N-CSR 1 d15029dncsr.htm FORM N-CSR Form N-CSR

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-CSR

 

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-173

 

 

DODGE & COX FUNDS

(Exact name of registrant as specified in charter)

 

 

555 California Street, 40th Floor

San Francisco, CA 94104

(Address of principal executive offices) (Zip code)

 

 

Thomas M. Mistele, Esq.

555 California Street, 40th Floor

San Francisco, CA 94104

(Name and address of agent for service)

 

 

Registrant’s telephone number, including area code: 415-981-1710

Date of fiscal year end: DECEMBER 31, 2015

Date of reporting period: DECEMBER 31, 2015

 

 

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507.

 

 

 


ITEM 1. REPORTS TO STOCKHOLDERS.

The following are the December 31, 2015 annual reports for the Dodge & Cox Funds, a Delaware statutory trust, consisting of six series: Dodge & Cox Stock Fund, Dodge & Cox Global Stock Fund, Dodge & Cox International Stock Fund, Dodge & Cox Balanced Fund, Dodge & Cox Income Fund, and Dodge & Cox Global Bond Fund. The reports of each series were transmitted to their respective shareholders on February 26, 2016.


LOGO

 

DODGE & COX FUNDS®

 

2015

   

 

Annual Report

December 31, 2015

Stock Fund

ESTABLISHED 1965

TICKER:  DODGX

 

 

12/15 SF AR    LOGO    Printed on recycled paper


TO OUR SHAREHOLDERS

 

The Dodge & Cox Stock Fund had a total return of –4.5% for the year ending December 31, 2015, compared to a return of 1.4% for the S&P 500 Index.

MARKET COMMENTARY

U.S. equity markets were volatile in 2015: after a significant selloff in August and September, the S&P 500 rebounded during the fourth quarter to finish the year up just over 1%. Global oil prices declined 35% during the year, which aided U.S. household purchasing power and hindered the profitability of oil and gas companies. Consumer Discretionary was the strongest sector (up 10%) of the S&P 500, while Energy was the worst-performing sector (down 21%).

In the United States, economic activity expanded at a moderate pace: household spending and business investment increased, and the housing market strengthened. Labor market conditions continued to improve, with solid job gains and reduced unemployment. Growth was tempered by the stronger U.S. dollar and weaker demand for U.S. exports. In December, the U.S. Federal Reserve (Fed) raised the federal funds rate for the first time in nine years. The 0.25 percentage point increase ended a historic seven-year period with the federal funds rate close to 0%, aimed at stimulating the economy. Fed Chair Janet Yellen reiterated the Fed’s intent to normalize monetary policy gradually; the timing and size of future adjustments will be based on economic conditions in relation to the Fed’s goals of maximum employment and 2% inflation.

Global growth expectations declined and emerging markets faced significant macroeconomic challenges during the year. China’s slowing economic growth contributed to depressed commodity prices (e.g., global copper prices plummeted 24%) and weighed on the global economy. The stronger U.S. dollar and prospects for higher U.S. interest rates negatively affected economies in need of external financing, such as Brazil.

INVESTMENT STRATEGY

As a value-oriented manager, 2015 was a challenging year for absolute and relative performance. Across equities, value stocks (the lower valuation portion of the market) underperformed growth stocks (the higher valuation portion of the market) by one of the widest spreads since the global financial crisis. The Fund was significantly affected by this performance divergence. Many of the S&P 500’s higher-valuation growth companies, not held by the Fund, outperformed significantly. In addition, some individual Fund holdings (e.g., HP Inc.(a), Time Warner, Wal-Mart) significantly detracted from results for the year, and the Fund’s Energy holdings were negatively impacted by falling oil prices.

We extensively revisited and retested our thinking on many of the Fund’s holdings during 2015. Our equity and fixed income teams regularly work together to evaluate risk and reward as we look at investment opportunities across a company’s capital structure, and this collaboration intensified during the year. As a part of our bottom-up research process, our investment teams thoroughly investigated individual company concerns, challenged analyst assumptions, and conducted further due diligence. For

example, a group of portfolio managers and analysts travelled to Houston to better understand shale economics and met with company management teams, suppliers, competitors, and industry consultants. In addition, we conducted intensive reviews to evaluate the key factors affecting a company’s capital structure, end-market demand, and relative competitiveness. Through this comprehensive process, we reaffirmed our view that the Fund’s holdings have attractive valuations relative to their fundamental outlook over our three- to five-year investment horizon.

During the year, U.S. valuation disparities widened overall: companies with higher valuations became more expensive relative to companies with lower valuations. As valuations became more attractive, we added selectively to existing holdings, including Baker Hughes, Bank of America, Cigna, EMC Corp., HP Inc., and MetLife.(b) We also identified 8 new investment opportunities (including American Express, Anthem, Concho Resources, and VMware) and exited 13 holdings (including Chevron, General Electric, and PayPal).

We continue to be optimistic about the long-term outlook for the portfolio. Our value-oriented approach has led us to invest in companies where we believe the long-term potential is not reflected in the current price. Three examples—American Express, Hewlett Packard Enterprise, and HP Inc.—are discussed below.

American Express

American Express—the largest new purchase in the Fund during 2015—provides charge and credit card products and travel-related services to consumers and businesses worldwide. The company is the number one credit/charge card issuer and merchant acquirer in the United States measured by billed business, and its network is the second largest after Visa. Historically, American Express has generated attractive returns due to its vertical integration and strong value proposition for high-spending customers.

In 2015, American Express’ stock declined 24%(c) due to concerns that the company’s business model is under pressure: Costco U.S. and JetBlue terminated their exclusive relationships with the card company and the Department of Justice questioned American Express’ ability to enforce rules prohibiting merchants from steering customers to other credit cards. As a result, American Express’ valuation relative to the market is at a historically low level (13 times forward estimated earnings(d)). We initiated a position in the company because we believe these near-term concerns have obscured a long-term investment opportunity. The company has an attractive business model that produces high returns on capital by encouraging more affluent and creditworthy customers to use the company’s credit and charge cards. American Express’ highly perceived rewards program, customer service, and strong brand recognition help attract and retain wealthier customers. The company should benefit from a continued industry shift from paper to plastic payments and growth in its third-party issued cards business. We believe American Express will be able to maintain its strong return on equity and improve profitability in the long run. On December 31, American Express was a 1.4% position in the Fund.

 

 

PAGE 2 § DODGE & COX STOCK FUND


Hewlett Packard Enterprise and HP Inc.

After providing strong returns in 2013 and 2014, Hewlett-Packard was the Fund’s largest detractor from results during 2015. Hewlett-Packard recently split into two entities—Hewlett Packard Enterprise and HP Inc.—which should result in greater focus and flexibility for each company to achieve its strategic goals. To assess secular challenges and evaluate the risks and opportunities of each stand-alone business, we met numerous times with their management teams and competitors and spoke with industry consultants. As a result, we added to the Fund’s positions in both companies. On December 31, Hewlett Packard Enterprise was a 2.5% position and HP Inc. was a 1.8% position in the Fund.

Hewlett Packard Enterprise, one of the largest vendors in information technology (IT), consists of the enterprise technology infrastructure, software, and services segments of the old Hewlett-Packard. We acknowledge the company faces headwinds: the shift to the cloud has negatively impacted all on-premise IT vendors, continued public cloud adoption will likely erode the company’s market share, and competition is keen. Despite these risks, we believe Hewlett Packard Enterprise is an attractive investment due to its strong market positions across its portfolio (e.g., top provider of servers, number two position in IT services), scale advantages, and opportunities to improve its margin structure. Meg Whitman—the CEO of Hewlett Packard Enterprise—has overseen sound acquisitions (e.g., 3Par), new product launches, and cost reduction programs during her tenures at Hewlett-Packard and eBay. Management is actively cutting costs and retooling its product and service offerings to improve the company’s competitiveness. Margins in the Enterprise Services segment should expand as the company optimizes its contract mix and delivery models. The company trades at a compelling valuation (eight times forward estimated earnings), which is among the lowest in the S&P 500.

As the leader in printing and personal computer sales globally, HP Inc.’s key challenge is declining revenues. Partly due to the stronger U.S. dollar, consensus estimates have the company’s sales declining approximately 10% in 2016. Many investors believe a shrinking market for hardware and ink may be too difficult to overcome; we believe this view of the company’s prospects is too pessimistic. HP’s management is aggressively cutting costs and has plans to introduce more new products. For example, HP has portions of its printing business (e.g., high-end graphics production) that are currently growing and may increase share in the established copier market and in the more nascent 3D print market. Moreover, the company generates robust free cash flow. Trading at seven times forward estimated earnings, HP remains an attractive investment opportunity with strong business prospects given its large valuation discount to the overall market.

IN CLOSING

On December 31, the Fund’s portfolio of 63 companies traded at 13.8 times forward estimated earnings, a significant discount to the S&P 500 (17.4 times forward estimated earnings). We remain confident in the prospects for the portfolio over our three- to five-year investment horizon and believe it is positioned to benefit from long-term global growth opportunities.

Our experienced and stable team has weathered past periods of market turbulence by remaining steadfast in our investment philosophy and process. Our approach—constructing a diversified portfolio through in-depth, independent research, a long-term investment horizon, and a focus on valuation relative to underlying fundamentals—continues to guide us through this period. We remain confident that our enduring value-oriented approach will benefit the Fund in the years ahead.

Thank you for your continued confidence in our firm. As always, we welcome your comments and questions.

For the Board of Trustees,

 

LOGO   LOGO

Charles F. Pohl,

Chairman

 

Dana M. Emery,

President

January 29, 2016

 

 

(a)  

After Hewlett-Packard Co. split into two companies, HP Inc. retained the HPQ ticker symbol. HP Inc.’s –37% return in 2015 includes Hewlett-Packard Co.’s performance through October 2015.

(b)  

The use of specific examples does not imply that they are more attractive investments than the Fund’s other holdings.

(c)  

All returns are total returns unless otherwise noted.

(d)  

Unless otherwise specified, all weightings and characteristics are as of December 31, 2015.

 

 

DODGE & COX STOCK FUND § PAGE 3


ANNUAL PERFORMANCE REVIEW

The Fund underperformed the S&P 500 by 5.9 percentage points in 2015.

Key Detractors from Relative Results

  §  

The Fund’s holdings in the Consumer Discretionary sector (down 6% compared to up 10% for the S&P 500 sector) hindered performance. Media holdings Twenty-First Century Fox (down 29%) and Time Warner (down 23%) were particularly weak.

 
  §  

Wal-Mart, the Fund’s only holding in the Consumer Staples sector (down 27% compared to up 7% for the S&P 500 sector), hurt returns.

 
  §  

The Fund’s holdings in the Information Technology sector (flat compared to up 6% for the S&P 500 sector) detracted from results. HP Inc. (down 37%) and NetApp (down 35%) performed poorly.

 
  §  

The Fund’s holdings in the Energy sector (down 26% compared to down 21% for the S&P 500 sector) hurt results. National Oilwell Varco (down 47%), Apache (down 28%), and Schlumberger (down 16%) were key detractors.

 
  §  

Capital One (down 11%) was also a detractor.

 

Key Contributors to Relative Results

  §  

The Fund’s average overweight position (6% versus 3%) and holdings in the Health Care Providers & Services industry (up 18% compared to up 12% for the S&P 500 industry) helped returns. Cigna (up 42%) and UnitedHealth Group (up 18%) were particularly strong.

 
  §  

In the Materials sector (up 14% compared to down 9% for the S&P 500 sector), the Fund’s only holding, Celanese, and lack of holdings in the Metals & Mining industry (down 39%) contributed to results.

 
  §  

Additional contributors included Alphabet (up 45%), Time Warner Cable (up 25%), Maxim Integrated Products (up 23%), Microsoft (up 23%), and Charles Schwab (up 10%).

 

KEY CHARACTERISTICS OF DODGE & COX

Independent Organization

Dodge & Cox is one of the largest privately owned investment managers in the world. We remain committed to independence, with a goal of providing the highest quality investment management service to our existing clients.

Over 85 Years of Investment Experience

Dodge & Cox was founded in 1930. We have a stable and well-qualified team of investment professionals, most of whom have spent their entire careers at Dodge & Cox.

Experienced Investment Team

The Investment Policy Committee, which is the decision-making body for the Stock Fund, is a nine-member committee with an average tenure at Dodge & Cox of 27 years.

One Business with a Single Research Office

Dodge & Cox manages equity (domestic, international, and global), fixed income (domestic and global), and balanced investments, operating from one office in San Francisco.

Consistent Investment Approach

Our team decision-making process involves thorough, bottom-up fundamental analysis of each investment.

Long-Term Focus and Low Expenses

We invest with a three- to five-year investment horizon, which has historically resulted in low turnover relative to our peers. We manage Funds that maintain low expense ratios.

 

Risks: 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. Please read the prospectus and summary prospectus for specific details regarding the Fund’s risk profile.

 

 

PAGE 4 § DODGE & COX STOCK FUND


GROWTH OF $10,000 OVER 10 YEARS

FOR AN INVESTMENT MADE ON DECEMBER 31, 2005

 

LOGO

AVERAGE ANNUAL TOTAL RETURN

FOR PERIODS ENDED DECEMBER 31, 2015

 

       1 Year       5 Years     10 Years     20 Years  

Dodge & Cox Stock Fund

    –4.47     11.64     5.69     10.05

S&P 500 Index

    1.41        12.58        7.31        8.19   

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. Performance is updated and published monthly. Visit the Fund’s website at dodgeandcox.com or call 800-621-3979 for current performance figures.

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 but, unlike Fund returns, do not reflect fees or expenses. 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.

S&P 500® is a trademark of McGraw Hill Financial.

 

 

FUND EXPENSE EXAMPLE

As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.

ACTUAL EXPENSES

The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER MUTUAL FUNDS

Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.

 

Six Months Ended
December 31, 2015
   Beginning Account Value
7/1/2015
     Ending Account Value
12/31/2015
     Expenses Paid
During Period*
 

Based on Actual Fund Return

   $ 1,000.00       $ 942.40       $ 2.51   

Based on Hypothetical 5% Yearly Return

     1,000.00         1,022.63         2.61   
*  

Expenses are equal to the Fund’s annualized expense ratio of 0.51%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. Though other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).

 

DODGE & COX STOCK FUND § PAGE 5


FUND INFORMATION (unaudited)     December 31, 2015   

 

GENERAL INFORMATION        

Net Asset Value Per Share

     $162.77   

Total Net Assets (billions)

     $54.8   

Expense Ratio

     0.52%   

Portfolio Turnover Rate

     15%   

30-Day SEC Yield(a)

     1.38%   

Number of Companies

     63   

Fund Inception

     1965   

No sales charges or distribution fees

  

Investment Manager: Dodge & Cox, San Francisco. Managed by the Investment Policy Committee, whose nine members’ average tenure at Dodge & Cox is 27 years.

 

PORTFOLIO CHARACTERISTICS    Fund       

S&P 500

 

Median Market Capitalization (billions)

     $38           $18   

Weighted Average Market Capitalization (billions)

     $116           $140   

Price-to-Earnings Ratio(b)

     13.8x           17.4x   

Foreign Securities not in the S&P 500(c)

     9.1%           0.0%   

 

TEN LARGEST HOLDINGS (%)(d)   

Fund

 

Wells Fargo & Co.

     4.1   

Microsoft Corp.

     4.0   

Capital One Financial Corp.

     3.9   

Time Warner Cable, Inc.

     3.9   

Charles Schwab Corp.

     3.7   

Alphabet, Inc.

     3.4   

Bank of America Corp.

     3.4   

Novartis AG (Switzerland)

     2.9   

EMC Corp.

     2.7   

Schlumberger, Ltd.

     2.7   
ASSET ALLOCATION

LOGO

 

SECTOR DIVERSIFICATION (%)    Fund       

S&P 500

 

Financials

     26.4           16.5   

Information Technology

     24.6           20.7   

Health Care

     16.5           15.2   

Consumer Discretionary

     15.1           13.0   

Energy

     7.3           6.5   

Industrials

     4.2           10.0   

Consumer Staples

     2.1           10.1   

Materials

     0.9           2.6   

Telecommunication Services

     0.7           2.4   

Utilities

     0.0           3.0   
 

 

 

(a) 

SEC Yield is an annualization of the Fund’s total net investment income per share for the 30-day period ended on the last day of the month.

(b) 

Price-to-earnings (P/E) ratios for the equity securities held in the Fund and the S&P 500 are calculated using 12-month forward earnings estimates from third-party sources.

(c) 

Foreign securities are U.S. dollar denominated.

(d) 

The Fund’s portfolio holdings are subject to change without notice. The mention of specific securities is not a recommendation to buy, sell, or hold any particular security and is not indicative of Dodge & Cox’s current or future trading activity.

(e) 

Net Cash & Other includes short-term investments (e.g., money market funds and repurchase agreements) and other assets less liabilities (e.g., cash, receivables, payables, and unrealized appreciation/depreciation on certain derivatives). A majority of the short-term investments position is equitized using futures contracts.

 

PAGE 6 § DODGE & COX STOCK FUND


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

COMMON STOCKS: 97.8%               
    SHARES      VALUE  
CONSUMER DISCRETIONARY: 15.1%      

AUTOMOBILES & COMPONENTS: 0.4%

  

  

Harley-Davidson, Inc.

    4,886,500       $ 221,798,235   

CONSUMER DURABLES & APPAREL: 0.6%

  

  

Coach, Inc.

    10,088,700         330,203,151   

MEDIA: 11.8%

    

Comcast Corp., Class A

    25,658,797         1,447,925,915   

DISH Network Corp., Class A(a)

    6,691,149         382,599,900   

News Corp., Class A

    4,912,806         65,635,088   

Time Warner Cable, Inc.

    11,437,410         2,122,668,922   

Time Warner, Inc.

    22,227,832         1,437,473,895   

Twenty-First Century Fox, Inc., Class A

    28,934,626         785,864,442   

Twenty-First Century Fox, Inc., Class B

    9,350,000         254,600,500   
    

 

 

 
     6,496,768,662   

RETAILING: 2.3%

    

Liberty Interactive Corp. QVC Group, Series A(a)

    12,317,275         336,507,953   

Target Corp.

    5,760,586         418,276,150   

The Priceline Group, Inc.(a)

    390,900         498,377,955   
    

 

 

 
     1,253,162,058   
    

 

 

 
     8,301,932,106   
CONSUMER STAPLES: 2.1%     

FOOD & STAPLES RETAILING: 2.1%

  

  

Wal-Mart Stores, Inc.

    18,678,550         1,144,995,115   
ENERGY: 7.3%     

Apache Corp.(c)

    15,359,845         683,052,307   

Baker Hughes, Inc.

    20,362,050         939,708,607   

Concho Resources, Inc.(a)

    3,115,000         289,258,900   

National Oilwell Varco, Inc.

    12,598,000         421,907,020   

Schlumberger, Ltd.(b) (Curacao/United States)

    20,848,845         1,454,206,939   

Weatherford International PLC(a)(b) (Ireland)

    23,907,400         200,583,086   
    

 

 

 
     3,988,716,859   
FINANCIALS: 26.4%     

BANKS: 10.5%

    

Bank of America Corp.

    110,553,200         1,860,610,356   

BB&T Corp.

    14,494,144         548,023,585   

JPMorgan Chase & Co.

    16,665,200         1,100,403,156   

Wells Fargo & Co.

    41,962,641         2,281,089,165   
    

 

 

 
     5,790,126,262   

DIVERSIFIED FINANCIALS: 13.6%

  

  

American Express Co.

    10,720,800         745,631,640   

Bank of New York Mellon Corp.

    31,721,024         1,307,540,609   

Capital One Financial Corp.(c)

    29,786,611         2,149,997,582   

Charles Schwab Corp.

    61,864,400         2,037,194,692   

Goldman Sachs Group, Inc.

    6,694,800         1,206,603,804   
    

 

 

 
     7,446,968,327   

INSURANCE: 2.3%

    

AEGON NV(b) (Netherlands)

    69,285,166         392,846,891   

MetLife, Inc.

    17,662,700         851,518,767   
    

 

 

 
     1,244,365,658   
    

 

 

 
     14,481,460,247   
HEALTH CARE: 16.5%     

HEALTH CARE EQUIPMENT & SERVICES: 7.0%

  

  

Anthem, Inc.

    1,288,685         179,694,237   

Cigna Corp.

    8,052,484         1,178,319,984   

Express Scripts Holding Co.(a)

    14,813,071         1,294,810,536   

Medtronic PLC(b) (Ireland)

    3,749,600         288,419,232   

UnitedHealth Group, Inc.

    7,678,063         903,247,331   
    

 

 

 
     3,844,491,320   
    SHARES      VALUE  

PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES: 9.5%

  

AstraZeneca PLC ADR(b) (United Kingdom)

    7,564,200       $ 256,804,590   

Merck & Co., Inc.

    14,316,800         756,213,376   

Novartis AG ADR(b) (Switzerland)

    18,828,500         1,620,004,140   

Roche Holding AG ADR(b) (Switzerland)

    34,496,900         1,189,108,143   

Sanofi ADR(b) (France)

    31,765,829         1,354,812,607   

Thermo Fisher Scientific, Inc.

    226,010         32,059,518   
    

 

 

 
     5,209,002,374   
    

 

 

 
     9,053,493,694   
INDUSTRIALS: 4.2%     

CAPITAL GOODS: 0.9%

    

Danaher Corp.

    4,719,600         438,356,448   

NOW, Inc.(a)

    1,690,218         26,739,249   
    

 

 

 
     465,095,697   

COMMERCIAL & PROFESSIONAL SERVICES: 1.4%

  

ADT Corp.(c)

    11,138,437         367,345,652   

Tyco International PLC(b) (Ireland)

    12,974,975         413,771,953   
    

 

 

 
     781,117,605   

TRANSPORTATION: 1.9%

    

FedEx Corp.

    7,158,399         1,066,529,867   
    

 

 

 
     2,312,743,169   
INFORMATION TECHNOLOGY: 24.6%      

SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT: 0.9%

  

Maxim Integrated Products, Inc.(c)

    13,535,740         514,358,120   

SOFTWARE & SERVICES: 10.8%

    

Alphabet, Inc., Class A(a)

    670,700         521,811,307   

Alphabet, Inc., Class C(a)

    1,837,253         1,394,254,556   

Cadence Design Systems, Inc.(a)

    7,977,200         166,005,532   

eBay, Inc.(a)

    1,838,244         50,514,945   

Microsoft Corp.

    39,336,600         2,182,394,568   

Symantec Corp.(c)

    54,111,000         1,136,331,000   

Synopsys, Inc.(a)(c)

    9,193,469         419,314,121   

VMware, Inc.(a)

    1,309,375         74,071,344   
    

 

 

 
     5,944,697,373   

TECHNOLOGY, HARDWARE & EQUIPMENT: 12.9%

  

  

Cisco Systems, Inc.

    39,857,711         1,082,336,142   

Corning, Inc.

    33,952,000         620,642,560   

EMC Corp.

    57,817,203         1,484,745,773   

Hewlett Packard Enterprise Co.(c)

    90,984,995         1,382,971,924   

HP, Inc.

    84,807,695         1,004,123,109   

Juniper Networks, Inc.

    3,231,546         89,190,670   

NetApp, Inc.(c)

    21,532,731         571,263,353   

TE Connectivity, Ltd.(b) (Switzerland)

    12,541,775         810,324,083   
    

 

 

 
     7,045,597,614   
    

 

 

 
     13,504,653,107   
MATERIALS: 0.9%     

Celanese Corp., Series A(c)

    7,219,998         486,122,465   
TELECOMMUNICATION SERVICES: 0.7%   

Sprint Corp.(a)

    107,816,127         390,294,380   
    

 

 

 

TOTAL COMMON STOCKS
(Cost $40,821,453,282)

   

   $ 53,664,411,142   
 

 

See accompanying Notes to Financial Statements   DODGE & COX STOCK FUND § PAGE 7


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

SHORT-TERM INVESTMENTS: 2.3%  
    PAR VALUE     VALUE  

MONEY MARKET FUND: 0.1%

  

 

SSgA U.S. Treasury Money Market Fund

  $ 55,422,858      $ 55,422,858   

REPURCHASE AGREEMENT: 2.2%

  

 

Fixed Income Clearing Corporation(d)
0.08%, dated 12/31/15, due 1/4/16, maturity value $1,204,155,704

    1,204,145,000        1,204,145,000   
   

 

 

 

TOTAL SHORT-TERM INVESTMENTS
(Cost $1,259,567,858)

   

  $ 1,259,567,858   
   

 

 

 

TOTAL INVESTMENTS
(Cost $42,081,021,140)

    100.1   $ 54,923,979,000   

OTHER ASSETS LESS LIABILITIES

    (0.1 %)      (78,854,493
 

 

 

   

 

 

 
NET ASSETS     100.0   $ 54,845,124,507   
 

 

 

   

 

 

 

 

(a) 

Non-income producing

(b)

Security denominated in U.S. dollars

(c) 

See Note 8 regarding holdings of 5% voting securities

(d) 

Repurchase agreement is collateralized by U.S. Treasury Note 1.750%, 12/31/20. Total collateral value is $1,228,232,788.

In determining a company’s country designation, the Fund generally references the country of incorporation. In cases where the Fund considers the country of incorporation to be a “jurisdiction of convenience” chosen primarily for tax purposes or in other limited circumstances, the Fund uses the country designation of an appropriate broad-based market index. In those cases, two countries are listed - the country of incorporation and the country designated by an appropriate index, respectively.

ADR: American Depositary Receipt

FUTURES CONTRACTS

 

Description   Number of
Contracts
    Expiration
Date
   

Notional

Amount

    Unrealized
Appreciation/
(Depreciation)
 

E-mini S&P 500 Index—Long Position

    12,023        Mar 2016      $ 1,223,580,710      $ 1,713,207   
 

 

PAGE 8 § DODGE & COX STOCK FUND   See accompanying Notes to Financial Statements


STATEMENT OF ASSETS AND LIABILITIES                         

   

    December 31, 2015  

ASSETS:

 

Investments, at value

 

Unaffiliated issuers (cost $37,049,990,593)

  $ 48,896,755,368   

Affiliated issuers (cost $5,031,030,547)

    6,027,223,632   
 

 

 

 
    54,923,979,000   

Cash held at broker

    55,305,169   

Receivable for investments sold

    15,637,977   

Receivable for Fund shares sold

    61,926,918   

Dividends and interest receivable

    60,350,707   

Prepaid expenses and other assets

    309,904   
 

 

 

 
    55,117,509,675   
 

 

 

 

LIABILITIES:

 

Payable to broker for variation margin

    11,542,080   

Payable for investments purchased

    59,141,766   

Payable for Fund shares redeemed

    176,752,622   

Management fees payable

    23,485,250   

Accrued expenses

    1,463,450   
 

 

 

 
    272,385,168   
 

 

 

 

NET ASSETS

  $ 54,845,124,507   
 

 

 

 

NET ASSETS CONSIST OF:

 

Paid in capital

  $ 41,101,955,700   

Undistributed net investment income

    7,503,253   

Undistributed net realized gain

    890,994,487   

Net unrealized appreciation

    12,844,671,067   
 

 

 

 
  $ 54,845,124,507   
 

 

 

 

Fund shares outstanding (par value $0.01 each,
unlimited shares authorized)

    336,950,058   

Net asset value per share

  $ 162.77   

STATEMENT OF OPERATIONS

  

    Year Ended
December 31, 2015
 

INVESTMENT INCOME:

 

Dividends (net of foreign taxes of $20,876,250)

 

Unaffiliated issuers

  $ 954,579,629   

Affiliated issuers

    150,632,113   

Interest

    72,003   
 

 

 

 
    1,105,283,745   
 

 

 

 

EXPENSES:

 

Management fees

    293,725,621   

Custody and fund accounting fees

    724,423   

Transfer agent fees

    4,195,938   

Professional services

    231,414   

Shareholder reports

    1,262,127   

Registration fees

    262,297   

Trustees’ fees

    237,500   

Miscellaneous

    3,225,585   
 

 

 

 
    303,864,905   
 

 

 

 

NET INVESTMENT INCOME

    801,418,840   
 

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS):

 

Net realized gain (loss)

 

Unaffiliated issuers

    2,784,965,660   

Affiliated issuers

    212,205,714   

Index futures contracts

    (14,553,232

Net change in unrealized appreciation/depreciation

 

Investments

    (6,398,781,160

Index futures contracts

    1,713,207   
 

 

 

 

Net realized and unrealized loss

    (3,414,449,811
 

 

 

 

NET DECREASE IN NET ASSETS FROM OPERATIONS

  $ (2,613,030,971
 

 

 

 

STATEMENT OF CHANGES IN NET ASSETS                         

   

    Year Ended
December 31, 2015
    Year Ended
December 31, 2014
 

OPERATIONS:

   

Net investment income

  $ 801,418,840      $ 919,834,389   

Net realized gain

    2,982,618,142        2,333,359,854   

Net change in unrealized
appreciation/depreciation

    (6,397,067,953     2,407,499,870   
 

 

 

   

 

 

 
    (2,613,030,971     5,660,694,113   
 

 

 

   

 

 

 

DISTRIBUTIONS TO SHAREHOLDERS FROM:

   

Net investment income

    (813,298,971     (908,453,128

Net realized gain

    (2,475,923,268     (840,004,493
 

 

 

   

 

 

 

Total distributions

    (3,289,222,239     (1,748,457,621
 

 

 

   

 

 

 

FUND SHARE
TRANSACTIONS:

   

Proceeds from sale of shares

    7,399,154,348        9,175,796,977   

Reinvestment of distributions

    3,094,798,205        1,609,896,035   

Cost of shares redeemed

    (10,006,695,861     (9,285,324,011
 

 

 

   

 

 

 

Net increase from Fund share transactions

    487,256,692        1,500,369,001   
 

 

 

   

 

 

 

Total increase/(decrease) in
net assets

    (5,414,996,518     5,412,605,493   

NET ASSETS:

   

Beginning of year

    60,260,121,025        54,847,515,532   
 

 

 

   

 

 

 

End of year (including undistributed
net investment income of $7,503,253 and $19,383,384, respectively)

  $ 54,845,124,507      $ 60,260,121,025   
 

 

 

   

 

 

 

SHARE INFORMATION:

   

Shares sold

    41,883,366        52,472,086   

Distributions reinvested

    18,759,974        9,034,682   

Shares redeemed

    (56,738,159     (53,255,380
 

 

 

   

 

 

 

Net increase in shares outstanding

    3,905,181        8,251,388   
 

 

 

   

 

 

 
 

 

See accompanying Notes to Financial Statements   DODGE & COX STOCK FUND § PAGE 9


NOTES TO FINANCIAL STATEMENTS

 

NOTE 1—ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Dodge & Cox Stock Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund commenced operations on January 4, 1965, and seeks long-term growth of principal and income. Risk considerations and investment strategies of the Fund are discussed in the Fund’s Prospectus.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Actual results may differ from those estimates. Significant accounting policies are as follows:

Security valuation The Fund’s net assets are valued as of the close of trading on the New York Stock Exchange (NYSE), generally 4:00 p.m. Eastern Time, each day that the NYSE is open for business. If the NYSE is closed due to inclement weather, technology problems, or for any other reason on a day it would normally be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the Fund reserves the right to calculate the Fund’s NAV as of the normally scheduled close of regular trading on the NYSE for that day, provided that Dodge & Cox believes that it can obtain reliable market quotes or valuations.

Portfolio securities and other financial instruments for which market quotes are readily available are valued at market value. Listed securities are generally valued using the official quoted close price or the last sale on the exchange that is determined to be the primary market for the security. Exchange-traded derivatives are valued at the settlement price determined by the relevant exchange. Security values are not discounted based on the size of the Fund’s position. Short-term securities less than 60 days to maturity may be valued at amortized cost if amortized cost approximates current value. Mutual funds are valued at their respective net asset values. All securities held by the Fund are denominated in U.S. dollars.

If market quotations are not readily available or if a security’s value is believed to have materially changed after the close of the security’s primary market but before the close of trading on the NYSE, the security is valued at fair value as determined in good faith by or under the direction of the Fund’s Board of Trustees. The Board of Trustees has appointed Dodge & Cox, the Fund’s investment manager, to make fair value determinations in accordance with the Dodge & Cox Funds Valuation Policies (“Valuation Policies”), subject to Board oversight. Dodge & Cox has established a Pricing Committee that is comprised of representatives from Treasury, Legal, Compliance, and Operations. The Pricing Committee is responsible for implementing the Valuation Policies, including determining the fair value of securities when market quotations or market-based valuations are

not readily available or are deemed unreliable. The Pricing Committee considers relevant indications of value that are reasonably available to it in determining the fair value assigned to a particular security, such as the value of similar financial instruments, trading volumes, contractual restrictions on disposition, related corporate actions, and changes in economic conditions. In doing so, the Pricing Committee employs various methods for calibrating fair valuation approaches, including a regular review of key inputs and assumptions, back-testing, and review of any related market activity.

Valuing securities through a fair value determination involves greater reliance on judgment than valuation of securities based on readily available market quotations. In some instances, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a security’s value. When fair value pricing is employed, the prices of securities used by the Fund to calculate its NAV may differ from quoted or published prices for the same securities.

Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.

Dividend income and corporate action transactions are recorded on the ex-dividend date, or when the Fund first learns of the dividend/corporate action if the ex-dividend date has passed. Withholding taxes on foreign dividends have been provided for in accordance with the Fund’s understanding of the applicable country’s tax rules and rates. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Dividends characterized as return of capital for U.S. tax purposes are recorded as a reduction of cost of investments and/or realized gain. Interest income is recorded on the accrual basis.

Expenses are recorded on the accrual basis. Some expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust based on relative net assets or other expense methodologies determined by the nature of the expense.

Distributions to shareholders are recorded on the ex-dividend date.

Repurchase agreements The Fund enters into repurchase agreements, secured by U.S. government or agency securities, which involve the purchase of securities from a counterparty with a simultaneous commitment to resell the securities at an agreed-upon date and price. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the collateral securities and to apply the proceeds in satisfaction of the obligation.

 

 

PAGE 10 § DODGE & COX STOCK FUND


NOTES TO FINANCIAL STATEMENTS

 

Futures Contracts Futures contracts involve an obligation to purchase or sell (depending on whether the Fund has entered a long or short futures contract, respectively) an asset at a future date, at a price set at the time of the contract. Upon entering into a futures contract, the Fund is required to deposit an amount of cash or liquid assets (referred to as initial margin) in a segregated account with the clearing broker. Subsequent payments (referred to as variation margin) to and from the clearing broker are made on a daily basis based on changes in the market value of futures contracts. Futures contracts are traded publicly and their market value changes daily. Changes in the market value of open futures contracts are recorded as unrealized appreciation or depreciation in the Statement of Operations. Realized gains and losses on futures contracts are recorded in the Statement of Operations at the closing or expiration of the contracts. Cash deposited with a broker as initial margin is recorded on the Statement of Assets and Liabilities. A receivable and/or payable to brokers for daily variation margin is also recorded on the Statement of Assets and Liabilities.

Investments in futures contracts may include certain risks, which may be different from, and potentially greater than, those of the underlying securities. To the extent the Fund uses futures, it is exposed to additional volatility and potential losses resulting from leverage.

The Fund entered into long S&P 500 futures contracts to provide equity exposure in an amount comparable to the Fund’s net cash position. During the year ended December 31, 2015, these S&P 500 futures contracts had notional values ranging from 0% to 2% of net assets.

Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.

NOTE 2—VALUATION MEASUREMENTS

Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below.

§  

Level 1: Quoted prices in active markets for identical securities

§  

Level 2: Other significant observable inputs (including quoted prices for similar securities, market indices, interest rates, credit risk, etc.)

§  

Level 3: Significant unobservable inputs (including Fund management’s assumptions in determining the fair value of investments)

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used to value the Fund’s holdings at December 31, 2015:

 

Classification(a)   LEVEL 1
(Quoted Prices)
    LEVEL 2
(Other Significant
Observable Inputs)
 

Securities

   

Common Stocks(b)

  $ 53,664,411,142      $   

Short-term Investments

   

Money Market Fund

    55,422,858          

Repurchase Agreement

           1,204,145,000   
 

 

 

   

 

 

 

Total

  $ 53,719,834,000      $ 1,204,145,000   
 

 

 

   

 

 

 

Other Financial Instruments(c)

   

Index Futures Contracts

   

Appreciation

  $ 1,713,207      $   
                 
(a) 

There were no transfers between Level 1 and Level 2 during the year ended December 31, 2015. There were no Level 3 securities at December 31, 2015 and 2014, and there were no transfers to Level 3 during the year.

(b) 

All common stocks held in the Fund are Level 1 securities. For a detailed break-out of common stocks by major industry classification, please refer to the Portfolio of Investments.

(c)

Represents unrealized appreciation/(depreciation).

NOTE 3—RELATED PARTY TRANSACTIONS

Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays an annual management fee of 0.50% of the Fund’s average daily net assets to Dodge & Cox, investment manager of the Fund. The agreement further provides that Dodge & Cox shall waive its fee to the extent that such fee plus all other ordinary operating expenses of the Fund exceed 0.75% of the average daily net assets for the year.

Fund officers and trustees All officers and two of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.

NOTE 4—INCOME TAX INFORMATION AND DISTRIBUTIONS TO SHAREHOLDERS

A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, and such amounts may differ from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book to tax differences at year end to reflect tax character.

Book to tax differences are primarily due to differing treatments of wash sales, in-kind redemptions, net short-term realized gain (loss), and Index Futures Contracts. During the year, the Fund recognized net realized gains of $68,854,889 from the delivery of appreciated securities in an in-kind redemption transaction. For federal income tax purposes, this gain is not recognized as taxable income to the Fund and therefore will not be distributed to shareholders. At December 31, 2015, the cost of investments for federal income tax purposes was $42,086,555,899.

 

 

DODGE & COX STOCK FUND § PAGE 11


NOTES TO FINANCIAL STATEMENTS

 

Distributions during the years noted below were characterized as follows for federal income tax purposes:

 

    

Year Ended

December 31, 2015

    Year Ended
December 31, 2014
 

Ordinary income

    $813,298,971        $908,453,128   
    ($2.460 per share)        ($2.800 per share)   

Long-term capital gain

    $2,475,923,268        $840,004,493   
    ($7.577 per share)        ($2.560 per share)   

At December 31, 2015, the tax basis components of distributable earnings were as follows:

 

Unrealized appreciation

   $ 15,260,989,069   

Unrealized depreciation

     (2,423,565,968
  

 

 

 

Net unrealized appreciation

     12,837,423,101   

Undistributed ordinary income

     7,503,253   

Undistributed long-term capital gain

     898,242,453   

Fund management has reviewed the tax positions for open periods (three years and four years, respectively, from filing the Fund’s Federal and State tax returns) as applicable to the Fund, and has determined that no provision for income tax is required in the Fund’s financial statements.

NOTE 5—LOAN FACILITIES

Pursuant to an exemptive order issued by the Securities and Exchange Commission (SEC), the Fund may participate in an interfund lending facility (Facility). The Facility allows the Fund to borrow money from or loan money to the Funds. Loans under the Facility are made for temporary or emergency purposes, such as to fund shareholder redemption requests. Interest on borrowings is the average of the current repurchase agreement rate and the bank loan rate. There was no activity in the Facility during the year.

All Funds in the Trust participate in a $500 million committed credit facility (Line of Credit) with State Street Bank and Trust Company, to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The maximum amount available to the Fund is $250 million. Each Fund pays an annual commitment fee on its pro-rata portion of the Line of Credit. For the year ended December 31, 2015, the Fund’s commitment fee amounted to $178,907 and is reflected as a Miscellaneous Expense in the Statement of Operations. Interest on borrowings is charged at the prevailing rate. There were no borrowings on the Line of Credit during the year.

NOTE 6—PURCHASES AND SALES OF INVESTMENTS

For the year ended December 31, 2015 purchases and sales of securities, other than short-term securities, aggregated $8,811,129,493 and $11,133,446,900, respectively.

NOTE 7—SUBSEQUENT EVENTS

Fund management has determined that no material events or transactions occurred subsequent to December 31, 2015, and through the date of the Fund’s financial statements issuance, which require additional disclosure in the Fund’s financial statements.

 

 

 

PAGE 12 § DODGE & COX STOCK FUND


NOTES TO FINANCIAL STATEMENTS

 

NOTE 8—HOLDINGS OF 5% VOTING SECURITIES

Each of the companies listed below was considered to be an affiliate of the Fund because the Fund owned 5% or more of the company’s voting securities during all or part of the year ended December 31, 2015. Purchase and sale transactions and dividend income earned during the year on these securities were as follows:

 

      Shares at
Beginning of Year
     Additions      Reductions     Shares at
End of Year
     Dividend
Income(a)
   

Value at

End of Year

 

ADT Corp.

     11,819,337                 (680,900     11,138,437       $ 9,613,243      $ 367,345,652   

AOL, Inc.

     7,100,754                 (7,100,754             (b)        

Apache Corp.

     18,390,028         918,617         (3,948,800     15,359,845         17,987,095        (c) 

Capital One Financial Corp.

     28,169,211         2,020,000         (402,600     29,786,611         43,659,793        2,149,997,582   

Celanese Corp., Series A

     9,220,971                 (2,000,973     7,219,998         9,652,893        (c) 

Hewlett Packard Enterprise Co.

             91,237,195         (252,200     90,984,995         5,004,175        1,382,971,924   

Maxim Integrated Products, Inc.

     16,326,840         500,000         (3,291,100     13,535,740         17,840,454        (c) 

NetApp, Inc.

     19,794,000         2,800,000         (1,061,269     21,532,731         14,697,360        571,263,353   

Symantec Corp.

     51,921,000         2,340,000         (150,000     54,111,000         32,177,100        1,136,331,000   

Synopsys, Inc.

     13,627,969                 (4,434,500     9,193,469         (b)      419,314,121   
             

 

 

   

 

 

 
              $ 150,632,113      $ 6,027,223,632   
             

 

 

   

 

 

 
                                       

 

 

   

 

 

 
(a)

Net of foreign taxes, if any

(b)

Non-income producing

(c)

Company was not an affiliate at year end

 

DODGE & COX STOCK FUND § PAGE 13


FINANCIAL HIGHLIGHTS

 

 

SELECTED DATA AND RATIOS

(for a share outstanding throughout each year)

    

Year Ended December 31,

 
       2015      2014      2013      2012      2011  
    

 

 

 

Net asset value, beginning of year

       $180.94         $168.87         $121.90         $101.64         $107.76   

Income from investment operations:

                

Net investment income

       2.42         2.83         2.11         1.98         1.76   

Net realized and unrealized gain (loss)

       (10.55      14.60         46.97         20.26         (6.13
    

 

 

 

Total from investment operations

       (8.13      17.43         49.08         22.24         (4.37
    

 

 

 

Distributions to shareholders from:

                

Net investment income

       (2.46      (2.80      (2.11      (1.98      (1.75

Net realized gain

       (7.58      (2.56                        
    

 

 

 

Total distributions

       (10.04      (5.36      (2.11      (1.98      (1.75
    

 

 

 

Net asset value, end of year

       $162.77         $180.94         $168.87         $121.90         $101.64   
    

 

 

 

Total return

       (4.47 )%       10.43      40.55      22.01      (4.08 )% 

Ratios/supplemental data:

                

Net assets, end of year (millions)

       $54,845         $60,260         $54,848         $39,841         $36,562   

Ratio of expenses to average net assets

       0.52      0.52      0.52 %       0.52      0.52

Ratio of net investment income to average net assets

       1.36      1.62      1.45 %       1.72      1.62

Portfolio turnover rate

       15      17      15      11      16

See accompanying Notes to Financial Statements

 

PAGE 14 § DODGE & COX STOCK FUND


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Trustees of Dodge & Cox Funds and Shareholders of Dodge & Cox Stock Fund

In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Dodge & Cox Stock Fund (the “Fund”, one of the series constituting Dodge & Cox Funds) at December 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as financial statements) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2015, by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 25, 2016

 

DODGE & COX STOCK FUND § PAGE 15


SPECIAL 2015 TAX INFORMATION

(unaudited)

The following information is provided pursuant to provisions of the Internal Revenue Code:

The Fund designates up to a maximum amount of $1,125,715,182 of its distributions paid to shareholders in 2015 as qualified dividends (treated for federal income tax purposes in the hands of shareholders as taxable at a maximum rate of 20%).

For shareholders that are corporations, the Fund designates 100% of its ordinary dividends paid to shareholders in 2015 as dividends from domestic corporations eligible for the corporate dividends received deduction, provided that the shareholder otherwise satisfies applicable requirements to claim that deduction.

BOARD APPROVAL OF FUNDS’ INVESTMENT MANAGEMENT AGREEMENTS AND MANAGEMENT FEES

(unaudited)

The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 16, 2015, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2016 with respect to each Fund. During the course of the year, the Board received a wide variety of materials relating to the investment management and administrative services provided by Dodge & Cox and the performance of each of the Funds.

INFORMATION RECEIVED

In advance of the meeting, the Board, including each of the Independent Trustees, requested, received, and reviewed materials relating to the Agreements and the services provided by Dodge & Cox. The Independent Trustees retained Morningstar® to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Morningstar. The Morningstar materials included information regarding advisory fee rates, expense ratios, and transfer agency, custodial, and distribution expenses, as well as appropriate performance comparisons to each Fund’s peer group and an index or combination of indices. The Morningstar materials also included a comparison of expenses of various share classes offered by comparable funds. The materials reviewed by the Board contained information concerning, among other things, Dodge & Cox’s profitability, financial results and condition, advisory fee revenue, and separate account and sub-adviser fund fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates, sales and redemption data and the significant investment that Dodge & Cox makes in research used in managing the Funds. The Board received and reviewed memoranda and related materials addressing, among other things, Dodge & Cox’s services to the Funds; how Dodge & Cox Funds’ fees compare to fees of peer group funds; the different fees, services, costs, and risks associated with

other accounts managed by Dodge & Cox as compared to the Dodge & Cox Funds; and the ways in which the Funds realize economies of scale. Throughout the process of reviewing the services provided by Dodge & Cox and preparing for the meeting, the Independent Trustees found Dodge & Cox to be open, forthright, detailed, and very helpful in answering questions about all issues. The Board received copies of the Agreements and a memorandum from the independent legal counsel to the Independent Trustees discussing the factors generally regarded as appropriate to consider in evaluating advisory arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the independent legal counsel on November 11, 2015, and again on December 16, 2015, to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements. In considering the Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board considered several factors, discussed below, to be key factors and reached the conclusions described below.

NATURE, QUALITY, AND EXTENT OF THE SERVICES

The Board considered that Dodge & Cox provides a wide range of services to the Funds in addition to portfolio management and that the quality of these services has been excellent in all respects. The extensive nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality, and extent of portfolio management, administrative, and shareholder services performed by Dodge & Cox. With regard to portfolio management services, the Board considered Dodge & Cox’s established long-term history of care and conscientiousness in the management of the Funds; its demonstrated consistency in investment approach and depth; the background and experience of the Dodge & Cox Investment Policy Committee, International Investment Policy Committee, Global Stock Investment Policy Committee, Fixed Income Investment Policy Committee, and Global Bond Investment Policy Committee, and research analysts responsible for managing the Funds; its methods for assessing the regulatory and investment climate in various jurisdictions; Dodge & Cox’s overall high level of attention to its core investment management function; and its commitment to the Funds and their shareholders. In the area of administrative and shareholder services, the Board considered the excellent quality of Dodge & Cox’s work in areas such as compliance, legal services, trading, proxy voting, technology, oversight of the Funds’ transfer agent and custodian, tax compliance, and shareholder communication through its website and other means. The Board also noted Dodge & Cox’s diligent disclosure policy, its favorable compliance record, and its reputation as a trusted, shareholder-friendly mutual fund family. In addition, the Board considered that Dodge & Cox manages approximately $185 billion in Fund assets with fewer professionals

 

 

PAGE 16 § DODGE & COX STOCK FUND


than most comparable funds, and that on average these professionals have more experience and longer tenure than investment professionals at comparable funds. The Board also noted that Dodge & Cox is an investment research-oriented firm with no other business endeavors to distract management’s attention from its research efforts, and that its investment professionals adhere to a consistent investment approach across the Funds. The Board further considered the favorable stewardship grades given by Morningstar to each of the Funds and the “Gold” analyst rating awarded by Morningstar to all of the Funds except the Global Bond Fund. The Board concluded that it was satisfied with the nature, extent, and quality of investment management and other services provided to the Funds by Dodge & Cox.

INVESTMENT PERFORMANCE

The Board considered short-term and long-term investment performance for each Fund (including periods of outperformance or underperformance) as compared to both relevant indices and the performance of such Fund’s peer group. The Board noted that the Funds had weak absolute and relative performance in 2015, but remained solid performers over longer periods. The Board determined after extensive review and inquiry that Dodge & Cox’s historic, long-term, team-oriented, bottom-up investment approach remains consistent and that Dodge & Cox continues to be distinguished by its integrity, transparency, and independence. The Board considered that the performance of the Funds is the result of a team-oriented investment management process that emphasizes a long-term investment horizon, comprehensive independent research, price discipline, low cost and low portfolio turnover. The Board also considered that the investment performance delivered by Dodge & Cox to the Funds appeared to be consistent with the relevant performance delivered for other clients of Dodge & Cox. The Board concluded that Dodge & Cox has delivered favorable long-term performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.

COSTS AND ANCILLARY BENEFITS

Costs of Services to Funds: Fees and Expenses. The Board considered each Fund’s management fee rate and expense ratio relative to each Fund’s peer group and relative to management fees charged by Dodge & Cox to other clients. In particular, the Board considered that the Funds continue to be substantially below their peer group median in expense ratios and that many media and industry reports specifically comment on the low expense ratios of the Funds, which have been a defining characteristic of the Funds for many years. The Board also evaluated the operating structures of the Funds and Dodge & Cox, noting that the Funds do not charge front-end sales commissions or distribution fees, and Dodge & Cox bears, among other things, the significant cost of third party research, reimbursement for recordkeeping and administrative costs to third-party retirement plan administrators, and administrative and office overhead.

The Board noted that expenses are well below industry averages. When compared to peer group funds, the Funds are in the quartile with the lowest expense ratios. The Board also

considered that the Funds receive numerous administrative, regulatory compliance, legal, technology and shareholder support services from Dodge & Cox without any additional administrative fee and the fact that the Funds have relatively low transaction costs and portfolio turnover rates. The Board noted the Funds’ unusual single-share-class structure and reviewed Morningstar data showing that the few peer group funds with lower expense ratios often have other share classes with significantly higher expense ratios. In this regard, the Board considered that many of the Funds’ shareholders would not be eligible to purchase comparably-priced shares of many peer group funds, which typically make their lower-priced share classes available only to institutional investors. The Board determined that the Funds provide access for small investors to high quality investment management at a relatively low cost.

The Board reviewed information regarding the fee rates Dodge & Cox charges to separate accounts and subadvised funds that have investment programs similar to those of the Funds, including instances where separate account and sub-advised fund fees are lower than Fund fees. The Board considered differences in the nature and scope of services Dodge & Cox provides to the Funds as compared to other client accounts, differences in regulatory, litigation, and other risks as between Dodge & Cox Funds and other types of clients. The Board also noted that different markets exist for mutual fund and institutional separate account management services. With respect to non-U.S. funds sponsored and managed by Dodge & Cox that are comparable to the Funds in many respects, the Board noted that the fee rates charged by Dodge & Cox are the same as or higher than the fee rates charged to the Funds. After consideration of these matters, the Board concluded that the overall costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation, and performance of Dodge & Cox and the low overall expense ratios of the Funds.

Profitability and Costs of Services to Dodge & Cox; “Fall-out” Benefits. The Board reviewed reports of Dodge & Cox’s financial position, profitability, and estimated overall value, and considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the favorable services provided. The Board noted in particular that Dodge & Cox’s profits are not generated by high fee rates, but reflect an extraordinarily streamlined, efficient, and focused business approach toward investment management. The Board recognized the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that the compensation/profit structure at Dodge & Cox includes a return on shareholder employees’ investment in the firm, which is vital for remaining independent and facilitating retention of management and investment professionals. The Board considered independent research indicating that firms that grow organically, rather than through acquisition, tend to have better performance. Key to organic growth is the ability to retain talented and experienced analysts, portfolio managers and other professionals.

 

 

DODGE & COX STOCK FUND § PAGE 17


The Board also considered that in January 2015, Dodge & Cox closed the International Stock Fund to new investors to pro-actively manage the growth of the Fund. The Stock Fund and Balanced Fund were similarly closed to new investors during periods of significant growth in the past. While these actions are intended to benefit existing shareholders, the effect is to reduce potential revenues to Dodge & Cox from new shareholders. The Board also considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers and reputational benefits to non-U.S. funds sponsored and managed by Dodge & Cox) that Dodge & Cox might receive as a result of its association with the Funds and determined that they are acceptable. The Board also noted that Dodge & Cox continues to invest substantial sums in its business in order to provide enhanced services, systems and research capabilities, all of which benefit the Funds. The Board concluded that Dodge & Cox’s profitability is the keystone of its independence, stability and long-term investment performance and that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) is fair and reasonable.

ECONOMIES OF SCALE

The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee structure and the considerable efficiencies of the Funds’ organization and fee structure that has been realized by shareholders from the time of each Fund’s inception (i.e., from the first dollar). An assessment of economies of scale must also take into account that Dodge & Cox invests significant time and resources in each new Fund for months (and sometimes years) prior to launch; in addition, expenses are capped, which means that Dodge & Cox earns no revenue and subsidizes the operations of a new Fund for a period of time until it reaches scale.

In addition, the Board noted that Dodge & Cox has shared economies of scale by adding or enhancing services to the Funds over time, and that the internal costs of providing investment management, up-to-date technology, administrative, legal, and compliance services to the Funds continue to increase. For example, Dodge & Cox has increased its global research staff and investment resources over the years to address the increased complexity of investing in multinational and non-U.S. companies. In addition, Dodge & Cox has made substantial expenditures in other staff, technology, cybersecurity, and infrastructure to enable it to integrate credit and equity analyses and to be able to implement its strategy in a more effective and secure manner. Over the last ten years, Dodge & Cox has increased its spending on third party research, data services, trading systems, technology, and recordkeeping service expenses at a rate that has significantly outpaced the Funds’ growth rate during the same period.

The Board considered that Dodge & Cox has a history of voluntarily limiting asset growth in several Funds that experienced significant inflows by closing them to new investors in order to protect the Funds’ ability to achieve good investment returns for shareholders. The Board also observed that, even without fee breakpoints, the Funds are competitively priced in a very competitive market and that having a low fee from inception is better for shareholders than starting with a higher fee and adding breakpoints. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately shares economies of scale that may exist.

CONCLUSION

Based on their evaluation of all material factors and assisted by the advice of independent legal counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the advisory fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that the scope and quality of Dodge & Cox’s services has provided substantial value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.

FUND HOLDINGS

The Fund provides a complete list of its holdings four times each fiscal year, as of the end of each quarter. The Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-CSR (second and fourth quarters) and Form N-Q (first and third quarters). Shareholders may view the Fund’s Forms N-CSR and N-Q on the SEC’s website at sec.gov. Forms N-CSR and N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 202-551-8090 (direct) or 800-732-0330 (general SEC number). A list of the Fund’s quarter-end holdings is also available at dodgeandcox.com on or about 15 days following each quarter end and remains available on the website until the list is updated in the subsequent quarter.

PROXY VOTING

For a free copy of the Fund’s proxy voting policies and procedures, please call 800-621-3979, visit the Fund’s website at dodgeandcox.com, or visit the SEC’s website at sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ending June 30 is also available at dodgeandcox.com or at sec.gov.

HOUSEHOLD MAILINGS

The Fund routinely mails shareholder reports and summary prospectuses to shareholders and, on occasion, proxy statements. In order to reduce the volume of mail, when possible, only one copy of these documents will be sent to shareholders who are part of the same family and share the same residential address.

If you have a direct account with the Funds and you do not want the mailing of shareholder reports and summary prospectuses combined with other members in your household, contact the Funds at 800-621-3979. Your request will be implemented within 30 days.

 

 

PAGE 18 § DODGE & COX STOCK FUND


DODGE & COX FUNDS—EXECUTIVE OFFICER & TRUSTEE INFORMATION

 

Name (Age) and
Address*
 

Position with Trust

(Year of Election or
Appointment)

  Principal Occupation During Past 5 Years   Other Directorships Held by Trustees
INTERESTED TRUSTEES AND EXECUTIVE OFFICERS
Charles F. Pohl (57)  

Chairman and Trustee

(Officer since 2004)

  Chairman (since 2013), Co-President (2011-2013), Senior Vice President (until 2011), and Director of Dodge & Cox; Chief Investment Officer, Portfolio Manager, Investment Analyst, and member of Investment Policy Committee (IPC), Global Stock Investment Policy Committee (GSIPC), International Investment Policy Committee (IIPC), and Fixed Income Investment Policy Committee (FIIPC)  
Dana M. Emery (54)  

President and Trustee

(Trustee since 1993)

  Chief Executive Officer (since 2013), President (since 2011), Executive Vice President (until 2011), and Director of Dodge & Cox; Director of Fixed Income, Portfolio Manager, and member of FIIPC and Global Bond Investment Policy Committee (GBIPC)  
John A. Gunn (72)  

Senior Vice President

(Officer since 1998)

  Chairman Emeritus (2011-2013), Chairman (until 2011), Chief Executive Officer (until 2010), and Director (until 2013) of Dodge & Cox; Portfolio Manager and member of IPC, GSIPC (until 2014), and IIPC (until 2015)  
Diana S. Strandberg (56)   Senior Vice President (Officer since 2006)   Senior Vice President (since 2011), Vice President (until 2011), and Director (since 2011) of Dodge & Cox; Director of International Equity (since 2009), Portfolio Manager, Investment Analyst, and member of IPC, GSIPC, IIPC, and GBIPC  
David H. Longhurst (58)  

Treasurer

(Officer since 2006)

  Vice President and Assistant Treasurer of Dodge & Cox  
Thomas M. Mistele (62)  

Secretary

(Officer since 1998)

  Chief Operating Officer, Director, Secretary, Senior Counsel (since 2011), and General Counsel (until 2011) of Dodge & Cox  
Katherine M. Primas (41)  

Chief Compliance

Officer

(Officer since 2009)

  Vice President (since 2011) and Chief Compliance Officer of Dodge & Cox  
INDEPENDENT TRUSTEES
Thomas A. Larsen (66)  

Trustee

(Since 2002)

  Senior Counsel of Arnold & Porter LLP (law firm) (since 2013); Partner of Arnold & Porter LLP (until 2012); Director of Howard, Rice, Nemerovski, Canady, Falk & Rabkin (1977-2011)  
Ann Mather (55)  

Trustee

(Since 2011)

  CFO, Pixar Animation Studios (1999-2004)   Director, Google, Inc. (internet information services) (since 2005); Director, Glu Mobile, Inc. (multimedia software) (since 2005); Director, Netflix, Inc. (internet television) (since 2010); Director, Arista Networks (cloud networking) (since 2013); Director, Shutterfly, Inc. (internet photography services/publishing) (since 2013)
Robert B. Morris III (63)  

Trustee

(Since 2011)

  Advisory Director, The Presidio Group (since 2005)  
Gary Roughead (64)  

Trustee

(Since 2013)

  Annenberg Distinguished Visiting Fellow, Hoover Institution (since 2012); Admiral, United States Navy (Ret.); U.S. Navy Chief of Naval Operations (2008-2011)   Director, Northrop Grumman Corp. (global security) (since 2012)
Mark E. Smith (64)  

Trustee

(Since 2014)

  Executive Vice President, Managing Director—Fixed Income at Loomis Sayles & Company, L.P. (2003-2011)  
John B. Taylor (69)  

Trustee

(Since 2005)

(and 1995-2001)

  Professor of Economics, Stanford University (since 1984); Senior Fellow, Hoover Institution (since 1996); Under Secretary for International Affairs, United States Treasury (2001-2005)  

 

*  

The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all six series in the Dodge & Cox Funds complex and serves for an indefinite term.

Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Funds’ website at dodgeandcox.com or calling
800-621-3979.

 

DODGE & COX STOCK FUND § PAGE 19


Stock Fund

 

 

dodgeandcox.com

For Fund literature, transactions, and account

information, please visit the Funds’ website.

or write or call:

DODGE & COX FUNDS

c/o Boston Financial Data Services

P.O. Box 8422

Boston, Massachusetts 02266-8422

(800) 621-3979

INVESTMENT MANAGER

Dodge & Cox

555 California Street, 40th Floor

San Francisco, California 94104

(415) 981-1710

 

This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.

This report reflects our views, opinions, and portfolio holdings as of December 31, 2015, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.


LOGO

 

DODGE & COX FUNDS®

 

2015

   

 

Annual Report

December 31, 2015

Global Stock Fund

ESTABLISHED 2008

TICKER:  DODWX

 

12/15 GSF AR    LOGO    Printed on recycled paper


TO OUR SHAREHOLDERS

 

The Dodge & Cox Global Stock Fund had a total return of –8.1% for the year ending December 31, 2015, compared to a return of
–0.9% for the MSCI World Index.

MARKET COMMENTARY

Global growth expectations declined during 2015. Slower growth in China, the largest consumer of raw materials worldwide, was of particular significance as it negatively impacted commodity prices, as well as the currencies of commodity-driven economies. Global copper prices plummeted 24% and oil prices plunged 35%. The Brazilian real and South African rand depreciated 33% and 25%, respectively, relative to the U.S. dollar. Prospects for higher U.S. interest rates, coupled with the U.S. dollar’s sharp appreciation against major global currencies, further exacerbated conditions for those emerging market economies in need of external financing. As a result, while the MSCI Emerging Markets index was down 6% in local currency for the year, it was down 15% in U.S. dollars.

In Europe, a dampened economic recovery and a weaker inflation outlook led the European Central Bank to extend its asset purchase program aimed at reviving the economy. The Bank of Japan, in turn, introduced measures to supplement its already large Quantitative and Qualitative Easing Program, as economic activity softened and inflation hovered around zero. In contrast, economic activity in the United States expanded at a moderate pace: household spending and business investment increased, the housing market strengthened, and labor market conditions continued to improve, with solid job gains and reduced unemployment. After a significant selloff in August and September, the S&P 500 rebounded during the fourth quarter to finish the year up just over 1%.

INVESTMENT STRATEGY

As a value-oriented manager, 2015 was a challenging year for absolute and relative performance. Across equities, value stocks (the lower valuation portion of the market) underperformed growth stocks (the higher valuation portion of the market) by one of the widest spreads since the global financial crisis. The Fund was significantly affected by this performance divergence. For example, in the United States, many higher-valuation growth companies, not held by the Fund, outperformed significantly. In addition, emerging markets collectively underperformed developed markets. The Fund’s investments in individual companies domiciled in a number of especially weak emerging market countries (including Brazil, South Africa, and Turkey) negatively impacted results. Finally, several individual holdings—HP Inc(a), MTN Group, Petrobras, and Standard Chartered—meaningfully detracted from results for the year.

Throughout 2015, we continued to revisit and retest our thinking on many of the Fund’s holdings. Our equity and fixed income teams regularly work together to evaluate risk and reward as we look at investment opportunities around the world. As part of our bottom-up research process, our investment teams thoroughly investigated individual company concerns, challenged

analyst assumptions, and conducted further due diligence. In addition, we conducted macroeconomic reviews to evaluate the key factors affecting a company’s capital structure, end-market demand, and relative competitiveness. Through this comprehensive process, we reaffirmed our view that the Fund’s holdings have attractive valuations relative to their fundamental outlook over our three- to five-year investment horizon.

During the year, valuation disparities widened globally: companies with higher valuations became more expensive relative to companies with lower valuations. As valuations became more attractive, we added selectively to existing holdings, including Bank of America, EMC Corp., HP Inc., and Standard Chartered.(b) We also identified 6 new investment opportunities (including Anthem, Cisco, JD.com, and Priceline) and exited 17 holdings (including PayPal and Unilever).

We continue to be optimistic about the long-term outlook for the portfolio. Our value-oriented approach has led us to invest in companies where we believe the long-term potential is not reflected in the current price. Three examples—Standard Chartered, Hewlett Packard Enterprise, and HP Inc.—are discussed below.

Standard Chartered

Standard Chartered, domiciled in the United Kingdom, provides consumer and wholesale banking services to customers in Asia, Africa, and the Middle East. The company has a strong global franchise with a broad network across the developing world that would be very difficult to replicate. Standard Chartered’s global payments and trade business is a particular strength: local roots from its longstanding presence allow for local currency funding, and cooperation across the network provides integrated wholesale banking services to clients. During 2015, Standard Chartered’s performance suffered from the slowdown in emerging markets, large fines from legacy issues, rising restructuring costs, and deteriorating asset quality. As a result, Standard Chartered’s stock was down 39%(c) in U.S. dollars and its valuation fell to 0.6 times tangible book value, a historically low level.(d)

In 2015, we met with Standard Chartered’s new executive team on multiple occasions to better understand its strategy and priorities. This management team is focused on streamlining the organization and prioritizing profitability over growth. They have a realistic assessment of current balance sheet issues, as evidenced by the recent $5.1 billion capital raise that provides ample new capital to fortify the balance sheet, resolve legacy issues, and accelerate their restructuring plans. The company seeks to cut costs, exit peripheral businesses, and increase investments to improve systems and further diversify its geographic footprint. In addition, Standard Chartered has been able to attract high-caliber talent with some key new hires. Based on the bank’s leading franchise, strong balance sheet, management’s initiatives, and low valuation, we recently added to the holding. On December 31, Standard Chartered was a 2.1% position in the Fund.

 

 

PAGE 2 § DODGE & COX GLOBAL STOCK FUND


Hewlett Packard Enterprise and HP Inc.

After providing strong returns in 2013 and 2014, Hewlett-Packard was the Fund’s largest detractor from results during 2015. Hewlett-Packard recently split into two entities—Hewlett Packard Enterprise and HP Inc.—which should result in greater focus and flexibility for each company to achieve its strategic goals. To assess secular challenges and evaluate the risks and opportunities of each stand-alone business, we met numerous times with their management teams and competitors and spoke with industry consultants. As a result, Hewlett Packard Enterprise was a 1.8% position and HP Inc. was a 1.4% position in the Fund on December 31.

Hewlett Packard Enterprise, one of the largest vendors in information technology (IT), consists of the enterprise technology infrastructure, software, and services segments of the old Hewlett-Packard. We acknowledge the company faces headwinds: the shift to the cloud has negatively impacted all on-premise IT vendors, continued public cloud adoption will likely erode the company’s market share, and competition is keen. Despite these risks, we believe Hewlett Packard Enterprise is an attractive investment due to its strong market positions across its portfolio (e.g., top provider of servers, number two position in IT services), scale advantages, and opportunities to improve its margin structure. Meg Whitman—the CEO of Hewlett Packard Enterprise—has overseen sound acquisitions (e.g., 3Par), new product launches, and cost reduction programs during her tenures at Hewlett-Packard and eBay. Management is actively cutting costs and retooling its product and service offerings to improve the company’s competitiveness. Margins in the Enterprise Services segment should expand as the company optimizes its contract mix and delivery models. The company trades at a compelling valuation (eight times forward estimated earnings), which is among the lowest in the S&P 500.

As the leader in printing and personal computer sales globally, HP Inc.’s key challenge is declining revenues. Partly due to the stronger U.S. dollar, consensus estimates have the company’s sales declining approximately 10% in 2016. Many investors believe a shrinking market for hardware and ink may be too difficult to overcome; we believe this view of the company’s prospects is too pessimistic. HP’s management is aggressively cutting costs and has plans to introduce more new products. For example, HP has portions of its printing business (e.g., high-end graphics production) that are currently growing and may increase share in the established copier market and in the more nascent 3D print market. Moreover, the company generates robust free cash flow. Trading at seven times forward estimated earnings, HP remains an attractive investment opportunity with strong business prospects given its large valuation discount to the overall market.

IN CLOSING

Global equity valuations are attractive: the MSCI World traded at 15.7 times forward estimated earnings (compared to a 20-year average of 16.2 times) with a 2.6% dividend yield at year end. Valuation disparities have widened significantly, creating more opportunities for value-oriented investors. We are identifying

attractively valued investments in both developed and emerging markets and continue to be optimistic about the long-term outlook for the portfolio.

Our experienced and stable team has weathered past periods of market turbulence by remaining steadfast in our investment process and philosophy. Our approach—constructing a diversified portfolio through in-depth, independent research, a three- to five-year investment horizon, and a focus on valuation relative to underlying fundamentals—continues to guide us through this period. We remain confident that our enduring value-oriented approach will benefit the Fund in the years ahead.

Thank you for your continued confidence in our firm. As always, we welcome your comments and questions.

For the Board of Trustees,

 

LOGO   LOGO

Charles F. Pohl,

Chairman

 

Dana M. Emery,

President

January 29, 2016

 

 

(a)  

After Hewlett-Packard Co. split into two companies, HP Inc. retained the HPQ ticker symbol. HP Inc.’s –37% return in 2015 includes Hewlett-Packard Co.’s performance through October 2015.

(b)  

The use of specific examples does not imply that they are more attractive investments than the Fund’s other holdings.

(c)  

All returns are total returns unless otherwise noted.

(d)  

Unless otherwise specified, all weightings and characteristics are as of December 31, 2015.

 

 

DODGE & COX GLOBAL STOCK FUND § PAGE 3


ANNUAL PERFORMANCE REVIEW

The Fund underperformed the MSCI World by 7.2 percentage points in 2015.

Key Detractors from Relative Results

  §  

The Fund’s average overweight position in emerging markets (17% versus 0% for the MSCI World), a particularly weak region of the portfolio (down 21%), significantly detracted from results.

 
  §  

Relative returns in the Financials sector (down 15% compared to down 4% for the MSCI World sector), especially in the emerging markets, hurt performance. BR Malls (down 53%), Kasikornbank (down 39%), Standard Chartered (down 39%), and ICICI Bank (down 28%) all detracted.

 
  §  

Weak returns in the Consumer Staples sector (down 18% compared to up 6% for the MSCI World sector) hurt results. Wal-Mart (down 27%) performed poorly.

 
  §  

The Fund’s holdings in the Telecommunication Services sector (down 24% compared to up 2% for the MSCI World sector) had a negative impact. MTN Group (down 53%) was a meaningful detractor.

 
  §  

Additional detractors included Teck Resources (down 69% since date of purchase), Petrobras (down 55%), HP Inc. (down 37%), and Time Warner (down 23%).

 

Key Contributors to Relative Results

  §  

Strong returns from the Fund’s holdings in the Health Care Providers and Services industry (up 18% compared to up 12% for the MSCI World industry) contributed to results. Cigna (up 42%) and UnitedHealth Group (up 18%) were notable performers.

 
  §  

The Fund’s holdings in the Automobiles industry (up 11% compared to up 1% for the MSCI World industry) aided performance. Nissan Motor (up 24%) and Honda Motor (up 13%) performed well.

 
  §  

Additional contributors included Nintendo (up 61% to date of sale), New Oriental Education & Technology (up 54%), Alphabet (up 45%), and Time Warner Cable (up 25%).

 

KEY CHARACTERISTICS OF DODGE & COX

Independent Organization

Dodge & Cox is one of the largest privately owned investment managers in the world. We remain committed to independence, with a goal of providing the highest quality investment management service to our existing clients.

Over 85 Years of Investment Experience

Dodge & Cox was founded in 1930. We have a stable and well-qualified team of investment professionals, most of whom have spent their entire careers at Dodge & Cox.

Experienced Investment Team

The Global Stock Investment Policy Committee, which is the decision-making body for the Global Stock Fund, is a seven-member committee with an average tenure at Dodge & Cox of 19 years.

One Business with a Single Research Office

Dodge & Cox manages equity (domestic, international, and global), fixed income (domestic and global), and balanced investments, operating from one office in San Francisco.

Consistent Investment Approach

Our team decision-making process involves thorough, bottom-up fundamental analysis of each investment.

Long-Term Focus and Low Expenses

We invest with a three- to five-year investment horizon, which has historically resulted in low turnover relative to our peers. We manage Funds that maintain low expense ratios.

 

Risks: 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. Investing in non-U.S. securities may entail risk due to foreign economic and political developments; this risk may be increased when investing in emerging markets. The Fund is also subject to currency risk. Please read the prospectus and summary prospectus for specific details regarding the Fund’s risk profile.

 

 

PAGE 4 § DODGE & COX GLOBAL STOCK FUND


GROWTH OF $10,000 SINCE INCEPTION

FOR AN INVESTMENT MADE ON MAY 1, 2008

 

LOGO

AVERAGE ANNUAL TOTAL RETURN

FOR PERIODS ENDED DECEMBER 31, 2015

 

     1 Year     3 Years     5 Years     Since
Inception
(5/1/08)
 

Dodge & Cox Global Stock Fund

    –8.05     9.41     7.04     3.27

MSCI World Index

    –0.89        9.63        7.59        3.45   

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. Performance is updated and published monthly. Visit the Fund’s website at dodgeandcox.com or call 800-621-3979 for current performance figures.

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 but, unlike Fund returns, do not reflect fees or expenses. The MSCI World Index is a broad-based, unmanaged equity market index aggregated from 23 developed market country indices, including the United States. 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 report is not approved, reviewed, or produced by MSCI.

MSCI World is a service mark of MSCI Barra.

 

 

FUND EXPENSE EXAMPLE

As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.

ACTUAL EXPENSES

The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER MUTUAL FUNDS

Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.

 

Six Months Ended

December 31, 2015

   Beginning Account Value
7/1/2015
     Ending Account Value
12/31/2015
    

Expenses Paid

During Period*

 

Based on Actual Fund Return

   $ 1,000.00       $ 899.80       $ 2.99   

Based on Hypothetical 5% Yearly Return

     1,000.00         1,022.06         3.18   
*  

Expenses are equal to the Fund’s annualized expense ratio of 0.62%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. Though other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).

 

DODGE & COX GLOBAL STOCK FUND § PAGE 5


FUND INFORMATION (unaudited)     December 31, 2015   

 

GENERAL INFORMATION        

Net Asset Value Per Share

     $10.46   

Total Net Assets (billions)

     $5.7   

2014 Expense Ratio (per 5/1/15 Prospectus)

     0.65%   

2015 Expense Ratio

     0.63%   

Portfolio Turnover Rate

     20%   

30-Day SEC Yield(a)

     1.42%   

Number of Companies

     83   

Fund Inception

     2008   

No sales charges or distribution fees

  

Investment Manager: Dodge & Cox, San Francisco. Managed by the Global Stock Investment Policy Committee, whose seven members’ average tenure at Dodge & Cox is 19 years.

 

PORTFOLIO CHARACTERISTICS    Fund        MSCI
World
 

Median Market Capitalization (billions)

     $31           $10   

Weighted Average Market Capitalization (billions)

     $94           $93   

Price-to-Earnings Ratio(b)

     13.3x           15.7x   

Countries Represented

     20           23   

Emerging Markets (Brazil, China, India, Mexico, South Africa, South Korea, Thailand, Turkey)

     16.9%           0.0%   

 

TEN LARGEST HOLDINGS (%)(c)    Fund  

Alphabet, Inc. (United States)

     3.7   

Time Warner Cable, Inc. (United States)

     3.1   

Samsung Electronics Co., Ltd. (South Korea)

     2.9   

Bank of America Corp. (United States)

     2.6   

Naspers, Ltd. (South Africa)

     2.6   

Roche Holding AG (Switzerland)

     2.4   

Novartis AG (Switzerland)

     2.3   

Sanofi (France)

     2.3   

Time Warner, Inc. (United States)

     2.2   

Standard Chartered PLC (United Kingdom)

     2.1   
ASSET ALLOCATION

LOGO

 

REGION DIVERSIFICATION (%)(e)    Fund        MSCI
World
 

United States

     50.6           58.7   

Europe (excluding United Kingdom)

     19.7           17.2   

Pacific (excluding Japan)

     10.6           4.3   

United Kingdom

     6.2           7.4   

Japan

     3.4           9.0   

Africa/Middle East

     3.4           0.3   

Latin America

     3.3           0.0   

Canada

     0.6           3.1   

 

SECTOR DIVERSIFICATION (%)    Fund        MSCI
World
 

Financials

     23.6           20.8   

Consumer Discretionary

     21.3           13.3   

Information Technology

     20.5           14.2   

Health Care

     14.8           13.5   

Energy

     6.4           6.1   

Industrials

     3.7           10.7   

Materials

     3.0           4.4   

Telecommunication Services

     2.6           3.4   

Consumer Staples

     1.9           10.4   

Utilities

     0.0           3.2   
 

 

 

(a) 

SEC Yield is an annualization of the Fund’s total net investment income per share for the 30-day period ended on the last day of the month.

(b) 

Price-to-earnings (P/E) ratios are calculated using 12-month forward earnings estimates from third-party sources.

(c) 

The Fund’s portfolio holdings are subject to change without notice. The mention of specific securities is not a recommendation to buy, sell, or hold any particular security and is not indicative of Dodge & Cox’s current or future trading activity.

(d) 

Net Cash & Other includes short-term investments (e.g., money market funds and repurchase agreements) and other assets less liabilities (e.g., cash, receivables, payables, and unrealized appreciation/depreciation on certain derivatives).

(e) 

The Fund may classify a company in a different category than the MSCI World. The Fund generally classifies a company based on its country of incorporation, but may designate a different country in certain circumstances.

 

PAGE 6 § DODGE & COX GLOBAL STOCK FUND


CONSOLIDATED PORTFOLIO OF INVESTMENTS     December 31, 2015  

 

COMMON STOCKS: 94.2%               
    SHARES      VALUE  
CONSUMER DISCRETIONARY: 21.3%   

AUTOMOBILES & COMPONENTS: 5.4%

  

  

Bayerische Motoren Werke AG (Germany)

    620,200       $ 65,318,528   

Honda Motor Co., Ltd. (Japan)

    3,109,700         99,639,572   

Mahindra & Mahindra, Ltd. (India)

    2,543,374         48,632,867   

Nissan Motor Co., Ltd. (Japan)

    5,816,300         60,913,271   

Yamaha Motor Co., Ltd. (Japan)

    1,448,400         32,456,868   
    

 

 

 
       306,961,106   

CONSUMER DURABLES & APPAREL: 0.5%

  

Coach, Inc. (United States)

    971,500         31,797,195   

CONSUMER SERVICES: 0.5%

  

New Oriental Education & Technology Group, Inc. ADR (Cayman Islands/China)

    853,567         26,776,397   

MEDIA: 12.0%

    

Comcast Corp., Class A (United States)

    1,265,400         71,406,522   

DISH Network Corp., Class A(a) (United States)

    786,300         44,960,634   

Grupo Televisa SAB ADR (Mexico)

    1,412,300         38,428,683   

Liberty Global PLC LiLAC, Series C(a) (United Kingdom)

    63,185         2,716,955   

Liberty Global PLC, Series C(a) (United Kingdom)

    1,566,800         63,878,436   

Naspers, Ltd. (South Africa)

    1,059,300         145,212,803   

Television Broadcasts, Ltd. (Hong Kong)

    2,599,500         10,716,579   

Time Warner Cable, Inc. (United States)

    961,171         178,383,726   

Time Warner, Inc. (United States)

    1,964,666         127,054,950   
    

 

 

 
       682,759,288   

RETAILING: 2.9%

    

JD.com, Inc. ADR(a) (Cayman Islands/China)

    1,686,900         54,427,829   

Target Corp. (United States)

    615,600         44,698,716   

The Priceline Group, Inc.(a) (United States)

    53,200         67,827,340   
    

 

 

 
       166,953,885   
    

 

 

 
       1,215,247,871   
CONSUMER STAPLES: 1.9%      

FOOD & STAPLES RETAILING: 1.4%

  

  

Wal-Mart Stores, Inc. (United States)

    1,298,200         79,579,660   

FOOD, BEVERAGE & TOBACCO: 0.5%

  

  

Anadolu Efes Biracilik ve Malt Sanayii AS (Turkey)

    4,023,248         26,059,236   
    

 

 

 
       105,638,896   
ENERGY: 5.6%     

Apache Corp. (United States)

    1,028,432         45,734,371   

Baker Hughes, Inc. (United States)

    1,494,087         68,952,115   

National Oilwell Varco, Inc. (United States)

    960,200         32,157,098   

Saipem SPA(a) (Italy)

    4,771,043         38,352,249   

Schlumberger, Ltd. (Curacao/United States)

    1,450,200         101,151,450   

Weatherford International PLC(a) (Ireland)

    3,779,375         31,708,956   
    

 

 

 
       318,056,239   
FINANCIALS: 22.3%     

BANKS: 10.9%

    

Bank of America Corp. (United States)

    8,918,400         150,096,672   

Barclays PLC (United Kingdom)

    32,430,600         104,654,320   

ICICI Bank, Ltd. (India)

    19,126,282         75,457,113   

Kasikornbank PCL- Foreign (Thailand)

    12,934,700         53,474,818   

Siam Commercial Bank PCL- Foreign (Thailand)

    5,156,300         17,016,303   

Standard Chartered PLC (United Kingdom)

    14,588,077         121,227,876   

Wells Fargo & Co. (United States)

    1,651,573         89,779,508   

Yapi ve Kredi Bankasi AS (Turkey)

    7,580,017         8,551,041   
    

 

 

 
       620,257,651   
    SHARES      VALUE  

DIVERSIFIED FINANCIALS: 7.7%

  

  

Bank of New York Mellon Corp. (United States)

    1,497,200       $ 61,714,584   

Capital One Financial Corp. (United States)

    1,206,900         87,114,042   

Charles Schwab Corp. (United States)

    3,670,800         120,879,444   

Credit Suisse Group AG (Switzerland)

    4,566,743         98,702,568   

Goldman Sachs Group, Inc. (United States)

    271,900         49,004,537   

Haci Omer Sabanci Holding AS (Turkey)

    7,957,588         22,592,521   
    

 

 

 
       440,007,696   

INSURANCE: 2.1%

    

AEGON NV (Netherlands)

    11,121,459         63,211,053   

Aviva PLC (United Kingdom)

    7,893,600         60,045,606   
    

 

 

 
       123,256,659   

REAL ESTATE: 1.6%

    

BR Malls Participacoes SA (Brazil)

    7,033,500         19,616,305   

Hang Lung Group, Ltd. (Hong Kong)

    14,438,300         46,854,310   

Hang Lung Properties, Ltd. (Hong Kong)

    10,126,100         23,048,161   
    

 

 

 
       89,518,776   
    

 

 

 
       1,273,040,782   
HEALTH CARE: 14.8%     

HEALTH CARE EQUIPMENT & SERVICES: 6.3%

  

Anthem, Inc. (United States)

    341,688         47,644,975   

Cigna Corp. (United States)

    665,000         97,309,450   

Express Scripts Holding Co.(a) (United States)

    1,286,600         112,461,706   

UnitedHealth Group, Inc. (United States)

    868,900         102,217,396   
    

 

 

 
       359,633,527   

PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES: 8.5%

  

Bayer AG (Germany)

    379,320         47,589,978   

Merck & Co., Inc. (United States)

    644,400         34,037,208   

Novartis AG (Switzerland)

    949,500         81,160,026   

Novartis AG ADR (Switzerland)

    601,000         51,710,040   

Roche Holding AG (Switzerland)

    499,800         137,738,947   

Sanofi (France)

    1,549,862         132,386,941   
    

 

 

 
       484,623,140   
    

 

 

 
       844,256,667   
INDUSTRIALS: 3.7%     

CAPITAL GOODS: 1.5%

    

Schneider Electric SA (France)

    1,531,078         87,454,516   

COMMERCIAL & PROFESSIONAL SERVICES: 1.2%

  

  

ADT Corp. (United States)

    858,800         28,323,224   

Tyco International PLC (Ireland)

    1,279,100         40,790,499   
    

 

 

 
       69,113,723   

TRANSPORTATION: 1.0%

    

FedEx Corp. (United States)

    382,400         56,973,776   
    

 

 

 
       213,542,015   
INFORMATION TECHNOLOGY: 19.0%   

SOFTWARE & SERVICES: 8.3%

    

Alphabet, Inc., Class A(a) (United States)

    21,500         16,727,215   

Alphabet, Inc., Class C(a) (United States)

    253,399         192,299,433   

Baidu, Inc. ADR(a) (Cayman Islands/China)

    457,515         86,488,636   

eBay, Inc.(a) (United States)

    164,300         4,514,964   

Microsoft Corp. (United States)

    2,124,100         117,845,068   

Symantec Corp. (United States)

    1,641,300         34,467,300   

Synopsys, Inc.(a) (United States)

    425,100         19,388,811   
    

 

 

 
       471,731,427   
 

 

See accompanying Notes to Consolidated Financial Statements   DODGE & COX GLOBAL STOCK FUND § PAGE 7


CONSOLIDATED PORTFOLIO OF INVESTMENTS     December 31, 2015  

 

 

COMMON STOCKS (continued)               
    SHARES      VALUE  

TECHNOLOGY, HARDWARE & EQUIPMENT: 10.7%

  

Cisco Systems, Inc. (United States)

    3,960,200       $ 107,539,231   

Corning, Inc. (United States)

    2,500,900         45,716,452   

EMC Corp. (United States)

    4,470,200         114,794,736   

Hewlett Packard Enterprise Co. (United States)

    6,642,900         100,972,080   

HP, Inc. (United States)

    6,760,100         80,039,584   

NetApp, Inc. (United States)

    755,780         20,050,843   

Samsung Electronics Co., Ltd. (South Korea)

    72,517         77,435,944   

TE Connectivity, Ltd. (Switzerland)

    1,022,115         66,038,850   
    

 

 

 
       612,587,720   
    

 

 

 
       1,084,319,147   
MATERIALS: 3.0%      

Celanese Corp., Series A (United States)

    876,500         59,014,745   

LafargeHolcim, Ltd. (Switzerland)

    656,020         32,871,626   

Linde AG (Germany)

    327,710         47,568,194   

Teck Resources, Ltd., Class B (Canada)

    8,396,569         32,410,757   
    

 

 

 
       171,865,322   
TELECOMMUNICATION SERVICES: 2.6%   

America Movil SAB de CV, Series L (Mexico)

    12,229,000         8,585,738   

Millicom International Cellular SA SDR (Luxembourg)

    822,900         46,870,485   

MTN Group, Ltd. (South Africa)

    5,560,200         47,778,531   

Sprint Corp.(a) (United States)

    12,730,600         46,084,772   
    

 

 

 
       149,319,526   
    

 

 

 

TOTAL COMMON STOCKS
(Cost $4,967,081,960)

     $ 5,375,286,465   
PREFERRED STOCKS: 3.6%               
ENERGY: 0.8%     

Petroleo Brasileiro SA ADR(a) (Brazil)

    14,428,003         49,055,210   
FINANCIALS: 1.3%     

BANKS: 1.3%

    

Itau Unibanco Holding SA (Brazil)

    11,092,063         72,481,734   
INFORMATION TECHNOLOGY: 1.5%   

TECHNOLOGY, HARDWARE & EQUIPMENT: 1.5%

  

Samsung Electronics Co., Ltd. (South Korea)

    91,514         84,695,337   
    

 

 

 

TOTAL PREFERRED STOCKS
(Cost $302,069,322)

     $ 206,232,281   
SHORT-TERM INVESTMENTS: 2.7%  
    PAR VALUE     VALUE  

MONEY MARKET FUND: 0.1%

  

SSgA U.S. Treasury Money Market Fund

  $ 5,773,394      $ 5,773,394   

REPURCHASE AGREEMENT: 0.2%

  

Fixed Income Clearing Corporation(b)
0.08%, dated 12/31/15, due 1/4/16,
maturity value $12,877,114

    12,877,000        12,877,000   

TREASURY BILL: 2.4%

   

Canadian Treasury Bill (Canada) 2/11/16

    192,000,000        138,689,022   
   

 

 

 

TOTAL SHORT-TERM INVESTMENTS
(Cost $156,844,916)

    $ 157,339,416   
   

 

 

 

TOTAL INVESTMENTS
(Cost $5,425,996,198)

    100.5   $ 5,738,858,162   

OTHER ASSETS LESS LIABILITIES

    (0.5 %)      (31,079,480
 

 

 

   

 

 

 
NET ASSETS     100.0   $ 5,707,778,682   
 

 

 

   

 

 

 

 

(a) 

Non-income producing

(b) 

Repurchase agreement is collateralized by U.S. Treasury Note 1.625%, 7/31/20. Total collateral value is $13,136,400.

In determining a company’s country designation, the Fund generally references the country of incorporation. In cases where the Fund considers the country of incorporation to be a “jurisdiction of convenience” chosen primarily for tax purposes or in other limited circumstances, the Fund uses the country designation of an appropriate broad-based market index. In those cases, two countries are listed - the country of incorporation and the country designated by an appropriate index, respectively.

ADR: American Depositary Receipt

SDR: Swedish Depository Receipt

FORWARD CURRENCY CONTRACTS

 

           Contract Amount        
Counterparty   Settlement
Date
    

Receive

U.S. Dollar

     Deliver
Foreign
Currency
    Unrealized
Appreciation/
(Depreciation)
 

Contracts to sell CHF:

  

       

Goldman Sachs

    1/27/16         29,946,922         29,000,000      $ 966,230   

Goldman Sachs

    2/3/16         30,516,647         30,000,000        527,618   

UBS

    2/3/16         30,404,686         30,000,000        415,658   

Contracts to sell EUR:

  

       

Credit Suisse

    2/24/16         29,240,885         27,250,000        (409,690

JPMorgan

    2/24/16         13,673,610         12,750,000        (199,595

Deutsche Bank

    3/2/16         20,624,470         19,400,000        (488,244

Barclays

    3/9/16         20,698,790         19,000,000        17,635   

HSBC

    3/9/16         11,964,590         11,000,000        (8,710
         

 

 

 
          $ 820,902   
         

 

 

 
 

 

PAGE 8 § DODGE & COX GLOBAL STOCK FUND   See accompanying Notes to Consolidated Financial Statements


CONSOLIDATED

STATEMENT OF ASSETS AND LIABILITIES

  

  

    December 31, 2015  

ASSETS:

 

Investments, at value (cost $5,425,996,198)

  $ 5,738,858,162   

Unrealized appreciation on forward currency contracts

    1,927,141   

Cash denominated in foreign currency (cost $739)

    731   

Cash

    100   

Receivable for investments sold

    5,858,071   

Receivable for Fund shares sold

    27,278,177   

Dividends and interest receivable

    11,146,371   

Prepaid expenses and other assets

    49,675   
 

 

 

 
    5,785,118,428   
 

 

 

 

LIABILITIES:

 

Unrealized depreciation on forward currency contracts

    1,106,239   

Payable for investments purchased

    14,773,671   

Payable for Fund shares redeemed

    58,056,720   

Management fees payable

    2,927,968   

Accrued expenses

    475,148   
 

 

 

 
    77,339,746   
 

 

 

 

NET ASSETS

  $ 5,707,778,682   
 

 

 

 

NET ASSETS CONSIST OF:

 

Paid in capital

  $ 5,342,564,016   

Undistributed net investment income

    337,857   

Undistributed net realized gain

    51,920,181   

Net unrealized appreciation

    312,956,628   
 

 

 

 
  $ 5,707,778,682   
 

 

 

 

Fund shares outstanding (par value $0.01 each,
unlimited shares authorized)

    545,831,312   

Net asset value per share

  $ 10.46   

CONSOLIDATED

STATEMENT OF OPERATIONS

 
    Year Ended
December 31, 2015
 

INVESTMENT INCOME:

 

Dividends (net of foreign taxes of $5,879,065)

  $ 125,378,250   

Interest

    15,237   
 

 

 

 
    125,393,487   
 

 

 

 

EXPENSES:

 

Management fees

    37,258,811   

Custody and fund accounting fees

    620,606   

Transfer agent fees

    309,736   

Professional services

    219,650   

Shareholder reports

    100,505   

Registration fees

    196,886   

Trustees’ fees

    237,500   

Miscellaneous

    311,547   
 

 

 

 
    39,255,241   
 

 

 

 

NET INVESTMENT INCOME

    86,138,246   
 

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS):

 

Net realized gain (loss)

 

Investments

    135,300,729   

Forward currency contracts

    19,146,059   

Foreign currency transactions

    (637,316

Net change in unrealized appreciation/depreciation

 

Investments

    (761,602,676

Forward currency contracts

    (2,559,627

Foreign currency translation

    (521,016
 

 

 

 

Net realized and unrealized loss

    (610,873,847
 

 

 

 

NET DECREASE IN NET ASSETS
FROM OPERATIONS

  $ (524,735,601
 

 

 

 

CONSOLIDATED

STATEMENT OF CHANGES IN NET ASSETS

  

  

    Year Ended
December 31, 2015
    Year Ended
December 31, 2014
 

OPERATIONS:

   

Net investment income

  $ 86,138,246      $ 73,280,159   

Net realized gain

    153,809,472        160,901,823   

Net change in unrealized
appreciation/depreciation

    (764,683,319     67,737,521   
 

 

 

   

 

 

 
    (524,735,601     301,919,503   
 

 

 

   

 

 

 

DISTRIBUTIONS TO SHAREHOLDERS FROM:

   

Net investment income

    (98,070,160     (72,474,215

Net realized gain

    (119,687,722     (138,830,388
 

 

 

   

 

 

 

Total distributions

    (217,757,882     (211,304,603
 

 

 

   

 

 

 

FUND SHARE
TRANSACTIONS:

   

Proceeds from sale of shares

    1,649,174,317        2,482,518,668   

Reinvestment of distributions

    211,165,760        204,987,790   

Cost of shares redeemed

    (1,305,398,436     (806,780,930
 

 

 

   

 

 

 

Net increase from Fund share transactions

    554,941,641        1,880,725,528   
 

 

 

   

 

 

 

Total increase/(decrease) in net assets

    (187,551,842     1,971,340,428   

NET ASSETS:

   

Beginning of year

    5,895,330,524        3,923,990,096   
 

 

 

   

 

 

 

End of year (including undistributed net investment income of $337,857 and $(306,245), respectively)

  $ 5,707,778,682      $ 5,895,330,524   
 

 

 

   

 

 

 

SHARE INFORMATION:

   

Shares sold

    141,279,760        205,490,704   

Distributions reinvested

    20,441,990        17,283,962   

Shares redeemed

    (114,061,371     (66,336,804
 

 

 

   

 

 

 

Net increase in shares outstanding

    47,660,379        156,437,862   
 

 

 

   

 

 

 
 

 

See accompanying Notes to Consolidated Financial Statements   DODGE & COX GLOBAL STOCK FUND § PAGE 9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1—ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Dodge & Cox Global Stock Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund commenced operations on May 1, 2008, and seeks long-term growth of principal and income. The Fund invests primarily in a diversified portfolio of U.S. and foreign equity securities. Foreign investing, especially in developing countries, has special risks such as currency and market volatility and political and social instability. These and other risk considerations are discussed in the Fund’s Prospectus.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Actual results may differ from those estimates. Significant accounting policies are as follows:

Security valuation The Fund’s net assets are valued as of the close of trading on the New York Stock Exchange (NYSE), generally 4:00 p.m. Eastern Time, each day that the NYSE is open for business. If the NYSE is closed due to inclement weather, technology problems, or for any other reason on a day it would normally be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the Fund reserves the right to calculate the Fund’s NAV as of the normally scheduled close of regular trading on the NYSE for that day, provided that Dodge & Cox believes that it can obtain reliable market quotes or valuations.

Portfolio securities and other financial instruments for which market quotes are readily available are valued at market value. Listed securities are generally valued using the official quoted close price or the last sale on the exchange that is determined to be the primary market for the security. Security values are not discounted based on the size of the Fund’s position. Short-term securities less than 60 days to maturity may be valued at amortized cost if amortized cost approximates current value. Mutual funds are valued at their respective net asset values.

Investments initially valued in currencies other than the U.S. dollar are converted to the U.S. dollar using prevailing exchange rates. As a result, the Fund’s net assets may be affected by changes in the value of currencies in relation to the U.S. dollar.

If market quotations are not readily available or if a security’s value is believed to have materially changed after the close of the security’s primary market but before the close of trading on the NYSE, the security is valued at fair value as determined in good faith by or under the direction of the Fund’s Board of Trustees. The Board of Trustees has appointed Dodge & Cox, the Fund’s investment manager, to make fair value determinations in accordance with the Dodge & Cox Funds Valuation Policies (“Valuation Policies”), subject to Board oversight. Dodge & Cox has established a Pricing Committee that is comprised of

representatives from Treasury, Legal, Compliance, and Operations. The Pricing Committee is responsible for implementing the Valuation Policies, including determining the fair value of securities when market quotations or market-based valuations are not readily available or are deemed unreliable. The Pricing Committee considers relevant indications of value that are reasonably available to it in determining the fair value assigned to a particular security, such as the value of similar financial instruments, trading volumes, contractual restrictions on disposition, related corporate actions, and changes in economic conditions. In doing so, the Pricing Committee employs various methods for calibrating fair valuation approaches, including a regular review of key inputs and assumptions, back-testing, and review of any related market activity.

As trading in securities on most foreign exchanges is normally completed before the close of the NYSE, the value of non-U.S. securities can change by the time the Fund calculates its NAV. To address these changes, the Fund may utilize adjustment factors provided by an independent pricing service to systematically value non-U.S. securities at fair value. These adjustment factors are based on statistical analyses of subsequent movements and changes in U.S. markets and financial instruments trading in U.S. markets that represent foreign securities or baskets of securities.

Valuing securities through a fair value determination involves greater reliance on judgment than valuation of securities based on readily available market quotations. In some instances, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a security’s value. When fair value pricing is employed, the prices of securities used by the Fund to calculate its NAV may differ from quoted or published prices for the same securities.

Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.

Dividend income and corporate action transactions are recorded on the ex-dividend date, or when the Fund first learns of the dividend/corporate action if the ex-dividend date has passed. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Dividends characterized as return of capital for U.S. tax purposes are recorded as a reduction of cost of investments and/or realized gain. Interest income is recorded on the accrual basis.

Expenses are recorded on the accrual basis. Some expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust based on relative net assets or other expense methodologies determined by the nature of the expense.

Distributions to shareholders are recorded on the ex-dividend date.

Foreign taxes The Fund is subject to foreign taxes which may be imposed by certain countries in which the Fund invests.

 

 

PAGE 10 § DODGE & COX GLOBAL STOCK FUND


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Fund endeavors to record foreign taxes based on applicable foreign tax law. Withholding taxes are incurred on certain foreign dividends and are accrued at the time the associated dividend is recorded. The Fund files withholding tax reclaims in certain jurisdictions to recover a portion of amounts previously withheld. The Fund records a reclaim receivable based on, among other things, a jurisdiction’s legal obligation to pay reclaims as well as payment history and market convention. In consideration of recent decisions rendered by European courts, the Fund has filed for additional reclaims related to prior years. A corresponding receivable is established when both the amount is known and significant contingencies or uncertainties regarding collectability are removed. These amounts are reported in “dividends and interest receivable” on the Consolidated Statement of Assets and Liabilities.

Capital gains taxes are incurred upon disposition of certain foreign securities. Capital gains taxes on appreciated securities are accrued as unrealized losses and are reflected as realized losses upon the sale of the related security. Currency taxes may be incurred when the Fund purchases certain foreign currencies related to securities transactions and are recorded as realized losses on foreign currency transactions.

Repurchase agreements The Fund enters into repurchase agreements, secured by U.S. government or agency securities, which involve the purchase of securities from a counterparty with a simultaneous commitment to resell the securities at an agreed-upon date and price. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the collateral securities and to apply the proceeds in satisfaction of the obligation.

Forward currency contracts A forward currency contract represents an obligation to purchase or sell a specific foreign currency at a future date at a price set at the time of the contract. Losses from these transactions may arise from unfavorable changes in currency values or if the counterparties do not perform under a contract’s terms.

The values of the forward currency contracts are adjusted daily based on the prevailing forward exchange rates of the underlying currencies. Changes in the value of open contracts are recorded as unrealized appreciation or depreciation in the Consolidated Statement of Operations. When the forward currency contract is closed, the Fund records a realized gain or loss in the Consolidated Statement of Operations equal to the difference between the value at the time the contract was opened and the value at the time it was closed.

During the year, the Fund maintained forward currency contracts to hedge foreign currency risks associated with portfolio investments denominated in the euro and Swiss franc. During the year ended December 31, 2015, these euro and Swiss franc forward

currency contracts had U.S. dollar total values ranging from 1% to 2% of net assets and 0% to 2% of net assets, respectively.

Foreign currency translation The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the prevailing exchange rates of such currencies against the U.S. dollar. The market value of investment securities and other assets and liabilities are translated at the exchange rate as of the valuation date. Purchases and sales of investment securities, income, and expenses are translated at the exchange rate prevailing on the transaction date.

Reported realized and unrealized gain (loss) on investments include foreign currency gain (loss) related to investment transactions.

Reported realized and unrealized gain (loss) on foreign currency transactions and translation include the following: disposing/holding of foreign currency, the difference between the trade and settlement dates on securities transactions, the difference between the accrual and payment dates on dividends, and currency losses on the purchase of foreign currency in certain countries that impose taxes on such transactions.

Consolidation The Fund may invest in certain securities through its wholly owned subsidiary, Dodge & Cox Global Stock Fund Cayman, Ltd. (the “Subsidiary”). The Subsidiary is a Cayman Islands exempted company and invests in certain securities consistent with the investment objective of the Fund. The Fund’s Consolidated Financial Statements, including the Consolidated Portfolio of Investments, consist of the holdings and accounts of the Fund and the Subsidiary. All intercompany transactions and balances have been eliminated. At December 31, 2015, the Subsidiary had net assets of $100, which represented less than 0.01% of the Fund’s consolidated net assets.

Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.

NOTE 2—VALUATION MEASUREMENTS

Various inputs are used in determining the value of the Fund’s investments and other financial instruments. These inputs are summarized in the three broad levels listed below.

§  

Level 1: Quoted prices in active markets for identical securities

§  

Level 2: Other significant observable inputs (including quoted prices for similar securities, market indices, interest rates, credit risk, etc.)

§  

Level 3: Significant unobservable inputs (including Fund management’s assumptions in determining the fair value of investments)

 

 

DODGE & COX GLOBAL STOCK FUND § PAGE 11


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used to value the Fund’s holdings at December 31, 2015:

 

Classification(a)   LEVEL 1
(Quoted Prices)
    LEVEL 2
(Other Significant
Observable Inputs)
 

Securities

   

Common Stocks

   

Consumer Discretionary

  $ 956,919,632      $ 258,328,239   

Consumer Staples

    105,638,896          

Energy

    279,703,990        38,352,249   

Financials

    1,084,230,788        188,809,994   

Health Care

    577,767,715        266,488,952   

Industrials

    213,542,015          

Information Technology

    1,006,883,203        77,435,944   

Materials

    91,425,502        80,439,820   

Telecommunication Services

    102,449,041        46,870,485   

Preferred Stocks

   

Energy

    49,055,210          

Financials

           72,481,734   

Information Technology

           84,695,337   

Short-term Investments

   

Money Market Fund

    5,773,394          

Repurchase Agreement

           12,877,000   

Treasury Bill

           138,689,022   
 

 

 

   

 

 

 

Total Securities

  $ 4,473,389,386      $ 1,265,468,776   
 

 

 

   

 

 

 

Other Financial Instruments(b)

   

Forward Currency Contracts

   

Appreciation

  $      $ 1,927,141   

Depreciation

           (1,106,239
                 
(a)  

Transfers during the year between Level 1 and Level 2 relate to the use of systematic fair valuation (see Note 1). On days when systematic fair valuation is used, securities whose primary market closes before the NYSE are classified as Level 2. There were no Level 3 securities at December 31, 2015 and 2014, and there were no transfers to Level 3 during the year.

(b)  

Represents unrealized appreciation/(depreciation).

NOTE 3—ADDITIONAL DERIVATIVES INFORMATION

The Fund has entered into over-the-counter derivatives, such as forward currency contracts (each, a “Derivative”). Each Derivative is subject to a negotiated master agreement (based on a form published by the International Swaps and Derivatives Association (“ISDA”)) governing all Derivatives between the Fund and the relevant dealer counterparty. The master agreements specify (i) events of default and other events permitting a party to terminate some or all of the Derivatives thereunder and (ii) the process by which those Derivatives will be valued for purposes of determining termination payments. If some or all of the Derivatives under a master agreement are terminated because of an event of default or similar event, the values of all terminated Derivatives must be netted to determine a single payment owed by one party to the other. Some master agreements contain collateral terms requiring the parties to post collateral in respect of some or all of the Derivatives thereunder based on the net market value of those Derivatives, subject to a minimum exposure threshold. To

the extent amounts owed to the Fund by its counterparties are not collateralized, the Fund is at risk of those counterparties’ non-performance. The Fund attempts to mitigate counterparty credit risk by entering into Derivatives only with counterparties it believes to be of good credit quality and by monitoring the financial stability of those counterparties.

At December 31, 2015, no Derivative position subject to a master netting arrangement qualifies for netting. For financial reporting purposes, the Fund does not offset financial assets and liabilities that are subject to a master netting arrangement in the Consolidated Statement of Assets and Liabilities. Gross assets and liabilities related to Derivatives are presented as “unrealized appreciation on forward currency contracts” and “unrealized depreciation on forward currency contracts,” respectively, in the Consolidated Statement of Assets and Liabilities. Derivative information by counterparty is presented in the Consolidated Portfolio of Investments. At December 31, 2015, no collateral is pledged or held by the Fund for Derivatives.

NOTE 4—RELATED PARTY TRANSACTIONS

Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays an annual management fee of 0.60% of the Fund’s average daily net assets to Dodge & Cox, investment manager of the Fund.

Fund officers and trustees All officers and two of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.

NOTE 5—INCOME TAX INFORMATION AND DISTRIBUTIONS TO SHAREHOLDERS

A provision for federal income taxes is not required since the Fund intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, and such amounts may differ from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book to tax differences at year end to reflect tax character.

Book to tax differences are primarily due to differing treatments of wash sales, net short-term realized gain (loss), investments in passive foreign investment companies, foreign capital gain taxes, and foreign currency realized gain (loss). At December 31, 2015, the cost of investments for federal income tax purposes was $5,438,868,248.

Distributions during the years noted below were characterized as follows for federal income tax purposes:

 

    

Year Ended

December 31, 2015

   

Year Ended

December 31, 2014

 

Ordinary income

    $112,306,144        $100,240,292   
    ($0.213 per share)        ($0.213 per share)   

Long-term capital gain

    $105,451,738        $111,064,311   
    ($0.200 per share)        ($0.236 per share)   
 

 

PAGE 12 § DODGE & COX GLOBAL STOCK FUND


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

At December 31, 2015, the tax basis components of distributable earnings were as follows:

 

Unrealized appreciation

    $973,534,707   

Unrealized depreciation

    (673,544,793
 

 

 

 

Net unrealized appreciation

    299,989,914   

Undistributed ordinary income

    337,857   

Undistributed long-term capital gain

    68,386,040   

Deferred loss(a)

    (2,772,907
(a)  

Represents net short-term realized loss incurred between November 1, 2015 and December 31, 2015. As permitted by tax regulations, the Fund has elected to treat this loss as arising in 2016.

Fund management has reviewed the tax positions for open periods (three years and four years, respectively, from filing the Fund’s Federal and State tax returns) as applicable to the Fund, and has determined that no provision for income tax is required in the Fund’s financial statements.

NOTE 6—LOAN FACILITIES

Pursuant to an exemptive order issued by the Securities and Exchange Commission (SEC), the Fund may participate in an interfund lending facility (Facility). The Facility allows the Fund to borrow money from or loan money to the Funds. Loans under the Facility are made for temporary or emergency purposes, such as to fund shareholder redemption requests. Interest on borrowings is the average of the current repurchase agreement rate and the bank loan rate. There was no activity in the Facility during the year.

All Funds in the Trust participate in a $500 million committed credit facility (Line of Credit) with State Street Bank and Trust Company, to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The maximum amount available to the Fund is $250 million. Each Fund pays an annual commitment fee on its pro-rata portion of the Line of Credit. For the year ended December 31, 2015, the Fund’s commitment fee amounted to $19,178 and is reflected as a Miscellaneous Expense in the Consolidated Statement of Operations. Interest on borrowings is charged at the prevailing rate. There were no borrowings on the Line of Credit during the year.

NOTE 7—PURCHASES AND SALES OF INVESTMENTS

For the year ended December 31, 2015, purchases and sales of securities, other than short-term securities, aggregated $1,678,416,983 and $1,181,203,951, respectively.

NOTE 8—SUBSEQUENT EVENTS

Fund management has determined that no material events or transactions occurred subsequent to December 31, 2015, and through the date of the Fund’s financial statements issuance, which require additional disclosure in the Fund’s financial statements.

 

 

DODGE & COX GLOBAL STOCK FUND § PAGE 13


CONSOLIDATED FINANCIAL HIGHLIGHTS

 

SELECTED DATA AND RATIOS

(for a share outstanding throughout each year)

    

Year Ended December 31,

 
               2015      2014      2013      2012      2011  
    

 

 

 

Net asset value, beginning of year

       $11.83         $11.48         $8.99         $7.68         $8.90   

Income from investment operations:

                

Net investment income

       0.16         0.16         0.16         0.15         0.16   

Net realized and unrealized gain (loss)

       (1.11      0.64         2.81         1.48         (1.18
    

 

 

 

Total from investment operations

       (0.95      0.80         2.97         1.63         (1.02
    

 

 

 

Distributions to shareholders from:

                

Net investment income

       (0.19      (0.15      (0.16      (0.15      (0.15

Net realized gain

       (0.23      (0.30      (0.32      (0.17      (0.05
    

 

 

 

Total distributions

       (0.42      (0.45      (0.48      (0.32      (0.20
    

 

 

 

Net asset value, end of year

       $10.46         $11.83         $11.48         $8.99         $7.68   
    

 

 

 

Total return

       (8.05 )%       6.95      33.17      21.11      (11.39 )% 

Ratios/supplemental data:

                

Net assets, end of year (millions)

       $5,708         $5,895         $3,924         $2,695         $1,875   

Ratio of expenses to average net assets

       0.63      0.65      0.65      0.65      0.66

Ratio of net investment income to average net assets

       1.39      1.42      1.58      1.93      1.94

Portfolio turnover rate

       20      17      24      12      19

See accompanying Notes to Consolidated Financial Statements

 

PAGE 14 § DODGE & COX GLOBAL STOCK FUND


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Trustees of Dodge & Cox Funds and Shareholders of Dodge & Cox Global Stock Fund

In our opinion, the accompanying consolidated statement of assets and liabilities, including the consolidated portfolio of investments, and the related consolidated statements of operations and of changes in net assets and the consolidated financial highlights present fairly, in all material respects, the financial position of Dodge & Cox Global Stock Fund (the “Fund”, one of the series constituting Dodge & Cox Funds) at December 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements and consolidated financial highlights (hereafter referred to as financial statements) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2015, by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 25, 2016

 

DODGE & COX GLOBAL STOCK FUND § PAGE 15


SPECIAL 2015 TAX INFORMATION

(unaudited)

The following information is provided pursuant to provisions of the Internal Revenue Code:

In 2015, the Fund elected to pass through to shareholders foreign source income of $86,033,491 and foreign taxes paid of $5,878,958.

The Fund designates up to a maximum of $122,119,608 of its distributions paid to shareholders in 2015 as qualified dividends (treated for federal income tax purposes in the hands of shareholders as taxable at a maximum rate of 20%).

For shareholders that are corporations, the Fund designates 41% of its ordinary dividends paid to shareholders in 2015 as dividends from domestic corporations eligible for the corporate dividends received deduction, provided that the shareholder otherwise satisfies applicable requirements to claim that deduction.

BOARD APPROVAL OF FUNDS’ INVESTMENT MANAGEMENT AGREEMENTS AND MANAGEMENT FEES

(unaudited)

The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 16, 2015, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2016 with respect to each Fund. During the course of the year, the Board received a wide variety of materials relating to the investment management and administrative services provided by Dodge & Cox and the performance of each of the Funds.

INFORMATION RECEIVED

In advance of the meeting, the Board, including each of the Independent Trustees, requested, received, and reviewed materials relating to the Agreements and the services provided by Dodge & Cox. The Independent Trustees retained Morningstar® to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Morningstar. The Morningstar materials included information regarding advisory fee rates, expense ratios, and transfer agency, custodial, and distribution expenses, as well as appropriate performance comparisons to each Fund’s peer group and an index or combination of indices. The Morningstar materials also included a comparison of expenses of various share classes offered by comparable funds. The materials reviewed by the Board contained information concerning, among other things, Dodge & Cox’s profitability, financial results and condition, advisory fee revenue, and separate account and sub-adviser fund fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates, sales and redemption data

and the significant investment that Dodge & Cox makes in research used in managing the Funds. The Board received and reviewed memoranda and related materials addressing, among other things, Dodge & Cox’s services to the Funds; how Dodge & Cox Funds’ fees compare to fees of peer group funds; the different fees, services, costs, and risks associated with other accounts managed by Dodge & Cox as compared to the Dodge & Cox Funds; and the ways in which the Funds realize economies of scale. Throughout the process of reviewing the services provided by Dodge & Cox and preparing for the meeting, the Independent Trustees found Dodge & Cox to be open, forthright, detailed, and very helpful in answering questions about all issues. The Board received copies of the Agreements and a memorandum from the independent legal counsel to the Independent Trustees discussing the factors generally regarded as appropriate to consider in evaluating advisory arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the independent legal counsel on November 11, 2015, and again on December 16, 2015, to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements. In considering the Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board considered several factors, discussed below, to be key factors and reached the conclusions described below.

NATURE, QUALITY, AND EXTENT OF THE SERVICES

The Board considered that Dodge & Cox provides a wide range of services to the Funds in addition to portfolio management and that the quality of these services has been excellent in all respects. The extensive nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality, and extent of portfolio management, administrative, and shareholder services performed by Dodge & Cox. With regard to portfolio management services, the Board considered Dodge & Cox’s established long-term history of care and conscientiousness in the management of the Funds; its demonstrated consistency in investment approach and depth; the background and experience of the Dodge & Cox Investment Policy Committee, International Investment Policy Committee, Global Stock Investment Policy Committee, Fixed Income Investment Policy Committee, and Global Bond Investment Policy Committee, and research analysts responsible for managing the Funds; its methods for assessing the regulatory and investment climate in various jurisdictions; Dodge & Cox’s overall high level of attention to its core investment management function; and its commitment to the Funds and their shareholders. In the area of administrative and shareholder services, the Board considered the excellent quality of Dodge & Cox’s work in areas such as compliance, legal services, trading, proxy voting, technology, oversight of the Funds’ transfer agent and custodian, tax compliance, and shareholder communication through its

 

 

PAGE 16 § DODGE & COX GLOBAL STOCK FUND


website and other means. The Board also noted Dodge & Cox’s diligent disclosure policy, its favorable compliance record, and its reputation as a trusted, shareholder-friendly mutual fund family. In addition, the Board considered that Dodge & Cox manages approximately $185 billion in Fund assets with fewer professionals than most comparable funds, and that on average these professionals have more experience and longer tenure than investment professionals at comparable funds. The Board also noted that Dodge & Cox is an investment research-oriented firm with no other business endeavors to distract management’s attention from its research efforts, and that its investment professionals adhere to a consistent investment approach across the Funds. The Board further considered the favorable stewardship grades given by Morningstar to each of the Funds and the “Gold” analyst rating awarded by Morningstar to all of the Funds except the Global Bond Fund. The Board concluded that it was satisfied with the nature, extent, and quality of investment management and other services provided to the Funds by Dodge & Cox.

INVESTMENT PERFORMANCE

The Board considered short-term and long-term investment performance for each Fund (including periods of outperformance or underperformance) as compared to both relevant indices and the performance of such Fund’s peer group. The Board noted that the Funds had weak absolute and relative performance in 2015, but remained solid performers over longer periods. The Board determined after extensive review and inquiry that Dodge & Cox’s historic, long-term, team-oriented, bottom-up investment approach remains consistent and that Dodge & Cox continues to be distinguished by its integrity, transparency, and independence. The Board considered that the performance of the Funds is the result of a team-oriented investment management process that emphasizes a long-term investment horizon, comprehensive independent research, price discipline, low cost and low portfolio turnover. The Board also considered that the investment performance delivered by Dodge & Cox to the Funds appeared to be consistent with the relevant performance delivered for other clients of Dodge & Cox. The Board concluded that Dodge & Cox has delivered favorable long-term performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.

COSTS AND ANCILLARY BENEFITS

Costs of Services to Funds: Fees and Expenses. The Board considered each Fund’s management fee rate and expense ratio relative to each Fund’s peer group and relative to management fees charged by Dodge & Cox to other clients. In particular, the Board considered that the Funds continue to be substantially below their peer group median in expense ratios and that many media and industry reports specifically comment on the low expense ratios of the Funds, which have been a defining characteristic of the Funds for many years. The Board also evaluated the operating structures of the Funds and Dodge & Cox, noting that the Funds do not charge front-end sales commissions or distribution fees, and Dodge & Cox bears, among other things, the significant cost of

third party research, reimbursement for recordkeeping and administrative costs to third-party retirement plan administrators, and administrative and office overhead.

