Market Commentary
After three consecutive quarters of negative returns, global equity markets appreciated in the fourth quarter of 2022, but still finished down for the full year. The MSCI ACWI posted its worst calendar year return since 2008, as every sector of the Index declined with the sole exception of Energy (up 33%).
Geopolitical conflicts, high inflation, and interest rate hikes continued to fuel concerns about the potential for and the depth of recessions across various markets. Many companies juggled the challenging combination of supply chain bottlenecks, higher input prices, weaker end-market demand, and tighter credit markets.
Against this backdrop, value stocks2 outperformed growth stocks by 8.9 percentage points in the fourth quarter and 21.1 percentage points for the year.3 Despite value stocks’ recent outperformance, however, the valuation disparity with growth stocks remains very wide by historical standards. The MSCI ACWI Value Index4 now trades at 11.3 times forward earnings compared to 20.7 times for the MSCI ACWI Growth Index5, a gap that places it in the 85th percentile of historical observations.6
Portfolio Strategy
Our persistent and patient valuation-based approach contributed to the Fund's outperformance this year. The Fund had a positive return for the fourth quarter, outperforming the MSCI ACWI by 3.5 percentage points.7 For the full year, the Fund had a negative return, but declined significantly less than the MSCI ACWI by 12.6 percentage points. The Fund's overweights in value sectors, such as Energy and Financials, as well as its underweights in Information Technology and other expensive parts of the market, all contributed to the Fund's outperformance.
We believe the Fund is well positioned for the long term, based on the portfolio’s attractive valuation and current exposures. The portfolio currently trades at 9.8 times forward earnings8, versus 14.5 times for the MSCI ACWI. The Fund continues to maintain key overweights in Financials, Health Care, and Communication Services, and underweights in Information Technology, Consumer Staples, and Consumer Discretionary. Over the course of 2022, we started 11 new positions and sold 10 holdings. The largest trims by sector occurred in Energy and Health Care, while the largest additions were in Consumer Discretionary and Communication Services.
Our long-term, active, value-oriented management style has allowed our firm to navigate many uncertain environments for over 90 years. We have found that periods of market uncertainty can provide attractive opportunities for investors with patience, discipline, and a long-term investment horizon.
We thank you for your continued confidence in Dodge & Cox.
Performance Review (Fund’s Class I Shares vs. MSCI ACWI) Fourth Quarter
Key contributors to relative results included the Fund's:
- Consumer Discretionary holdings (up 15% compared to down 1% for the MSCI ACWI sector), particularly Prosus (XAMS:PRX, Financial) and Amazon (AMZN, Financial);9
- Information Technology holdings, due to positive stock selection and an underweight position in the sector;
- Overweight position in Financials and selected holdings, notably BNP Paribas (XPAR:BNP, Financial), Banco Santander (XMAD:SAN, Financial), UBS Group (UBS, Financial), and Axis Bank (BOM:532215, Financial);
- and, Positions in Sanofi (SNY, Financial), Anheuser-Busch InBev (BUD, Financial), General Electric (GE, Financial), and Johnson Controls (JCI, Financial).
Key detractors from relative results included the Fund's:
- Overweight position in Communication Services and select holdings, including Baidu (BIDU, Financial);
- Energy holdings, notably Occidental Petroleum (OXY, Financial);
- and, Position in XP (XP).
2022
Key contributors to relative results included the Fund's:
- Energy holdings (up 71% compared to up 33% for the MSCI ACWI sector)—such as Occidental Petroleum, Ovintiv (OVV), and Suncor Energy (SU)—and an overweight position in the best-performing sector of the market;
- Information Technology positioning—including VMWare (VMW)—reflecting positive stock selection amid an underweight in the sector;
- Financials holdings—especially Itau Unibanco (ITUB), Axis Bank, and Standard Chartered (LSE:STAN)—and an overweight position in the sector; and,
- Positions in Cigna (CI), Sanofi, Novartis (NOV), and Amazon.
Key detractors from relative results included the Fund's:
- Overweight position in Communication Services, which was the worst-performing sector of the market, and specific holdings, such as Charter Communications (CHTR), which fared poorly; and,
- Positions in Credit Suisse (CS) and Fresenius Medical Care (XTER:FME).
The information provided is not a complete analysis of every material fact concerning any market, industry or investment. Data has been obtained from sources considered reliable, but Dodge & Cox makes no representations as to the completeness or accuracy of such information. The information provided is historical and does not predict future results or profitability. This is not a recommendation to buy, sell, or hold any security and is not indicative of Dodge & Cox’s current or future trading activity. Any securities identified are subject to change without notice and do not represent a Fund’s entire holdings. Dodge & Cox does not guarantee the future performance of any account (including Dodge & Cox Funds) or any specific level of performance, the success of any investment decision or strategy that Dodge & Cox may use, or the success of Dodge & Cox’s overall management of an account.
