We believe this is overly pessimistic.

Figure 4: Historically Low Valuations

Source: FactSet financial data and analytics.

        Over the past 12 years, European and UK financial institutions have operated in a very challenging context including the global financial crisis, European sovereign debt crisis, the United Kingdom’s exit from the European Union (Brexit, finalized January 2020), and an environment of slower economic growth, prolonged low interest rates, and political uncertainty. Furthermore, capital requirements more than doubled during this period as regulatory standards tightened. The Funds’ current European and UK bank holdings have survived these “real life” stress tests, and have subsequently been improving profitability along with other European banks, as shown in Figure 5.

Figure 5: Improved Return on Equity

Source: FactSet financial data and analytics.

        In 2018-2019, European banks earned an average return on equity (ROE) of approximately 8% despite operating in a backdrop of low economic growth and negative interest rates. Prior to the onset of COVID-19, the management teams of the Funds’ bank holdings were targeting an improvement in ROE to 10% on average, largely through self-help measures such as cost cutting, exiting low-return sub-scale business lines, and further shifting their business models towards fee-generating businesses that consume less capital. In addition, they have been investing heavily in technology to meet their customers’ evolving digital banking needs and streamlining middle- and back-office functions.
        While the economic downturn caused by COVID-19 will hurt near-term profitability of many financial institutions, we believe those impacts will likely be transitory for those that have strong underlying fundamentals. Even returning to 2018/2019 profitability levels over the next three to five years could generate upside from current valuation levels. Resumption of capital return in the form of dividends and share repurchases would add another pillar of support to valuation. While we continue to assume a prolonged slow growth and low interest environment, we believe an improvement in the macroeconomic backdrop over the long term, coupled with achieving longerterm management targets, has the potential to drive further upside.

Finding Value Through Individual Security Selection

Our portfolio construction continues to be driven by rigorous bottom-up analysis and individual security selection. The Funds’ European and UK Financials investments are diversified across business models and geographies. Below we highlight two of the Funds’ larger European bank holdings to illustrate how we look beyond macro concerns to unearth long-term value opportunities.5

Banco Santander
Banco Santander is a Spain-domiciled European bank with large businesses in Spain, the United Kingdom, and Brazil. While Banco Santander will face economic headwinds from COVID-19, the bank trades at 0.4 times book value and six times trailing earnings, an inexpensive valuation given its attractive long-term fundamentals. In our view, Banco Santander is one of the better-run European banks with high pre-provision profit levels, which provides a cushion to absorb credit losses beyond regulatory and government measures. The bank remained profitable through the global financial and sovereign debt crises, and in addition to its defensive characteristics, has attractive long-term growth prospects through its emerging markets footprint. Furthermore, senior management has high equity ownership and is aligned with long-term shareholders.

UBS Group
Based in Switzerland, UBS is the world’s largest private bank and wealth manager. At 0.6 times book value, UBS is trading at its lowest valuation since the global financial crisis despite being in a much stronger financial position. Capital levels are also higher. In recent years, management has repositioned the company's business mix towards wealth management and reduced its risk profile. UBS has the premier brand, scale, and footprint in wealth management with a particular strength in Asia. While UBS will face headwinds from lower market asset levels and interest rates, we believe the company’s profitability will remain robust.

In Closing

Our deep fundamental research often gives us the conviction and confidence to invest when companies and sectors are out of favor, as is currently the case with European and UK Financials. We remain enthusiastic about the long-term outlook for the Funds’ European and UK Financials investments. While the economic impact of COVID-19 is uncertain and we continue to stress test these holdings, we observe that these companies are far more resilient today than they were in previous periods of economic stress. Furthermore, the accommodative fiscal, monetary, and regulatory responses to COVID-19 are large and unprecedented, which should help to mitigate downside risk.
        Current valuation levels imply structural impairment of the long-term earnings power of these companies, which we believe is overly pessimistic. While the economic downturn will hurt their near-term profitability, we believe that European and UK Financials with strong underlying fundamentals will be resilient during the current crisis and achieve higher profitability longer term. Even returning to 2018/2019 profitability levels over the next three to five years, coupled with resumption of capital return, could generate significant upside. An improvement in the macroeconomic backdrop over time, especially higher interest rates, would be a further tailwind.
        Patience and persistence are essential to long-term investment success. We encourage our clients and shareholders to take a similar view. Thank you for your continued confidence in Dodge & Cox.

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 MSCI World Index is a broad-based, unmanaged equity market index aggregated from 23 developed market country indices, including the United States and Canada. The MSCI ACWI (All Country World Index) Index is a broadbased, unmanaged equity market index aggregated from 46 developed and emerging market country indices. 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 publication is not approved, reviewed, or produced by MSCI.

The Dodge & Cox Worldwide Funds—Global Stock Fund is subject to equity risk and market risk, meaning investments in a Fund can be volatile and may decline in value because of changes in the actual or perceived financial condition of their issuers or other events affecting their issuers. Investment prices may increase or decrease, sometimes suddenly and unpredictably, due to general market conditions. Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issue, recessions, or other events could also have a significant impact on a Fund and its investments. In addition, investing in securities may entail risk due to economic and political developments; this risk may be higher when investing in emerging markets.

Endnotes

1  As of 31 March 2020. International Stock Fund (% of Fund’s net assets): AEGON (0.8%), Aviva (1.4%), Banco Santander (2.2%), Barclays (1.5%), BNP Paribas (2.4%), Credit Suisse Group (2.4%), Societe Generale (1.5%), Standard Chartered (1.5%), UBS Group (3.2%), and UniCredit (2.2%). Global Stock Fund (% of Fund’s net assets): AEGON (0.4%), Aviva (0.9%), Banco Santander (1.7%), Barclays (0.8%), BNP Paribas (1.8%), Credit Suisse Group (1.6%), Societe Generale (1.2%), Standard Chartered (1.3%), UBS Group (2.3%), and UniCredit (1.8%).
2  Unless otherwise specified, all weightings and characteristics are as of 31 March 2020.
3  The Common Equity Tier 1 ratio (CET1) is a measure of bank solvency that gauges a bank’s capital strength. Common Equity Tier 1 ratio = Common Equity Tier 1 Capital / Risk-Weighted Assets.
 One basis point is equal to 1/100th of 1%.
5  The use of specific examples does not imply that they are more or less attractive investments than the portfolio’s other holdings.