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The Dodge & Cox Balanced Fund: Evolving our Approach to Building a Balanced Portfolio

January 2022

 


In 1934, the Annual Report for the Dodge & Cox Balanced Fund1 explained the Fund’s two objectives: providing a “continuous safeguard of the shareholders’ principal value and purchasing power” and offering “the opportunity for aggressive participation in business recovery and inflation.” We believe these concepts are just as important to Fund shareholders today, but investors face different risks and opportunities that require expanded capabilities and deep focus. That is why we have continued to enhance our investment tools and processes, and believe these improvements will have meaningful benefits for the Balanced Fund in the years ahead.
        We have managed the Balanced Fund over the past nine decades using our bottom-up investment approach. Our analysts seek to uncover opportunities where current valuations do not reflect their long-term outlook for underlying fundamentals, and then advocate their recommendations to our U.S. Equity and Fixed Income Investment Committees, which currently manage the Balanced Fund. Our Investment Committees debate each investment advocacy, ultimately deciding on both the position size for each holding and the optimum balance between asset classes.
        Over this time, we have expanded our investment capabilities across our integrated research teams. In particular, we have broadened and deepened our research coverage globally, added asset allocation expertise, and enhanced our risk management tools. The result for the Balanced Fund is a diversified portfolio of predominantly equity and fixed income securities designed to help preserve capital, generate income, and deliver growth over the long term.
        The Fund has a strong track record over longer time periods.2 In recent years, the Fund has benefited as we have positioned the portfolio to participate more aggressively in business recovery and growth, particularly following the great financial crisis of 2008-09 and the initial impact of the COVID pandemic in 2020. More recently, we have reduced the Fund’s equity exposure in light of higher equity valuations and modestly more attractive bond yields.

Our Approach to Asset Allocation
 

Asset allocation between equity and fixed income securities is a critical determining factor in managing portfolio risk. In most environments, the equity allocation enables greater participation in growth opportunities, whereas the fixed income allocation helps safeguard principal and provides income. Eight years ago, we aligned our asset allocation decision-making process with our analyst-driven approach for determining which securities to own in the Balanced Fund. Our Portfolio Strategy team researches, models, and makes asset allocation recommendations, incorporating equity valuations, rates, and credit spread views, and economic conditions in its analysis. As part of this work, the team produces total return simulations in a variety of base up and down scenarios. This “top-down” process augments our analysts’ bottom-up research of companies and issuers, and helps better inform our understanding of potential risks and rewards as we determine and make gradual adjustments to the Fund’s asset allocation.

A New, Dedicated Balanced Fund Investment Committee

To ensure that we fully utilize our expanded risk management and asset allocations tools, in early 2021 we created a dedicated seven-member working group to review Balanced Fund advocacies in greater depth. Its members bring the breadth of investment experience necessary to address investment questions that span asset classes. The group has helped the U.S. Equity and U.S. Fixed Income Investment Committees holistically consider the risks and return potential of each investment and the entire portfolio.
        Given the quality of analysis and advocacies we have observed within the working group, we plan to transition this team to a dedicated Balanced Fund Investment Committee, which will take over management of the Fund from the current Committees, effective May 1, 2022. We believe the focus of a dedicated Committee—combining expertise across asset classes, risk management, and asset allocation—will enhance portfolio construction and ensure diversification across industries and sectors to benefit our clients and Fund shareholders. Specifically, the Committee will enhance our ability to holistically evaluate investment advocacies for individual holdings, analyze portfolio risk and return scenarios, and determine issuer position sizing and asset allocation across equity, fixed income, and cash. In addition, the Committee’s size aligns more closely with the Investment Committees responsible for managing each of our other Funds.
        The new Balanced Fund Investment Committee has significant experience with an average tenure of 15 years at Dodge & Cox, and its membership overlaps with the Committees currently managing the Fund. Three members also serve on our U.S. Equity Investment Committee. One serves on both of our U.S. and Global Fixed Income Investment Committees, and one serves on the Global Fixed Income Investment Committee. The other two members are analysts from our Portfolio Strategy group, which focuses on risk and asset allocation research. All of the Balanced Fund Investment Committee’s members have contributed to the Fund’s investment process for many years.