The Board noted that expenses are well below industry averages. When compared to peer group funds, the Funds are in the quartile with the lowest expense ratios. The Board also considered that the Funds receive numerous administrative, regulatory compliance, legal, technology and shareholder support services from Dodge & Cox without any additional administrative fee and the fact that the Funds have relatively low transaction costs and portfolio turnover rates. The Board noted the Funds’ unusual single-share-class structure and reviewed Morningstar data showing that the few peer group funds with lower expense ratios often have other share classes with significantly higher expense ratios. In this regard, the Board considered that many of the Funds’ shareholders would not be eligible to purchase comparably-priced shares of many peer group funds, which typically make their lower-priced share classes available only to institutional investors. The Board determined that the Funds provide access for small investors to high quality investment management at a relatively low cost.

The Board reviewed information regarding the fee rates Dodge & Cox charges to separate accounts and subadvised funds that have investment programs similar to those of the Funds, including instances where separate account and sub-advised fund fees are lower than Fund fees. The Board considered differences in the nature and scope of services Dodge & Cox provides to the Funds as compared to other client accounts, differences in regulatory, litigation, and other risks as between Dodge & Cox Funds and other types of clients. The Board also noted that different markets exist for mutual fund and institutional separate account management services. With respect to non-U.S. funds sponsored and managed by Dodge & Cox that are comparable to the Funds in many respects, the Board noted that the fee rates charged by Dodge & Cox are the same as or higher than the fee rates charged to the Funds. After consideration of these matters, the Board concluded that the overall costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation, and performance of Dodge & Cox and the low overall expense ratios of the Funds.

Profitability and Costs of Services to Dodge & Cox; “Fall-out” Benefits. The Board reviewed reports of Dodge & Cox’s financial position, profitability, and estimated overall value, and considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the favorable services provided. The Board noted in particular that Dodge & Cox’s profits are not generated by high fee rates, but reflect an extraordinarily streamlined, efficient, and focused business approach toward investment management. The Board recognized the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that the compensation/profit structure

 

 

DODGE & COX GLOBAL STOCK FUND § PAGE 17


at Dodge & Cox includes a return on shareholder employees’ investment in the firm, which is vital for remaining independent and facilitating retention of management and investment professionals. The Board considered independent research indicating that firms that grow organically, rather than through acquisition, tend to have better performance. Key to organic growth is the ability to retain talented and experienced analysts, portfolio managers and other professionals.

The Board also considered that in January 2015, Dodge & Cox closed the International Stock Fund to new investors to pro-actively manage the growth of the Fund. The Stock Fund and Balanced Fund were similarly closed to new investors during periods of significant growth in the past. While these actions are intended to benefit existing shareholders, the effect is to reduce potential revenues to Dodge & Cox from new shareholders. The Board also considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers and reputational benefits to non-U.S. funds sponsored and managed by Dodge & Cox) that Dodge & Cox might receive as a result of its association with the Funds and determined that they are acceptable. The Board also noted that Dodge & Cox continues to invest substantial sums in its business in order to provide enhanced services, systems and research capabilities, all of which benefit the Funds. The Board concluded that Dodge & Cox’s profitability is the keystone of its independence, stability and long-term investment performance and that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) is fair and reasonable.

ECONOMIES OF SCALE

The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee structure and the considerable efficiencies of the Funds’ organization and fee structure that has been realized by shareholders from the time of each Fund’s inception (i.e., from the first dollar). An assessment of economies of scale must also take into account that Dodge & Cox invests significant time and resources in each new Fund for months (and sometimes years) prior to launch; in addition, expenses are capped, which means that Dodge & Cox earns no revenue and subsidizes the operations of a new Fund for a period of time until it reaches scale.

In addition, the Board noted that Dodge & Cox has shared economies of scale by adding or enhancing services to the Funds over time, and that the internal costs of providing investment management, up-to-date technology, administrative, legal, and compliance services to the Funds continue to increase. For example, Dodge & Cox has increased its global research staff and investment resources over the years to address the increased complexity of investing in multinational and non-U.S. companies. In addition, Dodge & Cox has made substantial expenditures in other staff, technology, cybersecurity, and infrastructure to enable it to integrate credit and equity analyses and to be able to implement its strategy in a more effective and secure manner. Over the last ten years, Dodge & Cox has increased its spending on

third party research, data services, trading systems, technology, and recordkeeping service expenses at a rate that has significantly outpaced the Funds’ growth rate during the same period.

The Board considered that Dodge & Cox has a history of voluntarily limiting asset growth in several Funds that experienced significant inflows by closing them to new investors in order to protect the Funds’ ability to achieve good investment returns for shareholders. The Board also observed that, even without fee breakpoints, the Funds are competitively priced in a very competitive market and that having a low fee from inception is better for shareholders than starting with a higher fee and adding breakpoints. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately shares economies of scale that may exist.

CONCLUSION

Based on their evaluation of all material factors and assisted by the advice of independent legal counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the advisory fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that the scope and quality of Dodge & Cox’s services has provided substantial value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.

FUND HOLDINGS

The Fund provides a complete list of its holdings four times each fiscal year, as of the end of each quarter. The Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-CSR (second and fourth quarters) and Form N-Q (first and third quarters). Shareholders may view the Fund’s Forms N-CSR and N-Q on the SEC’s website at sec.gov. Forms N-CSR and N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 202-942-8090 (direct) or 800-732-0330 (general SEC number). A list of the Fund’s quarter-end holdings is also available at dodgeandcox.com on or about 15 days following each quarter end and remains available on the website until the list is updated in the subsequent quarter.

PROXY VOTING

For a free copy of the Fund’s proxy voting policies and procedures, please call 800-621-3979, visit the Fund’s website at dodgeandcox.com, or visit the SEC’s website at sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ending June 30 is also available at dodgeandcox.com or at sec.gov.

HOUSEHOLD MAILINGS

The Fund routinely mails shareholder reports and summary prospectuses to shareholders and, on occasion, proxy statements. In order to reduce the volume of mail, when possible, only one copy of these documents will be sent to shareholders who are part of the same family and share the same residential address.

If you have a direct account with the Funds and you do not want the mailing of shareholder reports and summary prospectuses combined with other members in your household, contact the Funds at 800-621-3979. Your request will be implemented within 30 days.

 

 

PAGE 18 § DODGE & COX GLOBAL STOCK FUND


DODGE & COX FUNDS—EXECUTIVE OFFICER & TRUSTEE INFORMATION

 

Name (Age) and
Address*
 

Position with Trust

(Year of Election or
Appointment)

  Principal Occupation During Past 5 Years   Other Directorships Held by Trustees
INTERESTED TRUSTEES AND EXECUTIVE OFFICERS
Charles F. Pohl (57)  

Chairman and Trustee

(Officer since 2004)

  Chairman (since 2013), Co-President (2011-2013), Senior Vice President (until 2011), and Director of Dodge & Cox; Chief Investment Officer, Portfolio Manager, Investment Analyst, and member of Investment Policy Committee (IPC), Global Stock Investment Policy Committee (GSIPC), International Investment Policy Committee (IIPC), and Fixed Income Investment Policy Committee (FIIPC)  
Dana M. Emery (54)  

President and Trustee

(Trustee since 1993)

  Chief Executive Officer (since 2013), President (since 2011), Executive Vice President (until 2011), and Director of Dodge & Cox; Director of Fixed Income, Portfolio Manager, and member of FIIPC and Global Bond Investment Policy Committee (GBIPC)  
John A. Gunn (72)  

Senior Vice President

(Officer since 1998)

  Chairman Emeritus (2011-2013), Chairman (until 2011), Chief Executive Officer (until 2010), and Director (until 2013) of Dodge & Cox; Portfolio Manager and member of IPC, GSIPC (until 2014), and IIPC (until 2015)  
Diana S. Strandberg (56)   Senior Vice President (Officer since 2006)   Senior Vice President (since 2011), Vice President (until 2011), and Director (since 2011) of Dodge & Cox; Director of International Equity (since 2009), Portfolio Manager, Investment Analyst, and member of IPC, GSIPC, IIPC, and GBIPC  
David H. Longhurst (58)  

Treasurer

(Officer since 2006)

  Vice President and Assistant Treasurer of Dodge & Cox  
Thomas M. Mistele (62)  

Secretary

(Officer since 1998)

  Chief Operating Officer, Director, Secretary, Senior Counsel (since 2011), and General Counsel (until 2011) of Dodge & Cox  
Katherine M. Primas (41)  

Chief Compliance

Officer

(Officer since 2009)

  Vice President (since 2011) and Chief Compliance Officer of Dodge & Cox  
INDEPENDENT TRUSTEES
Thomas A. Larsen (66)  

Trustee

(Since 2002)

  Senior Counsel of Arnold & Porter LLP (law firm) (since 2013); Partner of Arnold & Porter LLP (until 2012); Director of Howard, Rice, Nemerovski, Canady, Falk & Rabkin (1977-2011)  
Ann Mather (55)  

Trustee

(Since 2011)

  CFO, Pixar Animation Studios (1999-2004)   Director, Google, Inc. (internet information services) (since 2005); Director, Glu Mobile, Inc. (multimedia software) (since 2005); Director, Netflix, Inc. (internet television) (since 2010); Director, Arista Networks (cloud networking) (since 2013); Director, Shutterfly, Inc. (internet photography services/publishing) (since 2013)
Robert B. Morris III (63)  

Trustee

(Since 2011)

  Advisory Director, The Presidio Group (since 2005)  
Gary Roughead (64)  

Trustee

(Since 2013)

  Annenberg Distinguished Visiting Fellow, Hoover Institution (since 2012); Admiral, United States Navy (Ret.); U.S. Navy Chief of Naval Operations (2008-2011)   Director, Northrop Grumman Corp. (global security) (since 2012)
Mark E. Smith (64)  

Trustee

(Since 2014)

  Executive Vice President, Managing Director—Fixed Income at Loomis Sayles & Company, L.P. (2003-2011)  
John B. Taylor (69)  

Trustee

(Since 2005)

(and 1995-2001)

  Professor of Economics, Stanford University (since 1984); Senior Fellow, Hoover Institution (since 1996); Under Secretary for International Affairs, United States Treasury (2001-2005)  

 

*  

The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all six series in the Dodge & Cox Funds complex and serves for an indefinite term.

Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Funds’ website at dodgeandcox.com or calling
800-621-3979.

 

DODGE & COX GLOBAL STOCK FUND § PAGE 19


Global Stock Fund

 

 

dodgeandcox.com

For Fund literature, transactions, and account information, please visit the Funds’ website.

or write or call:

DODGE & COX FUNDS

c/o Boston Financial Data Services

P.O. Box 8422

Boston, Massachusetts 02266-8422

(800) 621-3979

INVESTMENT MANAGER

Dodge & Cox

555 California Street, 40th Floor

San Francisco, California 94104

(415) 981-1710

 

This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.

This report reflects our views, opinions, and portfolio holdings as of December 31, 2015, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.


LOGO

 

DODGE & COX FUNDS®

 

2015

   

 

Annual Report

December 31, 2015

International Stock Fund

ESTABLISHED 2001

TICKER:  DODFX

(Closed to New Investors)

 

12/15 ISF AR    LOGO    Printed on recycled paper


TO OUR SHAREHOLDERS

 

The Dodge & Cox International Stock Fund had a total return of
–11.4% for the year ending December 31, 2015, compared to a return of –0.8% for the MSCI EAFE (Europe, Australasia, Far East) Index.

MARKET COMMENTARY

In 2015, the U.S. dollar’s sharp appreciation against both developed and emerging market currencies was a meaningful headwind: the MSCI EAFE was up 5% in local currency and down 1% in U.S. dollars, while the MSCI Emerging Markets Index was down 6% in local currency and down 15% in U.S. dollars.

Global growth expectations declined and emerging markets faced significant macroeconomic challenges during the year. Fears of slowing growth in China were amplified by the government’s decision to devalue the renminbi. Since China is the world’s largest consumer of most raw materials, its weaker outlook negatively impacted commodity prices (e.g., global copper prices plummeted 24% and oil prices plunged 35%) and commodity-driven economies around the globe. For example, in South Africa, where mining accounts for approximately 50% of its foreign exchange earnings,(a) the rand depreciated 25% against the U.S. dollar. In addition, prospects for higher U.S. interest rates negatively affected those economies in need of external financing. Facing both fiscal and current account deficits, Brazil’s fiscal and political struggles intensified, and the Brazilian real depreciated 33% against the U.S. dollar during 2015.

In developed markets, a dampened economic recovery and a weaker inflation outlook in the Eurozone led the European Central Bank to extend its asset purchase program aimed at reviving the economy. The Bank of Japan, in turn, introduced measures to supplement its already large Quantitative and Qualitative Easing Program, as economic activity softened and inflation hovered around zero. In contrast, economic activity in the United States expanded at a moderate pace: household spending and business investment increased, the housing market strengthened, and labor market conditions continued to improve, with solid job gains and reduced unemployment.

INVESTMENT STRATEGY

The Fund’s results in 2015 were disappointing and stemmed from three main factors. First, value stocks (the lower valuation portion of the market) underperformed growth stocks (the higher valuation portion of the market) by one of the widest spreads since the global financial crisis. The Fund, which is value-oriented, was significantly affected by this performance divergence. Second, emerging markets collectively underperformed developed markets. The Fund’s investments in individual companies domiciled in a number of especially weak emerging market countries (including Brazil, South Africa, and Turkey) negatively impacted results. Third, some individual holdings—HP Inc.(b), MTN Group, Petrobras, and Standard Chartered—meaningfully detracted from results for the year.

During 2015, we extensively revisited and retested our thinking on many of the Fund’s holdings in the context of

changing macroeconomic conditions and valuations. Our equity and fixed income teams regularly work together to evaluate risk and reward as we look at investment opportunities around the world and across the capital structure; this collaboration intensified during 2015. As part of our bottom-up research process, a broad cross section of our team thoroughly investigated individual company concerns, vetted investment assumptions, and conducted further due diligence. For example, groups of portfolio managers and analysts travelled together across the globe to meet with company managements, government officials, suppliers, competitors, and consultants. In addition, we conducted macroeconomic reviews to evaluate the key factors affecting a company’s access to and cost of capital, end-market demand, and relative competitiveness. Through this comprehensive process, we reaffirmed our view that the Fund’s holdings have attractive valuations, strong competitive positions, and favorable growth prospects over our three- to five-year investment horizon.

In 2015, companies with higher valuations became more expensive relative to companies with lower valuations. As a result of changing valuations, we initiated 8 new holdings (including AstraZeneca, Cemex, Hyundai Motor, and JD.com(c)) and sold 11 holdings (including Imperial Tobacco Group and Standard Bank of South Africa) during the year. We also added to a number of our existing holdings domiciled in and exposed to the developing world as their valuations became increasingly attractive. At year end, 24.0% of the Fund was invested in companies domiciled in emerging markets, while 42.6% of the Fund was invested in companies that derive more than 40% of their revenues from the developing world, regardless of domicile.(d) Itau Unibanco (in Brazil), Schneider Electric (in France), and Standard Chartered (in the United Kingdom)—examples of such adds in the Fund—are discussed below.

Itau Unibanco

Itau Unibanco, Brazil’s leading bank, has strong market positions in consumer credit and payments and is exposed to under-penetrated areas of the financial market that are poised to grow over the next three to five years. Brazil’s struggling economy and sharp currency depreciation weighed substantially on Itau Unibanco’s stock during 2015 (down 41%(e) in U.S. dollars). We conducted both on-the-ground and other due diligence with company management and government officials to evaluate economic and company-specific concerns. What we found reaffirmed our view that Itau’s management has proactively managed credit risk by reducing exposures and raising provisions. Management is focused on enhancing shareholder value and has a solid track record of capital allocation. Beyond this cycle, management is investing for the future and strengthening Itau’s competitive advantage. For example, Itau continues to invest in online access to better serve the needs of affluent customers and more efficiently handle payments and transactions for its retail customer base. At 1.6 times tangible book value, Itau trades at a 10-year low valuation. While political and macroeconomic instability has plagued Brazil, we believe Itau is an attractive long-

 

 

PAGE 2 § DODGE & COX INTERNATIONAL STOCK FUND


term investment opportunity and added to the holding. On December 31, Itau was a 1.7% position in the Fund.

Schneider Electric

Schneider Electric, a 2.2% position in the Fund, is a global leader in electrical products, systems, and services such as low- and medium-voltage gear, factory automation equipment and systems, and uninterruptible power supply solutions for data centers. While incorporated in France, Schneider derives only 27% of its revenues from Western Europe and more than 40% of its sales come from emerging markets. Thus, Schneider is a prime example that a company’s domicile does not always reflect its true revenue exposure. Schneider’s stock performed poorly in 2015 (down 21% in U.S. dollars) due to lower than expected construction and industrial activity, driven in large part by a slowdown in China, Russia, and Brazil.

Despite these end-market headwinds, Schneider has high-quality business franchises with number one or two market positions in over 75% of its revenues and attractive returns on tangible capital. We believe the company can grow given its exposure to megatrends such as global electrification, energy efficiency, and factory automation. We have had numerous conversations with management and confirmed they are proactively managing the company’s cost structure, portfolio of businesses, and capital. Management recently initiated a EUR 1.0-1.5 billion share buyback program. Schneider has a strong balance sheet and trades at 13 times estimated forward earnings, a discount to its peers and the market.

Standard Chartered

Standard Chartered, domiciled in the United Kingdom, provides consumer and wholesale banking services to customers in Asia, Africa, and the Middle East. The company has a strong global franchise with a broad network across the developing world that would be very difficult to replicate. Standard Chartered’s global payments and trade business is a particular strength: local roots from its longstanding presence allow for local currency funding, and cooperation across the network provides integrated wholesale banking services to clients. During 2015, Standard Chartered’s performance suffered from the slowdown in emerging markets, large fines from legacy issues, rising restructuring costs, and deteriorating asset quality. As a result, Standard Chartered’s stock was down 39% in U.S. dollars and its valuation fell to 0.6 times tangible book value, a historically low level.

In 2015, we met with Standard Chartered’s new executive team on multiple occasions to better understand its strategy and priorities. This management team is focused on streamlining the organization and prioritizing profitability over growth. They have a realistic assessment of current balance sheet issues, as evidenced by the recent $5.1 billion capital raise that provides ample new capital to fortify the balance sheet, resolve legacy issues, and accelerate their restructuring plans. The company seeks to cut costs, exit peripheral businesses, and increase investments to improve systems and further diversify its geographic footprint. In addition, Standard Chartered has been able to attract high-caliber talent with some key new hires. Based on the bank’s leading

franchise, strong balance sheet, management’s initiatives, and low valuation, we recently added to the holding. On December 31, Standard Chartered was a 2.4% position in the Fund.

IN CLOSING

International equity valuations are attractive: the MSCI EAFE traded at 14.7 times forward estimated earnings (compared to a 20-year average of 15.9 times) with a 3.2% dividend yield at year end. Valuation disparities have widened significantly, creating more opportunities for value-oriented investors. We are identifying attractively valued investments in both developed and emerging markets and continue to be optimistic about the long-term outlook for the portfolio.

Our experienced and stable team has weathered past periods of market turbulence by remaining steadfast in our investment process and philosophy. Our approach—constructing a diversified portfolio through in-depth, independent research, a three- to five-year investment horizon, and a focus on valuation relative to underlying fundamentals—continues to guide us through this period. We remain confident that our enduring value-oriented approach will benefit the Fund in the years ahead.

Thank you for your continued confidence in our firm. As always, we welcome your comments and questions.

For the Board of Trustees,

 

LOGO   LOGO

Charles F. Pohl,

Chairman

 

Dana M. Emery,

President

January 29, 2016

 

 

(a)  

Foreign exchange earnings are the proceeds from exporting goods and services and exchanging currencies in global markets.

(b)  

After Hewlett-Packard Co. split into two companies, HP Inc. retained the HPQ ticker symbol. HP Inc.’s –37% return in 2015 includes Hewlett-Packard Co.’s performance through October 2015.

(c)  

The use of specific examples does not imply that they are more attractive investments than the Fund’s other holdings.

(d)  

Unless otherwise specified, all weightings and characteristics are as of December 31, 2015.

(e)  

All returns are total returns unless otherwise noted.

 

 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 3


ANNUAL PERFORMANCE REVIEW

The Fund underperformed the MSCI EAFE by 10.5 percentage points in 2015.

Key Detractors from Relative Results

  §  

Weak returns from the Fund’s holdings in the Financials sector (down 19% compared to down 3% for the MSCI EAFE sector), especially in the developing world, hurt results. Itau Unibanco (down 41%), Kasikornbank (down 39%), Standard Chartered (down 39%), and ICICI Bank (down 28%) performed poorly.

 
  §  

The Fund’s holdings in the Telecommunication Services sector (down 24% compared to up 3% for the MSCI EAFE sector) were notable detractors. MTN Group (down 53%) and America Movil (down 31%), both emerging market companies, were particularly weak.

 
  §  

The Fund’s holdings in the Industrials sector (down 13% compared to flat for the MSCI EAFE sector) negatively impacted performance. Tyco International (down 26%) and Schneider Electric (down 21%) lagged.

 
  §  

Additional detractors included Teck Resources (down 71% since date of purchase), Petrobras (down 55%), HP Inc. (down 37%), and Schlumberger (down 16%).

 

Key Contributors to Relative Results

  §  

The Fund’s average underweight position in the Metals & Mining industry (0.4% versus 3% for the MSCI EAFE industry), a weaker area of the market (down 40%), helped performance.

 
  §  

Strong returns from the Fund’s holdings in the Automobiles industry (up 12% compared to up 2% for the MSCI EAFE industry) aided results. Nissan Motor (up 24%), Yamaha Motor (up 14%), and Honda Motor (up 13%) performed well.

 
  §  

Additional contributors included Infineon Technologies (up 40%), Nintendo (up 34%), Imperial Tobacco Group (up 24% to date of sale), and Naspers (up 5%).

 

KEY CHARACTERISTICS OF DODGE & COX

Independent Organization

Dodge & Cox is one of the largest privately owned investment managers in the world. We remain committed to independence, with a goal of providing the highest quality investment management service to our existing clients.

Over 85 Years of Investment Experience

Dodge & Cox was founded in 1930. We have a stable and well-qualified team of investment professionals, most of whom have spent their entire careers at Dodge & Cox.

Experienced Investment Team

The International Investment Policy Committee, which is the decision-making body for the International Stock Fund, is a nine-member committee with an average tenure at Dodge & Cox of 22 years.

One Business with a Single Research Office

Dodge & Cox manages equity (domestic, international, and global), fixed income (domestic and global), and balanced investments, operating from one office in San Francisco.

Consistent Investment Approach

Our team decision-making process involves thorough, bottom-up fundamental analysis of each investment.

Long-Term Focus and Low Expenses

We invest with a three- to five-year investment horizon, which has historically resulted in low turnover relative to our peers. We manage Funds that maintain low expense ratios.

 

Risks: 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. Investing in non-U.S. securities may entail risk due to foreign economic and political developments; this risk may be increased when investing in emerging markets. The Fund is also subject to currency risk. Please read the prospectus and summary prospectus for specific details regarding the Fund’s risk profile.

 

 

PAGE 4 § DODGE & COX INTERNATIONAL STOCK FUND


GROWTH OF $10,000 OVER 10 YEARS

FOR AN INVESTMENT MADE ON DECEMBER 31, 2005

 

LOGO

AVERAGE ANNUAL TOTAL RETURN

FOR PERIODS ENDED DECEMBER 31, 2015

 

     1 Year     3 Years     5 Years     10 Years  

Dodge & Cox International
Stock Fund

    –11.35     3.87     2.65     3.83

MSCI EAFE Index

    –0.82        5.02        3.61        3.03   

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. Performance is updated and published monthly. Visit the Fund’s website at dodgeandcox.com or call 800-621-3979 for current performance figures.

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 but, unlike Fund returns, do not reflect fees or expenses. The MSCI EAFE (Europe, Australasia, Far East) Index is a broad-based, unmanaged equity market index aggregated from 21 developed market country indices, excluding the United States and Canada. 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 report is not approved, reviewed, or produced by MSCI.

MSCI EAFE is a service mark of MSCI Barra.

 

 

FUND EXPENSE EXAMPLE

As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.

ACTUAL EXPENSES

The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER MUTUAL FUNDS

Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.

 

Six Months Ended

December 31, 2015

   Beginning Account Value
7/1/2015
     Ending Account Value
12/31/2015
    

Expenses Paid

During Period*

 

Based on Actual Fund Return

   $ 1,000.00       $ 853.20       $ 2.96   

Based on Hypothetical 5% Yearly Return

     1,000.00         1,022.01         3.23   
*

Expenses are equal to the Fund’s annualized expense ratio of 0.63%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. Though other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).

 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 5


FUND INFORMATION (unaudited)     December 31, 2015   

 

 

GENERAL INFORMATION

       

Net Asset Value Per Share

     $36.48   

Total Net Assets (billions)

     $57.0   

Expense Ratio

     0.64%   

Portfolio Turnover Rate

     18%   

30-Day SEC Yield(a)

     1.80%   

Number of Companies

     79   

Fund Inception

     2001   

No sales charges or distribution fees

  

Investment Manager: Dodge & Cox, San Francisco. Managed by the International Investment Policy Committee, whose nine members’ average tenure at Dodge & Cox is 22 years.

 

PORTFOLIO CHARACTERISTICS    Fund        MSCI
EAFE
 

Median Market Capitalization (billions)

     $25           $9   

Weighted Average Market Capitalization (billions)

     $61           $54   

Price-to-Earnings Ratio(b)

     12.5x           14.7x   

Countries Represented

     23           21   

Emerging Markets (Brazil, China, India, Mexico, South Africa, South Korea, Thailand, Turkey, United Arab Emirates)

     24.0%           0.0%   

 

TEN LARGEST HOLDINGS (%)(c)    Fund  

Naspers, Ltd. (South Africa)

     4.2   

Samsung Electronics Co., Ltd. (South Korea)

     3.8   

Sanofi (France)

     3.7   

Schlumberger, Ltd. (United States)

     3.4   

Novartis AG (Switzerland)

     3.4   

Roche Holding AG (Switzerland)

     3.3   

Credit Suisse Group AG (Switzerland)

     2.7   

Barclays PLC (United Kingdom)

     2.5   

Standard Chartered PLC (United Kingdom)

     2.3   

Liberty Global PLC (United Kingdom)

     2.3   
ASSET ALLOCATION

LOGO

 

REGION DIVERSIFICATION (%)(e)    Fund        MSCI
EAFE
 

Europe (excluding United Kingdom)

     42.3           45.1   

Japan

     13.4           23.4   

Pacific (excluding Japan)

     13.0           11.3   

United Kingdom

     12.1           19.4   

United States

     6.7           0.0   

Africa/Middle East

     5.7           0.8   

Latin America

     5.5           0.0   

Canada

     0.6           0.0   

 

SECTOR DIVERSIFICATION (%)    Fund        MSCI
EAFE
 

Financials

     26.1           25.6   

Consumer Discretionary

     18.8           13.2   

Information Technology

     16.1           5.2   

Health Care

     12.8           11.9   

Industrials

     8.6           12.6   

Energy

     7.3           4.5   

Materials

     5.2           6.4   

Telecommunication Services

     4.0           4.9   

Consumer Staples

     0.4           11.9   

Utilities

     0.0           3.8   
 

 

 

(a) 

SEC Yield is an annualization of the Fund’s total net investment income per share for the 30-day period ended on the last day of the month.

(b)

Price-to-earnings (P/E) ratios are calculated using 12-month forward earnings estimates from third-party sources.

(c) 

The Fund’s portfolio holdings are subject to change without notice. The mention of specific securities is not a recommendation to buy, sell, or hold any particular security and is not indicative of Dodge & Cox’s current or future trading activity.

(d) 

Net Cash & Other includes short-term investments (e.g., money market funds and repurchase agreements) and other assets less liabilities (e.g., cash, receivables, payables, and unrealized appreciation/depreciation on certain derivatives).

(e) 

The Fund may classify a company in a different category than the MSCI EAFE. The Fund generally classifies a company based on its country of incorporation, but may designate a different country in certain circumstances.

 

PAGE 6 § DODGE & COX INTERNATIONAL STOCK FUND


CONSOLIDATED PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

COMMON STOCKS: 95.5%               
    SHARES      VALUE  
CONSUMER DISCRETIONARY: 18.8%   

AUTOMOBILES & COMPONENTS: 8.7%

  

Bayerische Motoren Werke AG (Germany)

    10,189,100       $ 1,073,100,643   

Honda Motor Co., Ltd. (Japan)

    33,966,400         1,088,335,707   

Honda Motor Co., Ltd. ADR (Japan)

    5,749,300         183,575,149   

Hyundai Motor Co. (South Korea)

    2,856,012         359,872,991   

Mahindra & Mahindra, Ltd. (India)

    16,522,808         315,939,191   

NGK Spark Plug Co., Ltd.(b) (Japan)

    10,341,300         272,417,191   

Nissan Motor Co., Ltd. (Japan)

    93,132,200         975,360,095   

Yamaha Motor Co., Ltd.(b) (Japan)

    31,550,100         706,999,061   
    

 

 

 
     4,975,600,028   

CONSUMER DURABLES & APPAREL: 1.4%

  

Panasonic Corp. (Japan)

    76,711,434         778,536,596   

CONSUMER SERVICES: 0.3%

    

New Oriental Education & Technology Group, Inc. ADR(b) (Cayman Islands/China)

    6,369,328         199,805,819   

MEDIA: 8.1%

    

Grupo Televisa SAB ADR (Mexico)

    25,685,392         698,899,516   

Liberty Global PLC LiLAC, Series A(a) (United Kingdom)

    580,950         24,033,902   

Liberty Global PLC LiLAC, Series C(a) (United Kingdom)

    874,412         37,599,716   

Liberty Global PLC, Series A(a) (United Kingdom)

    11,619,005         492,181,052   

Liberty Global PLC, Series C(a) (United Kingdom)

    19,696,847         803,040,452   

Naspers, Ltd. (South Africa)

    17,493,100         2,398,019,528   

Television Broadcasts, Ltd.(b) (Hong Kong)

    40,022,900         164,996,568   
    

 

 

 
     4,618,770,734   

RETAILING: 0.3%

    

JD.com, Inc. ADR(a) (Cayman Islands/China)

    5,083,036         164,004,157   
    

 

 

 
     10,736,717,334   
CONSUMER STAPLES: 0.4%   

FOOD, BEVERAGE & TOBACCO: 0.4%

  

Anadolu Efes Biracilik ve Malt Sanayii
AS(b) (Turkey)

    32,425,176         210,023,170   
ENERGY: 6.2%     

Royal Dutch Shell PLC ADR (United Kingdom)

    10,005,355         458,145,205   

Saipem SPA(a)(b) (Italy)

    46,865,200         376,728,063   

Schlumberger, Ltd. (Curacao/United States)

    27,754,124         1,935,850,149   

Total SA (France)

    10,745,842         481,894,390   

Weatherford International PLC(a) (Ireland)

    31,817,592         266,949,597   
    

 

 

 
     3,519,567,404   
FINANCIALS: 24.4%     

BANKS: 15.4%

    

Banco Santander SA (Spain)

    68,776,836         340,679,565   

Barclays PLC (United Kingdom)

    446,247,998         1,440,052,935   

BNP Paribas SA (France)

    17,886,158         1,015,235,180   

ICICI Bank, Ltd. (India)

    260,427,185         1,027,438,757   

Kasikornbank PCL- Foreign(b) (Thailand)

    139,883,027         578,306,373   

Lloyds Banking Group PLC (United Kingdom)

    834,782,400         899,225,897   

Mitsubishi UFJ Financial Group, Inc. (Japan)

    91,382,100         565,554,211   

Siam Commercial Bank PCL- Foreign (Thailand)

    78,078,500         257,666,820   

Societe Generale SA (France)

    9,252,542         428,049,787   

Standard Chartered PLC (United Kingdom)

    161,949,813         1,345,813,561   

UniCredit SPA (Italy)

    118,398,593         652,135,217   

Yapi ve Kredi Bankasi AS(b) (Turkey)

    204,376,868         230,558,187   
    

 

 

 
     8,780,716,490   
    SHARES      VALUE  

DIVERSIFIED FINANCIALS: 4.2%

    

Credit Suisse Group AG (Switzerland)

    70,622,958       $ 1,526,397,979   

Haci Omer Sabanci Holding AS (Turkey)

    82,095,354         233,078,292   

UBS Group AG (Switzerland)

    31,278,800         601,926,154   
    

 

 

 
     2,361,402,425   

INSURANCE: 3.4%

    

AEGON NV(b) (Netherlands)

    130,337,763         740,800,935   

Aviva PLC (United Kingdom)

    80,919,501         615,544,297   

Swiss Re AG (Switzerland)

    6,028,968         586,486,877   
    

 

 

 
     1,942,832,109   

REAL ESTATE: 1.4%

    

BR Malls Participacoes SA(b) (Brazil)

    54,870,300         153,032,279   

Hang Lung Group, Ltd.(b) (Hong Kong)

    110,524,300         358,666,866   

Hang Lung Properties, Ltd. (Hong Kong)

    126,187,300         287,216,724   
    

 

 

 
     798,915,869   
    

 

 

 
     13,883,866,893   
HEALTH CARE: 12.8%     

PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES: 12.8%

  

AstraZeneca PLC (United Kingdom)

    4,793,300         326,214,954   

Bayer AG (Germany)

    8,199,050         1,028,663,421   

Novartis AG (Switzerland)

    8,095,570         691,981,754   

Novartis AG ADR (Switzerland)

    14,346,800         1,234,398,672   

Roche Holding AG (Switzerland)

    6,942,700         1,913,325,710   

Sanofi (France)

    24,946,522         2,130,895,350   
    

 

 

 
     7,325,479,861   
INDUSTRIALS: 8.6%     

CAPITAL GOODS: 6.9%

    

Koninklijke Philips NV (Netherlands)

    31,282,995         800,964,341   

Mitsubishi Electric Corp. (Japan)

    100,043,000         1,048,902,987   

Nidec Corp. (Japan)

    5,430,700         393,086,983   

Schneider Electric SA (France)

    21,750,646         1,242,387,539   

Smiths Group PLC(b) (United Kingdom)

    33,926,200         469,881,576   
    

 

 

 
     3,955,223,426   

COMMERCIAL & PROFESSIONAL SERVICES: 1.4%

  

ADT Corp. (United States)

    6,296,960         207,673,741   

Tyco International PLC (Ireland)

    18,390,420         586,470,494   
    

 

 

 
     794,144,235   

TRANSPORTATION: 0.3%

    

DP World, Ltd. (United Arab Emirates)

    8,256,304         167,602,971   
    

 

 

 
     4,916,970,632   
INFORMATION TECHNOLOGY: 15.1%   

SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT: 1.4%

  

Infineon Technologies AG(b) (Germany)

    55,762,370         816,016,345   

SOFTWARE & SERVICES: 2.7%

    

Baidu, Inc. ADR(a) (Cayman Islands/China)

    4,903,965         927,045,544   

Nintendo Co., Ltd. (Japan)

    4,287,100         590,170,122   
    

 

 

 
     1,517,215,666   

TECHNOLOGY, HARDWARE & EQUIPMENT: 11.0%

  

Brother Industries, Ltd.(b) (Japan)

    12,212,000         140,035,217   

Hewlett Packard Enterprise Co. (United States)

    65,989,204         1,003,035,901   

HP, Inc. (United States)

    57,407,104         679,700,111   

Kyocera Corp.(b) (Japan)

    19,122,400         886,308,045   

Samsung Electronics Co., Ltd. (South Korea)

    1,521,592         1,624,804,017   

TE Connectivity, Ltd. (Switzerland)

    13,646,362         881,691,449   

Telefonaktiebolaget LM Ericsson (Sweden)

    110,232,700         1,067,791,477   
    

 

 

 
     6,283,366,217   
    

 

 

 
     8,616,598,228   
 

 

See accompanying Notes to Consolidated Financial Statements   DODGE & COX INTERNATIONAL STOCK FUND § PAGE 7


CONSOLIDATED PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

COMMON STOCKS (continued)  
    SHARES      VALUE  
MATERIALS: 5.2%     

Agrium, Inc. (Canada)

    2,079,983       $ 185,825,681   

Akzo Nobel NV (Netherlands)

    7,688,944         515,395,513   

Cemex SAB de CV ADR (Mexico)

    43,079,635         239,953,567   

LafargeHolcim, Ltd. (Switzerland)

    18,933,349         948,705,791   

Lanxess AG(b) (Germany)

    4,228,334         194,678,351   

Linde AG (Germany)

    4,987,605         723,967,418   

Teck Resources, Ltd., Class B (Canada)

    46,287,792         178,670,877   
    

 

 

 
     2,987,197,198   
TELECOMMUNICATION SERVICES: 4.0%   

America Movil SAB de CV, Series L (Mexico)

    618,430,000         434,187,415   

Bharti Airtel, Ltd. (India)

    57,768,204         295,144,494   

China Mobile, Ltd. (Hong Kong/China)

    27,348,200         308,768,008   

Millicom International Cellular SA SDR(b) (Luxembourg)

    10,088,392         574,611,534   

MTN Group, Ltd. (South Africa)

    77,635,000         667,113,815   
    

 

 

 
     2,279,825,266   
    

 

 

 

TOTAL COMMON STOCKS
(Cost $58,346,485,140)

   

   $ 54,476,245,986   
PREFERRED STOCKS: 3.8%          
ENERGY: 1.1%     

Petroleo Brasileiro SA ADR(a) (Brazil)

    178,018,900         605,264,260   
FINANCIALS: 1.7%     

BANKS: 1.7%

    

Itau Unibanco Holding SA (Brazil)

    150,343,065         982,425,551   
INFORMATION TECHNOLOGY: 1.0%   

TECHNOLOGY, HARDWARE & EQUIPMENT: 1.0%

  

Samsung Electronics Co., Ltd. (South Korea)

    586,116         542,444,786   
    

 

 

 

TOTAL PREFERRED STOCKS
(Cost $3,828,007,464)

   

   $ 2,130,134,597   
SHORT-TERM INVESTMENTS: 0.2%  
    PAR VALUE     VALUE  

MONEY MARKET FUND: 0.1%

   

SSgA U.S. Treasury Money Market Fund

  $ 57,731,545      $ 57,731,545   

REPURCHASE AGREEMENT: 0.1%

   

Fixed Income Clearing Corporation(c) 0.08%, dated 12/31/15, due 1/4/16, maturity value $72,314,643

    72,314,000        72,314,000   
   

 

 

 

TOTAL SHORT-TERM INVESTMENTS
(Cost $130,045,545)

   

  $ 130,045,545   
   

 

 

 

TOTAL INVESTMENTS
(Cost $62,304,538,149)

    99.5   $ 56,736,426,128   

OTHER ASSETS LESS LIABILITIES

    0.5     292,177,735   
 

 

 

   

 

 

 
NET ASSETS     100.0   $ 57,028,603,863   
 

 

 

   

 

 

 

 

(a) 

Non-income producing

(b) 

See Note 9 regarding holdings of 5% voting securities

(c) 

Repurchase agreement is collateralized by U.S. Treasury Note 1.75%, 12/31/20. Total collateral value is $73,762,681.

In determining a company’s country designation, the Fund generally references the country of incorporation. In cases where the Fund considers the country of incorporation to be a “jurisdiction of convenience” chosen primarily for tax purposes or in other limited circumstances, the Fund uses the country designation of an appropriate broad-based market index. In those cases, two countries are listed—the country of incorporation and the country designated by an appropriate index, respectively.

ADR: American Depositary Receipt

SDR: Swedish Depository Receipt

FORWARD CURRENCY CONTRACTS

 

          Contract Amount        
Counterparty   Settlement
Date
   

Receive

U.S. Dollar

    Deliver
Foreign
Currency
    Unrealized
Appreciation /
(Depreciation)
 

Contracts to sell CHF:

  

   

Goldman Sachs

    1/27/16        413,060,988        400,000,000      $ 13,327,311   

Goldman Sachs

    2/3/16        528,955,212        520,000,000        9,145,375   

UBS

    2/3/16        471,272,639        465,000,000        6,442,689   

Citibank

    3/2/16        173,604,222        175,000,000        (1,537,699

Contracts to sell EUR:

  

   

Barclays

    2/24/16        278,608,200        260,000,000        (4,296,367

Credit Suisse

    2/24/16        536,530,000        500,000,000        (7,517,244

JPMorgan

    2/24/16        536,220,000        500,000,000        (7,827,244

Deutsche Bank

    3/2/16        531,558,500        500,000,000        (12,583,615

Barclays

    3/9/16        653,646,000        600,000,000        556,905   

HSBC

    3/9/16        326,307,000        300,000,000        (237,547
       

 

 

 
        $ (4,527,436
       

 

 

 
 

 

PAGE 8 § DODGE & COX INTERNATIONAL STOCK FUND   See accompanying Notes to Consolidated Financial Statements


CONSOLIDATED

STATEMENT OF ASSETS AND LIABILITIES

  

  

   

December 31, 2015

 

ASSETS:

 

Investments, at value

 

Unaffiliated issuers (cost $56,299,697,750)

  $ 52,256,872,593   

Affiliated issuers (cost $6,004,840,399)

    4,479,553,535   
 

 

 

 
    56,736,426,128   

Unrealized appreciation on forward currency contracts

    29,472,280   

Cash denominated in foreign currency (cost $6,826,649)

    6,790,936   

Cash

    100   

Receivable for investments sold

    218,815,943   

Receivable for Fund shares sold

    94,685,572   

Dividends and interest receivable

    148,753,606   

Prepaid expenses and other assets

    352,521   
 

 

 

 
    57,235,297,086   
 

 

 

 

LIABILITIES:

 

Unrealized depreciation on forward currency contracts

    33,999,716   

Payable for Fund shares redeemed

    140,460,556   

Management fees payable

    29,782,461   

Accrued expenses

    2,450,490   
 

 

 

 
    206,693,223   
 

 

 

 

NET ASSETS

  $ 57,028,603,863   
 

 

 

 

NET ASSETS CONSIST OF:

 

Paid in capital

  $ 64,423,134,152   

Distributions in excess of net investment income

    (5,017,088

Accumulated net realized loss

    (1,813,517,131

Net unrealized depreciation

    (5,575,996,070
 

 

 

 
  $ 57,028,603,863   
 

 

 

 

Fund shares outstanding (par value $0.01 each,
unlimited shares authorized)

    1,563,237,054   

Net asset value per share

  $ 36.48   

CONSOLIDATED

STATEMENT OF OPERATIONS

  

  

    Year Ended
December 31, 2015
 

INVESTMENT INCOME:

 

Dividends (net of foreign taxes of $94,101,785)

 

Unaffiliated issuers

  $ 1,426,934,440   

Affiliated issuers

    226,416,324   

Interest

    268,570   
 

 

 

 
    1,653,619,334   
 

 

 

 

EXPENSES:

 

Management fees

    397,371,361   

Custody and fund accounting fees

    9,026,504   

Transfer agent fees

    9,712,021   

Professional services

    353,288   

Shareholder reports

    1,892,718   

Registration fees

    473,472   

Trustees’ fees

    237,500   

Miscellaneous

    4,262,360   
 

 

 

 
    423,329,224   
 

 

 

 

NET INVESTMENT INCOME

    1,230,290,110   
 

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS):

 

Net realized gain (loss)

 

Investments in unaffiliated issuers

    765,542,221   

Investments in affiliated issuers

    339,270,796   

Forward currency contracts

    478,324,730   

Foreign currency transactions

    (14,077,329

Net change in unrealized appreciation/depreciation

 

Investments

    (10,361,707,776

Forward currency contracts

    (87,123,422

Foreign currency translation

    (3,112,679
 

 

 

 

Net realized and unrealized loss

    (8,882,883,459
 

 

 

 

NET DECREASE IN NET ASSETS
FROM OPERATIONS

  $ (7,652,593,349
 

 

 

 

CONSOLIDATED

STATEMENT OF CHANGES IN NET ASSETS

  

  

    Year Ended
December 31, 2015
    Year Ended
December 31, 2014
 

OPERATIONS:

   

Net investment income

  $ 1,230,290,110      $ 1,451,548,384   

Net realized gain

    1,569,060,418        2,019,551,822   

Net change in unrealized
appreciation/depreciation

    (10,451,943,877     (3,874,051,496
 

 

 

   

 

 

 
    (7,652,593,349     (402,951,290
 

 

 

   

 

 

 

DISTRIBUTIONS TO SHAREHOLDERS FROM:

   

Net investment income

    (1,304,169,120     (1,440,251,048

Net realized gain

             
 

 

 

   

 

 

 

Total distributions

    (1,304,169,120     (1,440,251,048
 

 

 

   

 

 

 

FUND SHARE
TRANSACTIONS:

   

Proceeds from sale of shares

    12,406,796,087        19,083,592,819   

Reinvestment of distributions

    1,091,460,147        1,176,502,813   

Cost of shares redeemed

    (11,552,646,146     (7,993,354,008
 

 

 

   

 

 

 

Net increase from
Fund share transactions

    1,945,610,088        12,266,741,624   
 

 

 

   

 

 

 

Total increase/(decrease) in net assets

    (7,011,152,381     10,423,539,286   

NET ASSETS:

   

Beginning of year

    64,039,756,244        53,616,216,958   
 

 

 

   

 

 

 

End of year (including distributions in excess of net investment income of $(5,017,088) and undistributed net investment income of $9,485,734, respectively)

  $ 57,028,603,863      $ 64,039,756,244   
 

 

 

   

 

 

 

SHARE INFORMATION:

   

Shares sold

    295,300,198        427,948,359   

Distributions reinvested

    30,234,353        27,741,165   

Shares redeemed

    (283,036,306     (180,756,140
 

 

 

   

 

 

 

Net increase in shares outstanding

    42,498,245        274,933,384   
 

 

 

   

 

 

 
 

 

See accompanying Notes to Consolidated Financial Statements   DODGE & COX INTERNATIONAL STOCK FUND § PAGE 9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1—ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Dodge & Cox International Stock Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. On January 16th, 2015, the Fund closed to new investors. The Fund commenced operations on May 1, 2001, and seeks long-term growth of principal and income. The Fund invests primarily in a diversified portfolio of foreign equity securities. Foreign investing, especially in developing countries, has special risks such as currency and market volatility and political and social instability. These and other risk considerations are discussed in the Fund’s Prospectus.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Actual results may differ from those estimates. Significant accounting policies are as follows:

Security valuation The Fund’s net assets are valued as of the close of trading on the New York Stock Exchange (NYSE), generally 4:00 p.m. Eastern Time, each day that the NYSE is open for business. If the NYSE is closed due to inclement weather, technology problems, or for any other reason on a day it would normally be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the Fund reserves the right to calculate the Fund’s NAV as of the normally scheduled close of regular trading on the NYSE for that day, provided that Dodge & Cox believes that it can obtain reliable market quotes or valuations.

Portfolio securities and other financial instruments for which market quotes are readily available are valued at market value. Listed securities are generally valued using the official quoted close price or the last sale on the exchange that is determined to be the primary market for the security. Security values are not discounted based on the size of the Fund’s position. Short-term securities less than 60 days to maturity may be valued at amortized cost if amortized cost approximates current value. Mutual funds are valued at their respective net asset values.

Investments initially valued in currencies other than the U.S. dollar are converted to the U.S. dollar using prevailing exchange rates. As a result, the Fund’s net assets may be affected by changes in the value of currencies in relation to the U.S. dollar.

If market quotations are not readily available or if a security’s value is believed to have materially changed after the close of the security’s primary market but before the close of trading on the NYSE, the security is valued at fair value as determined in good faith by or under the direction of the Fund’s Board of Trustees. The Board of Trustees has appointed Dodge & Cox, the Fund’s investment manager, to make fair value determinations in accordance with the Dodge & Cox Funds Valuation Policies (“Valuation Policies”), subject to Board oversight. Dodge & Cox has established a Pricing Committee that is comprised of

representatives from Treasury, Legal, Compliance, and Operations. The Pricing Committee is responsible for implementing the Valuation Policies, including determining the fair value of securities when market quotations or market-based valuations are not readily available or are deemed unreliable. The Pricing Committee considers relevant indications of value that are reasonably available to it in determining the fair value assigned to a particular security, such as the value of similar financial instruments, trading volumes, contractual restrictions on disposition, related corporate actions, and changes in economic conditions. In doing so, the Pricing Committee employs various methods for calibrating fair valuation approaches, including a regular review of key inputs and assumptions, back-testing, and review of any related market activity.

As trading in securities on most foreign exchanges is normally completed before the close of the NYSE, the value of non-U.S. securities can change by the time the Fund calculates its NAV. To address these changes, the Fund may utilize adjustment factors provided by an independent pricing service to systematically value non-U.S. securities at fair value. These adjustment factors are based on statistical analyses of subsequent movements and changes in U.S. markets and financial instruments trading in U.S. markets that represent foreign securities or baskets of securities.

Valuing securities through a fair value determination involves greater reliance on judgment than valuation of securities based on readily available market quotations. In some instances, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a security’s value. When fair value pricing is employed, the prices of securities used by the Fund to calculate its NAV may differ from quoted or published prices for the same securities.

Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.

Dividend income and corporate action transactions are recorded on the ex-dividend date, or when the Fund first learns of the dividend/corporate action if the ex-dividend date has passed. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Dividends characterized as return of capital for U.S. tax purposes are recorded as a reduction of cost of investments and/or realized gain. Interest income is recorded on the accrual basis.

Expenses are recorded on the accrual basis. Some expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust based on relative net assets or other expense methodologies determined by the nature of the expense.

Distributions to shareholders are recorded on the ex-dividend date.

Foreign taxes The Fund is subject to foreign taxes which may be imposed by certain countries in which the Fund invests.

 

 

PAGE 10 § DODGE & COX INTERNATIONAL STOCK FUND


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Fund endeavors to record foreign taxes based on applicable foreign tax law. Withholding taxes are incurred on certain foreign dividends and are accrued at the time the associated dividend is recorded. The Fund files withholding tax reclaims in certain jurisdictions to recover a portion of amounts previously withheld. The Fund records a reclaim receivable based on, among other things, a jurisdiction’s legal obligation to pay reclaims as well as payment history and market convention. In consideration of recent decisions rendered by European courts, the Fund has filed for additional reclaims related to prior years. A corresponding receivable is established when both the amount is known and significant contingencies or uncertainties regarding collectability are removed. These amounts are reported in “dividends and interest receivable” on the Consolidated Statement of Assets and Liabilities.

Capital gains taxes are incurred upon disposition of certain foreign securities. Capital gains taxes on appreciated securities are accrued as unrealized losses and are reflected as realized losses upon the sale of the related security. Currency taxes may be incurred when the Fund purchases certain foreign currencies related to securities transactions and are recorded as realized losses on foreign currency transactions.

Repurchase agreements The Fund enters into repurchase agreements, secured by U.S. government or agency securities, which involve the purchase of securities from a counterparty with a simultaneous commitment to resell the securities at an agreed-upon date and price. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the collateral securities and to apply the proceeds in satisfaction of the obligation.

Forward currency contracts A forward currency contract represents an obligation to purchase or sell a specific foreign currency at a future date at a price set at the time of the contract. Losses from these transactions may arise from unfavorable changes in currency values or if the counterparties do not perform under a contract’s terms.

The values of the forward currency contracts are adjusted daily based on the prevailing forward exchange rates of the underlying currencies. Changes in the value of open contracts are recorded as unrealized appreciation or depreciation in the Consolidated Statement of Operations. When the forward currency contract is closed, the Fund records a realized gain or loss in the Consolidated Statement of Operations equal to the difference between the value at the time the contract was opened and the value at the time it was closed.

The Fund maintained forward currency contracts to hedge foreign currency risks associated with portfolio investments denominated in the euro and Swiss franc. During the year ended December 31, 2015, these euro and Swiss franc forward currency

contracts had U.S. dollar total values ranging from 3% to 5% of net assets and 0% to 3% of net assets, respectively.

Foreign currency translation The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the prevailing exchange rates of such currencies against the U.S. dollar. The market value of investment securities and other assets and liabilities are translated at the exchange rate as of the valuation date. Purchases and sales of investment securities, income, and expenses are translated at the exchange rate prevailing on the transaction date.

Reported realized and unrealized gain (loss) on investments include foreign currency gain (loss) related to investment transactions.

Reported realized and unrealized gain (loss) on foreign currency transactions and translation include the following: disposing/holding of foreign currency, the difference between the trade and settlement dates on securities transactions, the difference between the accrual and payment dates on dividends, and currency losses on the purchase of foreign currency in certain countries that impose taxes on such transactions.

Consolidation The Fund may invest in certain securities through its wholly owned subsidiary, Dodge & Cox International Stock Fund Cayman, Ltd. (the “Subsidiary”). The Subsidiary is a Cayman Islands exempted company and invests in certain securities consistent with the investment objective of the Fund. The Fund’s Consolidated Financial Statements, including the Consolidated Portfolio of Investments, consist of the holdings and accounts of the Fund and the Subsidiary. All intercompany transactions and balances have been eliminated. At December 31, 2015, the Subsidiary had net assets of $100, which represented less than 0.01% of the Fund’s consolidated net assets.

Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.

NOTE 2—VALUATION MEASUREMENTS

Various inputs are used in determining the value of the Fund’s investments and other financial instruments. These inputs are summarized in the three broad levels listed below.

§  

Level 1: Quoted prices in active markets for identical securities

§  

Level 2: Other significant observable inputs (including quoted prices for similar securities, market indices, interest rates, credit risk, etc.)

§  

Level 3: Significant unobservable inputs (including Fund management’s assumptions in determining the fair value of investments)

 

 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 11


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used to value the Fund’s holdings at December 31, 2015:

 

Classification(a)   LEVEL 1
(Quoted Prices)
    LEVEL 2
(Other Significant
Observable Inputs)
 

Securities

   

Common Stocks

   

Consumer Discretionary

  $ 5,482,095,050      $ 5,254,622,284   

Consumer Staples

    210,023,170          

Energy

    3,142,839,341        376,728,063   

Financials

    8,962,360,983        4,921,505,910   

Health Care

    3,691,508,976        3,633,970,885   

Industrials

    3,474,980,662        1,441,989,970   

Information Technology

    3,491,473,005        5,125,125,223   

Materials

    1,119,845,638        1,867,351,560   

Telecommunication Services

    1,705,213,732        574,611,534   

Preferred Stocks

   

Energy

    605,264,260          

Financials

           982,425,551   

Information Technology

           542,444,786   

Short-term Investments

   

Money Market Fund

    57,731,545          

Repurchase Agreement

           72,314,000   
 

 

 

   

 

 

 

Total Securities

  $ 31,943,336,362      $ 24,793,089,766   
 

 

 

   

 

 

 

Other Financial Instruments(b)

   

Forward Currency Contracts

   

Appreciation

  $      $ 29,472,280   

Depreciation

           (33,999,716
                 
(a) 

Transfers during the year between Level 1 and Level 2 relate to the use of systematic fair valuation (see Note 1). On days when systematic fair valuation is used, securities whose primary market closes before the NYSE are classified as Level 2. There were no Level 3 securities at December 31, 2015 and 2014, and there were no transfers to Level 3 during the year.

(b)

Represents unrealized appreciation/(depreciation).

NOTE 3—ADDITIONAL DERIVATIVES INFORMATION

The Fund has entered into over-the-counter derivatives, such as forward currency contracts (each, a “Derivative”). Each Derivative is subject to a negotiated master agreement (based on a form published by the International Swaps and Derivatives Association (“ISDA”)) governing all Derivatives between the Fund and the relevant dealer counterparty. The master agreements specify (i) events of default and other events permitting a party to terminate some or all of the Derivatives thereunder and (ii) the process by which those Derivatives will be valued for purposes of determining termination payments. If some or all of the Derivatives under a master agreement are terminated because of an event of default or similar event, the values of all terminated Derivatives must be netted to determine a single payment owed by one party to the other. Some master agreements contain collateral terms requiring the parties to post collateral in respect of some or all of the Derivatives thereunder based on the net market value of those Derivatives, subject to a minimum exposure threshold. To

the extent amounts owed to the Fund by its counterparties are not collateralized, the Fund is at risk of those counterparties’ non-performance. The Fund attempts to mitigate counterparty credit risk by entering into Derivatives only with counterparties it believes to be of good credit quality and by monitoring the financial stability of those counterparties.

At December 31, 2015, no Derivative position subject to a master netting arrangement qualifies for netting. For financial reporting purposes, the Fund does not offset financial assets and liabilities that are subject to a master netting arrangement in the Consolidated Statement of Assets and Liabilities. Gross assets and liabilities related to Derivatives are presented as “unrealized appreciation on forward currency contracts” and “unrealized depreciation on forward currency contracts,” respectively, in the Consolidated Statement of Assets and Liabilities. Derivative information by counterparty is presented in the Consolidated Portfolio of Investments. At December 31, 2015, no collateral is pledged or held by the Fund for Derivatives.

NOTE 4—RELATED PARTY TRANSACTIONS

Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays an annual management fee of 0.60% of the Fund’s average daily net assets to Dodge & Cox, investment manager of the Fund.

Fund officers and trustees All officers and two of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.

NOTE 5—INCOME TAX INFORMATION AND DISTRIBUTIONS TO SHAREHOLDERS

A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, and such amounts may differ from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book to tax differences at year end to reflect tax character.

Book to tax differences are primarily due to differing treatments of wash sales, net short-term realized gain (loss), investments in passive foreign investment companies, foreign capital gain taxes, and foreign currency realized gain (loss). At December 31, 2015, the cost of investments for federal income tax purposes was $62,340,216,132.

Distributions during the years noted below were characterized as follows for federal income tax purposes.

 

     Year Ended
December 31, 2015
    Year Ended
December 31, 2014
 

Ordinary income

    $1,304,169,120        $1,440,251,048   
    ($0.840 per share)        ($0.970 per share)   

Long-term capital gain

             
 

 

PAGE 12 § DODGE & COX INTERNATIONAL STOCK FUND


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

At December 31, 2015, the tax basis components of distributable earnings were as follows:

 

Unrealized appreciation

  $ 6,704,313,452   

Unrealized depreciation

    (12,308,103,456
 

 

 

 

Net unrealized depreciation

    (5,603,790,004

Undistributed ordinary income

    14,057,590   

Capital loss carryforward(a)

    (1,783,220,989

Deferred loss(b)

    (18,220,273
(a) 

Represents accumulated capital loss as of December 31, 2015, which may be carried forward to offset future capital gains. During 2015, the Fund utilized $1,416,343,422 of the capital loss carryforward. If not utilized, the remaining capital loss carryforward will expire as follows:

 

Expiring in 2017

   $ 663,100,760   

Expiring in 2018

     1,120,120,229   
  

 

 

 
   $ 1,783,220,989   
  

 

 

 
(b)

Represents net realized specified loss incurred between November 1, 2015 and December 31, 2015. As permitted by tax regulations, the Fund has elected to treat this loss as arising in 2016.

Under the Regulated Investment Company Modernization Act of 2010, capital losses incurred by the Fund after January 1, 2011, are not subject to expiration. In addition, such losses must be utilized prior to the losses incurred in the years preceding enactment.

Fund management has reviewed the tax positions for open periods (three years and four years, respectively, from filing the Fund’s Federal and State tax returns) as applicable to the Fund, and has determined that no provision for income tax is required in the Fund’s financial statements.

NOTE 6—LOAN FACILITIES

Pursuant to an exemptive order issued by the Securities and Exchange Commission (SEC), the Fund may participate in an interfund lending facility (Facility). The Facility allows the Fund to borrow money from or loan money to the Funds. Loans under the Facility are made for temporary or emergency purposes, such as to fund shareholder redemption requests. Interest on borrowings is the average of the current repurchase agreement rate and the bank loan rate. There was no activity in the Facility during the year.

All Funds in the Trust participate in a $500 million committed credit facility (Line of Credit) with State Street Bank and Trust Company, to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The maximum amount available to the Fund is $250 million. Each Fund pays an annual commitment fee on its pro-rata portion of the Line of Credit. For the year ended December 31, 2015, the Fund’s commitment fee amounted to $204,009 and is reflected as a Miscellaneous Expense in the Consolidated Statement of Operations. Interest on borrowings is charged at the prevailing rate. There were no borrowings on the Line of Credit during the year.

NOTE 7—PURCHASES AND SALES OF INVESTMENTS

For the year ended December 31, 2015, purchases and sales of securities, other than short-term securities, aggregated $14,357,056,088 and $11,503,938,817 respectively.

NOTE 8—SUBSEQUENT EVENTS

Fund management has determined that no material events or transactions occurred subsequent to December 31, 2015, and through the date of the Fund’s financial statements issuance, which require additional disclosure in the Fund’s financial statements.

 

 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9—HOLDINGS OF 5% VOTING SECURITIES

Each of the companies listed below was considered to be an affiliate of the Fund because the Fund owned 5% or more of the company’s voting securities during all or part of the year ended December 31, 2015. Purchase and sale transactions and dividend income earned during the year on these securities were as follows:

 

     Shares at
Beginning of Year
    Additions     Reductions     Shares at
End of Year
    Dividend
Income(a)
    Value at
End of Year
 

AEGON NV (Netherlands)

    125,227,471        5,110,292               130,337,763        33,876,341        (c) 

Anadolu Efes Biracilik ve Malt Sanayii AS (Turkey)

    28,262,444        4,162,732               32,425,176        4,579,929        210,023,170   

BR Malls Participacoes SA (Brazil)

    54,870,300                      54,870,300        8,160,027        153,032,279   

Brother Industries, Ltd. (Japan)

    18,185,100               (5,973,100     12,212,000        3,331,859        (c) 

Hang Lung Group, Ltd. (Hong Kong)

    90,430,600        20,093,700               110,524,300        11,468,203        358,666,866   

Infineon Technologies AG (Germany)

    66,414,456               (10,652,086     55,762,370        13,631,230        (c) 

Kasikornbank PCL—Foreign (Thailand)

    123,826,527        16,056,500               139,883,027        14,472,518        578,306,373   

Kyocera Corp. (Japan)

    20,248,000               (1,125,600     19,122,400        16,628,257        886,308,045   

Lafarge SA (France)

    20,035,291               (20,035,291            24,427,989          

Lanxess AG (Germany)

    4,539,680        462,000        (773,346     4,228,334        2,419,062        (c) 

Millicom International Cellular SA SDR (Luxembourg)

    10,088,392                      10,088,392        22,755,923        574,611,534   

New Oriental Education & Technology Group, Inc. ADR (Cayman Islands/China)

    5,733,700        4,051,929        (3,416,301     6,369,328        3,528,539        (c) 

NGK Spark Plug Co., Ltd. (Japan)

    14,009,700        1,118,700        (4,787,100     10,341,300        3,405,633        (c) 

Saipem SPA (Italy)

    35,889,000        10,976,200               46,865,200        (b)      376,728,063   

Smiths Group PLC (United Kingdom)

    26,840,600        7,085,600               33,926,200        21,009,124        469,881,576   

Television Broadcasts, Ltd. (Hong Kong)

    40,022,900                      40,022,900        25,299,505        164,996,568   

Yamaha Motor Co., Ltd. (Japan)

    31,550,100                      31,550,100        11,417,409        706,999,061   

Yapi ve Kredi Bankasi AS (Turkey)

    234,711,168        4,650,000        (34,984,300     204,376,868        6,004,776        (c) 
         

 

 

   

 

 

 
          $ 226,416,324      $ 4,479,553,535   
         

 

 

   

 

 

 
                                   

 

 

   

 

 

 
(a)

Net of foreign taxes, if any

(b)

Non-income producing

(c) 

Company was not an affiliate at year end

 

PAGE 14 § DODGE & COX INTERNATIONAL STOCK FUND


CONSOLIDATED FINANCIAL HIGHLIGHTS

 

 

SELECTED DATA AND RATIOS

(for a share outstanding throughout each year)

 

Year Ended December 31,

 
    2015     2014      2013      2012      2011  
 

 

 

 

Net asset value, beginning of year

    $42.11        $43.04         $34.64         $29.24         $35.71   

Income from investment operations:

            

Net investment income

    0.79        0.98         0.70         0.76         0.78   

Net realized and unrealized gain (loss)

    (5.58     (0.94      8.40         5.39         (6.49
 

 

 

 

Total from investment operations

    (4.79     0.04         9.10         6.15         (5.71
 

 

 

 

Distributions to shareholders from:

            

Net investment income

    (0.84     (0.97      (0.70      (0.75      (0.76

Net realized gain

                                     
 

 

 

 

Total distributions

    (0.84     (0.97      (0.70      (0.75      (0.76
 

 

 

 

Net asset value, end of year

    $36.48        $42.11         $43.04         $34.64         $29.24   
 

 

 

 

Total return

    (11.35 )%      0.07      26.31      21.03      (15.97 )% 

Ratios/supplemental data:

            

Net assets, end of year (millions)

    $57,029        $64,040         $53,616         $40,556         $35,924   

Ratio of expenses to average net assets

    0.64     0.64      0.64      0.64      0.64

Ratio of net investment income to average net assets

    1.86     2.39      1.85      2.31      2.23

Portfolio turnover rate

    18     12      13      10      16

See accompanying Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Trustees of Dodge & Cox Funds and Shareholders of Dodge & Cox International Stock Fund

In our opinion, the accompanying consolidated statement of assets and liabilities, including the consolidated portfolio of investments, and the related consolidated statements of operations and of changes in net assets and the consolidated financial highlights present fairly, in all material respects, the financial position of Dodge & Cox International Stock Fund (the “Fund”, one of the series constituting Dodge & Cox Funds) at December 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements and consolidated financial highlights (hereafter referred to as financial statements) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2015, by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 25, 2016

 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 15


SPECIAL 2015 TAX INFORMATION

The following information is provided pursuant to provisions of the Internal Revenue Code:

In 2015, the Fund elected to pass through to shareholders foreign source income of $1,705,148,285 and foreign taxes paid of $93,902,146.

The Fund designates up to a maximum of $1,627,860,558 of its distributions paid to shareholders in 2015 as qualified dividends (treated for federal income tax purposes in the hands of shareholders as taxable at a maximum rate of 20%).

For shareholders that are corporations, the Fund designates 3% of its ordinary dividends paid to shareholders in 2015 as dividends from domestic corporations eligible for the corporate dividends received deduction, provided that the shareholder otherwise satisfies applicable requirements to claim that deduction.

BOARD APPROVAL OF FUNDS’ INVESTMENT MANAGEMENT AGREEMENTS AND MANAGEMENT FEES

(unaudited)

The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 16, 2015, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2016 with respect to each Fund. During the course of the year, the Board received a wide variety of materials relating to the investment management and administrative services provided by Dodge & Cox and the performance of each of the Funds.

INFORMATION RECEIVED

In advance of the meeting, the Board, including each of the Independent Trustees, requested, received, and reviewed materials relating to the Agreements and the services provided by Dodge & Cox. The Independent Trustees retained Morningstar® to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Morningstar. The Morningstar materials included information regarding advisory fee rates, expense ratios, and transfer agency, custodial, and distribution expenses, as well as appropriate performance comparisons to each Fund’s peer group and an index or combination of indices. The Morningstar materials also included a comparison of expenses of various share classes offered by comparable funds. The materials reviewed by the Board contained information concerning, among other things, Dodge & Cox’s profitability, financial results and condition, advisory fee revenue, and separate account and sub-adviser fund fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates, sales and redemption data and the significant investment that Dodge & Cox makes in research used in managing the Funds. The Board received and reviewed

memoranda and related materials addressing, among other things, Dodge & Cox’s services to the Funds; how Dodge & Cox Funds’ fees compare to fees of peer group funds; the different fees, services, costs, and risks associated with other accounts managed by Dodge & Cox as compared to the Dodge & Cox Funds; and the ways in which the Funds realize economies of scale. Throughout the process of reviewing the services provided by Dodge & Cox and preparing for the meeting, the Independent Trustees found Dodge & Cox to be open, forthright, detailed, and very helpful in answering questions about all issues. The Board received copies of the Agreements and a memorandum from the independent legal counsel to the Independent Trustees discussing the factors generally regarded as appropriate to consider in evaluating advisory arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the independent legal counsel on November 11, 2015, and again on December 16, 2015, to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements. In considering the Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board considered several factors, discussed below, to be key factors and reached the conclusions described below.

NATURE, QUALITY, AND EXTENT OF THE SERVICES

The Board considered that Dodge & Cox provides a wide range of services to the Funds in addition to portfolio management and that the quality of these services has been excellent in all respects. The extensive nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality, and extent of portfolio management, administrative, and shareholder services performed by Dodge & Cox. With regard to portfolio management services, the Board considered Dodge & Cox’s established long-term history of care and conscientiousness in the management of the Funds; its demonstrated consistency in investment approach and depth; the background and experience of the Dodge & Cox Investment Policy Committee, International Investment Policy Committee, Global Stock Investment Policy Committee, Fixed Income Investment Policy Committee, and Global Bond Investment Policy Committee, and research analysts responsible for managing the Funds; its methods for assessing the regulatory and investment climate in various jurisdictions; Dodge & Cox’s overall high level of attention to its core investment management function; and its commitment to the Funds and their shareholders. In the area of administrative and shareholder services, the Board considered the excellent quality of Dodge & Cox’s work in areas such as compliance, legal services, trading, proxy voting, technology, oversight of the Funds’ transfer agent and custodian, tax compliance, and shareholder communication through its website and other means. The Board also noted Dodge & Cox’s diligent disclosure policy, its favorable compliance record, and its

 

 

PAGE 16 § DODGE & COX INTERNATIONAL STOCK FUND


reputation as a trusted, shareholder-friendly mutual fund family. In addition, the Board considered that Dodge & Cox manages approximately $185 billion in Fund assets with fewer professionals than most comparable funds, and that on average these professionals have more experience and longer tenure than investment professionals at comparable funds. The Board also noted that Dodge & Cox is an investment research-oriented firm with no other business endeavors to distract management’s attention from its research efforts, and that its investment professionals adhere to a consistent investment approach across the Funds. The Board further considered the favorable stewardship grades given by Morningstar to each of the Funds and the “Gold” analyst rating awarded by Morningstar to all of the Funds except the Global Bond Fund. The Board concluded that it was satisfied with the nature, extent, and quality of investment management and other services provided to the Funds by Dodge & Cox.

INVESTMENT PERFORMANCE

The Board considered short-term and long-term investment performance for each Fund (including periods of outperformance or underperformance) as compared to both relevant indices and the performance of such Fund’s peer group. The Board noted that the Funds had weak absolute and relative performance in 2015, but remained solid performers over longer periods. The Board determined after extensive review and inquiry that Dodge & Cox’s historic, long-term, team-oriented, bottom-up investment approach remains consistent and that Dodge & Cox continues to be distinguished by its integrity, transparency, and independence. The Board considered that the performance of the Funds is the result of a team-oriented investment management process that emphasizes a long-term investment horizon, comprehensive independent research, price discipline, low cost and low portfolio turnover. The Board also considered that the investment performance delivered by Dodge & Cox to the Funds appeared to be consistent with the relevant performance delivered for other clients of Dodge & Cox. The Board concluded that Dodge & Cox has delivered favorable long-term performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.

COSTS AND ANCILLARY BENEFITS

Costs of Services to Funds: Fees and Expenses. The Board considered each Fund’s management fee rate and expense ratio relative to each Fund’s peer group and relative to management fees charged by Dodge & Cox to other clients. In particular, the Board considered that the Funds continue to be substantially below their peer group median in expense ratios and that many media and industry reports specifically comment on the low expense ratios of the Funds, which have been a defining characteristic of the Funds for many years. The Board also evaluated the operating structures of the Funds and Dodge & Cox, noting that the Funds do not charge front-end sales commissions or distribution fees, and Dodge & Cox bears, among other things, the significant cost of third party research, reimbursement for recordkeeping and administrative costs to third-party retirement plan administrators, and administrative and office overhead.

The Board noted that expenses are well below industry averages. When compared to peer group funds, the Funds are in the quartile with the lowest expense ratios. The Board also considered that the Funds receive numerous administrative, regulatory compliance, legal, technology and shareholder support services from Dodge & Cox without any additional administrative fee and the fact that the Funds have relatively low transaction costs and portfolio turnover rates. The Board noted the Funds’ unusual single-share-class structure and reviewed Morningstar data showing that the few peer group funds with lower expense ratios often have other share classes with significantly higher expense ratios. In this regard, the Board considered that many of the Funds’ shareholders would not be eligible to purchase comparably-priced shares of many peer group funds, which typically make their lower-priced share classes available only to institutional investors. The Board determined that the Funds provide access for small investors to high quality investment management at a relatively low cost.

The Board reviewed information regarding the fee rates Dodge & Cox charges to separate accounts and subadvised funds that have investment programs similar to those of the Funds, including instances where separate account and sub-advised fund fees are lower than Fund fees. The Board considered differences in the nature and scope of services Dodge & Cox provides to the Funds as compared to other client accounts, differences in regulatory, litigation, and other risks as between Dodge & Cox Funds and other types of clients. The Board also noted that different markets exist for mutual fund and institutional separate account management services. With respect to non-U.S. funds sponsored and managed by Dodge & Cox that are comparable to the Funds in many respects, the Board noted that the fee rates charged by Dodge & Cox are the same as or higher than the fee rates charged to the Funds. After consideration of these matters, the Board concluded that the overall costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation, and performance of Dodge & Cox and the low overall expense ratios of the Funds.

Profitability and Costs of Services to Dodge & Cox; “Fall-out” Benefits. The Board reviewed reports of Dodge & Cox’s financial position, profitability, and estimated overall value, and considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the favorable services provided. The Board noted in particular that Dodge & Cox’s profits are not generated by high fee rates, but reflect an extraordinarily streamlined, efficient, and focused business approach toward investment management. The Board recognized the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that the compensation/profit structure at Dodge & Cox includes a return on shareholder employees’ investment in the firm, which is vital for remaining independent and facilitating retention of management and investment

 

 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 17


professionals. The Board considered independent research indicating that firms that grow organically, rather than through acquisition, tend to have better performance. Key to organic growth is the ability to retain talented and experienced analysts, portfolio managers and other professionals.

The Board also considered that in January 2015, Dodge & Cox closed the International Stock Fund to new investors to pro-actively manage the growth of the Fund. The Stock Fund and Balanced Fund were similarly closed to new investors during periods of significant growth in the past. While these actions are intended to benefit existing shareholders, the effect is to reduce potential revenues to Dodge & Cox from new shareholders. The Board also considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers and reputational benefits to non-U.S. funds sponsored and managed by Dodge & Cox) that Dodge & Cox might receive as a result of its association with the Funds and determined that they are acceptable. The Board also noted that Dodge & Cox continues to invest substantial sums in its business in order to provide enhanced services, systems and research capabilities, all of which benefit the Funds. The Board concluded that Dodge & Cox’s profitability is the keystone of its independence, stability and long-term investment performance and that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) is fair and reasonable.

ECONOMIES OF SCALE

The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee structure and the considerable efficiencies of the Funds’ organization and fee structure that has been realized by shareholders from the time of each Fund’s inception (i.e., from the first dollar). An assessment of economies of scale must also take into account that Dodge & Cox invests significant time and resources in each new Fund for months (and sometimes years) prior to launch; in addition, expenses are capped, which means that Dodge & Cox earns no revenue and subsidizes the operations of a new Fund for a period of time until it reaches scale.

In addition, the Board noted that Dodge & Cox has shared economies of scale by adding or enhancing services to the Funds over time, and that the internal costs of providing investment management, up-to-date technology, administrative, legal, and compliance services to the Funds continue to increase. For example, Dodge & Cox has increased its global research staff and investment resources over the years to address the increased complexity of investing in multinational and non-U.S. companies. In addition, Dodge & Cox has made substantial expenditures in other staff, technology, cybersecurity, and infrastructure to enable it to integrate credit and equity analyses and to be able to implement its strategy in a more effective and secure manner. Over the last ten years, Dodge & Cox has increased its spending on third party research, data services, trading systems, technology, and recordkeeping service expenses at a rate that has significantly outpaced the Funds’ growth rate during the same period.

The Board considered that Dodge & Cox has a history of voluntarily limiting asset growth in several Funds that experienced significant inflows by closing them to new investors in order to protect the Funds’ ability to achieve good investment returns for shareholders. The Board also observed that, even without fee breakpoints, the Funds are competitively priced in a very competitive market and that having a low fee from inception is better for shareholders than starting with a higher fee and adding breakpoints. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately shares economies of scale that may exist.

CONCLUSION

Based on their evaluation of all material factors and assisted by the advice of independent legal counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the advisory fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that the scope and quality of Dodge & Cox’s services has provided substantial value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.

FUND HOLDINGS

The Fund provides a complete list of its holdings four times each fiscal year, as of the end of each quarter. The Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-CSR (second and fourth quarters) and Form N-Q (first and third quarters). Shareholders may view the Fund’s Forms N-CSR and N-Q on the SEC’s website at sec.gov. Forms N-CSR and N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 202-551-8090 (direct) or 800-732-0330 (general SEC number). A list of the Fund’s quarter-end holdings is also available at dodgeandcox.com on or about 15 days following each quarter end and remains available on the website until the list is updated in the subsequent quarter.

PROXY VOTING

For a free copy of the Fund’s proxy voting policies and procedures, please call 800-621-3979, visit the Fund’s website at dodgeandcox.com, or visit the SEC’s website at sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ending June 30 is also available at dodgeandcox.com or at sec.gov.

HOUSEHOLD MAILINGS

The Fund routinely mails shareholder reports and summary prospectuses to shareholders and, on occasion, proxy statements. In order to reduce the volume of mail, when possible, only one copy of these documents will be sent to shareholders who are part of the same family and share the same residential address.

If you have a direct account with the Funds and you do not want the mailing of shareholder reports and summary prospectuses combined with other members in your household, contact the Funds at 800-621-3979. Your request will be implemented within 30 days.

 

 

PAGE 18 § DODGE & COX INTERNATIONAL STOCK FUND


DODGE & COX FUNDS—EXECUTIVE OFFICER & TRUSTEE INFORMATION

 

Name (Age) and
Address*
 

Position with Trust

(Year of Election or
Appointment)

  Principal Occupation During Past 5 Years   Other Directorships Held by Trustees
INTERESTED TRUSTEES AND EXECUTIVE OFFICERS
Charles F. Pohl (57)  

Chairman and Trustee

(Officer since 2004)

  Chairman (since 2013), Co-President (2011-2013), Senior Vice President (until 2011), and Director of Dodge & Cox; Chief Investment Officer, Portfolio Manager, Investment Analyst, and member of Investment Policy Committee (IPC), Global Stock Investment Policy Committee (GSIPC), International Investment Policy Committee (IIPC), and Fixed Income Investment Policy Committee (FIIPC)  
Dana M. Emery (54)  

President and Trustee

(Trustee since 1993)

  Chief Executive Officer (since 2013), President (since 2011), Executive Vice President (until 2011), and Director of Dodge & Cox; Director of Fixed Income, Portfolio Manager, and member of FIIPC and Global Bond Investment Policy Committee (GBIPC)  
John A. Gunn (72)  

Senior Vice President

(Officer since 1998)

  Chairman Emeritus (2011-2013), Chairman (until 2011), Chief Executive Officer (until 2010), and Director (until 2013) of Dodge & Cox; Portfolio Manager and member of IPC, GSIPC (until 2014), and IIPC (until 2013)  
Diana S. Strandberg (56)   Senior Vice President (Officer since 2006)   Senior Vice President (since 2011), Vice President (until 2011), and Director (since 2011) of Dodge & Cox; Director of International Equity (since 2009), Portfolio Manager, Investment Analyst, and member of IPC, GSIPC, IIPC, and GBIPC  
David H. Longhurst (58)  

Treasurer

(Officer since 2006)

  Vice President and Assistant Treasurer of Dodge & Cox  
Thomas M. Mistele (62)  

Secretary

(Officer since 1998)

  Chief Operating Officer, Director, Secretary, Senior Counsel (since 2011), and General Counsel (until 2011) of Dodge & Cox  
Katherine M. Primas (41)  

Chief Compliance

Officer

(Officer since 2009)

  Vice President (since 2011) and Chief Compliance Officer of Dodge & Cox  
INDEPENDENT TRUSTEES
Thomas A. Larsen (66)  

Trustee

(Since 2002)

  Senior Counsel of Arnold & Porter LLP (law firm) (since 2013); Partner of Arnold & Porter LLP (until 2012); Director of Howard, Rice, Nemerovski, Canady, Falk & Rabkin (1977-2011)  
Ann Mather (55)  

Trustee

(Since 2011)

  CFO, Pixar Animation Studios (1999-2004)   Director, Google, Inc. (internet information services) (since 2005); Director, Glu Mobile, Inc. (multimedia software) (since 2005); Director, Netflix, Inc. (internet television) (since 2010); Director, Arista Networks (cloud networking) (since 2013); Director, Shutterfly, Inc. (internet photography services/publishing) (since 2013)
Robert B. Morris III (63)  

Trustee

(Since 2011)

  Advisory Director, The Presidio Group (since 2005)  
Gary Roughead (64)  

Trustee

(Since 2013)

  Annenberg Distinguished Visiting Fellow, Hoover Institution (since 2012); Admiral, United States Navy (Ret.); U.S. Navy Chief of Naval Operations (2008-2011)   Director, Northrop Grumman Corp. (global security) (since 2012)
Mark E. Smith (64)  

Trustee

(Since 2014)

  Executive Vice President, Managing Director—Fixed Income at Loomis Sayles & Company, L.P. (2003-2011)  
John B. Taylor (69)  

Trustee

(Since 2005)

(and 1995-2001)

  Professor of Economics, Stanford University (since 1984); Senior Fellow, Hoover Institution (since 1996); Under Secretary for International Affairs, United States Treasury (2001-2005)  

 

*  

The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all six series in the Dodge & Cox Funds complex and serves for an indefinite term.

Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Funds’ website at dodgeandcox.com or calling
800-621-3979.

 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 19


International Stock Fund

 

 

dodgeandcox.com

For Fund literature, transactions, and account information, please visit the Funds’ website.

or write or call:

DODGE & COX FUNDS

c/o Boston Financial Data Services

P.O. Box 8422

Boston, Massachusetts 02266-8422

(800) 621-3979

INVESTMENT MANAGER

Dodge & Cox

555 California Street, 40th Floor

San Francisco, California 94104

(415) 981-1710

 

This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.

This report reflects our views, opinions, and portfolio holdings as of December 31, 2015, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.


LOGO

 

DODGE & COX FUNDS®

 

2015

   

 

Annual Report

December 31, 2015

Balanced Fund

ESTABLISHED 1931

TICKER:  DODBX

 

12/15 BF AR    LOGO    Printed on recycled paper


TO OUR SHAREHOLDERS

 

The Dodge & Cox Balanced Fund had a total return of –2.9% for the year ending December 31, 2015, compared to 1.3% for the Combined Index(a) (a 60/40 blend of stocks and fixed income securities).

MARKET COMMENTARY

U.S. equity markets were volatile in 2015: after a significant selloff in August and September, the S&P 500 rebounded during the fourth quarter to finish the year up just over 1%. Global oil prices declined 35% during the year, which aided U.S. household purchasing power and hindered the profitability of oil and gas companies. Consumer Discretionary was the strongest sector (up 10%) of the S&P 500, while Energy was the worst-performing sector (down 21%).

In the United States, economic activity expanded at a moderate pace: household spending and business investment increased, and the housing market strengthened. Labor market conditions continued to improve, with solid job gains and reduced unemployment. Growth was tempered by the stronger U.S. dollar and weaker demand for U.S. exports. In December, the U.S. Federal Reserve (Fed) raised its target federal funds rate for the first time in nine years. At that time, Fed Chair Janet Yellen reiterated the Fed’s intent to normalize monetary policy gradually; the timing and size of future adjustments will be based on economic conditions in relation to the Fed’s goals of maximum employment and 2% inflation.

Rising interest rates and wider credit yield premiums(b) resulted in a small positive return for the U.S. bond market in 2015. Some of the prominent factors affecting bond prices included changing expectations regarding Fed policy, diverging global economic conditions and monetary policy, and concerns about the effect of China’s decelerating economy. Investment-grade corporate bonds returned –0.7%(c) for 2015, underperforming comparable-duration(d) Treasuries by 1.6 percentage points in the sector’s poorest relative result since 2011. Agency-guaranteed(e) mortgage-backed securities (MBS) returned 1.5% for the year, roughly in line with comparable-duration Treasuries.

INVESTMENT STRATEGY

We continue to set the Fund’s asset allocation based on our long-term outlook for the Fund’s common stock, preferred stock, and fixed income holdings. We increased the allocation to preferred stock by 2.3 percentage points during the year due to attractive valuations and decreased our common stock and fixed income weightings by 0.8 percentage points and 1.6 percentage points, respectively.

Equity Strategy

As a value-oriented manager, 2015 was a challenging year for absolute and relative performance. Across equities, value stocks (the lower valuation portion of the market) underperformed growth stocks (the higher valuation portion of the market) by one of the widest spreads since the global financial crisis. The equity portfolio of the Fund was significantly affected by this performance divergence. Many of the S&P 500’s higher-valuation growth companies, not held in the

equity portfolio, outperformed significantly. In addition, some individual holdings (e.g., HP Inc.(f), Time Warner, Wal-Mart) significantly detracted from results for the year, and the portfolio’s Energy holdings were negatively impacted by falling oil prices.

We continue to be optimistic about the long-term outlook for the equity portfolio. Our value-oriented approach has led us to invest in companies where we believe the long-term potential is not reflected in the current valuation. Two examples of such companies—American Express and Hewlett Packard Enterprise—are discussed below.(g)

American Express

American Express—the largest new purchase in the equity portfolio during 2015—provides charge and credit card products and travel-related services to consumers and businesses worldwide. The company is the number one credit/charge card issuer and merchant acquirer in the United States measured by billed business, and its network is the second largest after Visa. Historically, American Express has generated attractive returns due to its vertical integration and strong value proposition for high-spending customers.

In 2015, American Express’ stock price declined 24% due to concerns that the company’s business model is under pressure: Costco U.S. and JetBlue terminated their exclusive relationships with the card company and the Department of Justice questioned American Express’ ability to enforce rules prohibiting merchants from steering customers to other credit cards. As a result, American Express’ valuation relative to the market is at a historically low level (13 times forward estimated earnings(h)). We initiated a position in the company because we believe these near-term concerns have obscured a long-term investment opportunity. The company has an attractive business model that produces high returns on capital by encouraging more affluent and creditworthy customers to use the company’s credit and charge cards. American Express’ highly perceived rewards program, customer service, and strong brand recognition help attract and retain wealthier customers. The company should benefit from a continued industry shift from paper to plastic payments and growth in its third-party issued cards business. We believe American Express will be able to maintain its strong return on equity and improve profitability in the long run. On December 31, American Express was a 1.4% position in the equity portfolio.

Hewlett Packard Enterprise

After providing strong returns in 2013 and 2014, Hewlett-Packard was the portfolio’s largest detractor from results during 2015. Hewlett-Packard recently split into two entities—Hewlett Packard Enterprise and HP Inc.—which should result in greater focus and flexibility for each company to achieve its strategic goals. To assess secular challenges and evaluate the risks and opportunities of each stand-alone business, we met numerous times with their management teams and competitors and spoke with industry consultants. As a result, we added to the portfolio’s positions in both companies. On December 31, Hewlett Packard Enterprise was a 2.4% position and HP Inc. was a 1.8% position in the equity portfolio.

 

 

PAGE 2 § DODGE & COX BALANCED FUND


Hewlett Packard Enterprise, one of the largest vendors in information technology (IT), consists of the enterprise technology infrastructure, software, and services segments of the old Hewlett-Packard. We acknowledge the company faces headwinds: the shift to the cloud has negatively impacted all on-premise IT vendors, continued public cloud adoption will likely erode the company’s market share, and competition is keen. Despite these risks, we believe Hewlett Packard Enterprise is an attractive investment due to its strong market positions across its portfolio (e.g., top provider of servers, number two position in IT services), scale advantages, and opportunities to improve its margin structure. Meg Whitman—the CEO of Hewlett Packard Enterprise—has overseen sound acquisitions (e.g., 3Par), new product launches, and cost reduction programs during her tenures at Hewlett-Packard and eBay. Management is actively cutting costs and retooling its product/service offerings to improve the company’s competitiveness. Margins in the Enterprise Services segment should expand as the company optimizes its contract mix and delivery models. The company trades at a compelling valuation (eight times forward estimated earnings), which is among the lowest in the S&P 500.

Fixed Income Strategy

We increased the fixed income portfolio weighting in credit investments to 55% in 2015 due to wider credit premiums and reduced our weighting in Treasuries to 8%. Most of the higher allocation to credit occurred in corporate bonds where the weighting rose to 46% from 44% at the end of 2014. A 36% allocation to structured products—Agency-guaranteed MBS (at 33%) and more traditional, AAA-rated asset-backed securities (3%)—rounds out the fixed income portfolio’s non-U.S. Treasury sector exposures.

Most of the increase in the credit position occurred in the third quarter, in part due to high levels of new issuance in connection with M&A financing. These transactions generally resulted in higher leverage and more attractive entry points for investors due to wider credit premiums at new issue. Much of the recent increase in investment-grade corporate leverage has been concentrated in highly-rated issuers engaging in strategic transactions that build scale and are expected to result in meaningful synergies. Examples of new or growing positions in the portfolio during 2015 related to strategic actions by corporate issuers included Allergan, Charter Communications, Hewlett Packard Enterprise, and Imperial Tobacco Group.

We have also found opportunities to invest in market sectors experiencing heightened volatility. In 2015, these segments were primarily the commodities sectors and the emerging markets, with the hardest-hit issuers exposed to both. Our analysis has focused on issuers whose securities appear undervalued relative to credit fundamentals, and has included in-depth assessments of the value of an issuer’s assets over a market cycle, as well as the issuer’s ability to survive a prolonged period of commodity price weakness. The result of this analysis has been new or increased exposures to BHP Billiton, Cemex, Codelco, Kinder Morgan, Teck Resources, and TransCanada. We have also maintained the Fund’s positions in Petrobras, Rio Oil Finance Trust, and Pemex (all of which

underperformed substantially in 2015), based in part on potential downside protection provided by strong government relationships and other sources of financial flexibility.

We continue to maintain a substantial position in subordinated securities issued by large U.S. and UK banks. 2015 presented opportunities to broaden these investments to include industrial hybrids, which are subordinated securities that are given partial equity treatment by the rating agencies. Examples include hybrid securities issued by TransCanada, a midstream energy company whose stability is supported by the long-term contractual nature of its business, and BHP Billiton, the world’s largest mining company with a strong balance sheet and attractive cost positions in its operations.

We remain constructive on the Fund’s credit holdings, which generally are diversified across market sectors, trade at attractive prices, and maintain financial flexibility to weather the current challenged environment. While we recognize that recent increases in corporate leverage and shareholder remuneration could result in weaker credit profiles, we believe that valuations provide adequate compensation for the current risks.

Turning to the portfolio’s Agency MBS, currently a 33% weighting, we shifted both the weighting and the mix of underlying holdings throughout the year in response to changing valuations. We likewise reduced the portfolio’s holdings of shorter-duration AAA-rated ABS to purchase relatively more attractive corporate bonds. We continue to view the portfolio’s MBS favorably in terms of their ability to generate regular income, provide an important source of liquidity, and add an element of defensiveness in a volatile market environment for credit markets.

With respect to interest rate risk, we believe it is prudent to mitigate the effect of price declines associated with rising interest rates through a shorter portfolio duration (roughly 70% of that of the Barclays U.S. Agg). We see a clear disconnect between the slow pace of rate increases implied by current U.S. Treasury valuations and the faster pace indicated by Fed expectations, particularly in the context of a modestly expanding economy (more than 2% growth is expected over the next several years) and an inflation rate likely to rise as energy and import prices increase. It is our view that interest rates will rise more quickly than the levels implied by the market’s very modest expectations.

IN CLOSING

On December 31, the Fund’s equity portfolio of 63 companies traded at 13.8 times forward estimated earnings, a significant discount to the S&P 500 (17.4 times forward estimated earnings). We remain confident in the prospects for the equity portfolio over our three- to five-year investment horizon and believe it is positioned to benefit from long-term global growth opportunities. The fixed income portfolio, with its defensive duration posture and higher yield than the Barclays U.S. Agg, is positioned to soften the effects of increases in interest rates that could reduce fixed income asset values.

Our experienced and stable team has weathered past periods of market turbulence by remaining steadfast in our investment philosophy and process. Our approach—constructing a diversified

 

 

DODGE & COX BALANCED FUND § PAGE 3


portfolio through in-depth, independent research, a three- to five-year investment horizon, and a focus on valuation relative to underlying fundamentals—continues to guide us through this period as well. We remain confident that our enduring value-oriented approach will benefit the Fund in the years ahead.

Thank you for your continued confidence in our firm. As always, we welcome your comments and questions.

For the Board of Trustees,

 

LOGO

 

LOGO

Charles F. Pohl,

Chairman

 

Dana M. Emery,

President

January 29, 2016

 

 

(a)  

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 Barclays U.S. Aggregate Bond Index (Barclays U.S. Agg), which is a widely recognized, unmanaged index of U.S. dollar-denominated, investment-grade, taxable fixed income securities.

(b)  

Yield premiums are one way to measure a security’s valuation. Narrowing yield premiums result in a higher valuation. Widening yield premiums result in a lower valuation.

(c)  

Sector returns as calculated and reported by Barclays.

(d)  

Duration is a measure of a bond’s (or a bond portfolio’s) price sensitivity to changes in interest rates.

(e)  

The U.S. Government does not guarantee the Fund’s shares, yield, or net asset value. The agency guarantee (by, for example, Ginnie Mae, Fannie Mae, or Freddie Mac) does not eliminate market risk.

(f)  

After Hewlett-Packard Co. split into two companies, HP Inc. retained the HPQ ticker symbol. HP Inc.’s –37% return in 2015 includes Hewlett-Packard Co.’s performance through October 2015.

(g)  

The use of specific examples does not imply that they are more attractive investments than the Fund’s other holdings.

(h)  

Unless otherwise specified, all weightings and characteristics are as of December 31, 2015.

 

 

PAGE 4 § DODGE & COX BALANCED FUND


ANNUAL PERFORMANCE REVIEW

The Fund underperformed the Combined Index by 4.2 percentage points in 2015. The Fund’s higher weighting in equities had a negative impact on results. Preferred equities were especially strong and contributed meaningfully.

Equity Portfolio

  §  

The portfolio’s holdings in the Consumer Discretionary sector (down 6% compared to up 10% for the S&P 500 sector) hindered performance. Media holdings Twenty-First Century Fox (down 29%) and Time Warner (down 23%) were particularly weak.

 
  §  

Wal-Mart, the portfolio’s only holding in the Consumer Staples sector (down 27% compared to up 7% for the S&P 500 sector), hurt returns.

 
  §  

The portfolio’s holdings in the Information Technology sector (flat compared to up 6% for the S&P 500 sector) detracted from results. HP Inc. (down 37%) and NetApp (down 35%) performed poorly.

 
  §  

The portfolio’s average overweight position (5% versus 3%) and holdings in the Health Care Providers & Services industry (up 18% compared to up 12% for the S&P 500 industry) helped returns. Cigna (up 42%) and UnitedHealth Group (up 18%) were particularly strong.

 

Fixed Income Portfolio

  §  

Certain emerging market-related credit holdings underperformed for the year, including Pemex, Petrobras, and Rio Oil Finance Trust.

 
  §  

The portfolio’s overweight to the Industrial sub-sector (27% versus 14% for the Barclays U.S. Agg) and underweight to U.S. Treasuries (9% versus 36% for the Barclays U.S. Agg) detracted from relative returns.

 
  §  

Corporate security selection was slightly negative as a number of industrial issuers performed poorly.

 
  §  

The portfolio’s shorter relative duration (approximately 72% of the Barclays U.S. Agg’s duration) added to relative returns.

 

 

      

Unless otherwise noted, figures cited in this section denote portfolio positioning at the beginning of the period.

 

KEY CHARACTERISTICS OF DODGE & COX

Independent Organization

Dodge & Cox is one of the largest privately owned investment managers in the world. We remain committed to independence, with a goal of providing the highest quality investment management service to our existing clients.

Over 85 Years of Investment Experience

Dodge & Cox was founded in 1930. We have a stable and well-qualified team of investment professionals, most of whom have spent their entire careers at Dodge & Cox.

Experienced Investment Team

The Investment Policy Committee, which is the decision-making body for the equity portion of the Balanced Fund, is a nine-member committee with an average tenure at Dodge & Cox of 27 years. The Fixed Income Investment Policy Committee, which is the decision-making body for the Fixed Income portion of the Balanced Fund, is an eight-member committee with an average tenure of 20 years.

One Business with a Single Research Office

Dodge & Cox manages equity (domestic, international, and global), fixed income (domestic and global), and balanced investments, operating from one office in San Francisco.

Consistent Investment Approach

Our team decision-making process involves thorough, bottom-up fundamental analysis of each investment.

Long-Term Focus and Low Expenses

We invest with a three- to five-year investment horizon, which has historically resulted in low turnover relative to our peers. We manage Funds that maintain low expense ratios.

 

Risks: 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 an 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. A low interest rate environment creates an elevated risk of future negative returns. Financial intermediaries may restrict their market making activities for certain debt securities, which may reduce the liquidity and increase the volatility of such securities. Please read the prospectus and summary prospectus for specific details regarding the Fund’s risk profile.

 

 

DODGE & COX BALANCED FUND § PAGE 5


GROWTH OF $10,000 OVER 10 YEARS

FOR AN INVESTMENT MADE ON DECEMBER 31, 2005

 

LOGO

AVERAGE ANNUAL TOTAL RETURN

FOR PERIODS ENDED DECEMBER 31, 2015

 

       1 Year       5 Years     10 Years     20 Years  
       

Dodge & Cox Balanced Fund

    –2.88     9.58     5.76     8.78

Combined Index(a)

    1.31        8.95        6.49        7.36   

S&P 500 Index

    1.41        12.58        7.31        8.19   

Barclays U.S. Aggregate Bond Index (Barclays U.S. Agg)

    0.57        3.26        4.52        5.34   

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. Performance is updated and published monthly. Visit the Fund’s website at dodgeandcox.com or call 800-621-3979 for current performance figures.

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.

Standard & Poor’s, Standard & Poor’s 500, and S&P 500® are trademarks of McGraw Hill Financial. Barclays® is a trademark of Barclays Bank PLC.

 

 

(a) 

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 Barclays U.S. Aggregate Bond Index (Barclays U.S. Agg), 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.

 

 

FUND EXPENSE EXAMPLE

As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.

ACTUAL EXPENSES

The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER MUTUAL FUNDS

Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.

 

Six Months Ended
December 31, 2015
   Beginning Account Value
7/1/2015
     Ending Account Value
12/31/2015
     Expenses Paid
During Period*
 

Based on Actual Fund Return

   $ 1,000.00      $ 960.70       $ 2.57   

Based on Hypothetical 5% Yearly Return

     1,000.00         1,022.58         2.65   
*  

Expenses are equal to the Fund’s annualized expense ratio of 0.52%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. Though other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).

 

PAGE 6 § DODGE & COX BALANCED FUND


FUND INFORMATION (unaudited)     December 31, 2015   

 

GENERAL INFORMATION        

Net Asset Value Per Share

     $94.42   

Total Net Assets (billions)

     $14.3   

Expense Ratio

     0.53%   

Portfolio Turnover Rate

     20%   

30-Day SEC Yield(a)

     2.17%   

Fund Inception

     1931   

No sales charges or distribution fees

  

Investment Manager: Dodge & Cox, San Francisco. Managed by the Investment Policy Committee, whose nine members’ average tenure at Dodge & Cox is 27 years, and by the Fixed Income Investment Policy Committee, whose eight members’ average tenure is 20 years.

 

EQUITY PORTFOLIO (70.2%)    Fund  

Number of Common Stocks

     63   

Number of Preferred Stocks

     5   

Median Market Capitalization (billions)(b)

     $38   

Price-to-Earnings Ratio(b)(c)

     13.8x   

Foreign Securities not in the S&P 500(d)

     6.2%   

 

SECTOR DIVERSIFICATION (%)

(FIVE LARGEST)

   Common      Preferred      Total  

Financials

     17.9         3.9         21.8   

Information Technology

     16.5                 16.5   

Health Care

     11.1                 11.1   

Consumer Discretionary

     10.1         0.4         10.5   

Energy

     4.9                 4.9   

 

TEN LARGEST EQUITY
SECURITIES (%)(e)
   Common      Preferred      Total  

Wells Fargo & Co.

     2.8         1.7         4.5   

JPMorgan Chase & Co.

     1.3         1.8         3.1   

Microsoft Corp.

     2.7                 2.7   

Capital One Financial Corp.

     2.6                 2.6   

Charles Schwab Corp.

     2.6                 2.6   

Time Warner Cable, Inc.

     2.6                 2.6   

Alphabet, Inc.

     2.3                 2.3   

Bank of America Corp.

     2.3                 2.3   

Novartis AG (Switzerland)

     2.0                 2.0   

EMC Corp.

     1.8                 1.8   
ASSET ALLOCATION

LOGO

 

FIXED INCOME PORTFOLIO (28.2%)    Fund  

Number of Credit Issuers

     60   

Effective Duration (years)

     4.0   

 

SECTOR DIVERSIFICATION (%)        

U.S. Treasury(g)

     2.2   

Government-Related

     2.0   

Mortgage-Related(h)

     9.5   

Corporate

     13.2   

Asset-Backed

     1.3   

 

CREDIT QUALITY (%)(i)        

U.S. Treasury/Agency/GSE(g)

     11.7   

Aaa

     0.9   

Aa

     0.8   

A

     1.3   

Baa

     10.1   

Ba

     2.8   

B

     0.6   

 

FIVE LARGEST CREDIT ISSUERS (%)(e)        

Telecom Italia SPA

     0.6   

Verizon Communications, Inc.

     0.6   

State of Illinois GO

     0.5   

State of California GO

     0.5   

Kinder Morgan, Inc.

     0.5   
 

 

 

(a) 

SEC Yield is an annualization of the Fund’s total net investment income per share for the 30-day period ended on the last day of the month.

(b) 

Excludes the Fund’s preferred stock positions.

(c) 

Price-to-earnings (P/E) ratio is calculated using 12-month forward earnings estimates from third-party sources.

(d) 

Foreign stocks are U.S. dollar denominated.

(e) 

The Fund’s portfolio holdings are subject to change without notice. The mention of specific securities is not a recommendation to buy, sell, or hold any particular security and is not indicative of Dodge & Cox’s current or future trading activity.

(f) 

Net Cash & Other includes short-term investments (e.g., money market funds and repurchase agreements) and other assets less liabilities (e.g., cash, receivables, payables, and unrealized appreciation/depreciation on certain derivatives).

(g) 

Data as presented excludes the Fund’s position in Treasury futures contracts.

(h) 

The fixed income portfolio holds 0.16% in Agency multifamily mortgage securities; the Index classifies these securities under CMBS – Agency.

(i) 

The credit quality distribution shown for the Fund is based on the middle of Moody’s, S&P’s, and Fitch ratings, which is the methodology used by Barclays in constructing its indices. If a security is rated by only two agencies, the lower of the two ratings is used. Please note the Fund applies the highest of Moody’s, S&P’s, and Fitch ratings to determine compliance with the quality requirements stated in its prospectus. The credit quality of the investments in the portfolio does not apply to the stability or safety of the Fund or its shares.

 

DODGE & COX BALANCED FUND § PAGE 7


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

COMMON STOCKS: 65.9%               
    SHARES      VALUE  
CONSUMER DISCRETIONARY: 10.1%      

AUTOMOBILES & COMPONENTS: 0.3%

    

Harley-Davidson, Inc.

    860,000       $ 39,035,400   

CONSUMER DURABLES & APPAREL: 0.4%

    

Coach, Inc.

    1,655,036         54,169,328   

MEDIA: 7.9%

    

Comcast Corp., Class A

    4,564,774         257,590,197   

DISH Network Corp., Class A(a)

    1,165,032         66,616,530   

News Corp., Class A

    688,050         9,192,348   

Time Warner Cable, Inc.

    1,982,383         367,910,461   

Time Warner, Inc.

    3,817,066         246,849,658   

Twenty-First Century Fox, Inc., Class A

    4,882,200         132,600,552   

Twenty-First Century Fox, Inc., Class B

    1,600,000         43,568,000   
    

 

 

 
       1,124,327,746   

RETAILING: 1.5%

    

Liberty Interactive Corp. QVC Group, Series A(a)

    2,284,650         62,416,638   

Target Corp.

    985,400         71,549,894   

The Priceline Group, Inc.(a)

    67,000         85,421,650   
    

 

 

 
       219,388,182   
    

 

 

 
       1,436,920,656   
CONSUMER STAPLES: 1.4%     

FOOD & STAPLES RETAILING: 1.4%

    

Wal-Mart Stores, Inc.

    3,201,900         196,276,470   
ENERGY: 4.9%     

Apache Corp.

    2,710,017         120,514,456   

Baker Hughes, Inc.

    3,547,579         163,720,771   

Concho Resources, Inc.(a)

    560,900         52,085,174   

National Oilwell Varco, Inc.

    2,210,000         74,012,900   

Schlumberger, Ltd.(b) (Curacao/United States)

    3,674,021         256,262,964   

Weatherford International PLC(a)(b) (Ireland)

    4,250,000         35,657,500   
    

 

 

 
       702,253,765   
FINANCIALS: 17.9%     

BANKS: 7.1%

    

Bank of America Corp.

    19,257,100         324,096,993   

BB&T Corp.

    2,714,584         102,638,421   

JPMorgan Chase & Co.

    2,929,900         193,461,297   

Wells Fargo & Co.

    7,408,506         402,726,386   
    

 

 

 
       1,022,923,097   

DIVERSIFIED FINANCIALS: 9.3%

    

American Express Co.

    1,905,000         132,492,750   

Bank of New York Mellon Corp.

    5,702,600         235,061,172   

Capital One Financial Corp.

    5,169,959         373,167,641   

Charles Schwab Corp.

    11,232,900         369,899,397   

Goldman Sachs Group, Inc.

    1,182,000         213,031,860   
    

 

 

 
       1,323,652,820   

INSURANCE: 1.5%

    

AEGON NV(b) (Netherlands)

    12,084,994         68,521,916   

MetLife, Inc.

    3,077,000         148,342,170   
    

 

 

 
       216,864,086   
    

 

 

 
       2,563,440,003   
HEALTH CARE: 11.1%     

HEALTH CARE EQUIPMENT & SERVICES: 4.7%

  

  

Anthem, Inc.

    260,980         36,391,051   

Cigna Corp.

    1,361,216         199,186,737   

Express Scripts Holding Co.(a)

    2,599,568         227,228,239   

Medtronic PLC(b) (Ireland)

    660,200         50,782,584   

UnitedHealth Group, Inc.

    1,398,562         164,526,834   
    

 

 

 
       678,115,445   

PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES: 6.4%

  

AstraZeneca PLC ADR(b) (United Kingdom)

    1,270,100         43,119,895   

Merck & Co., Inc.

    2,583,175         136,443,304   

Novartis AG ADR(b) (Switzerland)

    3,294,900         283,493,196   
    SHARES      VALUE  

Roche Holding AG ADR(b) (Switzerland)

    5,980,000       $ 206,130,600   

Sanofi ADR(b) (France)

    5,515,165         235,221,787   

Thermo Fisher Scientific, Inc.

    24,500         3,475,325   
    

 

 

 
       907,884,107   
    

 

 

 
       1,585,999,552   
INDUSTRIALS: 2.9%     

CAPITAL GOODS: 0.6%

    

Danaher Corp.

    826,400         76,756,032   

NOW, Inc.(a)

    340,950         5,393,829   
    

 

 

 
       82,149,861   

COMMERCIAL & PROFESSIONAL SERVICES: 1.0%

  

  

ADT Corp.

    2,017,717         66,544,307   

Tyco International PLC(b) (Ireland)

    2,365,434         75,433,690   
    

 

 

 
       141,977,997   

TRANSPORTATION: 1.3%

    

FedEx Corp.

    1,242,254         185,083,423   
    

 

 

 
       409,211,281   
INFORMATION TECHNOLOGY: 16.5%      

SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT: 0.6%

  

Maxim Integrated Products, Inc.

    2,377,091         90,329,458   

SOFTWARE & SERVICES: 7.3%

    

Alphabet, Inc., Class A(a)

    116,700         90,793,767   

Alphabet, Inc., Class C(a)

    326,895         248,074,078   

Cadence Design Systems, Inc.(a)

    1,170,700         24,362,267   

eBay, Inc.(a)

    320,592         8,809,868   

Microsoft Corp.

    6,901,700         382,906,316   

Symantec Corp.

    9,214,000         193,494,000   

Synopsys, Inc.(a)

    1,614,700         73,646,467   

VMware, Inc.(a)

    326,300         18,458,791   
    

 

 

 
       1,040,545,554   

TECHNOLOGY, HARDWARE & EQUIPMENT: 8.6%

  

  

Cisco Systems, Inc.

    6,991,100         189,843,321   

Corning, Inc.

    5,761,700         105,323,876   

EMC Corp.

    10,174,000         261,268,320   

Hewlett Packard Enterprise Co.

    15,984,712         242,967,622   

HP, Inc.

    14,934,712         176,826,990   

Juniper Networks, Inc.

    620,645         17,129,802   

NetApp, Inc.

    3,826,491         101,516,806   

TE Connectivity, Ltd.(b) (Switzerland)

    2,080,536         134,423,431   
    

 

 

 
       1,229,300,168   
    

 

 

 
       2,360,175,180   
MATERIALS: 0.6%     

Celanese Corp., Series A

    1,330,960         89,613,537   
TELECOMMUNICATION SERVICES: 0.5%      

Sprint Corp.(a)

    18,742,971         67,849,555   
    

 

 

 

TOTAL COMMON STOCKS
(Cost $6,846,235,719)

     $ 9,411,739,999   
PREFERRED STOCKS: 4.3%               
CONSUMER DISCRETIONARY: 0.4%      

MEDIA: 0.4%

    

NBCUniversal Enterprise, Inc. 5.25%(d)

    53,210         56,402,600   
FINANCIALS: 3.9%     

BANKS: 3.9%

    

Citigroup, Inc. 5.95%

    

12/31/49

    60,975         58,688,438   

7/29/49

    5,175         5,063,738   

JPMorgan Chase & Co. 6.10%

    254,565         255,863,281   

Wells Fargo & Co. 5.875%

    227,645         239,596,362   
    

 

 

 
       559,211,819   
    

 

 

 

TOTAL PREFERRED STOCKS
(Cost $601,634,518)

   

   $ 615,614,419   
 

 

PAGE 8 § DODGE & COX BALANCED FUND   See accompanying Notes to Financial Statements


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

DEBT SECURITIES: 28.2%               
    PAR VALUE      VALUE  
U.S. TREASURY: 2.2%     

U.S. Treasury Note/Bond

    

0.50%, 3/31/17

  $ 50,600,000       $ 50,368,758   

0.875%, 1/15/18

    148,000,000         147,343,768   

1.00%, 3/15/18

    81,500,000         81,225,590   

1.625%, 7/31/19

    13,315,000         13,363,839   

1.625%, 11/30/20

    23,000,000         22,869,659   
    

 

 

 
       315,171,614   
GOVERNMENT-RELATED: 2.0%      

FEDERAL AGENCY: 0.1%

    

Small Business Admin. — 504 Program

    

Series 1996-20L 1, 6.70%, 12/1/16

    71,193         72,524   

Series 1997-20F 1, 7.20%, 6/1/17

    159,461         163,598   

Series 1997-20I 1, 6.90%, 9/1/17

    232,115         238,998   

Series 1998-20D 1, 6.15%, 4/1/18

    262,195         275,691   

Series 1998-20I 1, 6.00%, 9/1/18

    239,941         251,340   

Series 1999-20F 1, 6.80%, 6/1/19

    261,313         271,606   

Series 2000-20D 1, 7.47%, 4/1/20

    933,276         990,642   

Series 2000-20E 1, 8.03%, 5/1/20

    198,626         212,663   

Series 2000-20G 1, 7.39%, 7/1/20

    418,605         442,963   

Series 2000-20I 1, 7.21%, 9/1/20

    286,407         303,850   

Series 2001-20E 1, 6.34%, 5/1/21

    916,069         994,336   

Series 2001-20G 1, 6.625%, 7/1/21

    804,090         873,338   

Series 2003-20J 1, 4.92%, 10/1/23

    3,385,536         3,641,847   

Series 2007-20F 1, 5.71%, 6/1/27

    3,874,995         4,332,510   
    

 

 

 
       13,065,906   

FOREIGN AGENCY: 0.6%

    

Corp. Nacional del Cobre de Chile(b) (Chile)

    11,100,000         10,452,604   

4.50%, 9/16/25(d)

    

Petroleo Brasileiro SA(b) (Brazil)

    

4.375%, 5/20/23

    29,800,000         19,668,000   

6.25%, 3/17/24

    4,225,000         3,031,437   

Petroleos Mexicanos(b) (Mexico)

    

4.25%, 1/15/25(d)

    22,685,000         19,849,375   

6.625%, 6/15/35

    9,425,000         8,423,594   

6.375%, 1/23/45

    17,125,000         14,552,277   

5.625%, 1/23/46(d)

    16,675,000         12,759,710   
    

 

 

 
       88,736,997   

LOCAL AUTHORITY: 1.2%

    

New Jersey Turnpike Authority RB

    

7.414%, 1/1/40

    3,350,000         4,757,837   

7.102%, 1/1/41

    12,436,000         17,092,785   

State of California GO

    

7.50%, 4/1/34

    13,470,000         18,795,634   

7.55%, 4/1/39

    16,525,000         24,002,728   

7.30%, 10/1/39

    13,730,000         19,216,371   

7.625%, 3/1/40

    8,790,000         12,800,613   

State of Illinois GO

    

5.365%, 3/1/17

    37,215,000         38,596,793   

5.665%, 3/1/18

    26,160,000         27,699,516   

5.10%, 6/1/33

    11,565,000         10,936,442   
    

 

 

 
       173,898,719   

SOVEREIGN: 0.1%

    

Spain Government International(b) (Spain)

    

4.00%, 3/6/18(d)

    11,850,000         12,360,522   
    

 

 

 
       288,062,144   
    PAR VALUE      VALUE  
MORTGAGE-RELATED: 9.5%     

FEDERAL AGENCY CMO & REMIC: 2.1%

  

  

Dept. of Veterans Affairs

    

Series 1995-1 1, 7.243%, 2/15/25

  $ 395,926       $ 445,411   

Series 1995-2C 3A, 8.793%, 6/15/25

    179,364         217,524   

Series 2002-1 2J, 6.50%, 8/15/31

    10,723,089         12,247,566   

Fannie Mae

    

Trust 2002-33 A1, 7.00%, 6/25/32

    2,099,246         2,351,752   

Trust 2009-66 ET, 6.00%, 5/25/39

    4,796,186         5,160,867   

Trust 2009-30 AG, 6.50%, 5/25/39

    3,302,517         3,576,862   

Trust 2001-T7 A1, 7.50%, 2/25/41

    1,718,556         2,008,262   

Trust 2001-T5 A3, 7.50%, 6/19/41

    682,256         811,245   

Trust 2001-T8 A1, 7.50%, 7/25/41

    1,692,666         1,957,987   

Trust 2001-T4 A1, 7.50%, 7/25/41

    1,712,600         2,025,133   

Trust 2001-W3 A, 6.808%, 9/25/41

    1,160,859         1,302,228   

Trust 2001-T10 A2, 7.50%, 12/25/41

    1,489,256         1,778,734   

Trust 2013-106 MA, 4.00%, 2/25/42

    11,563,313         12,242,707   

Trust 2002-W6 2A1, 6.321%, 6/25/42

    1,718,690         2,001,011   

Trust 2002-W8 A2, 7.00%, 6/25/42

    2,234,030         2,545,373   

Trust 2003-W2 1A1, 6.50%, 7/25/42

    3,487,032         3,980,360   

Trust 2003-W2 1A2, 7.00%, 7/25/42

    1,341,223         1,557,434   

Trust 2003-W4 4A, 7.028%, 10/25/42

    1,803,821         2,070,685   

Trust 2012-121 NB, 7.00%, 11/25/42

    3,164,256         3,648,919   

Trust 2013-98 FA, 0.972%, 9/25/43

    10,693,645         10,818,562   

Trust 2013-92 FA, 0.972%, 9/25/43

    46,687,279         46,951,706   

Trust 2004-T1 1A2, 6.50%, 1/25/44

    2,211,506         2,469,037   

Trust 2004-W2 5A, 7.50%, 3/25/44

    4,324,224         4,930,797   

Trust 2004-W8 3A, 7.50%, 6/25/44

    723,254         841,494   

Trust 2005-W4 1A2, 6.50%, 8/25/45

    6,459,234         7,647,394   

Trust 2009-11 MP, 7.00%, 3/25/49

    6,673,247         7,588,629   

Freddie Mac

    

Series 1078 GZ, 6.50%, 5/15/21

    134,068         138,901   

Series 16 PK, 7.00%, 8/25/23

    2,444,672         2,705,203   

Series T-48 1A4, 5.538%, 7/25/33

    31,624,028         34,855,962   

Series 314 F2, 0.941%, 9/15/43

    22,307,420         22,317,611   

Series T-51 1A, 6.50%, 9/25/43

    214,076         249,417   

Series T-59 1A1, 6.50%, 10/25/43

    11,105,448         12,756,046   

Series 4281 BC, 4.786%, 12/15/43

    76,760,905         82,819,605   
    

 

 

 
       299,020,424   

FEDERAL AGENCY MORTGAGE PASS-THROUGH: 7.4%

  

Fannie Mae, 15 Year

    

3.50%, 12/1/29

    11,970,331         12,545,691   

4.00%, 2/1/27-5/1/27

    73,221,983         77,654,673   

4.50%, 1/1/25-1/1/27

    19,067,881         20,499,531   

6.00%, 7/1/16-3/1/22

    2,681,738         2,764,039   

6.50%, 9/1/16-11/1/18

    2,289,141         2,336,331   

7.00%, 11/1/18

    151,009         153,966   

7.50%, 12/1/16-8/1/17

    166,511         168,910   

Fannie Mae, 20 Year

    

4.00%, 11/1/30-12/1/34

    197,825,165         211,580,702   

4.50%, 1/1/31-5/1/32

    61,706,443         67,109,133   

Fannie Mae, 30 Year

    

4.50%, 1/1/39-2/1/45

    75,323,091         81,860,896   

5.50%, 7/1/33-8/1/37

    18,624,348         20,951,246   

6.00%, 9/1/36-8/1/37

    24,376,674         27,807,279   

6.50%, 12/1/28-8/1/39

    27,831,830         32,020,692   

7.00%, 4/1/37-8/1/37

    8,954,789         10,377,448   

Fannie Mae, Hybrid ARM

    

2.00%, 1/1/35

    3,146,535         3,276,777   

2.246%, 12/1/34

    2,396,886         2,495,717   

2.266%, 9/1/34

    1,643,186         1,751,991   

2.272%, 1/1/35

    1,596,759         1,690,113   

2.319%, 8/1/35

    1,820,017         1,911,963   

2.436%, 8/1/38

    4,655,366         4,943,460   

2.525%, 11/1/43

    8,927,599         9,165,918   

2.707%, 4/1/44

    20,208,801         20,876,530   
 

 

See accompanying Notes to Financial Statements   DODGE & COX BALANCED FUND § PAGE 9


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

DEBT SECURITIES (continued)               
    PAR VALUE      VALUE  

2.817%, 12/1/44

  $ 19,774,634       $ 20,236,265   

2.837%, 11/1/44

    33,113,696         33,900,264   

2.843%, 12/1/45

    31,025,839         31,690,646   

2.947%, 9/1/45

    7,215,008         7,395,642   

3.284%, 6/1/41

    17,461,196         18,333,013   

3.569%, 12/1/40

    6,752,555         7,043,894   

3.757%, 11/1/40

    2,781,454         2,909,755   

4.27%, 7/1/39

    3,194,145         3,406,023   

5.566%, 5/1/37

    1,781,996         1,890,037   

6.35%, 9/1/36

    422,015         445,578   

Fannie Mae, Multifamily DUS
Trust 2014-M9 ASQ2, 1.462%, 4/25/17

    6,492,485         6,500,988   

Freddie Mac, Hybrid ARM

    

2.216%, 4/1/37

    2,849,537         3,010,044   

2.447%, 10/1/38

    2,517,714         2,659,540   

2.535%, 9/1/37

    1,435,803         1,526,716   

2.558%, 10/1/35

    3,206,679         3,387,835   

2.623%, 8/1/42

    13,917,232         14,321,510   

2.678%, 5/1/34

    3,169,406         3,387,139   

2.69%, 2/1/38

    7,150,632         7,602,865   

2.784%, 10/1/45

    16,972,680         17,287,286   

2.939%, 5/1/44

    3,082,081         3,164,477   

2.952%, 6/1/44

    5,691,194         5,837,153   

2.97%, 5/1/44

    23,078,551         23,727,620   

3.141%, 6/1/44

    8,211,836         8,459,960   

3.609%, 10/1/41

    2,135,177         2,222,316   

5.857%, 7/1/38

    552,655         589,911   

6.103%, 1/1/38

    703,454         746,787   

Freddie Mac Gold, 15 Year

    

4.00%, 3/1/25-11/1/26

    48,627,233         51,359,897   

4.50%, 9/1/24-9/1/26

    13,296,565         14,246,687   

6.00%, 2/1/18

    325,603         332,847   

6.50%, 5/1/16-9/1/18

    1,022,622         1,041,584   

Freddie Mac Gold, 20 Year

    

4.50%, 4/1/31-6/1/31

    14,328,880         15,560,529   

6.50%, 10/1/26

    5,265,986         5,996,930   

Freddie Mac Gold, 30 Year

    

4.50%, 9/1/41-1/1/44

    85,366,522         92,170,526   

5.50%, 12/1/37

    1,135,012         1,273,791   

6.00%, 2/1/39

    2,948,130         3,357,630   

6.50%, 12/1/32-4/1/33

    7,928,552         9,202,337   

7.00%, 11/1/37-9/1/38

    7,339,801         8,428,452   

7.47%, 3/17/23

    115,396         126,666   

7.75%, 7/25/21

    328,322         354,645   

Ginnie Mae, 30 Year

    

7.50%, 11/15/24-10/15/25

    921,752         1,043,115   

7.97%, 4/15/20-1/15/21

    412,946         443,203   
    

 

 

 
       1,050,565,109   
    

 

 

 
       1,349,585,533   
ASSET-BACKED: 1.3%     

AUTO LOAN: 0.3%

    

Ford Credit Auto Owner Trust

    

Series 2014-C A3, 1.06%, 5/15/19

    23,000,000         22,944,850   

Series 2015-1 A, 2.12%, 7/15/26(d)

    16,450,000         16,245,696   
    

 

 

 
       39,190,546   

CREDIT CARD: 0.3%

    

American Express Master Trust
Series 2014-3 A, 1.49%, 4/15/20

    16,025,000         16,029,651   

Chase Issuance Trust

    

Series 2013-A8 A8, 1.01%, 10/15/18

    14,000,000         13,987,047   

Series 2014-A1 A1, 1.15%, 1/15/19

    8,400,000         8,393,246   

Series 2014-A6 A6, 1.26%, 7/15/19

    6,500,000         6,486,090   
    

 

 

 
       44,896,034   
    PAR VALUE      VALUE  

OTHER: 0.5%

    

Rio Oil Finance Trust(b) (Brazil)

    

9.25%, 7/6/24(d)

  $ 49,425,000       $ 36,574,500   

9.75%, 1/6/27(d)

    42,925,000         31,549,875   
    

 

 

 
       68,124,375   

STUDENT LOAN: 0.2%

    

SLM Student Loan Trust (Private Loans)

    

Series 2014-A A2A, 2.59%, 1/15/26(d)

    5,250,000         5,223,136   

Series 2012-B A2, 3.48%, 10/15/30(d)

    9,358,036         9,486,544   

Series 2012-E A2A, 2.09%, 6/15/45(d)

    13,775,000         13,661,272   

Series 2012-C A2, 3.31%, 10/15/46(d)

    10,100,000         10,227,070   
    

 

 

 
       38,598,022   
    

 

 

 
       190,808,977   
CORPORATE: 13.2%     

FINANCIALS: 4.2%

    

Bank of America Corp.