The Balanced Fund Investment Committee3

 *Years of experience at Dodge & Cox / Years of industry experience.

In Closing

Established in 1931, the Dodge & Cox Balanced Fund is one of the longest-standing mutual funds in the world. Many of its shareholders have used it to meet their investment goals—often across generations—and to benefit from the Fund’s long-term record of success. We thank you for your continued confidence in Dodge & Cox, and we look forward to sharing with you in upcoming shareholder letters how we continue to manage the Fund to participate in growth, while safeguarding shareholders’ principal and purchasing power.

The Balanced Fund Investment Committee

David Hoeft

Chief Investment Officer, Investment Committee Member, D&C Board Member

29 years with Dodge & Cox

Lucy Johns

Associate Director of Fixed Income, Investment Committee Member, D&C Board Member

20 years with Dodge & Cox

Phil Barret

Investment Committee Member, Global Industry Analyst, D&C Board Member

18 years with Dodge & Cox

Ben Garosi

Investment Committee Member, Global Industry Analyst

13 years with Dodge & Cox

Matt Schefer

Investment Committee Member, Fixed Income Analyst

14 years with Dodge & Cox

Robert Turley

Investment Committee Member, Portfolio Strategy Analyst

9 years with Dodge & Cox

Tom Powers

Investment Committee Member, Portfolio Strategy and Macro Analyst

6 years with Dodge & Cox

Disclosures

Returns represent past performance and do not guarantee future results. Investment return and share price will fluctuate with market conditions, and investors may have a gain or loss when shares are sold. Fund performance changes over time and currently may be significantly lower than stated above. Performance is updated and published monthly. Before investing in any Dodge & Cox Fund, you should carefully consider the Fund’s investment objectives, risks, and charges and expenses. To obtain a Fund’s prospectus and summary prospectus, which contain this and other important information, or for current month-end performance figures, visit dodgeandcox.com or call 800-621-3979. Please read the prospectus and summary prospectus carefully before investing.

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 issues, recessions, or other events could also have a significant impact on a Fund and its investments. The Fund is subject to market risk, meaning holdings in the Fund may decline in value for extended periods due to the financial prospects of individual companies or due to general market and economic conditions. The Fund also invests in individual bonds whose yields and market values fluctuate, so that your investment may be worth more or less than its original cost. Debt securities are subject to interest rate risk, credit risk, and prepayment and call risk, all of which could have adverse effects on the value of the Fund.

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.

Endnotes

1 The Balanced Fund was known as “Investors Management Trust” at the time.
2 Balanced Fund SEC Standardized Average Annual Total Returns as of September 30, 2021: 1 Year 31.97% versus 16.92% for the Combined Index; 5 Years 11.29% versus 11.43%; 10 Years 12.49% versus 11.25%; 20 years 8.54% versus 7.71%. The Fund’s total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include dividends and/or interest income but, unlike Fund returns, do not reflect fees or expenses. The Combined Index reflects an unmanaged portfolio (rebalanced monthly) of 60% of the S&P 500 Index, which is a market capitalization-weighted index of 500 large-capitalization stocks commonly used to represent the U.S. equity market, and 40% of the Bloomberg U.S. Aggregate Bond Index, which is a widely recognized, unmanaged index of U.S. dollar-denominated, investment-grade, taxable fixed income securities. The Fund may, however, invest up to 75% of its total assets in equity securities. S&P 500® is a trademark of S&P Global Inc. Bloomberg is a registered trademark of Bloomberg Finance L.P. and its affiliates. For more information about these indices, visit dodgeandcox.com.
3  Effective May 1, 2022.