    

7.625%, 6/1/19

    6,800,000         7,868,810   

5.625%, 7/1/20

    5,030,000         5,589,210   

4.20%, 8/26/24

    5,825,000         5,833,458   

6.625%, 5/23/36(c)

    37,275,000         42,454,249   

Barclays PLC(b) (United Kingdom)
4.375%, 9/11/24

    23,275,000         22,758,784   

BNP Paribas SA(b) (France)

    

4.25%, 10/15/24

    31,175,000         30,899,756   

4.375%, 9/28/25(d)

    10,100,000         9,892,778   

Boston Properties, Inc.

    

3.85%, 2/1/23

    7,800,000         7,963,215   

3.125%, 9/1/23

    17,550,000         17,095,543   

3.80%, 2/1/24

    11,175,000         11,368,205   

Capital One Financial Corp.

    

3.50%, 6/15/23

    42,579,000         42,342,857   

4.20%, 10/29/25

    6,175,000         6,100,066   

Cigna Corp.

    

7.65%, 3/1/23

    9,705,000         11,771,777   

7.875%, 5/15/27

    21,888,000         28,780,706   

8.30%, 1/15/33

    8,845,000         11,617,775   

Citigroup, Inc.
6.692%, 10/30/40(c)

    43,080,925         45,131,577   

Equity Residential

    

4.625%, 12/15/21

    14,054,000         15,259,552   

3.00%, 4/15/23

    14,775,000         14,514,074   

Health Net, Inc.
6.375%, 6/1/17

    13,275,000         13,806,000   

HSBC Holdings PLC(b) (United Kingdom)

    

5.10%, 4/5/21

    3,625,000         4,030,271   

6.50%, 5/2/36

    23,190,000         27,661,867   

6.50%, 9/15/37

    15,315,000         18,375,075   

JPMorgan Chase & Co.
8.75%, 9/1/30(c)

    23,042,000         32,999,047   

Lloyds Banking Group PLC(b) (United Kingdom)
4.50%, 11/4/24

    19,575,000         19,873,480   

Navient Corp.

    

6.00%, 1/25/17

    14,285,000         14,642,125   

4.625%, 9/25/17

    9,550,000         9,406,750   

8.45%, 6/15/18

    15,755,000         16,582,137   

Royal Bank of Scotland Group PLC(b) (United Kingdom)

    

6.125%, 12/15/22

    48,416,000         52,710,935   

6.00%, 12/19/23

    3,250,000         3,500,270   

Unum Group

    

7.19%, 2/1/28

    8,305,000         9,754,048   

7.25%, 3/15/28

    2,030,000         2,361,507   

6.75%, 12/15/28

    11,368,000         13,341,587   

Wells Fargo & Co.
4.30%, 7/22/27

    20,710,000         21,158,268   
    

 

 

 
       597,445,759   
 

 

PAGE 10 § DODGE & COX BALANCED FUND   See accompanying Notes to Financial Statements


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

DEBT SECURITIES (continued)               
    PAR VALUE      VALUE  

INDUSTRIALS: 8.6%

    

Allergan PLC(b) (Ireland)

    

3.00%, 3/12/20

  $ 19,550,000       $ 19,534,419   

3.45%, 3/15/22

    11,130,000         11,147,775   

3.80%, 3/15/25

    10,870,000         10,815,487   

AT&T, Inc.

    

3.40%, 5/15/25

    6,725,000         6,464,171   

6.55%, 2/15/39

    7,675,000         8,621,028   

5.35%, 9/1/40

    27,575,000         27,235,552   

4.75%, 5/15/46

    7,000,000         6,407,968   

Becton, Dickinson and Co.
3.734%, 12/15/24

    5,725,000         5,777,544   

BHP Billiton, Ltd.(b) (Australia)
6.75%, 10/19/75(c)(d)

    19,800,000         19,107,000   

Burlington Northern Santa Fe LLC(f)

    

8.251%, 1/15/21

    664,677         748,300   

3.85%, 9/1/23

    2,150,000         2,234,633   

5.72%, 1/15/24

    9,037,276         9,948,974   

5.342%, 4/1/24

    9,407,801         10,166,540   

5.629%, 4/1/24

    14,244,488         15,581,690   

Cemex SAB de CV(b) (Mexico)

    

6.50%, 12/10/19(d)

    22,500,000         21,712,500   

6.00%, 4/1/24(d)

    10,575,000         9,068,062   

5.70%, 1/11/25(d)

    22,475,000         18,794,719   

6.125%, 5/5/25(d)

    8,100,000         6,925,500   

Charter Communications, Inc.

    

4.908%, 7/23/25(d)

    11,600,000         11,588,597   

6.484%, 10/23/45(d)

    8,150,000         8,152,893   

Cox Enterprises, Inc.

    

3.25%, 12/15/22(d)

    15,740,000         14,307,550   

2.95%, 6/30/23(d)

    37,166,000         32,742,651   

3.85%, 2/1/25(d)

    19,625,000         17,993,868   

CRH PLC(b) (Ireland)
3.875%, 5/18/25(d)

    17,100,000         16,991,740   

CSX Corp.
9.75%, 6/15/20

    5,231,000         6,646,169   

Dillard’s, Inc.

    

7.13%, 8/1/18

    3,606,000         3,968,681   

7.875%, 1/1/23

    8,660,000         10,205,273   

7.75%, 7/15/26

    50,000         57,831   

7.75%, 5/15/27

    540,000         628,421   

7.00%, 12/1/28

    15,135,000         16,775,271   

Dow Chemical Co.

    

8.55%, 5/15/19

    12,775,000         15,061,342   

7.375%, 11/1/29

    17,000,000         21,006,764   

9.40%, 5/15/39

    9,677,000         13,906,023   

FedEx Corp.

    

8.00%, 1/15/19

    6,965,000         8,108,848   

6.72%, 7/15/23

    5,156,509         5,813,964   

Ford Motor Credit Co. LLC(f)

    

5.75%, 2/1/21

    12,700,000         14,036,865   

5.875%, 8/2/21

    11,350,000         12,657,270   

4.25%, 9/20/22

    9,593,000         9,814,790   

4.375%, 8/6/23

    14,575,000         14,981,599   

Hewlett Packard Enterprise Co.
3.60%, 10/15/20(d)

    33,600,000         33,680,640   

Imperial Tobacco Group PLC(b) (United Kingdom)

    

3.75%, 7/21/22(d)

    10,475,000         10,518,126   

4.25%, 7/21/25(d)

    31,825,000         32,300,020   

Kinder Morgan, Inc.

    

4.30%, 6/1/25

    36,515,000         31,565,647   

5.50%, 3/1/44

    33,730,000         26,307,646   

5.40%, 9/1/44

    15,414,000         11,648,452   
    PAR VALUE      VALUE  

Macy’s, Inc.

    

6.90%, 1/15/32

  $ 49,699,000       $ 54,850,351   

6.70%, 7/15/34

    2,890,000         3,002,626   

Naspers, Ltd. (b) (South Africa)

    

6.00%, 7/18/20(d)

    21,900,000         23,300,067   

5.50%, 7/21/25(d)

    17,575,000         16,907,712   

Norfolk Southern Corp.
9.75%, 6/15/20

    7,224,000         9,220,403   

RELX PLC(b) (United Kingdom)

    

8.625%, 1/15/19

    4,901,000         5,716,316   

3.125%, 10/15/22

    22,133,000         21,508,274   

Sprint Corp.
6.00%, 12/1/16

    24,367,000         24,245,165   

Teck Resources, Ltd.(b) (Canada)
5.20%, 3/1/42

    17,773,000         7,464,660   

Telecom Italia SPA(b) (Italy)

    

6.999%, 6/4/18

    17,100,000         18,468,000   

7.175%, 6/18/19

    27,527,000         30,349,068   

5.303%, 5/30/24(d)

    11,500,000         11,356,250   

7.20%, 7/18/36

    11,596,000         11,711,960   

7.721%, 6/4/38

    7,062,000         7,362,135   

The Kraft Heinz Co.
3.95%, 7/15/25(d)

    4,000,000         4,038,724   

Time Warner Cable, Inc.

    

8.75%, 2/14/19

    13,840,000         16,059,202   

8.25%, 4/1/19

    33,815,000         38,861,483   

6.55%, 5/1/37

    11,000,000         11,125,840   

6.75%, 6/15/39

    2,110,000         2,117,503   

Time Warner, Inc.

    

7.625%, 4/15/31

    31,348,000         38,787,727   

7.70%, 5/1/32

    14,374,000         17,944,415   

TransCanada Corp.(b) (Canada)
5.625%, 5/20/75(c)

    20,570,000         19,018,693   

Twenty-First Century Fox, Inc.

    

6.15%, 3/1/37

    15,000,000         16,713,435   

6.65%, 11/15/37

    1,638,000         1,903,456   

Union Pacific Corp.

    

5.866%, 7/2/30

    26,119,175         29,814,027   

6.176%, 1/2/31

    9,262,594         10,532,209   

Verizon Communications, Inc.

    

4.15%, 3/15/24

    12,750,000         13,110,838   

4.272%, 1/15/36

    11,847,000         10,693,173   

6.55%, 9/15/43

    46,476,000         55,175,238   

Vulcan Materials Co.
7.50%, 6/15/21

    20,340,000         23,696,100   

Xerox Corp.

    

6.35%, 5/15/18

    20,585,000         22,009,708   

4.50%, 5/15/21

    19,161,000         19,347,973   

Zoetis, Inc.

    

3.45%, 11/13/20

    8,960,000         8,970,743   

4.50%, 11/13/25

    7,985,000         8,097,365   
    

 

 

 
       1,225,239,642   

UTILITIES: 0.4%

    

Dominion Resources, Inc.
5.75%, 10/1/54(c)

    22,950,000         22,486,410   

Enel SPA(b) (Italy)

    

6.80%, 9/15/37(d)

    18,700,000         22,833,598   

6.00%, 10/7/39(d)

    8,550,000         9,560,627   
    

 

 

 
       54,880,635   
    

 

 

 
       1,877,566,036   
    

 

 

 

TOTAL DEBT SECURITIES
(Cost $3,929,370,365)

   

   $ 4,021,194,304   
 

 

See accompanying Notes to Financial Statements   DODGE & COX BALANCED FUND § PAGE 11


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

SHORT-TERM INVESTMENTS: 1.4%         
    PAR VALUE     VALUE  

MONEY MARKET FUND: 0.1%

   

SSgA U.S. Treasury Money Market Fund

  $ 14,374,610      $ 14,374,610   

REPURCHASE AGREEMENT: 1.3%

  

 

Fixed Income Clearing Corporation(e)
0.08%, dated 12/31/15, due 1/4/16, maturity value $184,725,642

    184,724,000        184,724,000   
   

 

 

 

TOTAL SHORT-TERM INVESTMENTS
(Cost $199,098,610)

   

  $ 199,098,610   
   

 

 

 

TOTAL INVESTMENTS
(Cost $11,576,339,212)

    99.8   $ 14,247,647,332   

OTHER ASSETS LESS LIABILITIES

    0.2     21,681,711   
 

 

 

   

 

 

 
NET ASSETS     100.0   $ 14,269,329,043   
 

 

 

   

 

 

 

 

(a) 

Non-income producing

(b) 

Security denominated in U.S. dollars

(c) 

Hybrid security

(d) 

Security exempt from registration under Rule 144A of the Securities Act of 1933. The security may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of December 31, 2015, all such securities in total represented $586,566,526 or 4.1% of net assets. These securities have been deemed liquid by Dodge & Cox, investment manager, pursuant to procedures approved by the Fund’s Board of Trustees.

(e) 

Repurchase agreement is collateralized by U.S. Treasury Notes 1.625%-1.75%, 7/31/20-3/31/22. Total collateral value is $188,420,119.

(f) 

Subsidiary (see below)

In determining a company’s country designation, the Fund generally references the country of incorporation. In cases where the Fund considers the country of incorporation to be a “jurisdiction of convenience” chosen primarily for tax purposes or in other limited circumstances, the Fund uses the country designation of an appropriate broad-based market index. In those cases, two countries are listed — the country of incorporation and the country designated by an appropriate index, respectively.

Debt securities are grouped by parent company unless otherwise noted. Actual securities may be issued by the listed parent company or one of its subsidiaries.

ADR: American Depositary Receipt

ARM: Adjustable Rate Mortgage

CMO: Collateralized Mortgage Obligation

DUS: Delegated Underwriting and Servicing

GO: General Obligation

RB: Revenue Bond

REMIC: Real Estate Mortgage Investment Conduit

FUTURES CONTRACTS

 

Description   Number of
Contracts
    Expiration
Date
    Notional
Amount
    Unrealized
Appreciation/
(Depreciation)
 

10 Year U.S. Treasury Note—Short Position

    1,664        Mar 2016      $ (209,508,000   $ 781,542   

Long-Term U.S. Treasury Bond—Short Position

    1,040        Mar 2016        (165,035,000     (525,653
       

 

 

 
        $ 255,889   
       

 

 

 
 

 

PAGE 12 § DODGE & COX BALANCED FUND   See accompanying Notes to Financial Statements


STATEMENT OF ASSETS AND LIABILITIES

  

         
December 31, 2015
 

ASSETS:

  

Investments, at value (cost $11,576,339,212)

   $ 14,247,647,332   

Cash held at broker

     6,770,388   

Receivable for investments sold

     5,801,740   

Receivable for Fund shares sold

     8,024,925   

Dividends and interest receivable

     52,275,035   

Prepaid expenses and other assets

     93,831   
  

 

 

 
     14,320,613,251   
  

 

 

 

LIABILITIES:

  

Payable to broker for variation margin

     1,533,992   

Payable for investments purchased

     5,288,661   

Payable for Fund shares redeemed

     37,488,385   

Management fees payable

     6,113,609   

Accrued expenses

     859,561   
  

 

 

 
     51,284,208   
  

 

 

 
NET ASSETS    $ 14,269,329,043   
  

 

 

 

NET ASSETS CONSIST OF:

  

Paid in capital

   $ 11,444,166,191   

Undistributed net investment income

     3,251,258   

Undistributed net realized gain

     150,347,585   

Net unrealized appreciation

     2,671,564,009   
  

 

 

 
   $ 14,269,329,043   
  

 

 

 

Fund shares outstanding (par value $0.01 each,
unlimited shares authorized)

     151,122,480   

Net asset value per share

   $ 94.42   

STATEMENT OF OPERATIONS

  

     Year Ended
December 31, 2015
 

INVESTMENT INCOME:

  

Dividends (net of foreign taxes of $3,724,034)

   $ 197,425,260   

Interest

     190,225,233   
  

 

 

 
     387,650,493   
  

 

 

 

EXPENSES:

  

Management fees

     75,758,904   

Custody and fund accounting fees

     302,185   

Transfer agent fees

     1,780,717   

Professional services

     204,059   

Shareholder reports

     339,208   

Registration fees

     174,198   

Trustees’ fees

     237,500   

Miscellaneous

     1,065,235   
  

 

 

 
     79,862,006   
  

 

 

 

NET INVESTMENT INCOME

     307,788,487   
  

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS):

  

Net realized gain (loss)

  

Investments

     501,033,067   

Treasury futures contracts

     (8,435,099

Net change in unrealized appreciation/depreciation

  

Investments

     (1,237,696,213

Treasury futures contracts

     7,923,554   
  

 

 

 

Net realized and unrealized loss

     (737,174,691
  

 

 

 

NET DECREASE IN NET ASSETS FROM OPERATIONS

   $ (429,386,204
  

 

 

 

STATEMENT OF CHANGES IN NET ASSETS

  

   

Year Ended
December 31, 2015

    Year Ended
December 31, 2014
 

OPERATIONS:

   

Net investment income

  $ 307,788,487      $ 298,744,812   

Net realized gain

    492,597,968        399,919,057   

Net change in unrealized
appreciation/depreciation

    (1,229,772,659     567,009,703   
 

 

 

   

 

 

 
    (429,386,204     1,265,673,572   
 

 

 

   

 

 

 

DISTRIBUTIONS TO SHAREHOLDERS FROM:

   

Net investment income

    (308,037,610     (298,877,158

Net realized gain

    (455,897,559 )       (359,115,663
 

 

 

   

 

 

 

Total distributions

    (763,935,169 )       (657,992,821
 

 

 

   

 

 

 

FUND SHARE
TRANSACTIONS:

   

Proceeds from sale of shares

    1,416,791,531        1,944,425,723   

Reinvestment of distributions

    725,183,002        624,013,075   

Cost of shares redeemed

    (2,144,401,683     (2,114,967,089
 

 

 

   

 

 

 

Net increase/(decrease) from
Fund share transactions

    (2,427,150     453,471,709   
 

 

 

   

 

 

 

Total increase/(decrease) in
net assets

    (1,195,748,523     1,061,152,460   

NET ASSETS:

   

Beginning of year

    15,465,077,566        14,403,925,106   
 

 

 

   

 

 

 

End of year (including undistributed net investment income of $3,251,258 and $3,500,381, respectively)

  $ 14,269,329,043      $ 15,465,077,566   
 

 

 

   

 

 

 

SHARE INFORMATION:

   

Shares sold

    14,047,663        19,199,410   

Distributions reinvested

    7,539,830        6,142,973   

Shares redeemed

    (21,376,698     (20,958,749
 

 

 

   

 

 

 

Net increase in shares outstanding

    210,795        4,383,634   
 

 

 

   

 

 

 
 

 

See accompanying Notes to Financial Statements   DODGE & COX BALANCED FUND § PAGE 13


NOTES TO FINANCIAL STATEMENTS

 

NOTE 1—ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Dodge & Cox Balanced Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund commenced operations on June 26, 1931, and seeks regular income, conservation of principal, and an opportunity for long-term growth of principal and income. Risk considerations and investment strategies of the Fund are discussed in the Fund’s Prospectus.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Actual results may differ from those estimates. Significant accounting policies are as follows:

Security valuation The Fund’s net assets are valued as of the close of trading on the New York Stock Exchange (NYSE), generally 4:00 p.m. Eastern Time, each day that the NYSE is open for business. If the NYSE is closed due to inclement weather, technology problems, or for any other reason on a day it would normally be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the Fund reserves the right to calculate the Fund’s NAV as of the normally scheduled close of regular trading on the NYSE for that day, provided that Dodge & Cox believes that it can obtain reliable market quotes or valuations. Portfolio securities and other financial instruments for which market quotes are readily available are valued at market value. Listed securities are generally valued using the official quoted close price or the last sale on the exchange that is determined to be the primary market for the security.

Debt securities (including certain preferred stocks) and non-exchange traded derivatives are valued based on prices received from independent pricing services which utilize both dealer-supplied valuations and pricing models. Pricing models may consider quoted prices for similar securities, interest rates, prepayment speeds, and credit risk. Exchange-traded derivatives are valued at the settlement price determined by the relevant exchange. Security values are not discounted based on the size of the Fund’s position. Short-term securities less than 60 days to maturity may be valued at amortized cost if amortized cost approximates current value. Mutual funds are valued at their respective net asset values. All securities held by the Fund are denominated in U.S. dollars.

If market quotations are not readily available or if a security’s value is believed to have materially changed after the close of the security’s primary market but before the close of trading on the NYSE, the security is valued at fair value as determined in good faith by or under the direction of the Fund’s Board of Trustees. The Board of Trustees has appointed Dodge & Cox, the Fund’s investment manager, to make fair value determinations in accordance with the Dodge & Cox Funds Valuation Policies

(“Valuation Policies”), subject to Board oversight. Dodge & Cox has established a Pricing Committee that is comprised of representatives from Treasury, Legal, Compliance, and Operations. The Pricing Committee is responsible for implementing the Valuation Policies, including determining the fair value of securities when market quotations or market-based valuations are not readily available or are deemed unreliable. The Pricing Committee considers relevant indications of value that are reasonably available to it in determining the fair value assigned to a particular security, such as the value of similar financial instruments, trading volumes, contractual restrictions on disposition, related corporate actions, and changes in economic conditions. In doing so, the Pricing Committee employs various methods for calibrating fair valuation approaches, including a regular review of key inputs and assumptions, back-testing, and review of any related market activity.

Valuing securities through a fair value determination involves greater reliance on judgment than valuation of securities based on readily available market quotations. In some instances, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a security’s value. When fair value pricing is employed, the prices of securities used by the Fund to calculate its NAV may differ from quoted or published prices for the same securities.

Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.

Dividend income and corporate action transactions are recorded on the ex-dividend date, or when the Fund first learns of the dividend/corporate action if the ex-dividend date has passed. Withholding taxes on foreign dividends have been provided for in accordance with the Fund’s understanding of the applicable country’s tax rules and rates. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Dividends characterized as return of capital for U.S. tax purposes are recorded as a reduction of cost of investments and/or realized gain.

Interest income is recorded on the accrual basis. Interest income includes coupon interest, amortization of premium and accretion of discount on debt securities, and gain/loss on paydowns. The ability of the issuers of the debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry, state, or region. Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectibility of interest is reasonably assured.

Expenses are recorded on the accrual basis. Some expenses of the Trust can be directly attributed to a specific series. Expenses

 

 

PAGE 14 § DODGE & COX BALANCED FUND


NOTES TO FINANCIAL STATEMENTS

 

which cannot be directly attributed are allocated among the Funds in the Trust based on relative net assets or other expense methodologies determined by the nature of the expense.

Distributions to shareholders are recorded on the ex-dividend date.

Repurchase agreements The Fund enters into repurchase agreements, secured by U.S. government or agency securities, which involve the purchase of securities from a counterparty with a simultaneous commitment to resell the securities at an agreed-upon date and price. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the collateral securities and to apply the proceeds in satisfaction of the obligation.

Futures Contracts Futures contracts involve an obligation to purchase or sell (depending on whether the Fund has entered a long or short futures contract, respectively) an asset at a future date, at a price set at the time of the contract. Upon entering into a futures contract, the Fund is required to deposit an amount of cash or liquid assets (referred to as initial margin) in a segregated account with the clearing broker. Subsequent payments (referred to as variation margin) to and from the clearing broker are made on a daily basis based on changes in the market value of futures contracts. Futures contracts are traded publicly and their market value changes daily. Changes in the market value of open futures contracts are recorded as unrealized appreciation or depreciation in the Statement of Operations. Realized gains and losses on futures contracts are recorded in the Statement of Operations at the closing or expiration of the contracts. Cash deposited with a broker as initial margin is recorded on the Statement of Assets and Liabilities. A receivable and/or payable to brokers for daily variation margin is also recorded on the Statement of Assets and Liabilities.

Investments in futures contracts may include certain risks, which may be different from, and potentially greater than, those of the underlying securities. To the extent the Fund uses futures, it is exposed to additional volatility and potential losses resulting from leverage.

The Fund has maintained short Treasury futures contracts to assist with the management of the portfolio’s interest rate exposure. During the year ended December 31, 2015, these Treasury futures contracts had notional values ranging from 1% to 3% of net assets.

Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.

NOTE 2—VALUATION MEASUREMENTS

Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below.

§  

Level 1: Quoted prices in active markets for identical securities

§  

Level 2: Other significant observable inputs (including quoted prices for similar securities, market indices, interest rates, credit risk, etc.)

§  

Level 3: Significant unobservable inputs (including Fund management’s assumptions in determining the fair value of investments)

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used to value the Fund’s holdings at December 31, 2015:

 

Classification(a)  

LEVEL 1

(Quoted Prices)

   

LEVEL 2

(Other Significant

Observable Inputs)

 

Securities

   

Common Stocks(b)

  $ 9,411,739,999          

Preferred Stocks

           615,614,419   

Debt Securities

   

U.S. Treasury

           315,171,614   

Government-Related

           288,062,144   

Mortgage-Related

           1,349,585,533   

Asset-Backed

           190,808,977   

Corporate

           1,877,566,036   

Short-term Investments

   

Money Market Fund

    14,374,610          

Repurchase Agreement

           184,724,000   
 

 

 

   

 

 

 

Total Securities

  $ 9,426,114,609      $ 4,821,532,723   
 

 

 

   

 

 

 

Other Financial Instruments(c)

   

Treasury Futures Contracts

   

Appreciation

  $ 781,542      $   

Depreciation

    (525,653       
                 
(a) 

U.S. Treasury securities were transferred from Level 1 to Level 2 during the year. There were no Level 3 securities at December 31, 2015 and 2014, and there were no transfers to Level 3 during the year.

(b) 

All common stocks held in the Fund are Level 1 securities. For a detailed break-out of common stocks by major industry classification, please refer to the Portfolio of Investments.

(c) 

Represents unrealized appreciation/(depreciation).

NOTE 3—RELATED PARTY TRANSACTIONS

Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays an annual management fee of 0.50% of the Fund’s average daily net assets to Dodge & Cox, investment manager of the Fund.

Fund officers and trustees All officers and two of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.

Cross trades Cross trading is the buying or selling of portfolio securities between funds to which Dodge & Cox serves as investment manager. At its regularly scheduled quarterly meetings,

 

 

DODGE & COX BALANCED FUND § PAGE 15


NOTES TO FINANCIAL STATEMENTS

 

the Board of Trustees reviews such transactions as of the most recent calendar quarter for compliance with the requirements and restrictions set forth by Rule 17a-7 under the Investment Company Act of 1940. During the year ending December 31, 2015, the Fund executed cross trades with the Dodge & Cox Income Fund pursuant to Rule 17a-7 under the Investment Company Act of 1940.

NOTE 4—INCOME TAX INFORMATION AND DISTRIBUTIONS TO SHAREHOLDERS

A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, and such amounts may differ from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book to tax differences at year end to reflect tax character.

Book to tax differences are primarily due to differing treatments of wash sales, net short-term realized gain (loss), and Treasury futures contracts. At December 31, 2015, the cost of investments for federal income tax purposes was $11,577,698,098.

Distributions during the years noted below were characterized as follows for federal income tax purposes:

 

     Year Ended
December 31, 2015
    Year Ended
December 31, 2014
 

Ordinary income

    $311,803,137        $357,296,853   
    ($2.085 per share)        ($2.417 per share)   

Long-term capital gain

    $452,132,032        $300,695,968   
    ($3.049 per share)        ($2.020 per share)   

At December 31, 2015, the tax basis components of distributable earnings were as follows:

 

Unrealized appreciation

   $ 3,115,795,334   

Unrealized depreciation

     (445,846,100
  

 

 

 

Net unrealized appreciation

     2,669,949,234   

Undistributed ordinary income

     3,197,590   

Undistributed long-term capital gain

     152,016,028   

Fund management has reviewed the tax positions for open periods (three years and four years, respectively, from filing the Fund’s Federal and State tax returns) as applicable to the Fund, and has determined that no provision for income tax is required in the Fund’s financial statements.

NOTE 5—LOAN FACILITIES

Pursuant to an exemptive order issued by the Securities and Exchange Commission (SEC), the Fund may participate in an interfund lending facility (Facility). The Facility allows the Fund to borrow money from or loan money to the Funds. Loans under the Facility are made for temporary or emergency purposes, such as to fund shareholder redemption requests. Interest on borrowings is the average of the current repurchase agreement rate and the bank loan rate. There was no activity in the Facility during the year.

All Funds in the Trust participate in a $500 million committed credit facility (Line of Credit) with State Street Bank and Trust Company, to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The maximum amount available to the Fund is $250 million. Each Fund pays an annual commitment fee on its pro-rata portion of the Line of Credit. For the year ended December 31, 2015, the Fund’s commitment fee amounted to $46,840 and is reflected as a Miscellaneous Expense in the Statement of Operations. Interest on borrowings is charged at the prevailing rate. There were no borrowings on the Line of Credit during the year.

NOTE 6—PURCHASES AND SALES OF INVESTMENTS

For the year ended December 31, 2015, purchases and sales of securities, other than short-term securities and U.S. government securities, aggregated $2,404,105,515 and $2,555,199,624, respectively. For the year ended December 31, 2015, purchases and sales of U.S. government securities aggregated $592,405,701 and $862,581,661, respectively.

NOTE 7—SUBSEQUENT EVENTS

Fund management has determined that no material events or transactions occurred subsequent to December 31, 2015, and through the date of the Fund’s financial statements issuance, which require additional disclosure in the Fund’s financial statements.

 

 

PAGE 16 § DODGE & COX BALANCED FUND


FINANCIAL HIGHLIGHTS

 

SELECTED DATA AND RATIOS

(for a share outstanding throughout each year)

  Year Ended December 31,  
    2015      2014      2013      2012      2011  
 

 

 

 

Net asset value, beginning of year

    $102.48         $98.30         $78.06         $67.45         $70.22   

Income from investment operations:

             

Net investment income

    2.06         2.03         1.66         1.65         1.62   

Net realized and unrealized gain (loss)

    (4.99      6.59         20.30         10.62         (2.77
 

 

 

 

Total from investment operations

    (2.93      8.62         21.96         12.27         (1.15
 

 

 

 

Distributions to shareholders from:

             

Net investment income

    (2.06      (2.03      (1.65      (1.66      (1.62

Net realized gain

    (3.07      (2.41      (0.07                
 

 

 

 

Total distributions

    (5.13      (4.44      (1.72      (1.66      (1.62
 

 

 

 

Net asset value, end of year

    $94.42         $102.48         $98.30         $78.06         $67.45   
 

 

 

 

Total return

    (2.88 )%       8.85      28.37      18.32      (1.66 )% 

Ratios/supplemental data:

             

Net assets, end of year (millions)

    $14,269         $15,465         $14,404         $12,217         $12,220   

Ratio of expenses to average net assets

    0.53      0.53      0.53      0.53      0.53

Ratio of net investment income to average net assets

    2.03      2.00      1.85      2.21      2.26

Portfolio turnover rate

    20      23      25      16      19

See accompanying Notes to Financial Statements

 

DODGE & COX BALANCED FUND § PAGE 17


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Trustees of Dodge & Cox Funds and Shareholders of Dodge & Cox Balanced Fund

In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Dodge & Cox Balanced Fund (the “Fund”, one of the series constituting Dodge & Cox Funds) at December 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as financial statements) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2015, by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 25, 2016

 

PAGE 18 § DODGE & COX BALANCED FUND


SPECIAL 2015 TAX INFORMATION

(unaudited)

The following information is provided pursuant to provisions of the Internal Revenue Code:

The Fund designates $197,654,566 of its distributions paid to shareholders in 2015 as qualified dividends (treated for federal income tax purposes in the hands of shareholders as taxable at a maximum rate of 20%).

For shareholders that are corporations, the Fund designates 50% of its ordinary dividends paid to shareholders in 2015 as dividends from domestic corporations eligible for the corporate dividends received deduction, provided that the shareholder otherwise satisfies applicable requirements to claim that deduction.

BOARD APPROVAL OF FUNDS’ INVESTMENT MANAGEMENT AGREEMENTS AND MANAGEMENT FEES

(unaudited)

The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 16, 2015, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2016 with respect to each Fund. During the course of the year, the Board received a wide variety of materials relating to the investment management and administrative services provided by Dodge & Cox and the performance of each of the Funds.

INFORMATION RECEIVED

In advance of the meeting, the Board, including each of the Independent Trustees, requested, received, and reviewed materials relating to the Agreements and the services provided by Dodge & Cox. The Independent Trustees retained Morningstar® to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Morningstar. The Morningstar materials included information regarding advisory fee rates, expense ratios, and transfer agency, custodial, and distribution expenses, as well as appropriate performance comparisons to each Fund’s peer group and an index or combination of indices. The Morningstar materials also included a comparison of expenses of various share classes offered by comparable funds. The materials reviewed by the Board contained information concerning, among other things, Dodge & Cox’s profitability, financial results and condition, advisory fee revenue, and separate account and sub-adviser fund fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates, sales and redemption data and the significant investment that Dodge & Cox makes in research used in managing the Funds. The Board received and reviewed memoranda and related materials addressing, among

other things, Dodge & Cox’s services to the Funds; how Dodge & Cox Funds’ fees compare to fees of peer group funds; the different fees, services, costs, and risks associated with other accounts managed by Dodge & Cox as compared to the Dodge & Cox Funds; and the ways in which the Funds realize economies of scale. Throughout the process of reviewing the services provided by Dodge & Cox and preparing for the meeting, the Independent Trustees found Dodge & Cox to be open, forthright, detailed, and very helpful in answering questions about all issues. The Board received copies of the Agreements and a memorandum from the independent legal counsel to the Independent Trustees discussing the factors generally regarded as appropriate to consider in evaluating advisory arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the independent legal counsel on November 11, 2015, and again on December 16, 2015, to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements. In considering the Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board considered several factors, discussed below, to be key factors and reached the conclusions described below.

NATURE, QUALITY, AND EXTENT OF THE SERVICES

The Board considered that Dodge & Cox provides a wide range of services to the Funds in addition to portfolio management and that the quality of these services has been excellent in all respects. The extensive nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality, and extent of portfolio management, administrative, and shareholder services performed by Dodge & Cox. With regard to portfolio management services, the Board considered Dodge & Cox’s established long-term history of care and conscientiousness in the management of the Funds; its demonstrated consistency in investment approach and depth; the background and experience of the Dodge & Cox Investment Policy Committee, International Investment Policy Committee, Global Stock Investment Policy Committee, Fixed Income Investment Policy Committee, and Global Bond Investment Policy Committee, and research analysts responsible for managing the Funds; its methods for assessing the regulatory and investment climate in various jurisdictions; Dodge & Cox’s overall high level of attention to its core investment management function; and its commitment to the Funds and their shareholders. In the area of administrative and shareholder services, the Board considered the excellent quality of Dodge & Cox’s work in areas such as compliance, legal services, trading, proxy voting, technology, oversight of the Funds’ transfer agent and custodian, tax compliance, and shareholder communication through its website and other means. The Board also noted Dodge & Cox’s diligent disclosure policy, its favorable compliance record, and its reputation as a trusted, shareholder-friendly mutual fund family. In

 

 

DODGE & COX BALANCED FUND § PAGE 19


addition, the Board considered that Dodge & Cox manages approximately $185 billion in Fund assets with fewer professionals than most comparable funds, and that on average these professionals have more experience and longer tenure than investment professionals at comparable funds. The Board also noted that Dodge & Cox is an investment research-oriented firm with no other business endeavors to distract management’s attention from its research efforts, and that its investment professionals adhere to a consistent investment approach across the Funds. The Board further considered the favorable stewardship grades given by Morningstar to each of the Funds and the “Gold” analyst rating awarded by Morningstar to all of the Funds except the Global Bond Fund. The Board concluded that it was satisfied with the nature, extent, and quality of investment management and other services provided to the Funds by Dodge & Cox.

INVESTMENT PERFORMANCE

The Board considered short-term and long-term investment performance for each Fund (including periods of outperformance or underperformance) as compared to both relevant indices and the performance of such Fund’s peer group. The Board noted that the Funds had weak absolute and relative performance in 2015, but remained solid performers over longer periods. The Board determined after extensive review and inquiry that Dodge & Cox’s historic, long-term, team-oriented, bottom-up investment approach remains consistent and that Dodge & Cox continues to be distinguished by its integrity, transparency, and independence. The Board considered that the performance of the Funds is the result of a team-oriented investment management process that emphasizes a long-term investment horizon, comprehensive independent research, price discipline, low cost and low portfolio turnover. The Board also considered that the investment performance delivered by Dodge & Cox to the Funds appeared to be consistent with the relevant performance delivered for other clients of Dodge & Cox. The Board concluded that Dodge & Cox has delivered favorable long-term performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.

COSTS AND ANCILLARY BENEFITS

Costs of Services to Funds: Fees and Expenses. The Board considered each Fund’s management fee rate and expense ratio relative to each Fund’s peer group and relative to management fees charged by Dodge & Cox to other clients. In particular, the Board considered that the Funds continue to be substantially below their peer group median in expense ratios and that many media and industry reports specifically comment on the low expense ratios of the Funds, which have been a defining characteristic of the Funds for many years. The Board also evaluated the operating structures of the Funds and Dodge & Cox, noting that the Funds do not charge front-end sales commissions or distribution fees, and Dodge & Cox bears, among other things, the significant cost of third party research, reimbursement for recordkeeping and administrative costs to third-party retirement plan administrators, and administrative and office overhead.

The Board noted that expenses are well below industry averages. When compared to peer group funds, the Funds are in the quartile with the lowest expense ratios. The Board also considered that the Funds receive numerous administrative, regulatory compliance, legal, technology and shareholder support services from Dodge & Cox without any additional administrative fee and the fact that the Funds have relatively low transaction costs and portfolio turnover rates. The Board noted the Funds’ unusual single-share-class structure and reviewed Morningstar data showing that the few peer group funds with lower expense ratios often have other share classes with significantly higher expense ratios. In this regard, the Board considered that many of the Funds’ shareholders would not be eligible to purchase comparably-priced shares of many peer group funds, which typically make their lower-priced share classes available only to institutional investors. The Board determined that the Funds provide access for small investors to high quality investment management at a relatively low cost.

The Board reviewed information regarding the fee rates Dodge & Cox charges to separate accounts and subadvised funds that have investment programs similar to those of the Funds, including instances where separate account and sub-advised fund fees are lower than Fund fees. The Board considered differences in the nature and scope of services Dodge & Cox provides to the Funds as compared to other client accounts, differences in regulatory, litigation, and other risks as between Dodge & Cox Funds and other types of clients. The Board also noted that different markets exist for mutual fund and institutional separate account management services. With respect to non-U.S. funds sponsored and managed by Dodge & Cox that are comparable to the Funds in many respects, the Board noted that the fee rates charged by Dodge & Cox are the same as or higher than the fee rates charged to the Funds. After consideration of these matters, the Board concluded that the overall costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation, and performance of Dodge & Cox and the low overall expense ratios of the Funds.

Profitability and Costs of Services to Dodge & Cox; “Fall-out” Benefits. The Board reviewed reports of Dodge & Cox’s financial position, profitability, and estimated overall value, and considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the favorable services provided. The Board noted in particular that Dodge & Cox’s profits are not generated by high fee rates, but reflect an extraordinarily streamlined, efficient, and focused business approach toward investment management. The Board recognized the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that the compensation/profit structure at Dodge & Cox includes a return on shareholder employees’ investment in the firm, which is vital for remaining independent and facilitating retention of management and investment professionals. The Board considered independent research

 

 

PAGE 20 § DODGE & COX BALANCED FUND


indicating that firms that grow organically, rather than through acquisition, tend to have better performance. Key to organic growth is the ability to retain talented and experienced analysts, portfolio managers and other professionals.

The Board also considered that in January 2015, Dodge & Cox closed the International Stock Fund to new investors to pro-actively manage the growth of the Fund. The Stock Fund and Balanced Fund were similarly closed to new investors during periods of significant growth in the past. While these actions are intended to benefit existing shareholders, the effect is to reduce potential revenues to Dodge & Cox from new shareholders. The Board also considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers and reputational benefits to non-U.S. funds sponsored and managed by Dodge & Cox) that Dodge & Cox might receive as a result of its association with the Funds and determined that they are acceptable. The Board also noted that Dodge & Cox continues to invest substantial sums in its business in order to provide enhanced services, systems and research capabilities, all of which benefit the Funds. The Board concluded that Dodge & Cox’s profitability is the keystone of its independence, stability and long-term investment performance and that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) is fair and reasonable.

ECONOMIES OF SCALE

The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee structure and the considerable efficiencies of the Funds’ organization and fee structure that has been realized by shareholders from the time of each Fund’s inception (i.e., from the first dollar). An assessment of economies of scale must also take into account that Dodge & Cox invests significant time and resources in each new Fund for months (and sometimes years) prior to launch; in addition, expenses are capped, which means that Dodge & Cox earns no revenue and subsidizes the operations of a new Fund for a period of time until it reaches scale.

In addition, the Board noted that Dodge & Cox has shared economies of scale by adding or enhancing services to the Funds over time, and that the internal costs of providing investment management, up-to-date technology, administrative, legal, and compliance services to the Funds continue to increase. For example, Dodge & Cox has increased its global research staff and investment resources over the years to address the increased complexity of investing in multinational and non-U.S. companies. In addition, Dodge & Cox has made substantial expenditures in other staff, technology, cybersecurity, and infrastructure to enable it to integrate credit and equity analyses and to be able to implement its strategy in a more effective and secure manner. Over the last ten years, Dodge & Cox has increased its spending on third party research, data services, trading systems, technology, and recordkeeping service expenses at a rate that has significantly outpaced the Funds’ growth rate during the same period.

The Board considered that Dodge & Cox has a history of voluntarily limiting asset growth in several Funds that experienced significant inflows by closing them to new investors in order to protect the Funds’ ability to achieve good investment returns for shareholders. The Board also observed that, even without fee breakpoints, the Funds are competitively priced in a very competitive market and that having a low fee from inception is better for shareholders than starting with a higher fee and adding breakpoints. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately shares economies of scale that may exist.

CONCLUSION

Based on their evaluation of all material factors and assisted by the advice of independent legal counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the advisory fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that the scope and quality of Dodge & Cox’s services has provided substantial value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.

FUND HOLDINGS

The Fund provides a complete list of its holdings four times each fiscal year, as of the end of each quarter. The Fund files the lists with the SEC on Form N-CSR (second and fourth quarters) and Form N-Q (first and third quarters). Shareholders may view the Fund’s Forms N-CSR and N-Q on the SEC’s website at sec.gov. Forms N-CSR and N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 202-551-8090 (direct) or 800-732-0330 (general SEC number). A list of the Fund’s quarter-end holdings is also available at dodgeandcox.com on or about 15 days following each quarter end and remains available on the website until the list is updated in the subsequent quarter.

PROXY VOTING

For a free copy of the Fund’s proxy voting policies and procedures, please call 800-621-3979, visit the Fund’s website at dodgeandcox.com, or visit the SEC’s website at sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ending June 30 is also available at dodgeandcox.com or at sec.gov.

HOUSEHOLD MAILINGS

The Fund routinely mails shareholder reports and summary prospectuses to shareholders and, on occasion, proxy statements. In order to reduce the volume of mail, when possible, only one copy of these documents will be sent to shareholders who are part of the same family and share the same residential address.

If you have a direct account with the Funds and you do not want the mailing of shareholder reports and summary prospectuses combined with other members in your household, contact the Funds at 800-621-3979. Your request will be implemented within 30 days.

 

 

DODGE & COX BALANCED FUND § PAGE 21


 

 

 

THIS PAGE INTENTIONALLY LEFT BLANK

 

 

 

 

 

PAGE 22 § DODGE & COX BALANCED FUND


DODGE & COX FUNDS—EXECUTIVE OFFICER & TRUSTEE INFORMATION

 

Name (Age) and
Address*
 

Position with Trust

(Year of Election or
Appointment)

  Principal Occupation During Past 5 Years   Other Directorships Held by Trustees
INTERESTED TRUSTEES AND EXECUTIVE OFFICERS
Charles F. Pohl (57)  

Chairman and Trustee

(Officer since 2004)

  Chairman (since 2013), Co-President (2011-2013), Senior Vice President (until 2011), and Director of Dodge & Cox; Chief Investment Officer, Portfolio Manager, Investment Analyst, and member of Investment Policy Committee (IPC), Global Stock Investment Policy Committee (GSIPC), International Investment Policy Committee (IIPC), and Fixed Income Investment Policy Committee (FIIPC)  
Dana M. Emery (54)  

President and Trustee

(Trustee since 1993)

  Chief Executive Officer (since 2013), President (since 2011), Executive Vice President (until 2011), and Director of Dodge & Cox; Director of Fixed Income, Portfolio Manager, and member of FIIPC and Global Bond Investment Policy Committee (GBIPC)  
John A. Gunn (72)  

Senior Vice President

(Officer since 1998)

  Chairman Emeritus (2011-2013), Chairman (until 2011), Chief Executive Officer (until 2010), and Director (until 2013) of Dodge & Cox; Portfolio Manager and member of IPC, GSIPC (until 2014), and IIPC (until 2015)  
Diana S. Strandberg (56)   Senior Vice President (Officer since 2006)   Senior Vice President (since 2011), Vice President (until 2011), and Director (since 2011) of Dodge & Cox; Director of International Equity (since 2009), Portfolio Manager, Investment Analyst, and member of IPC, GSIPC, IIPC, and GBIPC  
David H. Longhurst (58)  

Treasurer

(Officer since 2006)

  Vice President and Assistant Treasurer of Dodge & Cox  
Thomas M. Mistele (62)  

Secretary

(Officer since 1998)

  Chief Operating Officer, Director, Secretary, Senior Counsel (since 2011), and General Counsel (until 2011) of Dodge & Cox  
Katherine M. Primas (41)  

Chief Compliance

Officer

(Officer since 2009)

  Vice President (since 2011) and Chief Compliance Officer of Dodge & Cox  
INDEPENDENT TRUSTEES
Thomas A. Larsen (66)  

Trustee

(Since 2002)

  Senior Counsel of Arnold & Porter LLP (law firm) (since 2013); Partner of Arnold & Porter LLP (until 2012); Director of Howard, Rice, Nemerovski, Canady, Falk & Rabkin (1977-2011)  
Ann Mather (55)  

Trustee

(Since 2011)

  CFO, Pixar Animation Studios (1999-2004)  

Director, Google, Inc. (internet information services) (since 2005); Director, Glu Mobile, Inc. (multimedia software) (since 2005); Director, Netflix, Inc. (internet television) (since 2010); Director, Arista Networks (cloud networking) (since 2013); Director, Shutterfly, Inc. (internet photography services/publishing) (since 2013)

Robert B. Morris III (63)  

Trustee

(Since 2011)

 

Advisory Director, The Presidio Group (since 2005)

 
Gary Roughead (64)  

Trustee

(Since 2013)

  Annenberg Distinguished Visiting Fellow, Hoover Institution (since 2012); Admiral, United States Navy (Ret.); U.S. Navy Chief of Naval Operations (2008-2011)   Director, Northrop Grumman Corp. (global security) (since 2012)
Mark E. Smith (64)  

Trustee

(Since 2014)

  Executive Vice President, Managing Director—Fixed Income at Loomis Sayles & Company, L.P. (2003-2011)  
John B. Taylor (69)  

Trustee

(Since 2005)

(and 1995-2001)

  Professor of Economics, Stanford University (since 1984); Senior Fellow, Hoover Institution (since 1996); Under Secretary for International Affairs, United States Treasury (2001-2005)  

 

*  

The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all six series in the Dodge & Cox Funds complex and serves for an indefinite term.

Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Funds’ website at dodgeandcox.com or calling
800-621-3979.

 

DODGE & COX BALANCED FUND § PAGE 23


Balanced Fund

 

 

dodgeandcox.com

For Fund literature, transactions, and account information, please visit the Funds’ website.

or write or call:

DODGE & COX FUNDS

c/o Boston Financial Data Services

P.O. Box 8422

Boston, Massachusetts 02266-8422

(800) 621-3979

INVESTMENT MANAGER

Dodge & Cox

555 California Street, 40th Floor

San Francisco, California 94104

(415) 981-1710

 

This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.

This report reflects our views, opinions, and portfolio holdings as of December 31, 2015, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.


LOGO

 

DODGE & COX FUNDS®

 

2015

   

 

Annual Report

December 31, 2015

Income Fund

ESTABLISHED 1989

TICKER:  DODIX

 

12/15 IF AR    LOGO    Printed on recycled paper


TO OUR SHAREHOLDERS

 

The Dodge & Cox Income Fund had a total return of –0.6% for the year ending December 31, 2015, compared to a total return of 0.6% for the Barclays U.S. Aggregate Bond Index (Barclays U.S. Agg).

MARKET COMMENTARY

The U.S. bond market’s low 2015 return reflected price declines associated with rising U.S. Treasury rates and widening credit yield premiums(a), the combination of which largely offset the relatively low level of income earned over the period. Many of the market themes influencing valuations in 2015 continued from late 2014, including changing expectations regarding U.S. Federal Reserve (Fed) policy, diverging global economic conditions and monetary policy, and concerns about the effect of China’s decelerating economy on the global growth outlook.

The U.S. economy continued to expand moderately in 2015. Highlights included robust labor market gains, a declining unemployment rate (to 5.0% by year end), an uptick in housing market activity, and increases in household and business spending. These factors were offset somewhat by a weak manufacturing sector and lower export demand. Outside the United States, flagging demand in Europe and China contributed to significant commodity price declines, causing many commodity-dependent emerging market economies to suffer.

After much anticipation, the Fed raised the target federal funds rate by 0.25 percentage points in December, marking the first rate increase from the so-called zero lower bound since late 2008. The Fed cited improving U.S. economic data and reiterated its intent to normalize monetary policy gradually. Headline inflation remained quite subdued—well below the Fed’s long-term 2% objective—but core CPI climbed throughout the year. Meanwhile, central bank policymakers elsewhere in the world moved in the opposite direction, easing monetary policies in Europe, China, and Japan as a means of catalyzing growth in those regions.

Investment-grade corporate bonds returned –0.7%(b) for 2015, underperforming comparable-duration(c) Treasuries by 1.6 percentage points in the sector’s poorest relative result since 2011. Almost all of the underperformance occurred in the third quarter, and returns varied dramatically by corporate sub-sector. Financials produced a positive absolute return (+1.5%) as earnings were generally positive and capital and liquidity profiles improved. In contrast, Industrial issuers performed poorly (–1.8% return and underperformance of 2.7 percentage points vs. comparable-duration Treasuries), influenced by heavy new issuance related to record M&A activity in 2015, lower commodity prices, global growth concerns, and higher levels of industrial leverage. Below-investment grade issuers fared even worse for the year (–4.5% return), with the largest declines in lower-rated, commodity-sensitive issuers. Agency-guaranteed(d) mortgage-backed securities (MBS) returned 1.5% for the year, roughly in line with comparable-duration Treasuries. The prepayment environment remained muted throughout most of 2015.

INVESTMENT STRATEGY

2015 was an active year in terms of shifts in the Fund’s positioning, particularly related to the overall size and constituents of the credit portion(e) of the Fund, as much of that market became more attractively priced. We have positioned the Fund with a substantial 46%(f) weighting in corporate bonds, up from 38% at the end of 2014, and a 7% weighting in government-related securities, which includes taxable municipal securities and securities of non-U.S. government entities. Including the Fund’s 1.7% position in Rio Oil (an asset-backed security that we group as a credit investment) brings the Fund’s total credit weighting to 55%, its highest in two years. A 37% allocation to structured products—Agency-guaranteed MBS (at 33%) and more traditional, AAA-rated asset-backed securities (4%)—rounds out the Fund’s non-U.S. Treasury sector exposures. We continued to reduce the Fund’s already-low Treasury weighting (5% at year end, a decline of six percentage points) to add to the Fund’s credit holdings; we also maintained a shorter relative duration position, presently 70% of the Barclays U.S. Agg’s duration.

Most of the increase in the Fund’s credit weighting occurred in the third quarter, as high levels of new issuance in connection with M&A financing provided many interesting investment opportunities. Examples of new or growing positions in the Fund during 2015 included Allergan, Charter Communications, Hewlett Packard Enterprise, and Imperial Tobacco, each of which raised debt to finance transactions. M&A-related debt issuances often result in higher leverage ratios for the issuing entity, and may also be priced attractively (wider yield premiums) at new issue. Much of the recent increase in investment-grade corporate leverage has been concentrated in highly rated issuers willing to incur somewhat higher leverage to implement strategic transactions. While the depth and breadth of our research effort enables us to review nearly every large M&A-related investment-grade new issuance, we are selective in the Fund’s participation in these issues. When evaluating acquisition-related financing, our global industry analyst team develops a view of the strategic rationale for each M&A transaction and compiles a financial forecast assessing deleveraging potential under a range of scenarios. Meanwhile, our fixed income analyst team focuses on the balance sheet and liquidity implications, particularly in downside scenarios. When pricing appears attractive relative to these expectations and we see the potential for the issuer to delever over time, we often find it compelling to invest subsequent to a leveraging event.

In addition, we have recently found opportunities within market sectors experiencing heightened volatility. In 2015, these segments were primarily the commodities sectors and emerging markets, with hardest-hit issuers exposed to both. Our analysis has focused on issuers whose securities appear undervalued relative to credit fundamentals. Our investment team conducts in-depth assessments of the value of an issuer’s assets over a market cycle, as well as its ability to weather a prolonged period of commodity price weakness. This analysis has resulted in new or increased exposures to Cemex, Codelco, Kinder Morgan, and Teck Resources. We have also maintained the Fund’s positions in Petrobras, Rio Oil

 

 

PAGE 2 § DODGE & COX INCOME FUND


Finance Trust, and Pemex (all of which underperformed substantially in 2015), based in part on potential downside protection provided by strong government relationships and other sources of financial flexibility.

We continue to have a favorable view of subordinated securities issued by large U.S. and UK banks, where the Fund retains a modest overweight. 2015 presented opportunities to expand this theme to industrial issuers seeking to obtain financing without significant credit ratings degradation. Industrial hybrid securities are subordinated securities that are given partial equity treatment by the rating agencies. During the year we purchased hybrid securities issued by TransCanada, a leading midstream energy company whose stability is supported by the long-term contractual nature of its business, and BHP Billiton, the world’s largest mining company with a strong balance sheet and attractive cost positions in its operations.

We remain constructive on the Fund’s credit holdings, which generally are diversified across market sectors, trade at attractive prices, and have issuers with financial flexibility to weather the current challenged environment. While we recognize that recent increases in corporate leverage and shareholder remuneration could result in weaker credit profiles, we believe that the U.S. economy remains healthy, default rates remain low and fairly concentrated in lower-rated, commodity-related issuers, and valuations provide sufficient compensation for the current risks.

Turning to the Fund’s Agency MBS, currently a 33% weighting, we shifted both the weighting (between 33% and 36%) and the mix of underlying holdings throughout the year in response to changing valuations. For example, we trimmed the Fund’s CMO floaters, whose valuations became fuller, in favor of MBS with more attractive long-term total return potential (e.g., pre-reset hybrid ARM MBS, 15- and 30-year premium MBS). We also sold a portion of shorter-duration MBS and AAA-rated ABS to purchase relatively more attractive corporate bonds. We continue to view the Fund’s MBS favorably in terms of their ability to generate regular income, provide an important source of liquidity, and add an element of defensiveness in a volatile market environment for credit markets. Indeed, they were important contributors to the Fund’s 2015 return.

With respect to interest rate risk, we believe it is prudent to mitigate the effect of price declines associated with potentially rising interest rates through a shorter relative Fund duration. We see a clear disconnect between the slow pace of rate increases implied by current U.S. Treasury valuations and the faster pace expected by Fed policymakers, particularly in the context of a modestly expanding economy (more than 2% growth is expected over the next several years) and an inflation rate likely to rise as energy and import prices stabilize. It is our view that interest rates will rise more quickly than the levels implied by the market’s very modest expectations.

IN CLOSING

The Fund’s recent relative performance has been disappointing. The headwind of a weak credit sector since mid-2014 has been the primary factor behind this underperformance. While we are not

pleased with these returns, we remain confident in our investment strategy and process. We have navigated challenging environments in the past, and have used these environments to find attractive long-term investment opportunities at compelling valuations. Furthermore, we believe that the current environment suits us well, given our long-term orientation and focus on finding undervalued securities through a robust research process. We remain optimistic about the Fund’s long-term relative return prospects. However, given starting yields, we believe near-term absolute returns will be modest at best.

Thank you for your continued confidence in our firm. As always, we welcome your comments and questions.

For the Board of Trustees,

 

LOGO

 

LOGO

Charles F. Pohl,

Chairman

 

Dana M. Emery,

President

January 29, 2016

 

 

(a)  

Yield premiums are one way to measure a security’s valuation. Narrowing yield premiums result in a higher valuation. Widening yield premiums result in a lower valuation.

(b)  

Sector returns as calculated and reported by Barclays.

(c)  

Duration is a measure of a bond’s (or a bond portfolio’s) price sensitivity to changes in interest rates.

(d)  

The U.S. Government does not guarantee the Fund’s shares, yield, or net asset value. The agency guarantee (by, for example, Ginnie Mae, Fannie Mae, or Freddie Mac) does not eliminate market risk.

(e)  

Credit securities refers to corporate bonds and government-related securities, as classified by Barclays.

(f)  

Unless otherwise specified, all weightings and characteristics are as of December 31, 2015.

 

 

DODGE & COX INCOME FUND § PAGE 3


ANNUAL PERFORMANCE REVIEW

The Fund underperformed the Barclays U.S. Agg by 1.2 percentage points in 2015.

Key Detractors from Relative Results

  §  

Certain emerging market-related credit holdings underperformed for the year, including Pemex, Petrobras, and Rio Oil Finance Trust.

 
  §  

The Fund’s overweight to the Industrial sub-sector (23% versus 14% for the Barclays U.S. Agg) and underweight to U.S. Treasuries (11% versus 36% for the Barclays U.S. Agg) detracted from relative returns.

 
  §  

Corporate security selection was slightly negative; numerous industrial issuers performed poorly, including Cemex, Cox Communications, Kinder Morgan, Macy’s, and Teck Resources.

 

Key Contributors to Relative Results

  §  

The Fund’s shorter relative duration (approximately 70% of the Barclays U.S. Agg’s duration) added to relative returns.

 
  §  

The Fund’s Agency MBS holdings outperformed the MBS in the Barclays U.S. Agg after adjusting for duration differences.

 
  §  

The Fund’s nominal yield advantage benefited returns.

 

 

      

Unless otherwise noted, figures cited in this section denote Fund positioning at the beginning of the period.

 

KEY CHARACTERISTICS OF DODGE & COX

Independent Organization

Dodge & Cox is one of the largest privately owned investment managers in the world. We remain committed to independence, with a goal of providing the highest quality investment management service to our existing clients.

Over 85 Years of Investment Experience

Dodge & Cox was founded in 1930. We have a stable and well-qualified team of investment professionals, most of whom have spent their entire careers at Dodge & Cox.

Experienced Investment Team

The Fixed Income Investment Policy Committee, which is the decision-making body for the Income Fund, is an eight-member committee with an average tenure at Dodge & Cox of 20 years.

One Business with a Single Research Office

Dodge & Cox manages equity (domestic, international, and global), fixed income (domestic and global), and balanced investments, operating from one office in San Francisco.

Consistent Investment Approach

Our team decision-making process involves thorough, bottom-up fundamental analysis of each investment.

Long-Term Focus and Low Expenses

We invest with a three- to five-year investment horizon, which has historically resulted in low turnover relative to our peers. We manage Funds that maintain low expense ratios.

 

Risks: The Fund invests in individual bonds whose yields and market values fluctuate, so that an 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. A low interest rate environment creates an elevated risk of future negative returns. Financial intermediaries may restrict their market making activities for certain debt securities, which may reduce the liquidity and increase the volatility of such securities. Please read the prospectus and summary prospectus for specific details regarding the Fund’s risk profile.

 

 

 

PAGE 4 § DODGE & COX INCOME FUND


GROWTH OF $10,000 OVER 10 YEARS

FOR AN INVESTMENT MADE ON DECEMBER 31, 2005

 

LOGO

AVERAGE ANNUAL TOTAL RETURN

FOR PERIODS ENDED DECEMBER 31, 2015

 

       1 Year     5 Years     10 Years     20 Years  
       

Dodge & Cox Income Fund

    –0.59     3.60     5.02     5.68

Barclays U.S. Aggregate Bond Index (Barclays U.S. Agg)

    0.57        3.26        4.52        5.34   

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. Performance is updated and published monthly. Visit the Fund’s website at dodgeandcox.com or call 800-621-3979 for current performance figures.

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 interest income but, unlike Fund returns, do not reflect fees or expenses. The Barclays U.S. Aggregate Bond Index (Barclays U.S. Agg) is a widely recognized, unmanaged index of U.S. dollar-denominated, investment-grade, taxable debt securities.

Barclays® is a trademark of Barclays Bank PLC.

 

 

FUND EXPENSE EXAMPLE

As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.

ACTUAL EXPENSES

The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER MUTUAL FUNDS

Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.

 

Six Months Ended

December 31, 2015

   Beginning Account Value
7/1/2015
     Ending Account Value
12/31/2015
     Expenses Paid
During Period*
 

Based on Actual Fund Return

   $ 1,000.00      $ 993.20       $ 2.14   

Based on Hypothetical 5% Yearly Return

     1,000.00         1,023.06         2.17   
*  

Expenses are equal to the Fund’s annualized expense ratio of 0.43%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. Though other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).

 

DODGE & COX INCOME FUND § PAGE 5


FUND INFORMATION (unaudited)     December 31, 2015   

 

GENERAL INFORMATION        

Net Asset Value Per Share

     $13.29   

Total Net Assets (billions)

     $43.1   

30-Day SEC Yield(a)

     3.47%   

2014 Expense Ratio (per 5/1/15 Prospectus)

     0.44%   

2015 Expense Ratio

     0.43%   

Portfolio Turnover Rate

     24%   

Number of Credit Issuers

     67   

Fund Inception

     1989   

No sales charges or distribution fees

  

Investment Manager: Dodge & Cox, San Francisco. Managed by the Fixed Income Investment Policy Committee, whose eight members’ average tenure at Dodge & Cox is 20 years.

 

PORTFOLIO CHARACTERISTICS    Fund        Barclays
U.S. Agg
 

Effective Duration (years)

     4.0           5.7   

 

FIVE LARGEST CREDIT ISSUERS (%)(b)    Fund  

State of California GO

     2.2   

Bank of America Corp.

     2.0   

Verizon Communications, Inc.

     2.0   

Kinder Morgan, Inc.

     1.9   

Cox Enterprises, Inc.

     1.8   

 

CREDIT QUALITY (%)(c)    Fund      Barclays
U.S. Agg
 

U.S. Treasury/Agency/GSE(d)

     38.0         68.0   

Aaa

     4.0         4.8   

Aa

     3.1         3.5   

A

     5.1         10.5   

Baa

     35.9         13.2   

Ba

     8.9         0.0   

B

     2.1         0.0   

Caa

     0.0 (g)       0.0   

Cash Equivalents

     2.9         0.0   
ASSET ALLOCATION

LOGO

 

SECTOR DIVERSIFICATION (%)    Fund        Barclays
U.S. Agg
 

U.S. Treasury(d)

     5.0           36.4   

Government-Related

     7.4           8.2   

Mortgage-Related(f)

     32.7           28.6   

Corporate

     46.3           24.3   

Asset-Backed/Commercial Mortgage-Backed

     5.7           2.5   

Cash Equivalents

     2.9           0.0   

 

MATURITY DIVERSIFICATION (%)(d)    Fund        Barclays
U.S. Agg
 

0-1 Years to Maturity

     4.5           0.0   

1-5

     45.9           42.7   

5-10

     28.9           42.3   

10-15

     2.6           2.2   

15-20

     4.5           1.6   

20-25

     8.8           3.7   

25 and Over

     4.8           7.5   
 

 

 

(a) 

SEC Yield is an annualization of the Fund’s total net investment income per share for the 30-day period ended on the last day of the month.

(b) 

The Fund’s portfolio holdings are subject to change without notice. The mention of specific securities is not a recommendation to buy, sell, or hold any particular security and is not indicative of Dodge & Cox’s current or future trading activity.

(c) 

The credit quality distributions shown for the Fund and the Index are based on the middle of Moody’s, S&P’s, and Fitch ratings, which is the methodology used by Barclays in constructing its indices. If a security is rated by only two agencies, the lower of the two ratings is used. Please note the Fund applies the highest of Moody’s, S&P’s, and Fitch ratings to determine compliance with the quality requirements stated in its prospectus. On that basis, the Fund held 6.4% in securities rated below investment grade. The credit quality of the investments in the portfolio does not apply to the stability or safety of the Fund or its shares.

(d) 

Data as presented excludes the Fund’s position in Treasury futures contracts.

(e) 

Net Cash & Other includes short-term investments (e.g., money market funds and repurchase agreements) and other assets less liabilities (e.g., cash, receivables, payables, and unrealized appreciation/depreciation on certain derivatives).

(f) 

The Fund holds 0.4% in Agency multifamily mortgage securities; the Index classifies these securities under CMBS – Agency.

(g) 

Rounds to 0.0%.

 

PAGE 6 § DODGE & COX INCOME FUND


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

DEBT SECURITIES: 97.1%               
    PAR VALUE      VALUE  
U.S. TREASURY: 5.0%     

U.S. Treasury Note/Bond

    

1.50%, 8/31/18

  $ 250,000,000       $ 251,701,500   

0.875%, 10/15/18

    300,000,000         296,724,300   

1.50%, 2/28/19

    496,995,000         498,648,999   

1.625%, 7/31/19

    600,000,000         602,200,800   

1.625%, 12/31/19

    500,000,000         500,125,500   
    

 

 

 
     2,149,401,099   
GOVERNMENT-RELATED: 7.4%      

FEDERAL AGENCY: 0.3%

    

Small Business Admin. — 504 Program

    

Series 1997-20E 1, 7.30%, 5/1/17

    24,882         25,648   

Series 1997-20H 1, 6.80%, 8/1/17

    7,796         7,948   

Series 1997-20J 1, 6.55%, 10/1/17

    111,816         114,405   

Series 1997-20L 1, 6.55%, 12/1/17

    5,005         5,124   

Series 1998-20B 1, 6.15%, 2/1/18

    13,525         14,154   

Series 1998-20C 1, 6.35%, 3/1/18

    435,206         457,822   

Series 1998-20H 1, 6.15%, 8/1/18

    233,918         246,212   

Series 1998-20L 1, 5.80%, 12/1/18

    132,203         138,410   

Series 1999-20C 1, 6.30%, 3/1/19

    129,925         134,730   

Series 1999-20E 1, 6.30%, 5/1/19

    3,584         3,716   

Series 1999-20G 1, 7.00%, 7/1/19

    243,730         253,446   

Series 1999-20I 1, 7.30%, 9/1/19

    119,298         124,182   

Series 2000-20C 1, 7.625%, 3/1/20

    7,298         7,742   

Series 2000-20G 1, 7.39%, 7/1/20

    4,441         4,699   

Series 2001-20G 1, 6.625%, 7/1/21

    969,601         1,053,103   

Series 2001-20L 1, 5.78%, 12/1/21

    2,904,898         3,095,072   

Series 2002-20A 1, 6.14%, 1/1/22

    22,348         24,155   

Series 2002-20L 1, 5.10%, 12/1/22

    862,659         920,246   

Series 2003-20G 1, 4.35%, 7/1/23

    56,562         59,378   

Series 2004-20L 1, 4.87%, 12/1/24

    1,296,779         1,382,839   

Series 2005-20B 1, 4.625%, 2/1/25

    2,367,752         2,506,263   

Series 2005-20D 1, 5.11%, 4/1/25

    107,053         115,828   

Series 2005-20E 1, 4.84%, 5/1/25

    3,977,227         4,232,604   

Series 2005-20G 1, 4.75%, 7/1/25

    4,005,706         4,250,920   

Series 2005-20H 1, 5.11%, 8/1/25

    52,810         56,941   

Series 2005-20I 1, 4.76%, 9/1/25

    4,980,293         5,292,317   

Series 2006-20A 1, 5.21%, 1/1/26

    4,938,826         5,324,703   

Series 2006-20B 1, 5.35%, 2/1/26

    1,525,995         1,657,611   

Series 2006-20C 1, 5.57%, 3/1/26

    7,182,729         7,854,678   

Series 2006-20G 1, 6.07%, 7/1/26

    13,100,376         14,647,576   

Series 2006-20H 1, 5.70%, 8/1/26

    114,131         126,308   

Series 2006-20I 1, 5.54%, 9/1/26

    240,274         262,899   

Series 2006-20J 1, 5.37%, 10/1/26

    4,518,289         4,923,048   

Series 2006-20L 1, 5.12%, 12/1/26

    3,545,363         3,843,033   

Series 2007-20A 1, 5.32%, 1/1/27

    8,657,970         9,545,779   

Series 2007-20C 1, 5.23%, 3/1/27

    13,297,620         14,590,409   

Series 2007-20D 1, 5.32%, 4/1/27

    13,335,560         14,689,595   

Series 2007-20G 1, 5.82%, 7/1/27

    9,282,355         10,459,094   
    

 

 

 
     112,452,637   

FOREIGN AGENCY: 2.3%

    

Corp. Nacional del Cobre de Chile(c) (Chile)
4.50%, 9/16/25(b)

    122,575,000         115,425,936   

Petroleo Brasileiro SA(c) (Brazil)

    

5.75%, 1/20/20

    43,955,000         34,504,675   

5.375%, 1/27/21

    187,220,000         139,478,900   

4.375%, 5/20/23

    38,625,000         25,492,500   

6.25%, 3/17/24

    80,805,000         57,977,587   

Petroleos Mexicanos(c) (Mexico)

    

4.875%, 1/18/24

    123,065,000         114,758,112   

4.25%, 1/15/25(b)

    97,765,000         85,544,375   

4.50%, 1/23/26(b)

    15,065,000         13,234,603   

6.625%, 6/15/35

    102,290,000         91,421,687   

5.50%, 6/27/44

    5,900,000         4,438,806   

5.50%, 6/27/44(b)

    36,075,000         27,140,666   

6.375%, 1/23/45

    149,875,000         127,358,979   

5.625%, 1/23/46(b)

    190,720,000         145,938,944   
    

 

 

 
     982,715,770   
    PAR VALUE      VALUE  

LOCAL AUTHORITY: 4.7%

    

L.A. Unified School District GO

    

5.75%, 7/1/34

  $ 6,075,000       $ 7,313,146   

6.758%, 7/1/34

    185,585,000         244,530,508   

New Jersey Turnpike Authority RB

    

7.414%, 1/1/40

    41,065,000         58,322,566   

7.102%, 1/1/41

    148,277,000         203,800,805   

New Valley Generation
4.929%, 1/15/21

    340,287         368,052   

State of California GO

    

7.50%, 4/1/34

    203,021,000         283,289,413   

7.55%, 4/1/39

    200,880,000         291,780,209   

7.30%, 10/1/39

    116,735,000         163,381,138   

7.625%, 3/1/40

    103,410,000         150,592,881   

7.60%, 11/1/40

    56,435,000         83,763,649   

State of Illinois GO

    

4.961%, 3/1/16

    40,560,000         40,811,066   

5.365%, 3/1/17

    196,360,000         203,650,847   

5.665%, 3/1/18

    173,675,000         183,895,774   

5.10%, 6/1/33

    124,455,000         117,690,871   
    

 

 

 
     2,033,190,925   

SOVEREIGN: 0.1%

    

Spain Government International (c) (Spain)
4.00%, 3/6/18(b)

    55,790,000         58,193,545   
    

 

 

 
     3,186,552,877   
MORTGAGE-RELATED: 32.7%   

FEDERAL AGENCY CMO & REMIC: 3.2%

  

Dept. of Veterans Affairs

    

Series 1995-2D 4A, 9.293%, 5/15/25

    145,506         178,423   

Series 1997-2 Z, 7.50%, 6/15/27

    9,751,483         11,003,619   

Series 1998-2 2A, 8.693%, 8/15/27

    38,255         44,805   

Series 1998-1 1A, 8.209%, 3/15/28

    219,820         254,336   

Fannie Mae

    

Trust 1998-58 PX, 6.50%, 9/25/28

    427,092         470,195   

Trust 1998-58 PC, 6.50%, 10/25/28

    2,310,178         2,574,165   

Trust 2001-69 PQ, 6.00%, 12/25/31

    2,667,209         3,002,085   

Trust 2002-33 A1, 7.00%, 6/25/32

    2,513,867         2,816,246   

Trust 2002-69 Z, 5.50%, 10/25/32

    315,970         352,984   

Trust 2008-24 GD, 6.50%, 3/25/37

    2,424,010         2,684,804   

Trust 2007-47 PE, 5.00%, 5/25/37

    6,239,945         6,692,835   

Trust 2009-30 AG, 6.50%, 5/25/39

    14,068,493         15,237,184   

Trust 2009-53 QM, 5.50%, 5/25/39

    3,437,366         3,685,011   

Trust 2009-40 TB, 6.00%, 6/25/39

    6,494,274         7,204,096   

Trust 2001-T3 A1, 7.50%, 11/25/40

    134,874         157,013   

Trust 2010-123 WT, 7.00%, 11/25/40

    52,894,063         61,029,609   

Trust 2001-T7 A1, 7.50%, 2/25/41

    88,383         103,282   

Trust 2001-T5 A2, 6.989%, 6/19/41

    51,853         58,242   

Trust 2001-T5 A3, 7.50%, 6/19/41

    260,737         310,032   

Trust 2001-T4 A1, 7.50%, 7/25/41

    2,401,671         2,839,952   

Trust 2011-58 AT, 4.00%, 7/25/41

    12,743,491         13,223,814   

Trust 2001-T10 A1, 7.00%, 12/25/41

    2,710,771         3,179,728   

Trust 2013-106 MA, 4.00%, 2/25/42

    25,970,249         27,496,113   

Trust 2002-90 A1, 6.50%, 6/25/42

    5,514,942         6,244,734   

Trust 2002-W6 2A1, 6.321%, 6/25/42

    3,148,434         3,665,612   

Trust 2002-W8 A2, 7.00%, 6/25/42

    1,841,433         2,098,061   

Trust 2002-T16 A3, 7.50%, 7/25/42

    3,993,802         4,623,202   

Trust 2003-W2 1A2, 7.00%, 7/25/42

    8,407,371         9,762,673   

Trust 2003-W4 3A, 6.561%, 10/25/42

    2,514,950         2,839,493   

Trust 2012-121 NB, 7.00%, 11/25/42

    1,687,780         1,946,294   

Trust 2003-7 A1, 6.50%, 12/25/42

    4,454,329         5,119,161   

Trust 2003-W1 2A, 6.392%, 12/25/42

    3,240,697         3,729,835   

Trust 2012-133 HF, 0.772%, 12/25/42

    51,002,673         51,201,890   

Trust 2012-134 FD, 0.772%, 12/25/42

    1,374,965         1,379,725   

Trust 2012-134 FT, 0.772%, 12/25/42

    72,211,974         72,106,321   

Trust 2013-98 FA, 0.972%, 9/25/43

    48,863,321         49,434,113   

Trust 2013-101 CF, 1.022%, 10/25/43

    24,492,837         24,719,741   
 

 

See accompanying Notes to Financial Statements   DODGE & COX INCOME FUND § PAGE 7


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

DEBT SECURITIES (continued)               
    PAR VALUE      VALUE  

Trust 2013-101 FE, 1.022%, 10/25/43

  $ 39,072,948       $ 39,463,822   

Trust 2004-T1 1A2, 6.50%, 1/25/44

    2,811,476         3,138,873   

Trust 2004-W2 2A2, 7.00%, 2/25/44

    147,903         167,997   

Trust 2004-W2 5A, 7.50%, 3/25/44

    6,824,597         7,781,906   

Trust 2004-W8 3A, 7.50%, 6/25/44

    5,139,443         5,979,654   

Trust 2004-W14 1AF, 0.822%, 7/25/44

    1,939,751         1,912,776   

Trust 2004-W15 1A2, 6.50%, 8/25/44

    1,115,003         1,231,412   

Trust 2005-W1 1A3, 7.00%, 10/25/44

    7,357,811         8,387,652   

Trust 2001-79 BA, 7.00%, 3/25/45

    873,791         993,601   

Trust 2006-W1 1A1, 6.50%, 12/25/45

    554,568         623,322   

Trust 2006-W1 1A2, 7.00%, 12/25/45

    4,066,186         4,692,731   

Trust 2006-W1 1A3, 7.50%, 12/25/45

    71,084         82,100   

Trust 2006-W1 1A4, 8.00%, 12/25/45

    4,652,779         5,531,068   

Trust 2007-W10 1A, 6.315%, 8/25/47

    18,269,753         20,456,277   

Trust 2007-W10 2A, 6.324%, 8/25/47

    5,244,232         5,860,933   

Freddie Mac

    

Series 2456 CJ, 6.50%, 6/15/32

    234,421         264,277   

Series 3312 AB, 6.50%, 6/15/32

    4,450,335         4,990,524   

Series T-41 2A, 5.812%, 7/25/32

    311,554         356,568   

Series 2587 ZU, 5.50%, 3/15/33

    7,177,250         8,051,584   

Series 2610 UA, 4.00%, 5/15/33

    2,603,484         2,704,708   

Series T-48 1A, 5.464%, 7/25/33

    3,219,620         3,718,306   

Series 2708 ZD, 5.50%, 11/15/33

    27,253,897         30,214,335   

Series 3204 ZM, 5.00%, 8/15/34

    9,717,783         10,873,964   

Series 3330 GZ, 5.50%, 6/15/37

    6,364,269         6,877,120   

Series 4091 JF, 0.831%, 6/15/41

    34,928,663         35,113,949   

Series 4120 YF, 0.681%, 10/15/42

    77,374,187         77,742,944   

Series 309 F4, 0.861%, 8/15/43

    87,134,952         86,077,522   

Series 311 F1, 0.881%, 8/15/43

    113,397,893         112,025,953   

Series T-51 1A, 6.50%, 9/25/43

    72,786         84,802   

Series 4281 BC, 4.786%, 12/15/43

    209,428,788         225,958,898   

Series 4283 DW, 4.831%, 12/15/43

    126,715,000         137,843,656   

Series 4283 EW, 4.683%, 12/15/43

    77,420,658         83,955,984   

Series 4310 FA, 0.881%, 2/15/44

    3,047,562         3,047,548   

Series 4319 MA, 5.026%, 3/15/44

    38,337,000         42,060,665   
    

 

 

 
     1,381,736,859   

FEDERAL AGENCY MORTGAGE PASS-THROUGH: 29.5%

  

Fannie Mae, 10 Year
6.00%, 11/1/16

    246,089         248,714   

Fannie Mae, 15 Year

    

3.50%, 8/1/26-12/1/29

    800,843,886         839,998,715   

4.00%, 9/1/25-5/1/29

    210,720,621         223,409,135   

4.50%, 3/1/29

    47,030,431         50,546,304   

5.00%, 9/1/25

    75,564,467         81,350,479   

5.50%, 1/1/18-7/1/25

    205,240,634         222,454,729   

6.00%, 7/1/16-3/1/23

    71,990,929         77,317,094   

6.50%, 5/1/16-12/1/19

    5,198,921         5,320,478   

7.00%, 11/1/17

    6,149         6,253   

7.50%, 8/1/17

    70,340         71,379   

Fannie Mae, 20 Year

    

4.00%, 9/1/30-7/1/35

    2,587,757,122         2,767,465,569   

4.50%, 3/1/29-1/1/34

    736,111,213         798,572,337   

Fannie Mae, 30 Year

    

4.50%, 6/1/36-2/1/45

    913,899,731         991,081,657   

5.00%, 7/1/37

    16,645,776         18,388,688   

5.50%, 2/1/33-11/1/39

    274,213,435         308,216,177   

6.00%, 11/1/28-2/1/39

    179,729,016         204,911,049   

6.50%, 12/1/32-8/1/39

    77,343,880         89,196,415   

7.00%, 4/1/32-2/1/39

    111,585,383         129,145,893   

Fannie Mae, 40 Year
4.50%, 1/1/52

    14,324,834         15,340,512   

Fannie Mae, Hybrid ARM

    

1.881%, 8/1/34

    2,306,487         2,402,074   

1.884%, 6/1/43

    6,412,433         6,554,808   

1.956%, 9/1/43

    14,541,908         14,906,264   

1.991%, 1/1/35

    3,526,501         3,687,578   
    PAR VALUE      VALUE  

2.008%, 4/1/35

  $ 4,272,020       $ 4,496,576   

2.07%, 11/1/35

    2,670,407         2,790,372   

2.128%, 4/1/44

    84,904,636         87,949,868   

2.169%, 7/1/35

    1,672,315         1,767,239   

2.17%, 8/1/35

    2,592,642         2,735,746   

2.191%, 10/1/34

    2,669,567         2,799,698   

2.194%, 7/1/35

    1,978,426         2,088,827   

2.214%, 8/1/35

    8,755,321         9,224,085   

2.237%, 9/1/34

    3,606,884         3,805,095   

2.281%, 12/1/42

    26,082,611         26,250,828   

2.289%, 5/1/43

    5,512,318         5,546,856   

2.302%, 7/1/35

    2,490,331         2,639,170   

2.311%, 10/1/43

    66,096,177         67,347,462   

2.321%, 2/1/44

    4,992,102         5,114,862   

2.35%, 1/1/37

    4,386,771         4,611,034   

2.371%, 9/1/42

    15,680,251         16,034,249   

2.393%, 8/1/34

    738,464         783,963   

2.397%, 10/1/38

    9,822,166         10,397,982   

2.398%, 10/1/33

    3,149,535         3,339,332   

2.399%, 12/1/36

    3,797,562         4,005,727   

2.412%, 7/1/34

    3,376,707         3,563,399   

2.415%, 2/1/43

    22,285,757         22,811,114   

2.416%, 10/1/35

    3,747,603         3,964,897   

2.433%, 6/1/35

    1,339,022         1,412,630   

2.451%, 10/1/38

    2,463,990         2,618,071   

2.47%, 1/1/36

    5,886,195         6,226,428   

2.471%, 1/1/36

    4,541,752         4,806,457   

2.474%, 5/1/44

    24,095,420         24,666,222   

2.475%, 10/1/38

    5,587,495         5,869,715   

2.476%, 11/1/36

    2,954,946         3,136,611   

2.479%, 12/1/35-5/1/38

    220,890,585         233,789,469   

2.489%, 10/1/44

    11,373,974         11,558,600   

2.50%, 7/1/35

    2,193,708         2,327,561   

2.505%, 10/1/35

    2,631,963         2,783,987   

2.506%, 11/1/42

    15,135,933         15,510,886   

2.517%, 9/1/35

    3,402,851         3,604,305   

2.558%, 1/1/36

    22,455,501         23,754,119   

2.561%, 8/1/35

    5,070,129         5,394,631   

2.571%, 4/1/45

    10,852,275         11,016,996   

2.601%, 4/1/42

    19,446,107         20,008,241   

2.625%, 9/1/38

    1,105,905         1,177,271   

2.66%, 2/1/43

    9,315,226         9,811,094   

2.674%, 8/1/45

    22,412,131         22,804,576   

2.675%, 10/1/44

    23,757,282         24,271,339   

2.698%, 11/1/43

    23,901,698         24,532,516   

2.702%, 4/1/44

    27,654,815         28,557,438   

2.717%, 12/1/44

    11,695,367         11,948,652   

2.719%, 2/1/45

    33,558,952         34,261,785   

2.72%, 12/1/44

    7,692,711         7,860,462   

2.721%, 10/1/44

    17,293,969         17,687,676   

2.731%, 9/1/44

    17,817,126         18,242,468   

2.739%, 2/1/37

    10,913,461         11,602,789   

2.74%, 8/1/45

    21,609,630         22,044,970   

2.743%, 11/1/44

    9,363,226         9,577,359   

2.75%, 12/1/44

    8,005,738         8,187,041   

2.759%, 9/1/44

    19,069,689         19,532,453   

2.764%, 10/1/44

    17,720,770         18,139,395   

2.769%, 11/1/44

    15,911,672         16,280,583   

2.783%, 12/1/44

    56,871,308         58,180,953   

2.787%, 2/1/44

    10,278,368         10,554,985   

2.80%, 8/1/44-10/1/44

    76,544,703         78,387,177   

2.801%, 1/1/35

    1,372,432         1,453,017   

2.803%, 12/1/44

    26,888,409         27,512,739   

2.814%, 10/1/44

    33,261,468         34,058,209   

2.835%, 8/1/44

    48,711,517         49,904,297   

2.848%, 10/1/44

    20,726,300         21,226,890   
 

 

PAGE 8 § DODGE & COX INCOME FUND   See accompanying Notes to Financial Statements


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

DEBT SECURITIES (continued)               
    PAR VALUE      VALUE  

2.85%, 10/1/44

  $ 22,200,611       $ 22,728,488   

2.86%, 11/1/44

    32,169,041         32,958,245   

2.864%, 7/1/44

    29,631,331         30,396,645   

2.867%, 11/1/44

    29,915,171         30,651,847   

2.88%, 9/1/44

    60,821,053         62,416,330   

2.889%, 9/1/44-10/1/44

    26,569,323         27,251,937   

2.894%, 10/1/44

    10,435,897         10,700,705   

2.896%, 7/1/44

    20,446,306         21,004,335   

2.915%, 8/1/44

    11,332,393         11,634,824   

2.918%, 2/1/44

    16,269,225         16,760,471   

2.928%, 4/1/44

    11,052,054         11,373,872   

2.93%, 10/1/44

    37,875,379         38,881,783   

2.932%, 1/1/45

    24,416,718         25,059,180   

2.933%, 7/1/44

    15,059,049         15,484,248   

2.934%, 9/1/43

    12,457,920         12,841,625   

2.935%, 11/1/44

    29,559,493         30,343,174   

2.938%, 11/1/43

    21,763,709         22,312,424   

2.944%, 4/1/44

    10,868,773         11,187,250   

2.954%, 11/1/44

    28,329,937         29,105,386   

2.965%, 7/1/44

    11,203,665         11,526,484   

2.976%, 10/1/44

    23,055,337         23,705,230   

3.002%, 9/1/44

    35,269,218         36,313,735   

3.023%, 8/1/44

    15,385,878         15,850,254   

3.05%, 5/1/44

    46,658,354         48,167,907   

3.203%, 4/1/44

    35,247,177         36,368,197   

3.444%, 7/1/41

    69,632,696         73,237,947   

4.127%, 12/1/39

    4,141,439         4,373,579   

4.831%, 4/1/38

    741,995         788,343   

5.031%, 5/1/38

    2,545,726         2,696,969   

5.145%, 8/1/37

    719,354         739,053   

5.272%, 6/1/39

    1,347,451         1,440,177   

5.593%, 11/1/37

    1,500,371         1,592,281   

5.596%, 4/1/37

    743,019         795,432   

5.621%, 7/1/36

    69,417         69,003   

5.754%, 8/1/37

    3,252,836         3,457,562   

5.862%, 12/1/36

    1,571,302         1,665,268   

Fannie Mae, Multifamily DUS

    

Trust 2014-M13 ASQ2, 1.637%, 11/25/17

    57,955,932         58,136,511   

Pool AL6445, 2.405%, 1/1/22

    24,893,787         25,412,080   

Pool AL6455, 2.552%, 11/1/21

    29,305,788         30,160,742   

Pool AL6028, 2.934%, 7/1/21

    5,004,967         5,144,361   

Pool 745629, 5.389%, 1/1/18

    109,689         113,041   

Pool 888559, 5.487%, 6/1/17

    9,976,584         10,404,728   

Pool 888015, 5.496%, 11/1/16

    20,439,338         20,426,623   

Pool 735745, 5.60%, 1/1/17

    542         542   

Pool 745936, 6.061%, 8/1/16

    602,706         612,444   

Freddie Mac, Hybrid ARM

    

1.921%, 1/1/36

    3,477,396         3,660,015   

2.101%, 8/1/36

    4,006,797         4,206,786   

2.155%, 1/1/35

    1,762,455         1,863,418   

2.189%, 3/1/37

    5,134,789         5,444,385   

2.208%, 2/1/38

    11,584,017         12,135,901   

2.216%, 4/1/37

    1,782,770         1,883,189   

2.31%, 1/1/37

    3,755,662         3,990,037   

2.328%, 5/1/37

    3,716,851         3,941,112   

2.37%, 7/1/37

    10,672,846         11,363,720   

2.375%, 4/1/35

    1,353,397         1,440,314   

2.386%, 10/1/35

    4,355,497         4,568,773   

2.391%, 2/1/34

    7,216,321         7,687,023   

2.394%, 4/1/38

    10,044,623         10,669,831   

2.399%, 4/1/37

    2,679,394         2,813,996   

2.402%, 6/1/38

    6,090,733         6,422,494   

2.407%, 1/1/36

    3,876,895         4,103,560   

2.445%, 7/1/43

    9,419,624         9,827,308   

2.447%, 10/1/38

    1,240,045         1,309,898   

2.451%, 1/1/36

    9,584,063         10,160,381   
    PAR VALUE      VALUE  

2.452%, 3/1/35

  $ 1,783,179       $ 1,888,066   

2.455%, 10/1/38

    3,565,171         3,773,546   

2.487%, 8/1/35

    2,219,435         2,340,180   

2.489%, 2/1/35

    1,297,592         1,375,844   

2.494%, 4/1/38

    12,001,401         12,763,007   

2.529%, 9/1/33

    8,619,235         9,168,092   

2.546%, 8/1/34

    1,423,906         1,514,105   

2.552%, 4/1/36

    5,693,303         6,035,235   

2.582%, 9/1/35

    3,273,550         3,457,446   

2.617%, 11/1/34

    1,859,597         1,959,243   

2.62%, 8/1/35

    3,378,580         3,597,616   

2.643%, 8/1/45

    19,128,762         19,404,719   

2.731%, 1/1/45

    23,828,838         24,302,367   

2.738%, 9/1/44

    17,092,607         17,458,070   

2.741%, 6/1/45

    9,466,024         9,625,425   

2.752%, 11/1/44

    30,955,044         31,615,866   

2.771%, 10/1/43

    4,512,532         4,637,348   

2.798%, 12/1/44

    8,241,469         8,415,907   

2.818%, 9/1/44

    21,311,390         21,789,758   

2.832%, 10/1/44

    51,301,145         52,360,519   

2.835%, 10/1/44

    11,310,617         11,565,818   

2.84%, 11/1/44

    37,962,261         38,816,573   

2.843%, 1/1/45

    21,196,127         21,661,143   

2.856%, 8/1/45

    16,963,029         17,311,259   

2.873%, 12/1/44

    22,632,553         23,154,767   

2.891%, 6/1/44

    13,313,243         13,650,015   

2.897%, 12/1/44

    38,464,632         39,378,527   

2.903%, 11/1/44

    22,177,441         22,711,460   

2.904%, 2/1/44

    18,700,993         19,227,996   

2.911%, 8/1/44

    16,064,737         16,468,759   

2.92%, 12/1/44

    33,353,250         34,176,111   

2.927%, 11/1/44

    11,915,819         12,209,997   

2.928%, 1/1/45-2/1/45

    49,079,334         50,277,051   

2.932%, 1/1/45

    29,982,107         30,721,418   

2.939%, 1/1/44

    10,593,572         10,908,039   

2.943%, 11/1/44

    18,621,858         19,098,428   

2.947%, 11/1/44

    50,853,178         52,162,911   

2.953%, 11/1/44

    14,899,807         15,290,455   

2.959%, 12/1/44

    18,850,353         19,339,341   

2.966%, 9/1/44-11/1/44

    48,601,169         49,900,149   

2.991%, 11/1/44

    24,302,013         24,958,418   

3.015%, 7/1/44

    11,243,962         11,562,718   

3.02%, 5/1/44-10/1/44

    213,994,107         220,371,790   

3.022%, 7/1/44

    13,668,619         14,065,442   

3.025%, 10/1/44

    24,638,087         25,337,589   

3.043%, 8/1/44

    17,862,494         18,380,513   

3.058%, 4/1/44

    14,158,052         14,581,352   

3.10%, 6/1/44

    40,452,822         41,711,360   

3.105%, 8/1/44

    19,500,908         20,096,219   

3.129%, 1/1/44

    9,749,833         10,059,602   

3.137%, 4/1/44

    6,852,932         7,069,394   

3.581%, 6/1/41

    10,530,420         11,013,393   

3.694%, 9/1/41

    13,495,562         14,153,911   

4.797%, 6/1/38

    1,452,792         1,532,857   

5.195%, 5/1/38

    4,027,208         4,271,864   

5.498%, 11/1/39

    4,753,471         5,023,687   

5.784%, 1/1/38

    1,693,594         1,795,732   

6.178%, 12/1/36

    2,279,561         2,409,223   

6.182%, 10/1/37

    643,723         685,119   

Freddie Mac Gold, 10 Year
6.00%, 9/1/16

    79,918         80,519   

Freddie Mac Gold, 15 Year

    

4.00%, 6/1/26-6/1/27

    376,943,736         398,252,479   

4.50%, 3/1/25-6/1/26

    24,828,127         26,588,195   

5.50%, 10/1/20-12/1/24

    12,608,880         13,434,951   

6.00%, 8/1/16-11/1/23

    24,205,400         26,093,264   

6.50%, 5/1/16-9/1/18

    1,461,315         1,491,791   
 

 

See accompanying Notes to Financial Statements   DODGE & COX INCOME FUND § PAGE 9


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

DEBT SECURITIES (continued)               
    PAR VALUE      VALUE  

Freddie Mac Gold, 20 Year

    

4.00%, 9/1/31-6/1/35

  $ 351,048,364       $ 375,362,667   

4.50%, 5/1/30-1/1/34

    180,316,302         195,751,967   

6.00%, 7/1/25-12/1/27

    34,264,242         38,463,505   

6.50%, 7/1/21-10/1/26

    4,398,131         5,008,613   

Freddie Mac Gold, 30 Year

    

4.50%, 3/1/39-7/1/45

    1,083,467,253         1,170,822,891   

5.50%, 3/1/34-12/1/38

    96,598,961         107,402,603   

6.00%, 2/1/33-2/1/39

    39,549,995         44,971,623   

6.50%, 12/1/32-10/1/38

    22,498,505         25,653,708   

7.00%, 4/1/31-11/1/38

    6,578,891         7,653,130   

7.90%, 2/17/21

    366,298         391,837   

Ginnie Mae, 30 Year

    

7.00%, 5/15/28

    433,409         495,778   

7.50%, 9/15/17-5/15/25

    1,491,941         1,689,298   

7.80%, 6/15/20-1/15/21

    334,342         356,428   

7.85%, 1/15/21-10/15/21

    6,443         6,485   

8.00%, 9/15/20

    6,185         6,711   
    

 

 

 
     12,739,298,350   

PRIVATE LABEL CMO & REMIC: 0.0%(f)

  

GSMPS Mortgage Loan Trust
Series 2004-4 1A4, 8.50%, 6/25/34 30 Year(b)

    5,112,029         5,510,549   
    

 

 

 
     14,126,545,758   
ASSET-BACKED: 5.7%     

AUTO LOAN: 0.7%

    

Ford Credit Auto Owner Trust

    

Series 2012-B A4, 1.00%, 9/15/17

    3,893,649         3,893,953   

Series 2014-C A3, 1.06%, 5/15/19

    9,025,000         9,003,360   

Series 2015-B A3, 1.16%, 11/15/19

    57,115,000         56,692,646   

Series 2015-1 A, 2.12%, 7/15/26(b)

    200,480,000         197,990,098   

Toyota Auto Receivables Owner Trust

    

Series 2014-B A3, 0.76%, 3/15/18

    13,555,000         13,520,759   

Series 2015-A A3, 1.12%, 2/15/19

    8,325,000         8,302,381   

Series 2014-C A4, 1.44%, 4/15/20

    20,975,000         20,940,085   
    

 

 

 
     310,343,282   

CREDIT CARD: 2.6%

    

American Express Master Trust

    

Series 2014-2 A, 1.26%, 1/15/20

    10,900,000         10,877,420   

Series 2014-3 A, 1.49%, 4/15/20

    381,035,481         381,146,057   

Chase Issuance Trust

    

Series 2006-A2 A2, 5.16%, 4/16/18

    17,465,000         17,551,382   

Series 2013-A8 A8, 1.01%, 10/15/18

    11,740,000         11,729,138   

Series 2014-A1 A1, 1.15%, 1/15/19

    152,146,000         152,023,675   

Series 2014-A6 A6, 1.26%, 7/15/19

    24,285,000         24,233,030   

Series 2014-A7 A7, 1.38%, 11/15/19

    250,740,000         250,027,297   

Series 2015-A2 A2, 1.59%, 2/18/20

    260,397,000         260,391,219   
    

 

 

 
     1,107,979,218   

OTHER: 1.7%

    

Rio Oil Finance Trust(c) (Brazil)

    

9.25%, 7/6/24(b)

    592,816,000         438,683,840   

9.75%, 1/6/27(b)

    382,550,000         281,174,250   
    

 

 

 
     719,858,090   

STUDENT LOAN: 0.7%

    

Navient Student Loan Trust (Private Loans)
Series 2014-AA A2A, 2.74%, 2/15/29(b)

    35,880,000         35,217,698   

SLM Student Loan Trust (Private Loans)

    

Series 2013-A A2A, 1.77%, 5/17/27(b)

    58,445,000         57,168,766   

Series 2012-B A2, 3.48%, 10/15/30(b)

    68,051,448         68,985,950   

Series 2013-C A2A, 2.94%, 10/15/31(b)

    41,885,000         42,171,506   

Series 2012-E A2A, 2.09%, 6/15/45(b)

    14,555,000         14,434,832   

Series 2012-C A2, 3.31%, 10/15/46(b)

    94,748,000         95,940,044   
    

 

 

 
     313,918,796   
    

 

 

 
     2,452,099,386   
    PAR VALUE      VALUE  
CORPORATE: 46.3%     

FINANCIALS: 15.5%

    

Anthem, Inc.

    

7.00%, 2/15/19

  $ 83,470,000       $ 93,795,406   

3.70%, 8/15/21

    48,839,000         49,943,689   

Bank of America Corp.

    

7.625%, 6/1/19

    188,582,000         218,222,942   

5.625%, 7/1/20

    73,416,000         81,578,024   

4.20%, 8/26/24

    163,140,000         163,376,879   

4.25%, 10/22/26

    127,024,000         125,745,630   

6.625%, 5/23/36(a)

    241,528,000         275,087,591   

Barclays PLC(c) (United Kingdom)
4.375%, 9/11/24

    275,404,000         269,295,815   

BNP Paribas SA(c) (France)

    

4.25%, 10/15/24

    379,446,000         376,095,871   

4.375%, 9/28/25(b)

    65,275,000         63,935,753   

Boston Properties, Inc.

    

5.875%, 10/15/19

    48,079,000         53,374,036   

5.625%, 11/15/20

    79,385,000         88,390,117   

4.125%, 5/15/21

    52,852,000         55,383,717   

3.85%, 2/1/23

    99,296,000         101,373,769   

3.125%, 9/1/23

    44,040,000         42,899,584   

3.80%, 2/1/24

    88,654,000         90,186,739   

Capital One Financial Corp.

    

4.75%, 7/15/21

    182,195,000         197,441,989   

3.50%, 6/15/23

    193,115,000         192,043,984   

3.75%, 4/24/24

    36,940,000         37,198,543   

3.20%, 2/5/25

    67,240,000         65,034,259   

4.20%, 10/29/25

    64,960,000         64,171,710   

Cigna Corp.

    

4.00%, 2/15/22

    62,964,000         65,095,017   

7.65%, 3/1/23

    6,317,000         7,662,268   

7.875%, 5/15/27

    33,255,000         43,727,266   

8.30%, 1/15/33

    8,195,000         10,764,010   

6.15%, 11/15/36

    88,097,000         100,330,942   

5.875%, 3/15/41

    18,489,000         21,266,196   

5.375%, 2/15/42

    54,405,000         59,595,999   

Citigroup, Inc.

    

2.062%, 5/15/18

    120,345,000         122,382,321   

3.50%, 5/15/23

    105,730,000         103,963,569   

6.692%, 10/30/40(a)

    381,543,025         399,704,473   

Equity Residential

    

4.75%, 7/15/20

    5,200,000         5,619,240   

4.625%, 12/15/21

    102,744,000         111,557,380   

3.00%, 4/15/23

    47,300,000         46,464,682   

3.375%, 6/1/25

    77,890,000         77,090,615   

General Electric Co.
2.342%, 11/15/20(b)

    228,648,000         226,972,696   

Health Net, Inc.
6.375%, 6/1/17

    120,854,000         125,688,160   

HSBC Holdings PLC(c) (United Kingdom)

    

5.10%, 4/5/21

    85,935,000         95,542,447   

9.30%, 6/1/21

    100,000         127,338   

6.50%, 5/2/36

    179,105,000         213,642,892   

6.50%, 9/15/37

    195,591,000         234,671,842   

6.80%, 6/1/38

    32,000,000         39,829,920   

JPMorgan Chase & Co.

    

3.375%, 5/1/23

    92,238,000         90,704,174   

4.125%, 12/15/26

    106,000,000         105,809,306   

8.75%, 9/1/30(a)

    48,438,000         69,369,319   

Lloyds Banking Group PLC(c) (United Kingdom)
4.50%, 11/4/24

    218,317,000         221,645,898   
 

 

PAGE 10 § DODGE & COX INCOME FUND   See accompanying Notes to Financial Statements


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

DEBT SECURITIES (continued)               
    PAR VALUE      VALUE  

Navient Corp.

    

6.00%, 1/25/17

  $ 166,603,000       $ 170,768,075   

4.625%, 9/25/17

    111,437,000         109,765,445   

8.45%, 6/15/18

    192,028,000         202,109,470   

Royal Bank of Scotland Group PLC(c) (United Kingdom)

    

6.125%, 12/15/22

    292,243,000         318,167,584   

6.00%, 12/19/23

    264,320,000         284,674,226   

Unum Group

    

7.19%, 2/1/28

    11,295,000         13,265,740   

7.25%, 3/15/28

    25,060,000         29,152,398   

6.75%, 12/15/28

    8,107,000         9,514,448   

Wells Fargo & Co.
4.30%, 7/22/27

    247,864,000         253,229,016   
    

 

 

 
     6,694,450,419   

INDUSTRIALS: 29.5%

    

Allergan PLC(c) (Ireland)

    

3.00%, 3/12/20

    181,325,000         181,180,484   

3.45%, 3/15/22

    56,635,000         56,725,446   

3.80%, 3/15/25

    204,424,000         203,398,814   

AT&T, Inc.

    

3.40%, 5/15/25

    124,574,000         119,742,397   

8.25%, 11/15/31

    190,653,000         255,137,564   

6.55%, 2/15/39

    59,430,000         66,755,401   

5.35%, 9/1/40

    59,744,000         59,008,551   

4.75%, 5/15/46

    77,670,000         71,100,982   

Becton, Dickinson and Co. 3.734%, 12/15/24

    46,675,000         47,103,383   

BHP Billiton, Ltd.(c) (Australia)
6.75%, 10/19/75(a)(b)

    223,972,000         216,132,980   

Boston Scientific Corp.
6.00%, 1/15/20

    15,690,000         17,421,784   

Burlington Northern Santa Fe LLC(e)

    

4.70%, 10/1/19

    75,445,000         81,617,985   

7.57%, 1/2/21

    10,496,389         11,589,977   

8.251%, 1/15/21

    4,300,228         4,841,235   

4.10%, 6/1/21

    5,820,000         6,133,954   

3.05%, 9/1/22

    39,535,000         39,501,988   

5.943%, 1/15/23

    57,522         61,726   

3.85%, 9/1/23

    89,340,000         92,856,780   

5.72%, 1/15/24

    15,809,857         17,404,787   

3.75%, 4/1/24

    29,682,000         30,415,561   

5.342%, 4/1/24

    5,223,959         5,645,271   

5.629%, 4/1/24

    21,148,315         23,133,614   

5.996%, 4/1/24

    40,392,566         44,916,534   

3.442%, 6/16/28(b)

    89,043,354         85,967,440   

Cemex SAB de CV(c) (Mexico)

    

6.50%, 12/10/19(b)

    138,875,000         134,014,375   

7.25%, 1/15/21(b)

    163,907,000         157,760,487   

6.00%, 4/1/24(b)

    113,175,000         97,047,562   

5.70%, 1/11/25(b)

    202,411,000         169,266,199   

6.125%, 5/5/25(b)

    78,400,000         67,032,000   

Charter Communications, Inc.

    

4.908%, 7/23/25(b)

    122,505,000         122,384,578   

6.484%, 10/23/45(b)

    92,015,000         92,047,665   

Cox Enterprises, Inc.

    

5.875%, 12/1/16(b)

    76,215,000         78,796,859   

9.375%, 1/15/19(b)

    145,119,000         168,177,103   

3.25%, 12/15/22(b)

    147,403,000         133,988,295   

2.95%, 6/30/23(b)

    241,788,000         213,011,359   

3.85%, 2/1/25(b)

    197,601,000         181,177,393   
    PAR VALUE      VALUE  

CRH PLC(c) (Ireland)
3.875%, 5/18/25(b)

  $ 185,239,000       $ 184,066,252   

CSX Corp.

    

9.75%, 6/15/20

    10,067,000         12,790,476   

6.251%, 1/15/23

    15,173,398         17,315,396   

Dillard’s, Inc.

    

7.13%, 8/1/18

    23,565,000         25,935,097   

7.875%, 1/1/23

    275,000         324,070   

7.75%, 7/15/26

    21,016,000         24,307,463   

7.75%, 5/15/27

    12,848,000         14,951,757   

7.00%, 12/1/28

    28,225,000         31,283,913   

Dow Chemical Co.

    

8.55%, 5/15/19

    156,085,000         184,019,532   

4.25%, 11/15/20

    7,726,000         8,090,853   

3.00%, 11/15/22

    24,240,000         23,221,605   

7.375%, 11/1/29

    69,100,000         85,386,317   

9.40%, 5/15/39

    135,313,000         194,447,217   

5.25%, 11/15/41

    12,378,000         12,064,948   

Eaton Corp. PLC(c) (Ireland)
2.75%, 11/2/22

    61,835,000         59,840,203   

FedEx Corp.

    

8.00%, 1/15/19

    18,050,000         21,014,315   

7.65%, 7/15/24

    1,990,174         2,328,504   

Ford Motor Credit Co. LLC(e)

    

8.125%, 1/15/20

    16,910,000         19,923,835   

5.75%, 2/1/21

    215,710,000         238,416,713   

5.875%, 8/2/21

    153,240,000         170,889,877   

3.219%, 1/9/22

    39,700,000         38,869,675   

4.25%, 9/20/22

    44,075,000         45,094,014   

4.375%, 8/6/23

    27,875,000         28,652,629   

General Electric Co.

    

4.375%, 9/16/20

    14,629,000         15,887,665   

4.625%, 1/7/21

    15,139,000         16,628,890   

4.65%, 10/17/21

    15,937,000         17,622,402   

Hewlett Packard Enterprise Co.
3.60%, 10/15/20(b)

    354,040,000         354,889,696   

Imperial Tobacco Group PLC(c)
(United Kingdom)

    

3.75%, 7/21/22(b)

    124,595,000         125,107,958   

4.25%, 7/21/25(b)

    385,702,000         391,458,988   

Kinder Morgan, Inc.

    

3.45%, 2/15/23

    23,425,000         19,460,764   

3.50%, 9/1/23

    43,211,000         35,847,241   

5.625%, 11/15/23(b)

    49,500,000         45,278,739   

4.15%, 2/1/24

    47,997,000         41,435,762   

4.25%, 9/1/24

    22,635,000         19,268,927   

4.30%, 6/1/25

    196,680,000         170,021,403   

6.50%, 2/1/37

    50,861,000         43,686,242   

6.95%, 1/15/38

    92,139,000         81,909,913   

6.50%, 9/1/39

    72,546,000         59,824,551   

5.00%, 8/15/42

    57,054,000         42,097,579   

5.00%, 3/1/43

    71,101,000         52,669,061   

5.50%, 3/1/44

    90,632,000         70,688,247   

5.40%, 9/1/44

    64,829,000         48,991,664   

5.55%, 6/1/45

    40,000,000         31,236,480   

5.05%, 2/15/46

    62,325,000         46,218,475   

LafargeHolcim, Ltd.(c) (Switzerland)
6.50%, 7/15/16

    75,696,000         77,604,977   
 

 

See accompanying Notes to Financial Statements   DODGE & COX INCOME FUND § PAGE 11


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

DEBT SECURITIES (continued)               
    PAR VALUE      VALUE  

Macy’s, Inc.

    

6.65%, 7/15/24

  $ 52,526,000       $ 59,198,378   

7.00%, 2/15/28

    27,985,000         32,478,607   

6.70%, 9/15/28

    34,115,000         37,597,459   

6.90%, 4/1/29

    67,888,000         76,510,523   

6.90%, 1/15/32

    60,095,000         66,323,907   

6.70%, 7/15/34

    130,660,000         135,751,951   

4.50%, 12/15/34

    154,923,000         129,466,053   

6.375%, 3/15/37

    101,593,000         102,808,154   

Naspers, Ltd.(c) (South Africa)

    

6.00%, 7/18/20(b)

    220,010,000         234,075,239   

5.50%, 7/21/25(b)

    257,875,000         248,084,002   

Nordstrom, Inc.
6.95%, 3/15/28

    20,107,000         24,591,504   

Norfolk Southern Corp.

    

7.70%, 5/15/17

    28,585,000         30,895,240   

9.75%, 6/15/20

    13,813,000         17,630,319   

RELX PLC(c) (United Kingdom)

    

8.625%, 1/15/19

    28,613,000         33,372,973   

3.125%, 10/15/22

    144,337,000         140,262,944   

Sprint Corp.
6.00%, 12/1/16

    303,716,000         302,197,420   

Teck Resources, Ltd.(c) (Canada)

    

4.75%, 1/15/22

    13,000,000         6,305,000   

3.75%, 2/1/23

    26,161,000         12,099,463   

6.00%, 8/15/40

    17,000,000         7,140,000   

6.25%, 7/15/41

    36,795,000         16,189,800   

5.40%, 2/1/43

    51,150,000         21,099,375   

Telecom Italia SPA(c) (Italy)

    

6.999%, 6/4/18

    165,232,000         178,450,560   

7.175%, 6/18/19

    200,711,000         221,287,892   

5.303%, 5/30/24(b)

    154,656,000         152,722,800   

7.20%, 7/18/36

    53,458,000         53,992,580   

7.721%, 6/4/38

    118,140,000         123,160,950   

The Kraft Heinz Co.
3.95%, 7/15/25(b)

    36,303,000         36,654,449   

Time Warner Cable, Inc.

    

8.75%, 2/14/19

    130,460,000         151,378,870   

8.25%, 4/1/19

    237,543,000         272,993,442   

5.00%, 2/1/20

    20,700,000         21,911,488   

4.125%, 2/15/21

    30,545,000         31,188,705   

4.00%, 9/1/21

    40,609,000         41,003,313   

6.55%, 5/1/37

    46,188,000         46,716,391   

6.75%, 6/15/39

    112,072,000         112,470,528   

Time Warner, Inc.

    

7.625%, 4/15/31

    281,417,000         348,204,852   

7.70%, 5/1/32

    231,134,000         288,546,299   

TransCanada Corp.(c) (Canada)
5.625%, 5/20/75(a)

    237,639,000         219,717,217   

Twenty-First Century Fox, Inc.

    

6.20%, 12/15/34

        14,795,000               16,790,121   

6.40%, 12/15/35

    49,525,000         57,042,845   

6.15%, 3/1/37

    31,905,000         35,549,476   

6.65%, 11/15/37

    79,075,000         91,889,974   

6.15%, 2/15/41

    40,108,000         45,090,296   
    PAR VALUE      VALUE  

Union Pacific Corp.

    

6.70%, 2/23/19

  $ 2,427,820       $ 2,587,911   

7.60%, 1/2/20

    1,125,478         1,279,734   

6.061%, 1/17/23

    6,682,098         7,322,390   

4.698%, 1/2/24

    3,639,828         3,890,066   

3.646%, 2/15/24

    35,886,000         37,476,037   

3.75%, 3/15/24

    9,550,000         10,019,879   

5.082%, 1/2/29

    8,187,160         8,890,290   

5.866%, 7/2/30

    43,098,738         49,195,541   

6.176%, 1/2/31

    31,842,455         36,207,069   

Verizon Communications, Inc.

    

4.15%, 3/15/24

    66,000,000         67,867,866   

3.50%, 11/1/24

    169,000,000         167,003,603   

4.272%, 1/15/36

    163,817,000         147,862,207   

6.55%, 9/15/43

    403,637,000         479,188,563   

Vulcan Materials Co.
7.50%, 6/15/21

    143,984,000         167,741,360   

Xerox Corp.

    

6.40%, 3/15/16

    72,137,000         72,802,031   

7.20%, 4/1/16

    25,586,000         25,916,827   

6.75%, 2/1/17

    62,799,000         65,807,637   

2.95%, 3/15/17

    1,125,000         1,133,397   

6.35%, 5/15/18

    106,052,000         113,391,965   

5.625%, 12/15/19

    87,407,000         92,985,140   

4.50%, 5/15/21

    63,744,000         64,366,014   

Zoetis, Inc.

    

3.45%, 11/13/20

    39,377,000         39,424,213   

4.50%, 11/13/25

    156,205,000         158,403,117   
    

 

 

 
       12,705,173,014   

UTILITIES: 1.3%

    

Dominion Resources, Inc.
5.75%, 10/1/54(a)

    232,036,000         227,348,872   

Enel SPA(c) (Italy)

    

6.80%, 9/15/37(b)

    153,664,000         187,631,120   

6.00%, 10/7/39(b)

    137,712,000         153,989,834   
    

 

 

 
       568,969,826   
    

 

 

 
       19,968,593,259   
    

 

 

 

TOTAL DEBT SECURITIES
(Cost $41,826,048,489)

       41,883,192,379   
 

 

PAGE 12 § DODGE & COX INCOME FUND   See accompanying Notes to Financial Statements


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

SHORT-TERM INVESTMENTS: 2.1%  
    PAR VALUE     VALUE  

COMMERCIAL PAPER: 0.7%

   

Anthem, Inc.
1/20/16(b)

  $ 100,000,000      $ 99,959,889   

UnitedHealth Group, Inc.
1/7/16(b)

    173,000,000        172,980,970   
   

 

 

 
      272,940,859   

MONEY MARKET FUND: 0.1%

   

SSgA U.S. Treasury Money
Market Fund

    43,184,920        43,184,920   

REPURCHASE AGREEMENT: 1.3%

  

 

Fixed Income Clearing Corporation(d) 0.08%, dated 12/31/15, due 1/4/16, maturity value $574,252,104

    574,247,000        574,247,000   
   

 

 

 

TOTAL SHORT-TERM INVESTMENTS
(Cost $890,372,779)

   

  $ 890,372,779   
   

 

 

 

TOTAL INVESTMENTS
(Cost $42,716,421,268)

    99.2   $ 42,773,565,158   

OTHER ASSETS LESS LIABILITIES

    0.8     351,687,601   
 

 

 

   

 

 

 
NET ASSETS     100.0   $ 43,125,252,759   
 

 

 

   

 

 

 

 

(a) 

Hybrid security

(b)

Security exempt from registration under Rule 144A of the Securities Act of 1933. The security may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of December 31, 2015, all such securities in total represented $6,277,368,282 or 14.7% of net assets. These securities have been deemed liquid by Dodge & Cox, investment manager, pursuant to procedures approved by the Fund’s Board of Trustees.

(c) 

Security denominated in U.S. dollars

(d) 

Repurchase agreement is collateralized by U.S. Treasury Note 1.75%, 12/31/20. Total collateral value is $585,736,913.

(e) 

Subsidiary (see below)

(f) 

Rounds to 0.0%

Debt securities are grouped by parent company unless otherwise noted. Actual securities may be issued by the listed parent company or one of its subsidiaries. In determining a parent company’s country designation, the Fund generally references the country of incorporation.

ARM: Adjustable Rate Mortgage

CMO: Collateralized Mortgage Obligation

DUS: Delegated Underwriting and Servicing

GO: General Obligation

RB: Revenue Bond

REMIC: Real Estate Mortgage Investment Conduit

FUTURES CONTRACTS

 

Description   Number of
Contracts
    Expiration
Date
    Notional
Amount
    Unrealized
Appreciation/
(Depreciation)
 

10 Year U.S. Treasury Note— Short Position

    18,678        Mar 2016      $ (2,351,676,938   $ 8,831,538   

Long-Term U.S. Treasury Bond— Short Position

    11,371        Mar 2016        (1,804,435,562     (5,762,192
       

 

 

 
        $ 3,069,346   
       

 

 

 
 

 

See accompanying Notes to Financial Statements   DODGE & COX INCOME FUND § PAGE 13


STATEMENT OF ASSETS AND LIABILITIES

  

    December 31, 2015  

ASSETS:

 

Investments, at value (cost $42,716,421,268)

  $ 42,773,565,158   

Cash held at broker

    74,679,210   

Receivable for investments sold

    23,335,462   

Receivable for Fund shares sold

    40,308,548   

Interest receivable

    386,215,271   

Prepaid expenses and other assets

    223,995   
 

 

 

 
    43,298,327,644   
 

 

 

 

LIABILITIES:

 

Payable to broker for variation margin

    16,915,938   

Payable for Fund shares redeemed

    139,049,185   

Management fees payable

    14,800,439   

Accrued expenses

    2,309,323   
 

 

 

 
    173,074,885   
 

 

 

 

NET ASSETS

  $ 43,125,252,759   
 

 

 

 

NET ASSETS CONSIST OF:

 

Paid in capital

  $ 43,145,771,932   

Undistributed net investment income

    12,530,465   

Undistributed net realized loss

    (93,262,874

Net unrealized appreciation

    60,213,236   
 

 

 

 
  $ 43,125,252,759   
 

 

 

 

Fund shares outstanding (par value $0.01 each,
unlimited shares authorized)

    3,244,929,885   

Net asset value per share

  $ 13.29   

STATEMENT OF OPERATIONS

  

    Year Ended
December 31, 2015
 

INVESTMENT INCOME:

 

Dividends

  $ 28,970,448   

Interest

    1,452,159,615   
 

 

 

 
    1,481,130,063   
 

 

 

 

EXPENSES:

 

Management fees

    174,080,596   

Custody and fund accounting fees

    672,473   

Transfer agent fees

    8,733,946   

Professional services

    187,581   

Shareholder reports

    1,513,816   

Registration fees

    956,756   

Trustees’ fees

    237,500   

Miscellaneous

    548,505   
 

 

 

 
    186,931,173   
 

 

 

 

NET INVESTMENT INCOME

    1,294,198,890   
 

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS):

  

Net realized loss

 

Investments

    (5,284,623

Treasury futures contracts

    (84,502,080

Net change in unrealized appreciation/depreciation

 

Investments

    (1,566,447,658

Treasury futures contracts

    65,259,551   
 

 

 

 

Net realized and unrealized loss

    (1,590,974,810
 

 

 

 

NET DECREASE IN NET ASSETS
FROM OPERATIONS

  $ (296,775,920
 

 

 

 

STATEMENT OF CHANGES IN NET ASSETS

  

    Year Ended
December 31, 2015
    Year Ended
December 31, 2014
 

OPERATIONS:

   

Net investment income

  $ 1,294,198,890      $ 841,617,395   

Net realized gain (loss)

    (89,786,703     184,870,735   

Net change in unrealized
appreciation/depreciation

    (1,501,188,107     408,715,923   
 

 

 

   

 

 

 
    (296,775,920     1,435,204,053   
 

 

 

   

 

 

 

DISTRIBUTIONS TO SHAREHOLDERS FROM:

   

Net investment income

    (1,293,890,373     (836,624,131

Net realized gain

    (25,501,766     (232,101,623
 

 

 

   

 

 

 

Total distributions

    (1,319,392,139     (1,068,725,754
 

 

 

   

 

 

 

FUND SHARE
TRANSACTIONS:

   

Proceeds from sale of shares

    14,066,640,197        18,587,943,566   

Reinvestment of distributions

    1,067,877,119        840,852,670   

Cost of shares redeemed

    (9,521,033,129     (5,321,422,005
 

 

 

   

 

 

 

Net increase from Fund
share transactions

    5,613,484,187        14,107,374,231   
 

 

 

   

 

 

 

Total increase in net assets

    3,997,316,128        14,473,852,530   

NET ASSETS:

   

Beginning of year

    39,127,936,631        24,654,084,101   
 

 

 

   

 

 

 

End of year (including undistributed net investment income of $12,530,465 and $12,221,948, respectively)

  $ 43,125,252,759      $ 39,127,936,631   
 

 

 

   

 

 

 

SHARE INFORMATION:

   

Shares sold

    1,023,992,169        1,341,256,318   

Distributions reinvested

    79,082,204        61,052,395   

Shares redeemed

    (698,078,052     (384,742,642
 

 

 

   

 

 

 

Net increase in shares outstanding

    404,996,321        1,017,566,071   
 

 

 

   

 

 

 
 

 

PAGE 14 § DODGE & COX INCOME FUND   See accompanying Notes to Financial Statements


NOTES TO FINANCIAL STATEMENTS

 

NOTE 1—ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Dodge & Cox Income Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund commenced operations on January 3, 1989, and seeks high and stable current income consistent with long-term preservation of capital. Risk considerations and investment strategies of the Fund are discussed in the Fund’s Prospectus.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Actual results may differ from those estimates. Significant accounting policies are as follows:

Security valuation The Fund’s net assets are valued as of the close of trading on the New York Stock Exchange (NYSE), generally 4:00 p.m. Eastern Time, each day that the NYSE is open for business. If the NYSE is closed due to inclement weather, technology problems, or for any other reason on a day it would normally be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the Fund reserves the right to calculate the Fund’s NAV as of the normally scheduled close of regular trading on the NYSE for that day, provided that Dodge & Cox believes that it can obtain reliable market quotes or valuations.

Debt securities and non-exchange traded derivatives are valued based on prices received from independent pricing services which utilize both dealer-supplied valuations and pricing models. Pricing models may consider quoted prices for similar securities, interest rates, prepayment speeds, and credit risk. Exchange-traded derivatives are valued at the settlement price determined by the relevant exchange. Security values are not discounted based on the size of the Fund’s position. Short-term securities less than 60 days to maturity may be valued at amortized cost if amortized cost approximates current value. Mutual funds are valued at their respective net asset values. All securities held by the Fund are denominated in U.S. dollars.

If market quotations are not readily available or if a security’s value is believed to have materially changed after the close of the security’s primary market but before the close of trading on the NYSE, the security is valued at fair value as determined in good faith by or under the direction of the Fund’s Board of Trustees. The Board of Trustees has appointed Dodge & Cox, the Fund’s investment manager, to make fair value determinations in accordance with the Dodge & Cox Funds Valuation Policies (“Valuation Policies”), subject to Board oversight. Dodge & Cox has established a Pricing Committee that is comprised of representatives from Treasury, Legal, Compliance, and Operations. The Pricing Committee is responsible for implementing the Valuation Policies, including determining the fair value of securities when market quotations or market-based valuations are not readily

available or are deemed unreliable. The Pricing Committee considers relevant indications of value that are reasonably available to it in determining the fair value assigned to a particular security, such as the value of similar financial instruments, trading volumes, contractual restrictions on disposition, related corporate actions, and changes in economic conditions. In doing so, the Pricing Committee employs various methods for calibrating fair valuation approaches, including a regular review of key inputs and assumptions, back-testing, and review of any related market activity.

Valuing securities through a fair value determination involves greater reliance on judgment than valuation of securities based on readily available market quotations. In some instances, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a security’s value. When fair value pricing is employed, the prices of securities used by the Fund to calculate its NAV may differ from quoted or published prices for the same securities.

Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.

Interest income is recorded on the accrual basis. Interest income includes coupon interest, amortization of premium and accretion of discount on debt securities, and gain/loss on paydowns. The ability of the issuers of the debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry, state, or region. Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectibility of interest is reasonably assured. Dividend income is recorded on the ex-dividend date.

Expenses are recorded on the accrual basis. Some expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust based on relative net assets or other expense methodologies determined by the nature of the expense.

Distributions to shareholders are recorded on the ex-dividend date.

Repurchase agreements The Fund enters into repurchase agreements, secured by U.S. government or agency securities, which involve the purchase of securities from a counterparty with a simultaneous commitment to resell the securities at an agreed-upon date and price. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the securities and to apply the proceeds in satisfaction of the obligation.

 

 

DODGE & COX INCOME FUND § PAGE 15


NOTES TO FINANCIAL STATEMENTS

 

Futures Contracts Futures contracts involve an obligation to purchase or sell (depending on whether the Fund has entered a long or short futures contract, respectively) an asset at a future date, at a price set at the time of the contract. Upon entering into a futures contract, the Fund is required to deposit an amount of cash or liquid assets (referred to as initial margin) in a segregated account with the clearing broker. Subsequent payments (referred to as variation margin) to and from the clearing broker are made on a daily basis based on changes in the market value of futures contracts. Futures contracts are traded publicly and their market value changes daily. Changes in the market value of open futures contracts are recorded as unrealized appreciation or depreciation in the Statement of Operations. Realized gains and losses on futures contracts are recorded in the Statement of Operations at the closing or expiration of the contracts. Cash deposited with a broker as initial margin is recorded on the Statement of Assets and Liabilities. A receivable and/or payable to brokers for daily variation margin is also recorded on the Statement of Assets and Liabilities.

Investments in futures contracts may include certain risks, which may be different from, and potentially greater than, those of the underlying securities. To the extent the Fund uses futures, it is exposed to additional volatility and potential losses resulting from leverage.

The Fund has maintained short Treasury futures contracts to assist with the management of the portfolio’s interest rate exposure. During the year ended December 31, 2015, these Treasury futures contracts had notional values ranging from 5% to 10% of net assets.

Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.

NOTE 2—VALUATION MEASUREMENTS

Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below.

§  

Level 1: Quoted prices in active markets for identical securities

§  

Level 2: Other significant observable inputs (including quoted prices for similar securities, market indices, interest rates, credit risk, etc.)

§  

Level 3: Significant unobservable inputs (including Fund management’s assumptions in determining the fair value of investments)

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used to value the Fund’s holdings at December 31, 2015:

 

Classification(a)  

LEVEL 1

(Quoted Prices)

    

LEVEL 2

(Other Significant
Observable Inputs)

 

Securities

    

Debt Securities

    

U.S. Treasury

  $                     —       $ 2,149,401,099   

Government-Related

            3,186,552,877   

Mortgage-Related

            14,126,545,758   

Asset-Backed

            2,452,099,386   

Corporate

            19,968,593,259   

Short-term Investments

    

Commercial Paper

            272,940,859   

Money Market Fund

    43,184,920           

Repurchase Agreement

            574,247,000   
 

 

 

    

 

 

 

Total Securities

  $ 43,184,920       $ 42,730,380,238   
 

 

 

    

 

 

 

Other Financial Instruments(b)

  

  

Treasury Futures Contracts

    

Appreciation

  $ 8,831,538       $   

Depreciation

    (5,762,192        
                  
(a) 

U.S. Treasury securities were transferred from Level 1 to Level 2 during the year. There were no Level 3 securities at December 31, 2015 and 2014 and there were no transfers to Level 3 during the year.

(b)

Represents unrealized appreciation/(depreciation).

NOTE 3—RELATED PARTY TRANSACTIONS

Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays an annual management fee of 0.50% of the Fund’s average daily net assets up to $100 million and 0.40% of the Fund’s average daily net assets in excess of $100 million to Dodge & Cox, investment manager of the Fund. The agreement further provides that Dodge & Cox shall waive its fee to the extent that such fee plus all other ordinary operating expenses of the Fund exceed 1% of the average daily net assets for the year.

Fund officers and trustees All officers and two of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.

Cross trades Cross trading is the buying or selling of portfolio securities between funds to which Dodge & Cox serves as investment manager. At its regularly scheduled quarterly meetings, the Board of Trustees reviews such transactions as of the most recent calendar quarter for compliance with the requirements and restrictions set forth by Rule 17a-7 under the Investment Company Act of 1940. During the year ending December 31, 2015, the Fund executed cross trades with the Dodge & Cox Balanced Fund pursuant to Rule 17a-7 under the Investment Company Act of 1940.

 

 

PAGE 16 § DODGE & COX INCOME FUND


NOTES TO FINANCIAL STATEMENTS

 

NOTE 4—INCOME TAX INFORMATION AND DISTRIBUTIONS TO SHAREHOLDERS

A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, and such amounts may differ from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book to tax differences at year end to reflect tax character.

Book to tax differences are primarily due to differing treatments of wash sales, net short-term realized gain (loss), and Treasury futures contracts. At December 31, 2015, the cost of investments for federal income tax purposes was $42,716,465,638.

Distributions during the years noted below were characterized as follows for federal income tax purposes:

 

    

Year Ended

December 31, 2015

    

Year Ended

December 31, 2014

 

Ordinary income

    $1,300,100,433         $864,273,705   
    ($0.405 per share)         ($0.397 per share)   

Long-term capital gain

    $19,291,706         $204,452,049   
    ($0.006 per share)         ($0.088 per share)   

At December 31, 2015, the tax basis components of distributable earnings were as follows:

 

Unrealized appreciation

   $ 962,670,848   

Unrealized depreciation

     (905,571,328
  

 

 

 

Net unrealized appreciation

     57,099,520   

Undistributed ordinary income

     12,919,601   

Undistributed long-term capital gain

     59,927,325   

Deferred loss(a)

     (150,465,619
(a)

Represents net short-term realized loss incurred between November 1, 2015 and December 31, 2015. As permitted by tax regulations, the Fund has elected to treat this loss as arising in 2016.

Fund management has reviewed the tax positions for open periods (three years and four years, respectively, from filing the Fund’s Federal and State tax returns) as applicable to the Fund, and has determined that no provision for income tax is required in the Fund’s financial statements.

NOTE 5—LOAN FACILITIES

Pursuant to an exemptive order issued by the Securities and Exchange Commission (SEC), the Fund may participate in an interfund lending facility (Facility). The Facility allows the Fund to borrow money from or loan money to the Funds. Loans under the Facility are made for temporary or emergency purposes, such as to fund shareholder redemption requests. Interest on borrowings is the average of the current repurchase agreement rate and the bank loan rate. There was no activity in the Facility during the year.

All Funds in the Trust participate in a $500 million committed credit facility (Line of Credit) with State Street Bank and Trust Company, to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The maximum amount available to the Fund is $250 million. Each Fund pays an annual commitment fee on its pro-rata portion of the Line of Credit. For the year ended December 31, 2015, the Fund’s commitment fee amounted to $146,884 and is reflected as a Miscellaneous Expense in the Statement of Operations. Interest on borrowings is charged at the prevailing rate. There were no borrowings on the Line of Credit during the year.

NOTE 6—PURCHASES AND SALES OF INVESTMENTS

For the year ended December 31, 2015, purchases and sales of securities, other than short-term securities and U.S. government securities, aggregated $9,648,393,292 and $2,894,870,558, respectively. For the year ended December 31, 2015, purchases and sales of U.S. government securities aggregated $6,322,132,495 and $7,335,682,500, respectively.

NOTE 7—SUBSEQUENT EVENTS

Fund management has determined that no material events or transactions occurred subsequent to December 31, 2015, and through the date of the Fund’s financial statements issuance, which require additional disclosure in the Fund’s financial statements.

 

 

DODGE & COX INCOME FUND § PAGE 17


FINANCIAL HIGHLIGHTS

 

SELECTED DATA AND RATIOS

(for a share outstanding throughout each year)

 

Year Ended December 31,

 
    2015      2014      2013      2012      2011  
 

 

 

 

Net asset value, beginning of year

    $13.78         $13.53         $13.86         $13.30         $13.23   

Income from investment operations:

             

Net investment income

    0.40         0.39         0.42         0.48         0.55   

Net realized and unrealized gain (loss)

    (0.48      0.35         (0.33      0.56         0.07   
 

 

 

 

Total from investment operations

    (0.08      0.74         0.09         1.04         0.62   
 

 

 

 

Distributions to shareholders from:

             

Net investment income

    (0.40      (0.39      (0.42      (0.48      (0.55

Net realized gain

    (0.01      (0.10                        
 

 

 

 

Total distributions

    (0.41      (0.49      (0.42      (0.48      (0.55
 

 

 

 

Net asset value, end of year

    $13.29         $13.78         $13.53         $13.86         $13.30   
 

 

 

 

Total return

    (0.59 )%       5.48      0.64      7.94      4.76

Ratios/supplemental data:

             

Net assets, end of year (millions)

    $43,125         $39,128         $24,654         $26,539         $24,051   

Ratio of expenses to average net assets

    0.43      0.44      0.43      0.43      0.43

Ratio of net investment income to average net assets

    2.97      2.89      3.00      3.52      4.12

Portfolio turnover rate

    24      27      38      26      27

See accompanying Notes to Financial Statements

 

PAGE 18 § DODGE & COX INCOME FUND


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Trustees of Dodge & Cox Funds and Shareholders of Dodge & Cox Income Fund

In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Dodge & Cox Income Fund (the “Fund”, one of the series constituting Dodge & Cox Funds) at December 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as financial statements) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2015, by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 25, 2016

 

DODGE & COX INCOME FUND § PAGE 19


BOARD APPROVAL OF FUNDS’ INVESTMENT MANAGEMENT AGREEMENTS AND MANAGEMENT FEES

(unaudited)

The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 16, 2015, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2016 with respect to each Fund. During the course of the year, the Board received a wide variety of materials relating to the investment management and administrative services provided by Dodge & Cox and the performance of each of the Funds.

INFORMATION RECEIVED

In advance of the meeting, the Board, including each of the Independent Trustees, requested, received, and reviewed materials relating to the Agreements and the services provided by Dodge & Cox. The Independent Trustees retained Morningstar® to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Morningstar. The Morningstar materials included information regarding advisory fee rates, expense ratios, and transfer agency, custodial, and distribution expenses, as well as appropriate performance comparisons to each Fund’s peer group and an index or combination of indices. The Morningstar materials also included a comparison of expenses of various share classes offered by comparable funds. The materials reviewed by the Board contained information concerning, among other things, Dodge & Cox’s profitability, financial results and condition, advisory fee revenue, and separate account and sub-adviser fund fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates, sales and redemption data and the significant investment that Dodge & Cox makes in research used in managing the Funds. The Board received and reviewed memoranda and related materials addressing, among other things, Dodge & Cox’s services to the Funds; how Dodge & Cox Funds’ fees compare to fees of peer group funds; the different fees, services, costs, and risks associated with other accounts managed by Dodge & Cox as compared to the Dodge & Cox Funds; and the ways in which the Funds realize economies of scale. Throughout the process of reviewing the services provided by Dodge & Cox and preparing for the meeting, the Independent Trustees found Dodge & Cox to be open, forthright, detailed, and very helpful in answering questions about all issues. The Board received copies of the Agreements and a memorandum from the independent legal counsel to the Independent Trustees discussing the factors generally regarded as appropriate to consider in evaluating advisory arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the independent legal

counsel on November 11, 2015, and again on December 16, 2015, to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements. In considering the Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board considered several factors, discussed below, to be key factors and reached the conclusions described below.

NATURE, QUALITY, AND EXTENT OF THE SERVICES

The Board considered that Dodge & Cox provides a wide range of services to the Funds in addition to portfolio management and that the quality of these services has been excellent in all respects. The extensive nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality, and extent of portfolio management, administrative, and shareholder services performed by Dodge & Cox. With regard to portfolio management services, the Board considered Dodge & Cox’s established long-term history of care and conscientiousness in the management of the Funds; its demonstrated consistency in investment approach and depth; the background and experience of the Dodge & Cox Investment Policy Committee, International Investment Policy Committee, Global Stock Investment Policy Committee, Fixed Income Investment Policy Committee, and Global Bond Investment Policy Committee, and research analysts responsible for managing the Funds; its methods for assessing the regulatory and investment climate in various jurisdictions; Dodge & Cox’s overall high level of attention to its core investment management function; and its commitment to the Funds and their shareholders. In the area of administrative and shareholder services, the Board considered the excellent quality of Dodge & Cox’s work in areas such as compliance, legal services, trading, proxy voting, technology, oversight of the Funds’ transfer agent and custodian, tax compliance, and shareholder communication through its website and other means. The Board also noted Dodge & Cox’s diligent disclosure policy, its favorable compliance record, and its reputation as a trusted, shareholder-friendly mutual fund family. In addition, the Board considered that Dodge & Cox manages approximately $185 billion in Fund assets with fewer professionals than most comparable funds, and that on average these professionals have more experience and longer tenure than investment professionals at comparable funds. The Board also noted that Dodge & Cox is an investment research-oriented firm with no other business endeavors to distract management’s attention from its research efforts, and that its investment professionals adhere to a consistent investment approach across the Funds. The Board further considered the favorable stewardship grades given by Morningstar to each of the Funds and the “Gold” analyst rating awarded by Morningstar to all of the Funds except the Global Bond Fund. The Board concluded that it was satisfied with the nature, extent, and quality of investment management and other services provided to the Funds by Dodge & Cox.

 

 

PAGE 20 § DODGE & COX INCOME FUND


INVESTMENT PERFORMANCE

The Board considered short-term and long-term investment performance for each Fund (including periods of outperformance or underperformance) as compared to both relevant indices and the performance of such Fund’s peer group. The Board noted that the Funds had weak absolute and relative performance in 2015, but remained solid performers over longer periods. The Board determined after extensive review and inquiry that Dodge & Cox’s historic, long-term, team-oriented, bottom-up investment approach remains consistent and that Dodge & Cox continues to be distinguished by its integrity, transparency, and independence. The Board considered that the performance of the Funds is the result of a team-oriented investment management process that emphasizes a long-term investment horizon, comprehensive independent research, price discipline, low cost and low portfolio turnover. The Board also considered that the investment performance delivered by Dodge & Cox to the Funds appeared to be consistent with the relevant performance delivered for other clients of Dodge & Cox. The Board concluded that Dodge & Cox has delivered favorable long-term performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.

COSTS AND ANCILLARY BENEFITS

Costs of Services to Funds: Fees and Expenses. The Board considered each Fund’s management fee rate and expense ratio relative to each Fund’s peer group and relative to management fees charged by Dodge & Cox to other clients. In particular, the Board considered that the Funds continue to be substantially below their peer group median in expense ratios and that many media and industry reports specifically comment on the low expense ratios of the Funds, which have been a defining characteristic of the Funds for many years. The Board also evaluated the operating structures of the Funds and Dodge & Cox, noting that the Funds do not charge front-end sales commissions or distribution fees, and Dodge & Cox bears, among other things, the significant cost of third party research, reimbursement for recordkeeping and administrative costs to third-party retirement plan administrators, and administrative and office overhead.

The Board noted that expenses are well below industry averages. When compared to peer group funds, the Funds are in the quartile with the lowest expense ratios. The Board also considered that the Funds receive numerous administrative, regulatory compliance, legal, technology and shareholder support services from Dodge & Cox without any additional administrative fee and the fact that the Funds have relatively low transaction costs and portfolio turnover rates. The Board noted the Funds’ unusual single-share-class structure and reviewed Morningstar data showing that the few peer group funds with lower expense ratios often have other share classes with significantly higher expense ratios. In this regard, the Board considered that many of the Funds’ shareholders would not be eligible to purchase comparably-priced shares of many peer group funds, which typically make their lower-priced share classes available only to institutional investors. The Board determined that the Funds provide access for small investors to high quality investment management at a relatively low cost.

The Board reviewed information regarding the fee rates Dodge & Cox charges to separate accounts and subadvised funds that have investment programs similar to those of the Funds, including instances where separate account and sub-advised fund fees are lower than Fund fees. The Board considered differences in the nature and scope of services Dodge & Cox provides to the Funds as compared to other client accounts, differences in regulatory, litigation, and other risks as between Dodge & Cox Funds and other types of clients. The Board also noted that different markets exist for mutual fund and institutional separate account management services. With respect to non-U.S. funds sponsored and managed by Dodge & Cox that are comparable to the Funds in many respects, the Board noted that the fee rates charged by Dodge & Cox are the same as or higher than the fee rates charged to the Funds. After consideration of these matters, the Board concluded that the overall costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation, and performance of Dodge & Cox and the low overall expense ratios of the Funds.

Profitability and Costs of Services to Dodge & Cox; “Fall-out” Benefits. The Board reviewed reports of Dodge & Cox’s financial position, profitability, and estimated overall value, and considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the favorable services provided. The Board noted in particular that Dodge & Cox’s profits are not generated by high fee rates, but reflect an extraordinarily streamlined, efficient, and focused business approach toward investment management. The Board recognized the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that the compensation/profit structure at Dodge & Cox includes a return on shareholder employees’ investment in the firm, which is vital for remaining independent and facilitating retention of management and investment professionals. The Board considered independent research indicating that firms that grow organically, rather than through acquisition, tend to have better performance. Key to organic growth is the ability to retain talented and experienced analysts, portfolio managers and other professionals.

The Board also considered that in January 2015, Dodge & Cox closed the International Stock Fund to new investors to pro-actively manage the growth of the Fund. The Stock Fund and Balanced Fund were similarly closed to new investors during periods of significant growth in the past. While these actions are intended to benefit existing shareholders, the effect is to reduce potential revenues to Dodge & Cox from new shareholders. The Board also considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers and reputational benefits to non-U.S. funds sponsored and managed by Dodge & Cox) that Dodge & Cox might receive as a result of its association with the Funds and determined that they are acceptable. The Board also noted that Dodge & Cox continues to invest substantial

 

 

DODGE & COX INCOME FUND § PAGE 21


sums in its business in order to provide enhanced services, systems and research capabilities, all of which benefit the Funds. The Board concluded that Dodge & Cox’s profitability is the keystone of its independence, stability and long-term investment performance and that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) is fair and reasonable.

ECONOMIES OF SCALE

The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee structure and the considerable efficiencies of the Funds’ organization and fee structure that has been realized by shareholders from the time of each Fund’s inception (i.e., from the first dollar). An assessment of economies of scale must also take into account that Dodge & Cox invests significant time and resources in each new Fund for months (and sometimes years) prior to launch; in addition, expenses are capped, which means that Dodge & Cox earns no revenue and subsidizes the operations of a new Fund for a period of time until it reaches scale.

In addition, the Board noted that Dodge & Cox has shared economies of scale by adding or enhancing services to the Funds over time, and that the internal costs of providing investment management, up-to-date technology, administrative, legal, and compliance services to the Funds continue to increase. For example, Dodge & Cox has increased its global research staff and investment resources over the years to address the increased complexity of investing in multinational and non-U.S. companies. In addition, Dodge & Cox has made substantial expenditures in other staff, technology, cybersecurity, and infrastructure to enable it to integrate credit and equity analyses and to be able to implement its strategy in a more effective and secure manner. Over the last ten years, Dodge & Cox has increased its spending on third party research, data services, trading systems, technology, and recordkeeping service expenses at a rate that has significantly outpaced the Funds’ growth rate during the same period.

The Board considered that Dodge & Cox has a history of voluntarily limiting asset growth in several Funds that experienced significant inflows by closing them to new investors in order to protect the Funds’ ability to achieve good investment returns for shareholders. The Board also observed that, even without fee breakpoints, the Funds are competitively priced in a very competitive market and that having a low fee from inception is better for shareholders than starting with a higher fee and adding breakpoints. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately shares economies of scale that may exist.

CONCLUSION

Based on their evaluation of all material factors and assisted by the advice of independent legal counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the advisory fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that the scope and quality of Dodge & Cox’s services has provided substantial value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.

FUND HOLDINGS

The Fund provides a complete list of its holdings four times each fiscal year, as of the end of each quarter. The Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-CSR (second and fourth quarters) and Form N-Q (first and third quarters). Shareholders may view the Fund’s Forms N-CSR and N-Q on the SEC’s website at sec.gov. Forms N-CSR and N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 202-551-8090 (direct) or 800-732-0330 (general SEC number). A list of the Fund’s quarter-end holdings is also available at dodgeandcox.com on or about 15 days following each quarter end and remains available on the web site until the list is updated in the subsequent quarter.

PROXY VOTING

For a free copy of the Fund’s proxy voting policies and procedures, please call 800-621-3979, visit the Fund’s website at dodgeandcox.com, or visit the SEC’s website at sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ending June 30 is also available at dodgeandcox.com or at sec.gov.

HOUSEHOLD MAILINGS

The Fund routinely mails shareholder reports and summary prospectuses to shareholders and, on occasion, proxy statements. In order to reduce the volume of mail, when possible, only one copy of these documents will be sent to shareholders who are part of the same family and share the same residential address.

If you have a direct account with the Funds and you do not want the mailing of shareholder reports and summary prospectuses combined with other members in your household, contact the Funds at 800-621-3979. Your request will be implemented within 30 days.

 

 

PAGE 22 § DODGE & COX INCOME FUND


DODGE & COX FUNDS—EXECUTIVE OFFICER & TRUSTEE INFORMATION

 

Name (Age) and
Address*
 

Position with Trust

(Year of Election or
Appointment)

  Principal Occupation During Past 5 Years   Other Directorships Held by Trustees
INTERESTED TRUSTEES AND EXECUTIVE OFFICERS
Charles F. Pohl (57)  

Chairman and Trustee

(Officer since 2004)

  Chairman (since 2013), Co-President (2011-2013), Senior Vice President (until 2011), and Director of Dodge & Cox; Chief Investment Officer, Portfolio Manager, Investment Analyst, and member of Investment Policy Committee (IPC), Global Stock Investment Policy Committee (GSIPC), International Investment Policy Committee (IIPC), and Fixed Income Investment Policy Committee (FIIPC)  
Dana M. Emery (54)  

President and Trustee

(Trustee since 1993)

  Chief Executive Officer (since 2013), President (since 2011), Executive Vice President (until 2011), and Director of Dodge & Cox; Director of Fixed Income, Portfolio Manager, and member of FIIPC and Global Bond Investment Policy Committee (GBIPC)  
John A. Gunn (72)  

Senior Vice President

(Officer since 1998)

  Chairman Emeritus (2011-2013), Chairman (until 2011), Chief Executive Officer (until 2010), and Director (until 2013) of Dodge & Cox; Portfolio Manager and member of IPC, GSIPC (until 2014), and IIPC (until 2015)  
Diana S. Strandberg (56)   Senior Vice President (Officer since 2006)   Senior Vice President (since 2011), Vice President (until 2011), and Director (since 2011) of Dodge & Cox; Director of International Equity (since 2009), Portfolio Manager, Investment Analyst, and member of IPC, GSIPC, IIPC, and GBIPC  
David H. Longhurst (58)  

Treasurer

(Officer since 2006)

  Vice President and Assistant Treasurer of Dodge & Cox  
Thomas M. Mistele (62)  

Secretary

(Officer since 1998)

  Chief Operating Officer, Director, Secretary, Senior Counsel (since 2011), and General Counsel (until 2011) of Dodge & Cox  
Katherine M. Primas (41)  

Chief Compliance

Officer

(Officer since 2009)

  Vice President (since 2011) and Chief Compliance Officer of Dodge & Cox  
INDEPENDENT TRUSTEES
Thomas A. Larsen (66)  

Trustee

(Since 2002)

  Senior Counsel of Arnold & Porter LLP (law firm) (since 2013); Partner of Arnold & Porter LLP (until 2012); Director of Howard, Rice, Nemerovski, Canady, Falk & Rabkin (1977-2011)  
Ann Mather (55)  

Trustee

(Since 2011)

  CFO, Pixar Animation Studios (1999-2004)   Director, Google, Inc. (internet information services) (since 2005); Director, Glu Mobile, Inc. (multimedia software) (since 2005); Director, Netflix, Inc. (internet television) (since 2010); Director, Arista Networks (cloud networking) (since 2013); Director, Shutterfly, Inc. (internet photography services/publishing) (since 2013)
Robert B. Morris III (63)  

Trustee

(Since 2011)

  Advisory Director, The Presidio Group (since 2005)  
Gary Roughead (64)  

Trustee

(Since 2013)

  Annenberg Distinguished Visiting Fellow, Hoover Institution (since 2012); Admiral, United States Navy (Ret.); U.S. Navy Chief of Naval Operations (2008-2011)   Director, Northrop Grumman Corp. (global security) (since 2012)
Mark E. Smith (64)  

Trustee

(Since 2014)

  Executive Vice President, Managing Director—Fixed Income at Loomis Sayles & Company, L.P. (2003-2011)  
John B. Taylor (69)  

Trustee

(Since 2005)

(and 1995-2001)

  Professor of Economics, Stanford University (since 1984); Senior Fellow, Hoover Institution (since 1996); Under Secretary for International Affairs, United States Treasury (2001-2005)  

 

*  

The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all six series in the Dodge & Cox Funds complex and serves for an indefinite term.

Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Funds’ website at dodgeandcox.com or calling
800-621-3979.

 

DODGE & COX INCOME FUND § PAGE 23


Income Fund

 

 

dodgeandcox.com

For Fund literature, transactions, and account

information, please visit the Funds’ website.

or write or call:

DODGE & COX FUNDS

c/o Boston Financial Data Services

P.O. Box 8422

Boston, Massachusetts 02266-8422

(800) 621-3979

INVESTMENT MANAGER

Dodge & Cox

555 California Street, 40th Floor

San Francisco, California 94104

(415) 981-1710

 

This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.

This report reflects our views, opinions, and portfolio holdings as of December 31, 2015, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.


LOGO

 

DODGE & COX FUNDS®

 

2015

   

 

Annual Report

December 31, 2015

Global Bond Fund

ESTABLISHED 2014

TICKER:  DODLX

 

12/15 GBF AR    LOGO    Printed on recycled paper


TO OUR SHAREHOLDERS

 

The Dodge & Cox Global Bond Fund had a total return of –6.2% for the year ending December 31, 2015, compared to –3.2% for the Barclays Global Aggregate Bond Index (Barclays Global Agg).

MARKET COMMENTARY

Market volatility increased throughout 2015, particularly in late summer following China’s decision to devalue the renminbi. Numerous concerns contributed to “risk-off” behavior, including China’s ongoing structural adjustments, further declines in commodity prices, financial and political turmoil in some emerging markets, and important policy moves by major central banks. The U.S. dollar continued to strengthen against almost all currencies, which was the main driver of the Barclays Global Agg’s negative return, as it overwhelmed the income earned during the year. Widening yield premiums(a) also drove price declines for credit securities(b).

Global economic and policy divergence continued during 2015. The U.S. economy saw another year of solid growth underpinned by dynamism in consumption, investment, housing, and the labor market, which offset weakness in the manufacturing sector. The U.S. Federal Reserve (Fed) increased the federal funds rate by 0.25 percentage points after seven years at the so-called zero lower bound, citing progress in the recovery and assessing that inflation should move towards the 2% target over the medium term. In contrast, the economic outlook in the Eurozone remained challenged by considerable slack and weak inflation. This led the European Central Bank to continue easing during the year, taking deposit rates further into negative territory, extending its asset purchase program until at least March 2017, and expanding the pool of purchasable securities. Facing similar challenges, the Bank of Japan introduced measures to augment its already large Quantitative and Qualitative Easing Program. Despite large intra-year swings, 10-year yields in the United States, Germany, and Japan ended the year nearly unchanged at 2.27%, 0.63%, and 0.27%, respectively. The euro and the Japanese yen depreciated by 10.2% and 0.4%, respectively, against the U.S. dollar.

Emerging markets faced significant headwinds during 2015. China’s growth deceleration below 7%, the slowest yearly pace in years, dampened the outlook of its main trading partners and put downward pressure on global commodity prices. In particular, oil prices declined to the lowest level since the financial crisis, affecting growth and fiscal dynamics of exporting countries. Idiosyncratic events also contributed to financial turmoil in some emerging markets, such as Brazil and South Africa. In turn, interest rates rose in several emerging markets and many currencies depreciated against the U.S. dollar—ranging from the Brazilian real’s 32.9% at the higher end, to the Indian rupee’s 4.7% at the lower end. As in 2014, Asian oil importers and countries with economic reform momentum fared better than commodity exporters or countries with political challenges.

Investment-grade corporate bonds performed relatively poorly as yield premiums widened, especially during the third quarter. Energy, basic materials and/or below-investment grade issuers fared

worst, while financials were among the strongest performers. Supply and demand dynamics were negative, as supply was high due to record levels of M&A financing and demand weakened given accelerating outflows from credit funds in the second half of the year.

INVESTMENT STRATEGY

2015 was a challenging year for the Fund as currency depreciation and widening credit yield premiums drove negative performance. Declining commodity prices and weakness in several emerging market economies and credits had a particularly large negative impact on the Fund.

The broad investment themes of the Fund remained largely intact over the course of the year, but positioning shifted, substantially in some areas, as our conviction around some existing themes grew. The Fund continues to have a defensive posture via interest rate risk (i.e., low duration(c)), a majority of holdings in credit securities, high exposure to the U.S. dollar, and a sizable (27%(d)) exposure to emerging market currencies and credits. As the valuation and economic landscape evolved over the year, we increased the Fund’s credit exposure, decreased foreign currency exposure, and reduced interest rate exposure.

Credit: Identifying Opportunities

The Fund’s large allocation to credit securities was a detractor from performance, as credit yield premiums rose to levels not seen since 2013. Within the Fund’s credit holdings, commodity-related issuers such as Kinder Morgan, Rio Oil Finance Trust, and Pemex,(e) had the weakest performance. Amid this changing valuation backdrop, we found a number of individual opportunities that resulted in an increase in the Fund’s corporate bond weighting, from 51% to 58%. We added to a diverse group of issuers by geography, sector, and credit rating category.

One source of credit additions to the Fund was M&A-related financing, which created an abundant source of supply for the markets to absorb. Many companies seek to delever subsequent to these transactions, aligning incentives with bondholders. Our global industry analyst team develops a view of the strategic rationale for each M&A transaction and compiles a financial forecast that enables us to assess issuers’ deleveraging capabilities across a range of outcomes, while our fixed income analyst team focuses on the balance sheet and liquidity implications, particularly in downside scenarios. Examples of recent M&A-related investments include Actavis (a pharmaceutical company buying Allergen), CRH (a building materials company buying assets from Lafarge and Holcim), and Imperial Tobacco (purchasing assets from Reynolds American).

We also conducted considerable research on the energy and metals & mining sectors, where valuations changed most significantly, seeking credits trading at attractive valuations with strong business franchises and the ability to withstand lower commodity prices for a sustained period. We made several additions to the portfolio including a position in Concho Resources, an independent exploration and production company

 

 

PAGE 2 § DODGE & COX GLOBAL BOND FUND


and one of the largest producers in the Permian Basin. Concho Resources has one of the lowest break-even oil prices in the industry, significant valuable oil reserves, and a strong management team with a conservative approach to leverage. Another addition to the portfolio was Chilean state-owned Codelco, the world’s largest copper producer, accounting for around 10% of global copper production. We believe the strong AA-rated Chilean sovereign would support Codelco if needed, and that the long-term supply and demand outlook for copper is favorable given limited supply and consumer-driven demand.

While credit spreads ended the year at levels reflecting a perceived rise in defaults or a potential recession, we do not believe that either scenario is likely. Leverage levels are reasonable, interest coverage is robust, and the U.S. economy is growing at a moderate pace. As such, we believe many bonds are trading at attractive levels. The wide dispersion of valuations in credit today is conducive to our rigorous research process and focus on security selection. We remain optimistic about the prospects for the Fund’s credit holdings.

Currency: Strong U.S. Dollar Continues

As in 2014, nearly every currency depreciated against the U.S. dollar in 2015. These declines hurt the Fund’s performance, especially the depreciation of several Latin American currencies that accelerated in the latter half of the year. However, relative to the Barclays Global Agg, on the whole, the Fund’s currency positioning was slightly additive to performance, largely because of the Fund’s significant underweight to the euro.

During the year, we significantly increased the Fund’s U.S. dollar weighting (from 61% to 78%) as the divergence in economic strength and monetary policy between the United States and much of the rest of the world was cemented. Early in the year, we reduced exposure to the euro and other euro-correlated currencies (e.g., Swedish krona and British pound). These trims were driven by low yield levels and the likelihood that the European Central Bank would take actions that could weaken the euro versus the dollar. Later in the year, in the midst of weakening Chinese growth and a change to the Chinese currency regime, we reduced the Fund’s exposure to Asian emerging market currencies, including the Malaysian ringgit, the Indonesian rupiah, and the South Korean won. Depreciation pressure for these currencies is likely to continue as they are exporters to China and/or competitors with China. One brighter spot in the region is India, as it has fewer linkages with China, positive reform momentum, accelerating growth, solid macro policies, and is a net beneficiary from lower oil prices. In accordance with this favorable view, we increased the Fund’s exposure to the Indian rupee during the year.

Approximately 13% of the Fund’s holdings are denominated in four Latin American currencies (Mexican peso, Brazilian real, Colombian peso, and Chilean peso), which have been battered by a number of forces including commodity price declines, weakening sentiment towards emerging markets, and idiosyncratic challenges in the case of Brazil. Our constructive outlook for these currencies is based on their mix of high yield levels, low valuations, the prospect for a stabilization or recovery of commodity prices, and, in the case of Mexico, the medium-run benefits of structural reforms.

Rates: What Happens After “Liftoff”?

Developed market rates ended relatively unchanged over the course of 2015, despite important central bank moves, incessant media commentary about U.S. long-term rates, and some intra-year volatility. The U.S. 10-year rate increased just 0.1 percentage points during the year, and Japanese and German 10-year yields moved even less.

Our views regarding interest rate risk have not changed materially. We are operating in an environment where the price impact of a rise in rates could easily overwhelm the low yield/income of most developed market government bonds. As such, the Fund’s duration is 3.1 years, less than half that of the Barclays Global Agg. We see a clear disconnect between the far slower pace of rate increases implied by current U.S. Treasury valuations and the Fed’s stated expectations and, particularly in the context of a modestly expanding economy (more than 2% growth is expected over the next several years) and an inflation rate likely to rise as energy and import prices increase.

IN CLOSING

The Fund’s recent performance has been disappointing, but we retain a view that the vast global bond universe provides ample opportunity for investors over the long term. We remain confident in our investment strategy and process, which is based on robust fundamental research and a focus on relative valuation, and believe the current environment is conducive to our disciplined credit and currency selection processes. Acknowledging that bond prices and currencies can be volatile in the short term, we remain focused on the long term.

Thank you for your continued confidence in our firm. As always, we welcome your comments and questions.

For the Board of Trustees,

 

LOGO

 

LOGO

Charles F. Pohl,

Chairman

 

 

Dana M. Emery,

President

January 29, 2016

 

 

(a)  

Yield premiums are one way to measure a security’s valuation. Narrowing yield premiums result in a higher valuation. Widening yield premiums result in a lower valuation.

(b)  

Credit securities refers to corporate bonds and government-related securities, as classified by Barclays.

(c)  

Duration is a measure of a bond’s (or a bond portfolio’s) price sensitivity to changes in interest rates.

(d)  

Unless otherwise specified, all weightings and characteristics are as of December 31, 2015.

(e)  

The use of specific examples does not imply that they are more attractive investments than the Fund’s other holdings.

 

 

DODGE & COX GLOBAL BOND FUND § PAGE 3


ANNUAL PERFORMANCE REVIEW

The Fund underperformed the Barclays Global Agg by 3.0 percentage points in 2015.

Key Detractors from Relative Results

  §  

The Fund’s exposure to Latin American currencies (13% versus 0.4% for the Barclays Global Agg), including the Brazilian real, Mexican peso, Colombian peso, and Chilean peso, detracted from relative returns as these currencies depreciated versus the U.S. dollar.

 
  §  

The Fund’s commodity-related credit holdings underperformed, led by Kinder Morgan and Teck Resources in North America, as well as Pemex, Petrobras, and Rio Oil Finance Trust in Latin America.

 
  §  

The Fund’s relatively high corporate exposure (51% versus 17% for the Barclays Global Agg) detracted from relative returns as corporate yield premiums rose.

 

Key Contributors to Relative Results

  §  

The Fund’s underweight to the euro (6% versus 26% for the Barclays Global Agg) contributed significantly to relative returns as the euro depreciated 10.2% versus the U.S. dollar.

 
  §  

The Fund’s nominal yield advantage was a positive factor.

 

 

      

Unless otherwise noted, figures cited in this section denote Fund positioning at the beginning of the period.

 

KEY CHARACTERISTICS OF DODGE & COX

Independent Organization

Dodge & Cox is one of the largest privately owned investment managers in the world. We remain committed to independence, with a goal of providing the highest quality investment management service to our existing clients.

Over 85 Years of Investment Experience

Dodge & Cox was founded in 1930. We have a stable and well-qualified team of investment professionals, most of whom have spent their entire careers at Dodge & Cox.

Experienced Investment Team

The Global Bond Investment Policy Committee, which is the decision-making body for the Global Bond Fund, is a six-member committee with an average tenure at Dodge & Cox of 20 years.

One Business with a Single Research Office

Dodge & Cox manages equity (domestic, international, and global), fixed income (domestic and global), and balanced investments, operating from one office in San Francisco.

Consistent Investment Approach

Our team decision-making process involves thorough, bottom-up fundamental analysis of each investment.

Long-Term Focus and Low Expenses

We invest with a three- to five-year investment horizon, which has historically resulted in low turnover relative to our peers. We manage Funds that maintain low expense ratios.

 

Risks: The yields and market values of the instruments in which the Fund invests may fluctuate. Accordingly, an 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. A low interest rate environment creates an elevated risk of future negative returns. Financial intermediaries may restrict their market making activities for certain debt securities, which may reduce the liquidity and increase the volatility of such securities. Investing in non-U.S. securities may entail risk due to foreign economic and political developments; this risk may be increased when investing in emerging markets. The Fund is also subject to currency risk. Please read the prospectus and summary prospectus for specific details regarding the Fund’s risk profile.

 

 

 

PAGE 4 § DODGE & COX GLOBAL BOND FUND


GROWTH OF $10,000 SINCE INCEPTION

FOR AN INVESTMENT MADE ON DECEMBER 5, 2012

 

LOGO

AVERAGE ANNUAL TOTAL RETURN

FOR PERIODS ENDED DECEMBER 31, 2015

 

     1 Year      3 Years      Since
Inception
(12/5/12)
 
       

Dodge & Cox Global Bond Fund(a)

    –6.21      –0.73      –0.65

Barclays Global Aggregate Bond Index
(Barclays Global Agg)

    –3.17         –1.74         –1.93   

 

(a)  

Expense reimbursements have been in effect for the Fund since its inception. Without the expense reimbursements, returns for the Fund would have been lower. The Fund’s returns from May 1, 2014 to December 31, 2014 and from January 1, 2015 to December 31, 2015 are as presented in the Financial Highlights.

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. Performance is updated and published monthly. Visit the Fund’s website at dodgeandcox.com or call 800-621-3979 for current performance figures.

A private fund managed and funded by Dodge & Cox (the “Private Fund”) was reorganized into the Fund and the Fund commenced operations on May 1, 2014. The Private Fund commenced operations on December 5, 2012 and had an investment objective, policies, and strategies that were, in all material respects, the same as those of the Fund, and was managed in a manner that, in all material respects, complied with the investment guidelines and restrictions of the Fund. However, the Private Fund was not registered as an investment company under the Investment Company Act of 1940 (the “1940 Act”), and therefore was not subject to certain investment limitations, diversification requirements, liquidity requirements, and other restrictions imposed by the 1940 Act and the Internal Revenue Code, which, if applicable, may have adversely affected its performance.

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 interest income but, unlike Fund returns, do not reflect fees or expenses. The Barclays Global Aggregate Bond Index (Barclays Global Agg) is a widely recognized, unmanaged index of multi-currency investment-grade, debt securities.

Barclays® is a trademark of Barclays Bank PLC.

 

 

FUND EXPENSE EXAMPLE

As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.

ACTUAL EXPENSES

The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER MUTUAL FUNDS

Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.

 

Six Months Ended

December 31, 2015

   Beginning Account Value
7/1/2015
     Ending Account Value
12/31/2015
     Expenses Paid
During Period*
 

Based on Actual Fund Return

   $ 1,000.00      $ 958.40       $ 2.96   

Based on Hypothetical 5% Yearly Return

     1,000.00         1,022.18         3.06   
*  

Expenses are equal to the Fund’s annualized net expense ratio of 0.60%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. Though other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).

 

DODGE & COX GLOBAL BOND FUND § PAGE 5


FUND INFORMATION (unaudited)     December 31, 2015   

 

GENERAL INFORMATION        

Net Asset Value Per Share

     $9.67   

Total Net Assets (millions)

     $67.7   

30-Day SEC Yield (using net expenses)(a)(b)

     4.52%   

30-Day SEC Yield (using gross expenses)(a)

     3.71%   

Net Expense Ratio(b)

     0.60%   

2015 Gross Expense Ratio

     1.41%   

Portfolio Turnover Rate

     55%   

Number of Credit Issuers

     55   

Fund Inception

     May 1, 2014   

No sales charges or distribution fees

  

Investment Manager: Dodge & Cox, San Francisco. Managed by the Global Bond Investment Policy Committee, whose six members’ average tenure at Dodge & Cox is 20 years.

 

PORTFOLIO CHARACTERISTICS    Fund        Barclays
Global Agg
 

Effective Duration (years)

     3.1           6.6   

Emerging Markets(c)

     27.3%           5.0%   

 

FIVE LARGEST CREDIT ISSUERS (%)(d)    Fund  

Cemex SAB de CV

     2.5   

Millicom International Cellular SA

     2.2   

Chicago Transit Authority RB

     2.2   

Naspers, Ltd.

     2.2   

Imperial Tobacco Group PLC

     2.0   

 

CREDIT QUALITY (%)(e)(g)    Fund        Barclays
Global Agg
 

Aaa

     12.4           41.0   

Aa

     3.6           16.8   

A

     16.0           26.1   

Baa

     44.8           16.1   

Ba

     16.9           0.0   

B

     3.5           0.0   

Cash Equivalents

     2.8           0.0   
ASSET ALLOCATION

LOGO

 

SECTOR DIVERSIFICATION (%)(g)    Fund        Barclays
Global Agg
 

Government

     17.5           54.0   

Government-Related

     8.9           12.4   

Securitized

     13.3           15.7   

Corporate

     57.5           17.9   

Cash Equivalents

     2.8           0.0   

 

REGION DIVERSIFICATION (%)(c)(g)    Fund        Barclays
Global Agg
 

United States

     50.1           38.9   

Latin America

     23.1           1.1   

Europe (excluding United Kingdom)

     8.7           25.9   

United Kingdom

     7.9           6.2   

Africa/Middle East

     3.1           0.8   

Canada

     2.7           3.1   

Pacific (excluding Japan)

     1.6           5.1   

Japan

     0.0           16.5   

Other

     0.0           2.4   
 

 

 

(a) 

SEC Yield is an annualization of the Fund’s total net investment income per share for the 30-day period ended on the last day of the month.

(b) 

Dodge & Cox has contractually agreed to reimburse the Fund for all ordinary expenses to the extent necessary to maintain Total Annual Fund Operating expenses at 0.60% through April 30, 2016. The term of the agreement renews annually thereafter unless terminated with 30 days’ written notice by either party prior to the end of the term.

(c) 

The Fund may classify an issuer in a different category than the Barclays Global Aggregate Bond Index. The Fund generally classifies a corporate issuer based on the country of incorporation of the parent company, but may designate a different country in certain circumstances.

(d) 

The Fund’s portfolio holdings are subject to change without notice. The mention of specific securities is not a recommendation to buy, sell, or hold any particular security and is not indicative of Dodge & Cox’s current or future trading activity.

(e) 

The credit quality distributions shown for the Fund and the Index are based on the middle of Moody’s, S&P’s, and Fitch ratings, which is the methodology used by Barclays in constructing its indices. If a security is rated by only two agencies, the lower of the two ratings is used. Please note the Fund applies the highest of Moody’s, S&P’s, and Fitch ratings to comply with the quality requirements stated in its prospectus. On that basis, the Fund held 13.1% in securities rated below investment grade. The credit quality of the investments in the portfolio does not apply to the stability or safety of the Fund or its shares.

(f) 

Net Cash & Other includes short-term investments (e.g., money market funds and repurchase agreements) and other assets less liabilities (e.g., cash, receivables, payables, and unrealized appreciation/depreciation on certain derivatives).

(g) 

Excludes the Fund’s derivative contracts.

 

PAGE 6 § DODGE & COX GLOBAL BOND FUND


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

DEBT SECURITIES: 97.2%               
        PAR VALUE      VALUE  
GOVERNMENT: 17.5%       

Brazil Government (Brazil)

      

Series F, 10.00%, 1/1/21

  BRL     3,355,000       $ 675,044   

Series F, 10.00%, 1/1/25

  BRL     2,900,000         524,272   

Chile Government GDN (Chile)
6.00%, 1/1/18(c)

  CLP     905,000,000         1,323,807   

Colombia Government (Colombia)
9.85%, 6/28/27

  COP     3,900,000,000         1,402,378   

Mexico Government (Mexico)

      

4.75%, 6/14/18

  MXN     23,200,000         1,352,573   

2.00%, 6/9/22(a)

  MXN     71,166,039         3,859,355   

South Korea Government (South Korea)
3.00%, 12/10/16

  KRW     880,200,000         760,138   

U.S. Treasury Note/Bond (United States)
0.875%, 11/30/17

  USD     1,950,000         1,944,544   
      

 

 

 
         11,842,111   
GOVERNMENT-RELATED: 8.9%      

Brazil Government International (Brazil)
4.25%, 1/7/25

  USD     850,000         684,250   

Chicago Transit Authority RB (United States)

      

6.20%, 12/1/40

  USD     50,000         54,249   

6.899%, 12/1/40

  USD     1,250,000         1,452,774   

Corp. Nacional del Cobre de Chile (Chile)
4.50%, 9/16/25(c)

  USD     375,000         353,129   

Peru Government International (Peru)
4.125%, 8/25/27

  USD     700,000         686,000   

Petroleo Brasileiro SA (Brazil)
7.25%, 3/17/44

  USD     550,000         371,250   

Petroleos Mexicanos (Mexico)

      

2.75%, 4/21/27

  EUR     425,000         339,212   

5.50%, 6/27/44(c)

  USD     175,000         131,660   

6.375%, 1/23/45

  USD     485,000         412,137   

State of California GO (United States)
6.20%, 10/1/19

  USD     325,000         372,730   

State of Illinois GO (United States)

      

4.961%, 3/1/16

  USD     400,000         402,476   

5.665%, 3/1/18

  USD     700,000         741,195   
      

 

 

 
           6,001,062   
SECURITIZED: 13.3%       

Chase Issuance Trust (United States)
Series 2007-A3 A3, 5.23%, 4/15/19

  USD     419,000         437,502   

Fannie Mae, 15 Year (United States)
5.00%, 7/1/25

  USD     35,130         36,976   

Fannie Mae, 20 Year (United States)

      

4.50%, 6/1/31

  USD     267,621         291,359   

4.00%, 10/1/34

  USD     364,507         389,934   

Fannie Mae, Hybrid ARM (United States)

      

2.915%, 8/1/44

  USD     235,817         242,110   

2.759%, 9/1/44

  USD     422,977         433,242   

Ford Credit Auto Owner Trust (United States)

      

Series 2012-B A4, 1.00%, 9/15/17

  USD     194,682         194,698   

Series 2014-C A3, 1.06%, 5/15/19

  USD     880,000         877,890   
        PAR VALUE      VALUE  

Freddie Mac (United States)
Series 4283 EW, 4.683%, 12/15/43

  USD     241,632       $ 262,029   

Freddie Mac, Hybrid ARM (United States)

      

3.025%, 10/1/44

  USD     504,956         519,292   

2.752%, 11/1/44

  USD     1,272,832         1,300,004   

2.731%, 1/1/45

  USD     1,319,435         1,345,654   

Freddie Mac Gold, 30 Year (United States)
6.00%, 2/1/35

  USD     121,622         138,843   

Navient Student Loan Trust (Private Loans) (United States)
Series 2015-CA B, 3.25%, 5/15/40(c)

  USD     1,350,000         1,306,648   

Rio Oil Finance Trust (Brazil)

      

9.25%, 7/6/24(c)

  USD     1,200,000         888,000   

9.75%, 1/6/27(c)

  USD     475,000         349,125   
      

 

 

 
     9,013,306   
CORPORATE: 57.5%       

FINANCIALS: 16.4%

      

Anthem, Inc. (United States)

      

7.00%, 2/15/19

  USD     335,000         376,440   

4.35%, 8/15/20

  USD     275,000         291,287   

Bank of America Corp. (United States)

      

4.25%, 10/22/26

  USD     300,000         296,981   

6.625%, 5/23/36(b)

  USD     325,000         370,158   

Barclays PLC (United Kingdom)
4.375%, 9/11/24

  USD     600,000         586,693   

BNP Paribas SA (France)

      

5.75%, 1/24/22

  GBP     425,000         700,655   

4.375%, 9/28/25(c)

  USD     200,000         195,897   

Boston Properties, Inc. (United States)

      

5.625%, 11/15/20

  USD     275,000         306,195   

4.125%, 5/15/21

  USD     325,000         340,568   

Capital One Financial Corp. (United States)
3.75%, 4/24/24

  USD     750,000         755,249   

Citigroup, Inc. (United States)
6.692%, 10/30/40(b)

  USD     1,030,000           1,079,028   

Equity Residential (United States)
4.75%, 7/15/20

  USD     575,000         621,358   

Health Net, Inc. (United States)
6.375%, 6/1/17

  USD     550,000         572,000   

HSBC Holdings PLC (United Kingdom)

      

6.50%, 5/2/36

  USD     400,000         477,134   

6.50%, 9/15/37

  USD     525,000         629,900   

JPMorgan Chase & Co. (United States)
3.375%, 5/1/23

  USD     700,000         688,360   

Lloyds Banking Group PLC (United Kingdom)
4.50%, 11/4/24

  USD     950,000         964,486   

Navient Corp. (United States)

      

6.00%, 1/25/17

  USD     670,000         686,750   

4.625%, 9/25/17

  USD     243,000         239,355   

8.45%, 6/15/18

  USD     125,000         131,562   

Royal Bank of Scotland Group PLC (United Kingdom)

      

6.125%, 12/15/22

  USD     325,000         353,830   

6.00%, 12/19/23

  USD     400,000         430,802   
      

 

 

 
     11,094,688   
 

 

See accompanying Notes to Financial Statements   DODGE & COX GLOBAL BOND FUND § PAGE 7


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

DEBT SECURITIES (continued)                 
          PAR VALUE      VALUE  

INDUSTRIALS: 37.7%

      

Allergan PLC (Ireland)

      

3.00%, 3/12/20

    USD        275,000       $ 274,781   

3.80%, 3/15/25

    USD        225,000         223,872   

AT&T, Inc. (United States)

      

6.55%, 2/15/39

    USD        500,000         561,631   

4.75%, 5/15/46

    USD        125,000         114,428   

BHP Billiton, Ltd. (Australia)
6.75%, 10/19/75(b)(c)

    USD        350,000         337,750   

Canadian Pacific Railway, Ltd. (Canada)
6.25%, 6/1/18

    CAD        800,000         634,097   

Cemex SAB de CV (Mexico)
7.25%, 1/15/21(c)

    USD        1,750,000           1,684,375   

Concho Resources, Inc. (United States)
6.50%, 1/15/22

    USD        1,100,000         1,056,000   

Cox Enterprises, Inc. (United States)

      

3.25%, 12/15/22(c)

    USD        715,000         649,930   

2.95%, 6/30/23(c)

    USD        400,000         352,394   

Ford Motor Credit Co. LLC(d) (United States)

      

8.125%, 1/15/20

    USD        300,000         353,468   

5.875%, 8/2/21

    USD        625,000         696,986   

Grupo Televisa SAB (Mexico)
8.50%, 3/11/32

    USD        500,000         603,071   

HCA Holdings, Inc. (United States)
4.75%, 5/1/23

    USD        675,000         668,250   

Hewlett Packard Enterprise Co. (United States)
3.60%, 10/15/20(c)

    USD        550,000         551,320   

Imperial Tobacco Group PLC (United Kingdom)

      

9.00%, 2/17/22

    GBP        305,000         594,802   

4.25%, 7/21/25(c)

    USD        750,000         761,194   

Kinder Morgan, Inc. (United States)

      

4.30%, 6/1/25

    USD        100,000         86,446   

6.95%, 1/15/38

    USD        1,325,000         1,177,901   

Macy’s, Inc. (United States)

      

6.70%, 9/15/28

    USD        50,000         55,104   

6.90%, 4/1/29

    USD        75,000         84,526   

6.70%, 7/15/34

    USD        425,000         441,563   

Millicom International Cellular SA (Luxembourg)
6.625%, 10/15/21(c)

    USD        1,650,000         1,524,187   

Molex Electronic Technologies LLC(d) (United States)
2.878%, 4/15/20(c)

    USD        775,000         755,113   

MTN Group, Ltd. (South Africa)
4.755%, 11/11/24(c)

    USD        725,000         630,750   

Naspers, Ltd. (South Africa)

      

6.00%, 7/18/20(c)

    USD        700,000         744,751   

5.50%, 7/21/25(c)

    USD        750,000         721,524   

RELX PLC (United Kingdom)

      

8.625%, 1/15/19

    USD        58,000         67,649   

3.125%, 10/15/22

    USD        444,000         431,468   

Sprint Corp. (United States)
6.00%, 12/1/16

    USD        675,000         671,625   

Teck Resources, Ltd. (Canada)
6.00%, 8/15/40

    USD        400,000         168,000   
          PAR VALUE      VALUE  

Telecom Italia SPA (Italy)

      

6.375%, 6/24/19

    GBP        450,000       $ 720,525   

7.721%, 6/4/38

    USD        575,000         599,437   

Time Warner Cable, Inc. (United States)

      

8.75%, 2/14/19

    USD        475,000         551,165   

6.75%, 6/15/39

    USD        750,000         752,667   

Time Warner, Inc. (United States)

      

7.625%, 4/15/31

    USD        400,000         494,931   

7.70%, 5/1/32

    USD        375,000         468,148   

TransCanada Corp. (Canada)
5.625%, 5/20/75(b)

    USD        1,125,000         1,040,157   

Twenty-First Century Fox, Inc. (United States)

      

6.15%, 3/1/37

    USD        275,000         306,413   

6.65%, 11/15/37

    USD        625,000         726,288   

Tyco International PLC (Ireland)
3.90%, 2/14/26

    USD        375,000         376,063   

Verizon Communications, Inc. (United States)

      

4.272%, 1/15/36

    USD        375,000         338,477   

6.55%, 9/15/43

    USD        525,000         623,268   

Vulcan Materials Co. (United States)
7.50%, 6/15/21

    USD        438,000         510,270   

Zoetis, Inc. (United States)

      

3.45%, 11/13/20

    USD        100,000         100,120   

4.50%, 11/13/25

    USD        200,000         202,814   
      

 

 

 
         25,489,699   

UTILITIES: 3.4%

      

Dominion Resources, Inc. (United States)
5.75%, 10/1/54(b)

    USD        1,075,000         1,053,285   

Enel SPA (Italy)

      

6.80%, 9/15/37(c)

    USD        650,000         793,681   

6.00%, 10/7/39(c)

    USD        425,000         475,236   
      

 

 

 
         2,322,202   
      

 

 

 
           38,906,589   
      

 

 

 

TOTAL DEBT SECURITIES
(Cost $71,366,669)

   

       65,763,068   
 

 

PAGE 8 § DODGE & COX GLOBAL BOND FUND   See accompanying Notes to Financial Statements


PORTFOLIO OF INVESTMENTS     December 31, 2015   

 

SHORT-TERM INVESTMENTS: 1.4%  
          PAR VALUE     VALUE  

MONEY MARKET FUND: 0.1%

     

SSgA U.S. Treasury Money Market Fund

    USD        67,958      $ 67,958   

REPURCHASE AGREEMENT: 1.3%

     

Fixed Income Clearing Corporation(e) 0.08%, dated 12/31/15, due 1/4/16, maturity value $905,008

    USD        905,000        905,000   
     

 

 

 

TOTAL SHORT-TERM INVESTMENTS
(Cost $972,958)

   

  $ 972,958   
     

 

 

 

TOTAL INVESTMENTS
(Cost $72,339,627)

   

    98.6 %    $ 66,736,026   

OTHER ASSETS LESS LIABILITIES

  

    1.4     925,826   
   

 

 

   

 

 

 
NET ASSETS        100.0   $ 67,661,852   
   

 

 

   

 

 

 

 

(a) 

Inflation-linked

(b) 

Hybrid security

(c) 

Security exempt from registration under Rule 144A of the Securities Act of 1933. The security may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of December 31, 2015, all such securities in total represented $14,530,472 or 21.4% of total net assets. These securities have been deemed liquid by Dodge & Cox, investment manager, pursuant to procedures approved by the Fund’s Board of Trustees.

(d) 

Subsidiary (see below)

(e) 

Repurchase agreement is collateralized by U.S. Treasury Note 1.625%, 7/31/20. Total collateral value is $926,156.

Debt securities are grouped by parent company unless otherwise noted. Actual securities may be issued by the listed parent company or one of its subsidiaries. In determining a parent company’s country designation, the Fund generally references the country of incorporation.

ARM: Adjustable Rate Mortgage

GO: General Obligation

GDN: Global Depositary Note

RB: Revenue Bond

BRL: Brazilian Real

CAD: Canadian Dollar

CLP: Chilean Peso

COP: Colombian Peso

EUR: Euro

GBP: British Pound

INR: Indian Rupee

KRW: South Korean Won

MXN: Mexican Peso

USD: United States Dollar

FUTURES CONTRACTS

 

Description   Number of
Contracts
    Expiration
Date
    Notional
Amount
    Unrealized
Appreciation/
(Depreciation)
 

10 Year U.S.
Treasury Note
—Short Position

    66        Mar 2016      $ (8,309,813   $ 31,033   

Long-Term U.S. Treasury Bond—Short Position

    18        Mar 2016        (2,856,375     (8,905
       

 

 

 
        $ 22,128   
       

 

 

 

CENTRALLY CLEARED INTEREST RATE SWAPS

 

          Contract Amount        

Notional

Amount

  Expiration
Date
    Fixed
Rate
    Floating Rate     Unrealized
Appreciation/
(Depreciation)
 

Pay Fixed/Receive Floating:

  

   

$825,000

    5/6/24        2.72     USD LIBOR 3-Month      $ (45,704

  825,000

    8/22/24        2.57     USD LIBOR 3-Month        (39,699

  1,750,000

    7/29/45        2.774     USD LIBOR 3-Month        (79,352
       

 

 

 
        $ (164,755
       

 

 

 

FORWARD CURRENCY CONTRACTS

 

          Contract Amount        
Counterparty   Settlement
Date
    Receive
U.S. Dollar
    Deliver
Foreign
Currency
    Unrealized
Appreciation/
(Depreciation)
 

Contracts to sell EUR:

  

   

Barclays

    3/2/16        1,489,986        1,400,000      $ (33,612
Counterparty   Settlement
Date
   

Deliver

U.S. Dollar

    Receive
Foreign
Currency
    Unrealized
Appreciation/
(Depreciation)
 

Contracts to buy EUR:

  

   

Barclays

    3/2/16        1,146,251        1,075,000        23,654   

Contracts to buy INR:

  

   

Barclays

    2/17/16        1,272,321        85,500,000        11,134   

Barclays

    2/17/16        761,793        52,000,000        18,788   
       

 

 

 
        $ 19,964   
       

 

 

 
 

 

See accompanying Notes to Financial Statements   DODGE & COX GLOBAL BOND FUND § PAGE 9


STATEMENT OF ASSETS AND LIABILITIES

  

    December 31, 2015  

ASSETS:

 

Investments, at value (cost $72,339,627)

  $ 66,736,026   

Unrealized appreciation on forward currency contracts

    53,576   

Cash denominated in foreign currency (cost $167)

    164   

Cash held at broker

    359,674   

Receivable for investments sold

    39,172   

Receivable for Fund shares sold

    7,788   

Dividends and interest receivable

    971,912   

Prepaid expenses and other assets

    19,273   
 

 

 

 
    68,187,585   
 

 

 

 

LIABILITIES:

 

Unrealized depreciation on forward currency contracts

    33,612   

Payable to broker for variation margin

    80,439   

Payable for Fund shares redeemed

    342,887   

Expense reimbursement received in advance

    17,227   

Accrued expenses

    51,568   
 

 

 

 
    525,733   
 

 

 

 

NET ASSETS

  $ 67,661,852   
 

 

 

 

NET ASSETS CONSIST OF:

 

Paid in capital

  $ 74,419,062   

Accumulated net investment loss

    (186,162

Accumulated net realized loss

    (827,352

Net unrealized depreciation

    (5,743,696
 

 

 

 
  $ 67,661,852   
 

 

 

 

Fund shares outstanding (par value $0.01 each,
unlimited shares authorized)

    6,999,088   

Net asset value per share

  $ 9.67   

STATEMENT OF OPERATIONS

  

   

Year Ended

December 31, 2015

 

INVESTMENT INCOME:

 

Dividends

  $ 58,964   

Interest (net of foreign taxes of $5,879)

    2,759,838   
 

 

 

 
    2,818,802   
 

 

 

 

EXPENSES:

 

Management fees

    353,517   

Custody and fund accounting fees

    26,648   

Transfer agent fees

    21,750   

Professional services

    223,071   

Shareholder reports

    15,063   

Registration fees

    90,581   

Trustees’ fees

    237,500   

Miscellaneous

    27,068   
 

 

 

 

Total expenses

    995,198   

Expenses reimbursed by investment manager

    (570,879
 

 

 

 

Net expenses

    424,319   
 

 

 

 

NET INVESTMENT INCOME

    2,394,483   
 

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS):

 

Net realized loss

 

Investments

    (3,334,009

Treasury futures contracts

    (119,291

Interest rate swaps

    (37,901

Forward currency contracts

    (11,908

Foreign currency transactions

    (51,881

Net change in unrealized appreciation/depreciation

 

Investments

    (3,697,465

Treasury futures contracts

    229,905   

Interest rate swaps

    (97,410

Forward currency contracts

    37,073   

Foreign currency translation

    6,831   
 

 

 

 

Net realized and unrealized loss

    (7,076,056
 

 

 

 

NET DECREASE IN NET ASSETS
FROM OPERATIONS

  $ (4,681,573
 

 

 

 

STATEMENT OF CHANGES IN NET ASSETS

  

    Year Ended
December 31, 2015
    Period Ended
December 31, 2014*
 

OPERATIONS:

   

Net investment income

  $ 2,394,483      $ 746,563   

Net realized loss

    (3,554,990     (339,029

Net change in unrealized
appreciation/depreciation

    (3,521,066     (2,222,630
 

 

 

   

 

 

 
    (4,681,573     (1,815,096
 

 

 

   

 

 

 

DISTRIBUTIONS TO SHAREHOLDERS FROM:

   

Net investment income

           (650,780

Net realized gain

             
 

 

 

   

 

 

 

Total distributions

           (650,780
 

 

 

   

 

 

 

FUND SHARE
TRANSACTIONS:

   

Proceeds from sale of shares

    26,112,074        75,231,468   

Reinvestment of distributions

           582,706   

Cost of shares redeemed

    (18,458,010     (8,658,937
 

 

 

   

 

 

 

Net increase from Fund share transactions

    7,654,064        67,155,237   
 

 

 

   

 

 

 

Total increase in net assets

    2,972,491        64,689,361   

NET ASSETS:

   

Beginning of period

    64,689,361          
 

 

 

   

 

 

 

End of period (including accumulated net investment loss of $(186,162) and $(66,238), respectively)

  $ 67,661,852      $ 64,689,361   
 

 

 

   

 

 

 

SHARE INFORMATION:

   

Shares sold

    2,575,716        7,034,774   

Distributions reinvested

           55,846   

Shares redeemed

    (1,848,870     (818,378
 

 

 

   

 

 

 

Net increase in shares outstanding

    726,846        6,272,242   
 

 

 

   

 

 

 

 

 

 

*

Period from May 1, 2014 (commencement of operations) to December 31, 2014

 

 

PAGE 10 § DODGE & COX GLOBAL BOND FUND   See accompanying Notes to Financial Statements


NOTES TO FINANCIAL STATEMENTS

 

NOTE 1—ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Dodge & Cox Global Bond Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund1 seeks a high rate of total return consistent with long-term preservation of capital. Foreign investing, especially in developing countries, has special risks such as currency and market volatility and political and social instability. These and other risk considerations are discussed in the Fund’s Prospectus.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Actual results may differ from those estimates. Significant accounting policies are as follows:

Security valuation The Fund’s net assets are valued as of the close of trading on the New York Stock Exchange (NYSE), generally 4:00 p.m. Eastern Time, each day that the NYSE is open for business. If the NYSE is closed due to inclement weather, technology problems, or for any other reason on a day it would normally be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the Fund reserves the right to calculate the Fund’s NAV as of the normally scheduled close of regular trading on the NYSE for that day, provided that Dodge & Cox believes that it can obtain reliable market quotes or valuations.

Debt securities and non-exchange traded derivatives are valued based on prices received from independent pricing services which utilize both dealer-supplied valuations and pricing models. Pricing models may consider quoted prices for similar securities, interest rates, prepayment speeds, and credit risk. Exchange-traded derivatives are valued at the settlement price determined by the relevant exchange. Interest rate swaps are valued daily based on prices received from independent pricing services, which represent the net present value of all future cash settlement amounts based on implied forward interest rates. Other financial instruments for which market quotes are readily available are valued at market value. Security values are not discounted based on the size of the Fund’s position. Short-term securities less than 60 days to maturity may be valued at amortized cost if amortized cost approximates current value. Mutual funds are valued at their respective net asset values.

 

1   

The Fund’s predecessor, Dodge & Cox Global Bond Fund, L.L.C. (the “Private Fund”), was organized on August 31, 2012 and commenced operations on December 5, 2012 as a private investment fund that reorganized into, and had the same investment manager as, the Fund. The Fund commenced operations on May 1, 2014, upon the transfer of assets from the Private Fund. This transaction was accomplished through a transfer of Private Fund net assets valued at $10,725,688 in exchange for 1,000,000 shares of the Fund. Immediately after the transfer, the shares of the Fund were distributed to the sole owner of the Private Fund and the investment manager of the Fund, Dodge & Cox, which became the initial shareholder of the Fund.

Investments initially valued in currencies other than the U.S. dollar are converted to the U.S. dollar using prevailing exchange rates. As a result, the Fund’s net assets may be affected by changes in the value of currencies in relation to the U.S. dollar.

If market quotations are not readily available or if a security’s value is believed to have materially changed after the close of the security’s primary market but before the close of trading on the NYSE, the security is valued at fair value as determined in good faith by or under the direction of the Fund’s Board of Trustees. The Board of Trustees has appointed Dodge & Cox, the Fund’s investment manager, to make fair value determinations in accordance with the Dodge & Cox Funds Valuation Policies (“Valuation Policies”), subject to Board oversight. Dodge & Cox has established a Pricing Committee that is comprised of representatives from Treasury, Legal, Compliance, and Operations. The Pricing Committee is responsible for implementing the Valuation Policies, including determining the fair value of securities when market quotations or market-based valuations are not readily available or are deemed unreliable. The Pricing Committee considers relevant indications of value that are reasonably available to it in determining the fair value assigned to a particular security, such as the value of similar financial instruments, trading volumes, contractual restrictions on disposition, related corporate actions, and changes in economic conditions. In doing so, the Pricing Committee employs various methods for calibrating fair valuation approaches, including a regular review of key inputs and assumptions, back-testing, and review of any related market activity.

Valuing securities through a fair value determination involves greater reliance on judgment than valuation of securities based on readily available market quotations. In some instances, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a security’s value. When fair value pricing is employed, the prices of securities used by the Fund to calculate its NAV may differ from quoted or published prices for the same securities.

Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.

Interest income is recorded on the accrual basis. Interest income includes coupon interest, amortization of premium and accretion of discount on debt securities, gain/loss on paydowns, and inflation adjustments to the principal amount of inflation-indexed securities. The ability of the issuers of the debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry, state, region, or country. Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectability of interest is reasonably assured. Dividend income is recorded on the ex-dividend date.

 

 

DODGE & COX GLOBAL BOND FUND § PAGE 11


NOTES TO FINANCIAL STATEMENTS

 

Expenses are recorded on the accrual basis. Some expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust based on relative net assets or other expense methodologies determined by the nature of the expense.

Distributions to shareholders are recorded on the ex-dividend date.

Foreign taxes The Fund is subject to foreign taxes which may be imposed by certain countries in which the Fund invests. The Fund endeavors to record foreign taxes based on applicable foreign tax law. Withholding taxes are incurred on certain foreign receipts and are accrued at the time the associated interest income is recorded.

Capital gains taxes are incurred upon disposition of certain foreign securities. Capital gains taxes on appreciated securities are accrued as unrealized losses and are reflected as realized losses upon the sale of the related security. Currency taxes may be incurred when the Fund purchases certain foreign currencies related to securities transactions and are recorded as realized losses on foreign currency transactions.

Repurchase agreements The Fund enters into repurchase agreements, secured by U.S. government or agency securities, which involve the purchase of securities from a counterparty with a simultaneous commitment to resell the securities at an agreed-upon date and price. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the securities and to apply the proceeds in satisfaction of the obligation.

Futures Contracts Futures contracts involve an obligation to purchase or sell (depending on whether the Fund has entered a long or short futures contract, respectively) an asset at a future date, at a price set at the time of the contract. Upon entering into a futures contract, the Fund is required to deposit an amount of cash or liquid assets (referred to as initial margin) in a segregated account with the clearing broker. Subsequent payments (referred to as variation margin) to and from the clearing broker are made on a daily basis based on changes in the market value of futures contracts. Futures contracts are traded publicly and their market value changes daily. Changes in the market value of open futures contracts are recorded as unrealized appreciation or depreciation in the Statement of Operations. Realized gains and losses on futures contracts are recorded in the Statement of Operations at the closing or expiration of the contracts. Cash deposited with a broker as initial margin is recorded on the Statement of Assets and Liabilities. A receivable and/or payable to brokers for daily variation margin is also recorded on the Statement of Assets and Liabilities.

Investments in futures contracts may include certain risks, which may be different from, and potentially greater than, those of the underlying securities. To the extent the Fund uses futures, it is exposed to additional volatility and potential losses resulting from leverage.

The Fund has maintained short Treasury futures contracts to assist with the management of the portfolio’s interest rate

exposure. During the year ended December 31, 2015, these Treasury futures contracts had notional values ranging from 8% to 17% of net assets.

Interest rate swaps Interest rate swaps are agreements that obligate two parties to exchange a series of cash flows at specified payment dates calculated by reference to specified interest rates, such as an exchange of floating rate payments for fixed rate payments. Upon entering into a centrally cleared interest rate swap, the Fund is required to post an amount of cash or liquid assets (referred to as initial margin) in a segregated account with the clearing broker. Subsequent payments (referred to as variation margin) to and from the clearing broker are made on a daily basis based on changes in the market value of each interest rate swap. Changes in the market value of open interest rate swaps are recorded as unrealized appreciation or depreciation in the Statement of Operations. Realized gains and losses on interest rate swaps are recorded in the Statement of Operations, both upon the exchange of cash flows on each specified payment date and upon the closing or expiration of the swap. Cash deposited with the clearing broker as initial margin is recorded on the Statement of Assets and Liabilities. A receivable and/or payable to brokers for daily variation margin is also recorded on the Statement of Assets and Liabilities.

Investments in interest rate swaps may include certain risks including unfavorable changes in interest rates, or a default or failure by the clearing broker or clearinghouse.

The Fund has maintained interest rate swaps in connection with the management of the portfolio’s interest rate exposure. During the year ended December 31, 2015, these interest rate swaps had U.S. dollar notional values ranging from 2% to 5% of net assets.

Forward currency contracts A forward currency contract represents an obligation to purchase or sell a specific foreign currency at a future date at a price set at the time of the contract. Losses from these transactions may arise from unfavorable changes in currency values or if the counterparties do not perform under a contract’s terms.

The values of the forward currency contracts are adjusted daily based on the prevailing forward exchange rates of the underlying currencies. Changes in the value of open contracts are recorded as unrealized appreciation or depreciation in the Statement of Operations. When the forward currency contract is closed, the Fund records a realized gain or loss in the Statement of Operations equal to the difference between the value at the time the contract was opened and the value at the time it was closed.

The Fund has maintained forward currency contracts to increase its portfolio exposure to the Indian rupee. During the year ended December 31, 2015, these Indian rupee forward currency contracts had U.S. dollar total values ranging from 1% to 3% of net assets.

The Fund entered into forward currency contracts to hedge foreign currency risks associated with portfolio investments denominated in the euro. During the year ended December 31,

 

 

PAGE 12 § DODGE & COX GLOBAL BOND FUND


NOTES TO FINANCIAL STATEMENTS

 

2015, these euro forward currency contracts had U.S. dollar total values ranging from 0% to 2% of net assets.

Foreign currency translation The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the prevailing exchange rates of such currencies against the U.S. dollar. The market value of investment securities and other assets and liabilities are translated at the exchange rate as of the valuation date. Purchases and sales of investment securities, income, and expenses are translated at the exchange rate prevailing on the transaction date.

Reported realized and unrealized gain (loss) on investments includes foreign currency gain (loss) related to investment transactions.

Reported realized and unrealized gain (loss) on foreign currency transactions and translation include the following: holding/disposing of foreign currency, the difference between the trade and settlement dates on securities transactions, the difference between the accrual and payment dates on interest, and currency losses on the purchase of foreign currency in certain countries that impose taxes on such transactions.

Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.

NOTE 2—VALUATION MEASUREMENTS

Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below.

§  

Level 1: Quoted prices in active markets for identical securities

§  

Level 2: Other significant observable inputs (including quoted prices for similar securities, market indices, interest rates, credit risk, etc.)

§  

Level 3: Significant unobservable inputs (including Fund management’s assumptions in determining the fair value of investments)

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

 

The following is a summary of the inputs used to value the Fund’s holdings at December 31, 2015:

 

Classification(a)   LEVEL 1
(Quoted Prices)
   

LEVEL 2

(Other Significant
Observable Inputs)

 

Securities

   

Debt Securities

   

Government

  $      $ 11,842,111   

Government-Related

           6,001,062   

Securitized

           9,013,306   

Corporate

           38,906,589   

Short-term Investments

   

Money Market Fund

    67,958          

Repurchase Agreement

           905,000   
 

 

 

   

 

 

 

Total Securities

  $ 67,958      $ 66,668,068   
 

 

 

   

 

 

 

Other Financial Instruments(b)

   

Treasury Futures Contracts

   

Appreciation

  $ 31,033      $   

Depreciation

    (8,905       

Interest Rate Swaps

   

Depreciation

           (164,755

Forward Currency Contracts

   

Appreciation

           53,576   

Depreciation

           (33,612
                 
(a) 

U.S. Treasury securities were transferred from Level 1 to Level 2 during the year. There were no Level 3 securities at December 31, 2015 and 2014, and there were no transfers to Level 3 during the year.

(b)

Represents unrealized appreciation/(depreciation).

NOTE 3—ADDITIONAL DERIVATIVES INFORMATION

The Fund has entered into over-the-counter derivatives, such as forward currency contracts (each, a “Derivative”). Each Derivative is subject to a negotiated master agreement (based on a form published by the International Swaps and Derivatives Association (“ISDA”)) governing all Derivatives between the Fund and the relevant dealer counterparty. The master agreements specify (i) events of default and other events permitting a party to terminate some or all of the Derivatives thereunder and (ii) the process by which those Derivatives will be valued for purposes of determining termination payments. If some or all of the Derivatives under a master agreement are terminated because of an event of default or similar event, the values of all terminated Derivatives must be netted to determine a single payment owed by one party to the other. Some master agreements contain collateral terms requiring the parties to post collateral in respect of some or all of the Derivatives thereunder based on the net market value of those Derivatives, subject to a minimum exposure threshold. To the extent amounts owed to the Fund by its counterparties are not collateralized, the Fund is at risk of those counterparties’ non-performance. The Fund attempts to mitigate counterparty credit risk by entering into Derivatives only with counterparties it believes to be of good credit quality and by monitoring the financial stability of those counterparties.

At December 31, 2015, all offsetting Derivative positions qualify for netting pursuant to master netting arrangements. For financial reporting purposes, the Fund does not offset financial

 

 

DODGE & COX GLOBAL BOND FUND § PAGE 13


NOTES TO FINANCIAL STATEMENTS

 

assets and liabilities that are subject to a master netting arrangement in the Statement of Assets and Liabilities. Gross assets and liabilities related to Derivatives are presented as “unrealized appreciation on forward currency contracts” and “unrealized depreciation on forward currency contracts,” respectively, in the Statement of Assets and Liabilities. Derivative information by counterparty is presented in the Portfolio of Investments. At December 31, 2015, no collateral is pledged or held by the Fund for Derivatives.

NOTE 4—RELATED PARTY TRANSACTIONS

Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays an annual management fee of 0.50% of the Fund’s average daily net assets to Dodge & Cox, investment manager of the Fund. Until April 30, 2016, Dodge & Cox has contractually agreed to reimburse the Fund for all ordinary expenses to the extent necessary to maintain the ratio of total operating expenses to average net assets at 0.60%. The agreement is renewable annually thereafter and is subject to termination upon 30 days’ written notice by either party. This expense reimbursement agreement has been in effect since the Fund’s inception.

Fund officers and trustees All officers and two of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.

Share ownership At December 31, 2015, Dodge & Cox owned 14% of the Fund’s outstanding shares.

NOTE 5—INCOME TAX INFORMATION AND DISTRIBUTIONS TO SHAREHOLDERS

A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, and such amounts may differ from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book to tax differences at year end to reflect tax character.

Book to tax differences are primarily due to differing treatments of wash sales, net short-term realized gain (loss), foreign capital gain taxes, foreign currency realized gain (loss), Treasury futures contracts, and interest rate swaps. At December 31, 2015, the cost of investments for federal income tax purposes was $72,339,627.

Distributions during the periods noted below were characterized as follows for federal income tax purposes:

 

     Year Ended
December 31, 2015
    

Eight Months Ended

December 31, 2014

 

Ordinary income

    $—         $650,780   
       ($0.144 per share)   

Long-term capital gain

              

 

At December 31, 2015, the tax basis components of distributable earnings were as follows:

 

Unrealized appreciation

   $ 104,514   

Unrealized depreciation

     (5,708,115
  

 

 

 

Net unrealized depreciation

     (5,603,601

Undistributed ordinary income

       

Capital loss carryforward(a)

     (775,303

Deferred loss(b)

     (196,120 )  
(a) 

Represents accumulated capital loss as of December 31, 2015, which may be carried forward to offset future capital gains.

 

No expiration

  

Short-term

   $ 469,709   

Long-term

     305,594   
  

 

 

 
   $ 775,303   
  

 

 

 
(b)

Represents net realized specified loss incurred between November 1, 2015 and December 31, 2015. As permitted by tax regulations, the Fund has elected to treat this loss as arising in 2016.

Fund management has reviewed the tax positions for the open period applicable to the Fund, and has determined that no provision for income tax is required in the Fund’s financial statements.

NOTE 6—LOAN FACILITIES

Pursuant to an exemptive order issued by the Securities and Exchange Commission (SEC), the Fund may participate in an interfund lending facility (Facility). The Facility allows the Fund to borrow money from or loan money to the Funds. Loans under the Facility are made for temporary or emergency purposes, such as to fund shareholder redemption requests. Interest on borrowings is the average of the current repurchase agreement rate and the bank loan rate. There was no activity in the Facility during the year.

All Funds in the Trust participate in a $500 million committed credit facility (Line of Credit) with State Street Bank and Trust Company, to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The maximum amount available to the Fund is $250 million. Each Fund pays an annual commitment fee on its pro-rata portion of the Line of Credit. For the year ended December 31, 2015, the Fund’s commitment fee amounted to $250 and is reflected as a Miscellaneous Expense in the Statement of Operations. Interest on borrowings is charged at the prevailing rate. There were no borrowings on the Line of Credit during the year.

NOTE 7—PURCHASES AND SALES OF INVESTMENTS

For the year ended December 31, 2015, purchases and sales of securities, other than short-term securities and U.S. government securities, aggregated $38,643,970 and $27,999,196, respectively. For the year ended December 31, 2015, purchases and sales of U.S. government securities aggregated $10,835,441 and $9,365,464, respectively.

NOTE 8—SUBSEQUENT EVENTS

Fund management has determined that no material events or transactions occurred subsequent to December 31, 2015, and through the date of the Fund’s financial statements issuance, which require additional disclosure in the Fund’s financial statements.

 

 

PAGE 14 § DODGE & COX GLOBAL BOND FUND


FINANCIAL HIGHLIGHTS

 

SELECTED DATA AND RATIOS

(for a share outstanding throughout the period)

     Year Ended
December 31, 2015
    

Period from May 1, 2014

(commencement of Fund operations)

to December 31, 2014

 

Net asset value, beginning of period

       $10.31         $10.73   

Income from investment operations:

       

Net investment income

       0.34         0.16   

Net realized and unrealized loss

       (0.98      (0.44
    

 

 

    

 

 

 

Total from investment operations

       (0.64      (0.28
    

 

 

    

 

 

 

Distributions to shareholders from:

       

Net investment income

               (0.14

Net realized gain

                 
    

 

 

    

 

 

 

Total distributions

               (0.14
    

 

 

    

 

 

 

Net asset value, end of period

       $9.67         $10.31   
    

 

 

    

 

 

 

Total return

       (6.21 )%       (2.59 )% 

Ratios/supplemental data:

       

Net assets, end of period (millions)

       $68         $65   

Ratio of expenses to average net assets

       0.60      0.60 %(a) 

Ratio of expenses to average net assets, before reimbursement by investment manager

       1.41      2.18 %(a) 

Ratio of net investment income to average net assets

       3.39      2.83 %(a) 

Portfolio turnover rate

       55      36
(a)

Annualized

See accompanying Notes to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Trustees of Dodge & Cox Funds and Shareholders of Dodge & Cox Global Bond Fund

In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Dodge & Cox Global Bond Fund (the “Fund”, one of the series constituting Dodge & Cox Funds) at December 31, 2015, the results of its operations, the changes in its net assets, and financial highlights for each of the periods presented in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as financial statements) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits which included confirmation of securities at December 31, 2015, by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 25, 2016

 

DODGE & COX GLOBAL BOND FUND § PAGE 15


BOARD APPROVAL OF FUNDS’ INVESTMENT MANAGEMENT AGREEMENTS AND MANAGEMENT FEES

(unaudited)

The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 16, 2015, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2016 with respect to each Fund. During the course of the year, the Board received a wide variety of materials relating to the investment management and administrative services provided by Dodge & Cox and the performance of each of the Funds.

INFORMATION RECEIVED

In advance of the meeting, the Board, including each of the Independent Trustees, requested, received, and reviewed materials relating to the Agreements and the services provided by Dodge & Cox. The Independent Trustees retained Morningstar® to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Morningstar. The Morningstar materials included information regarding advisory fee rates, expense ratios, and transfer agency, custodial, and distribution expenses, as well as appropriate performance comparisons to each Fund’s peer group and an index or combination of indices. The Morningstar materials also included a comparison of expenses of various share classes offered by comparable funds. The materials reviewed by the Board contained information concerning, among other things, Dodge & Cox’s profitability, financial results and condition, advisory fee revenue, and separate account and sub-adviser fund fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates, sales and redemption data and the significant investment that Dodge & Cox makes in research used in managing the Funds. The Board received and reviewed memoranda and related materials addressing, among other things, Dodge & Cox’s services to the Funds; how Dodge & Cox Funds’ fees compare to fees of peer group funds; the different fees, services, costs, and risks associated with other accounts managed by Dodge & Cox as compared to the Dodge & Cox Funds; and the ways in which the Funds realize economies of scale. Throughout the process of reviewing the services provided by Dodge & Cox and preparing for the meeting, the Independent Trustees found Dodge & Cox to be open, forthright, detailed, and very helpful in answering questions about all issues. The Board received copies of the Agreements and a memorandum from the independent legal counsel to the Independent Trustees discussing the factors generally regarded as appropriate to consider in evaluating advisory arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the independent legal counsel on November 11, 2015, and again on December 16, 2015, to discuss

whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements. In considering the Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board considered several factors, discussed below, to be key factors and reached the conclusions described below.

NATURE, QUALITY, AND EXTENT OF THE SERVICES

The Board considered that Dodge & Cox provides a wide range of services to the Funds in addition to portfolio management and that the quality of these services has been excellent in all respects. The extensive nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality, and extent of portfolio management, administrative, and shareholder services performed by Dodge & Cox. With regard to portfolio management services, the Board considered Dodge & Cox’s established long-term history of care and conscientiousness in the management of the Funds; its demonstrated consistency in investment approach and depth; the background and experience of the Dodge & Cox Investment Policy Committee, International Investment Policy Committee, Global Stock Investment Policy Committee, Fixed Income Investment Policy Committee, and Global Bond Investment Policy Committee, and research analysts responsible for managing the Funds; its methods for assessing the regulatory and investment climate in various jurisdictions; Dodge & Cox’s overall high level of attention to its core investment management function; and its commitment to the Funds and their shareholders. In the area of administrative and shareholder services, the Board considered the excellent quality of Dodge & Cox’s work in areas such as compliance, legal services, trading, proxy voting, technology, oversight of the Funds’ transfer agent and custodian, tax compliance, and shareholder communication through its website and other means. The Board also noted Dodge & Cox’s diligent disclosure policy, its favorable compliance record, and its reputation as a trusted, shareholder-friendly mutual fund family. In addition, the Board considered that Dodge & Cox manages approximately $185 billion in Fund assets with fewer professionals than most comparable funds, and that on average these professionals have more experience and longer tenure than investment professionals at comparable funds. The Board also noted that Dodge & Cox is an investment research-oriented firm with no other business endeavors to distract management’s attention from its research efforts, and that its investment professionals adhere to a consistent investment approach across the Funds. The Board further considered the favorable stewardship grades given by Morningstar to each of the Funds and the “Gold” analyst rating awarded by Morningstar to all of the Funds except the Global Bond Fund. The Board concluded that it was satisfied with the nature, extent, and quality of investment management and other services provided to the Funds by Dodge & Cox.

 

 

PAGE 16 § DODGE & COX GLOBAL BOND FUND


INVESTMENT PERFORMANCE

The Board considered short-term and long-term investment performance for each Fund (including periods of outperformance or underperformance) as compared to both relevant indices and the performance of such Fund’s peer group. The Board noted that the Funds had weak absolute and relative performance in 2015, but remained solid performers over longer periods. The Board determined after extensive review and inquiry that Dodge & Cox’s historic, long-term, team-oriented, bottom-up investment approach remains consistent and that Dodge & Cox continues to be distinguished by its integrity, transparency, and independence. The Board considered that the performance of the Funds is the result of a team-oriented investment management process that emphasizes a long-term investment horizon, comprehensive independent research, price discipline, low cost and low portfolio turnover. The Board also considered that the investment performance delivered by Dodge & Cox to the Funds appeared to be consistent with the relevant performance delivered for other clients of Dodge & Cox. The Board concluded that Dodge & Cox has delivered favorable long-term performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.

COSTS AND ANCILLARY BENEFITS

Costs of Services to Funds: Fees and Expenses. The Board considered each Fund’s management fee rate and expense ratio relative to each Fund’s peer group and relative to management fees charged by Dodge & Cox to other clients. In particular, the Board considered that the Funds continue to be substantially below their peer group median in expense ratios and that many media and industry reports specifically comment on the low expense ratios of the Funds, which have been a defining characteristic of the Funds for many years. The Board also evaluated the operating structures of the Funds and Dodge & Cox, noting that the Funds do not charge front-end sales commissions or distribution fees, and Dodge & Cox bears, among other things, the significant cost of third party research, reimbursement for recordkeeping and administrative costs to third-party retirement plan administrators, and administrative and office overhead.

The Board noted that expenses are well below industry averages. When compared to peer group funds, the Funds are in the quartile with the lowest expense ratios. The Board also considered that the Funds receive numerous administrative, regulatory compliance, legal, technology and shareholder support services from Dodge & Cox without any additional administrative fee and the fact that the Funds have relatively low transaction costs and portfolio turnover rates. The Board noted the Funds’ unusual single-share-class structure and reviewed Morningstar data showing that the few peer group funds with lower expense ratios often have other share classes with significantly higher expense ratios. In this regard, the Board considered that many of the Funds’ shareholders would not be eligible to purchase comparably-priced shares of many peer group funds, which typically make their lower-priced share classes available only to institutional investors. The Board determined that the Funds provide access for small investors to high quality investment management at a relatively low cost.

The Board reviewed information regarding the fee rates Dodge & Cox charges to separate accounts and subadvised funds that have investment programs similar to those of the Funds, including instances where separate account and sub-advised fund fees are lower than Fund fees. The Board considered differences in the nature and scope of services Dodge & Cox provides to the Funds as compared to other client accounts, differences in regulatory, litigation, and other risks as between Dodge & Cox Funds and other types of clients. The Board also noted that different markets exist for mutual fund and institutional separate account management services. With respect to non-U.S. funds sponsored and managed by Dodge & Cox that are comparable to the Funds in many respects, the Board noted that the fee rates charged by Dodge & Cox are the same as or higher than the fee rates charged to the Funds. After consideration of these matters, the Board concluded that the overall costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation, and performance of Dodge & Cox and the low overall expense ratios of the Funds.

Profitability and Costs of Services to Dodge & Cox; “Fall-out” Benefits. The Board reviewed reports of Dodge & Cox’s financial position, profitability, and estimated overall value, and considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the favorable services provided. The Board noted in particular that Dodge & Cox’s profits are not generated by high fee rates, but reflect an extraordinarily streamlined, efficient, and focused business approach toward investment management. The Board recognized the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that the compensation/profit structure at Dodge & Cox includes a return on shareholder employees’ investment in the firm, which is vital for remaining independent and facilitating retention of management and investment professionals. The Board considered independent research indicating that firms that grow organically, rather than through acquisition, tend to have better performance. Key to organic growth is the ability to retain talented and experienced analysts, portfolio managers and other professionals.

The Board also considered that in January 2015, Dodge & Cox closed the International Stock Fund to new investors to pro-actively manage the growth of the Fund. The Stock Fund and Balanced Fund were similarly closed to new investors during periods of significant growth in the past. While these actions are intended to benefit existing shareholders, the effect is to reduce potential revenues to Dodge & Cox from new shareholders. The Board also considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers and reputational benefits to non-U.S. funds sponsored and managed by Dodge & Cox) that Dodge & Cox might receive as a

 

 

DODGE & COX GLOBAL BOND FUND § PAGE 17


result of its association with the Funds and determined that they are acceptable. The Board also noted that Dodge & Cox continues to invest substantial sums in its business in order to provide enhanced services, systems and research capabilities, all of which benefit the Funds. The Board concluded that Dodge & Cox’s profitability is the keystone of its independence, stability and long-term investment performance and that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) is fair and reasonable.

ECONOMIES OF SCALE

The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee structure and the considerable efficiencies of the Funds’ organization and fee structure that has been realized by shareholders from the time of each Fund’s inception (i.e., from the first dollar). An assessment of economies of scale must also take into account that Dodge & Cox invests significant time and resources in each new Fund for months (and sometimes years) prior to launch; in addition, expenses are capped, which means that Dodge & Cox earns no revenue and subsidizes the operations of a new Fund for a period of time until it reaches scale.

In addition, the Board noted that Dodge & Cox has shared economies of scale by adding or enhancing services to the Funds over time, and that the internal costs of providing investment management, up-to-date technology, administrative, legal, and compliance services to the Funds continue to increase. For example, Dodge & Cox has increased its global research staff and investment resources over the years to address the increased complexity of investing in multinational and non-U.S. companies. In addition, Dodge & Cox has made substantial expenditures in other staff, technology, cybersecurity, and infrastructure to enable it to integrate credit and equity analyses and to be able to implement its strategy in a more effective and secure manner. Over the last ten years, Dodge & Cox has increased its spending on third party research, data services, trading systems, technology, and recordkeeping service expenses at a rate that has significantly outpaced the Funds’ growth rate during the same period.

The Board considered that Dodge & Cox has a history of voluntarily limiting asset growth in several Funds that experienced significant inflows by closing them to new investors in order to protect the Funds’ ability to achieve good investment returns for shareholders. The Board also observed that, even without fee breakpoints, the Funds are competitively priced in a very competitive market and that having a low fee from inception is better for shareholders than starting with a higher fee and adding breakpoints. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately shares economies of scale that may exist.

CONCLUSION

Based on their evaluation of all material factors and assisted by the advice of independent legal counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the advisory fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that the scope and quality of Dodge & Cox’s services has provided substantial value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.

FUND HOLDINGS

The Fund provides a complete list of its holdings four times each fiscal year, as of the end of each quarter. The Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-CSR (second and fourth quarters) and Form N-Q (first and third quarters). Shareholders may view the Fund’s Forms N-CSR and N-Q on the SEC’s website at sec.gov. Forms N-CSR and N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 202-942-8090 (direct) or 800-732-0330 (general SEC number). A list of the Fund’s quarter-end holdings is also available at dodgeandcox.com on or about 15 days following each quarter end and remains available on the web site until the list is updated in the subsequent quarter.

PROXY VOTING

For a free copy of the Fund’s proxy voting policies and procedures, please call 800-621-3979, visit the Fund’s website at www.dodgeandcox.com, or visit the SEC’s website at sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 2-month period ending June 30 is also available at dodgeandcox.com or at sec.gov.

HOUSEHOLD MAILINGS

The Fund routinely mails shareholder reports and summary prospectuses to shareholders and, on occasion, proxy statements. In order to reduce the volume of mail, when possible, only one copy of these documents will be sent to shareholders who are part of the same family and share the same residential address.

If you have a direct account with the Funds and you do not want the mailing of shareholder reports and summary prospectuses combined with other members in your household, contact the Funds at 800-621-3979. Your request will be implemented within 30 days.

 

 

PAGE 18 § DODGE & COX GLOBAL BOND FUND


DODGE & COX FUNDS—EXECUTIVE OFFICER & TRUSTEE INFORMATION

 

Name (Age) and
Address*
 

Position with Trust

(Year of Election or
Appointment)

  Principal Occupation During Past 5 Years   Other Directorships Held by Trustees
INTERESTED TRUSTEES AND EXECUTIVE OFFICERS
Charles F. Pohl (57)  

Chairman and Trustee

(Officer since 2004)

  Chairman (since 2013), Co-President (2011-2013), Senior Vice President (until 2011), and Director of Dodge & Cox; Chief Investment Officer, Portfolio Manager, Investment Analyst, and member of Investment Policy Committee (IPC), Global Stock Investment Policy Committee (GSIPC), International Investment Policy Committee (IIPC), and Fixed Income Investment Policy Committee (FIIPC)  
Dana M. Emery (54)  

President and Trustee

(Trustee since 1993)

  Chief Executive Officer (since 2013), President (since 2011), Executive Vice President (until 2011), and Director of Dodge & Cox; Director of Fixed Income, Portfolio Manager, and member of FIIPC and Global Bond Investment Policy Committee (GBIPC)  
John A. Gunn (72)  

Senior Vice President

(Officer since 1998)

  Chairman Emeritus (2011-2013), Chairman (until 2011), Chief Executive Officer (until 2010), and Director (until 2013) of Dodge & Cox; Portfolio Manager and member of IPC, GSIPC (until 2014), and IIPC (until 2015)  
Diana S. Strandberg (56)   Senior Vice President (Officer since 2006)   Senior Vice President (since 2011), Vice President (until 2011), and Director (since 2011) of Dodge & Cox; Director of International Equity (since 2009), Portfolio Manager, Investment Analyst, and member of IPC, GSIPC, IIPC, and GBIPC  
David H. Longhurst (58)  

Treasurer

(Officer since 2006)

  Vice President and Assistant Treasurer of Dodge & Cox  
Thomas M. Mistele (62)  

Secretary

(Officer since 1998)

  Chief Operating Officer, Director, Secretary, Senior Counsel (since 2011), and General Counsel (until 2011) of Dodge & Cox  
Katherine M. Primas (41)  

Chief Compliance

Officer

(Officer since 2009)

  Vice President (since 2011) and Chief Compliance Officer of Dodge & Cox  
INDEPENDENT TRUSTEES
Thomas A. Larsen (66)  

Trustee

(Since 2002)

  Senior Counsel of Arnold & Porter LLP (law firm) (since 2013); Partner of Arnold & Porter LLP (until 2012); Director of Howard, Rice, Nemerovski, Canady, Falk & Rabkin (1977-2011)  
Ann Mather (55)  

Trustee

(Since 2011)

  CFO, Pixar Animation Studios (1999-2004)   Director, Google, Inc. (internet information services) (since 2005); Director, Glu Mobile, Inc. (multimedia software) (since 2005); Director, Netflix, Inc. (internet television) (since 2010); Director, Arista Networks (cloud networking) (since 2013); Director, Shutterfly, Inc. (internet photography services/publishing) (since 2013)
Robert B. Morris III (63)  

Trustee

(Since 2011)

  Advisory Director, The Presidio Group (since 2005)  
Gary Roughead (64)  

Trustee

(Since 2013)

  Annenberg Distinguished Visiting Fellow, Hoover Institution (since 2012); Admiral, United States Navy (Ret.); U.S. Navy Chief of Naval Operations (2008-2011)   Director, Northrop Grumman Corp. (global security) (since 2012)
Mark E. Smith (64)  

Trustee

(Since 2014)

  Executive Vice President, Managing Director—Fixed Income at Loomis Sayles & Company, L.P. (2003-2011)  
John B. Taylor (69)  

Trustee

(Since 2005)

(and 1995-2001)

  Professor of Economics, Stanford University (since 1984); Senior Fellow, Hoover Institution (since 1996); Under Secretary for International Affairs, United States Treasury (2001-2005)  

 

*  

The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all six series in the Dodge & Cox Funds complex and serves for an indefinite term.

Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Funds’ website at dodgeandcox.com or calling
800-621-3979.

 

DODGE & COX GLOBAL BOND FUND § PAGE 19


Global Bond Fund

 

 

dodgeandcox.com

For Fund literature, transactions, and account

information, please visit the Funds’ website.

or write or call:

DODGE & COX FUNDS

c/o Boston Financial Data Services

P.O. Box 8422

Boston, Massachusetts 02266-8422

(800) 621-3979

INVESTMENT MANAGER

Dodge & Cox

555 California Street, 40th Floor

San Francisco, California 94104

(415) 981-1710

This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.

This report reflects our views, opinions, and portfolio holdings as of December 31, 2015, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.


ITEM 2. CODE OF ETHICS.

A code of ethics, as defined in Item 2 of Form N-CSR, adopted by the registrant and applicable to the registrant’s principal executive officer and principal financial officer was in effect during the entire period covered by this report. A copy of the code of ethics as revised May 1, 2014 is filed as an exhibit to this Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the period covered by this report.

 

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

The Board of Trustees of the registrant has determined that Ann Mather and Robert B. Morris III, members of the registrant’s Audit and Compliance Committee, are each an “audit committee financial expert” and are “independent”, as defined in Item 3 of Form N-CSR.

 

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

(a) – (d) Aggregate fees billed to the registrant for the fiscal years ended December 31, 2015 and December 31, 2014 for professional services rendered by the registrant’s principal accountant were as follows:

 

     2015      2014  
(a) Audit Fees    $ 340,000       $ 317,000   
(b) Audit-Related Fees      —           —     
(c) Tax Fees      350,200         333,800   
(d) All Other Fees      —           —     

Audit fees include amounts related to the audit of the registrant’s annual financial statements and services normally provided by the accountant in connection with statutory and regulatory filings. Tax fees include amounts related to tax advice and tax return preparation, compliance, and reviews.

(e) (1) The registrant’s Audit and Compliance Committee has adopted policies and procedures (“Policies”) which require the registrant’s Audit and Compliance Committee to pre-approve all audit and non-audit services provided by the principal accountant to the registrant. The policies also require the Audit and Compliance Committee to pre-approve any engagement of the principal accountant to provide non-audit services to the registrant’s investment adviser, if the services directly impact the registrant’s operations and financial reporting. The Policies do not apply in the case of audit services that the principal accountant provides to the registrant’s adviser. If a service (other than the engagement of the principal accountant to audit the registrant’s financial statements) is required to be pre-approved under the Policies between regularly scheduled Audit and Compliance Committee meetings, pre-approval may be authorized by a designated Audit and Compliance Committee member with ratification at the next scheduled Audit and Compliance Committee meeting.

(e) (2) No services included in (b) – (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

(f) Less than 50% of the hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees.


(g) For the fiscal years ended December 31, 2015 and December 31, 2014, the aggregate fees billed by the registrant’s principal accountant for non-audit services rendered to the registrant, for non-audit services rendered to the registrant’s investment adviser, and for non-audit services rendered to entities controlled by the adviser were $795,300 and $723,600, respectively.

(h) All non-audit services described under (g) above that were not pre-approved by the registrant’s Audit and Compliance Committee were considered by the registrant’s Audit and Compliance Committee and found to be compatible with maintaining the principal accountant’s independence.

 

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

Not applicable.

 

ITEM 6. SCHEDULE OF INVESTMENTS.

Not applicable. The complete schedule of investments is included in Item 1 of this Form N-CSR.

 

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

 

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

 

ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

Not applicable.

 

ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The registrant has adopted the following procedures by which shareholders may recommend nominees to the registrant’s Board of Trustees.

1. The shareholder must submit any such recommendation in writing to the registrant to the attention of the Secretary at the address of the principal executive offices of the registrant. The shareholder’s recommendation is then considered by the registrant’s Nominating Committee.

2. The shareholder recommendation must include:

(i) A statement in writing setting forth (a) the name, date of birth, business address and residence address of the person recommended by the shareholder (the “candidate”); and (b) whether the recommending shareholder believes that the candidate is or will be an “interested person” of the registrant (as defined in the Investment Company Act of 1940) and, if not an “interested person,” information regarding the candidate that will be sufficient for the registrant to make such determination and, if applicable, similar information regarding whether the candidate would satisfy the standards for independence of a Board member under listing standards of the New York Stock Exchange or other applicable securities exchange.


(ii) The written and manually signed consent of the candidate to be named as a nominee and to serve as a Trustee if elected;

(iii) The recommending shareholder’s name as it appears on the registrant’s books and the number of all shares of the registrant owned beneficially and of record by the recommending shareholder (as evidenced to the Nominating Committee’s satisfaction by a recent brokerage or account statement); and

(iv) A description of all arrangements or understandings between the recommending shareholder and the candidate and any other person or persons (including their names) pursuant to which the recommendation is being made by the recommending shareholder.

In addition, the Nominating Committee may require the candidate to furnish such other information as it may reasonably require or deem necessary to determine the eligibility of such candidate to serve on the Board or to satisfy applicable law and information regarding the candidate that would be required to be disclosed if the candidate were a nominee in a proxy statement or other filing required to be made in connection with solicitation of proxies for election of Trustees.

 

ITEM 11. CONTROLS AND PROCEDURES.

(a) An evaluation was performed within 90 days of the filing of this report, under the supervision and with the participation of the registrant’s management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures. Based on that evaluation, the principal executive officer and principal financial officer concluded that the registrant’s disclosure controls and procedures were effective.

(b) The registrant’s principal executive officer and principal financial officer are aware of no changes in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

ITEM 12. EXHIBITS.

(a) (1) The registrant’s code of ethics pursuant to Item 2 of Form N-CSR is attached. (EX.99A)

(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are attached. (EX.99B)

(a) (3) Not applicable.

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached. (EX.99C)


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dodge & Cox Funds
By  

/s/ Charles F. Pohl

  Charles F. Pohl
  Chairman – Principal Executive Officer
Date   February 26, 2016

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Dodge & Cox Funds
By  

/s/ Charles F. Pohl

  Charles F. Pohl
  Chairman – Principal Executive Officer
By  

/s/ David H. Longhurst

  David H. Longhurst
  Treasurer – Principal Financial Officer
Date   February 26, 2016