Market Commentary
U.S. equity markets rose during the first quarter of 2023, extending the market recovery that started in the fourth quarter of 2022. The S&P 500 appreciated 7.5% during the first quarter amid positive economic data and slowing inflation. Market volatility increased in March as Silicon Valley Bank and Signature Bank collapsed and pressured Financials, particularly banks with weaker funding, sizable unrealized securities losses, and a greater concentration of customer deposits above the FDIC’s $250,000 insurance threshold. Conversely, the Information Technology sector rebounded during the quarter, buoyed by lower bond yields. This divergence in performance between the Financials and Information Technology sectors helped increase the valuation disparity between value and growth stocks.2 The Russell 1000 Value trades at 15.1 times forward earnings3 compared to 24.8 times for the Russell 1000 Growth Index.4
Portfolio Strategy
The Fund had a positive absolute return in the first quarter of 2023, but underperformed the S&P 500 by 6.0 percentage points while slightly outperforming the Russell 1000 Value.5 The Fund’s positioning in the Financials sector was the largest detractor from its relative results. Although the Fund did not own Silicon Valley Bank or Signature Bank, their failures weighed on the broader Financials sector. While we believe these banks had idiosyncratic issues that are not representative of the broader U.S. banking system, we are closely monitoring market developments and assessing implications for our Funds’ holdings.
Over our firm’s 90-plus years, we have found that volatile market environments can provide opportunities for investors with patience, discipline, and a long-term investment horizon. Our investment approach— which emphasizes valuation and extensive knowledge about the securities and issuers in which we invest—has generated successful investment results over the long term. We make investment decisions based on our long-term assessment of a company's fundamentals and are not overly influenced by short-term considerations.
As a result of our bottom-up investment process, the Fund remains overweight the Financials, Health Care, and Communication Services sectors. During the first quarter, we started a position in Dominion Energy and added to holdings including Alphabet, Amazon, Medtronic, and Wells Fargo. We also reduced our exposure to companies that have seen their valuations increase, such as Meta Platforms and General Electric.6
We believe the Fund’s diversified portfolio is well positioned and are encouraged by the Fund’s valuation of 11.9 times forward earnings, well below the S&P 500's and Russell 1000 Value’s 18.8 and 15.1 times, respectively. We are confident in our portfolio and approach. We believe a long-term investment horizon is crucial for investors to successfully navigate challenging economic and market conditions. Thank you for your continued confidence in Dodge & Cox.
Performance Review (Fund’s Class I Shares vs. S&P 500) First Quarter
Key contributors to relative results included the Fund's:
- Industrials holdings, particularly General Electric (GE, Financial) and FedEx (FDX, Financial);
- Stock selection and underweight position in Consumer Staples;
- Underweight position in the Utilities sector; and,
- Positions in Booking Holdings (BKNG, Financial) and Sanofi (SNY, Financial).
Key detractors from relative results included the Fund's:
- Financials overweight and holdings, including Charles Schwab (SCHW, Financial), MetLife (MET, Financial), Wells Fargo (WFC, Financial), and Fidelity National Information Services (FIS, Financial);
- Information Technology holdings—particularly Microsoft (MSFT, Financial)—and an underweight position in the sector;
- Overweight position in Health Care, especially Cigna (CI, Financial);
- Underweight position in Consumer Discretionary;
- and, Position in Occidental Petroleum (OXY, Financial).
Performance Review (Fund’s Class I Shares vs. Russell 1000 Value)
First Quarter
Key contributors to relative results included the Fund's:
- Industrials holdings, particularly General Electric and FedEx; Stock selection in the Consumer Discretionary sector; and,
- Positions in Alphabet (GOOG, Financial), Microsoft, Sanofi, and Booking Holdings.
Key detractors from relative results included the Fund's:
- Financials holdings—particularly Charles Schwab, MetLife, Wells Fargo, and Fidelity National Information Services—and overweight position; and,
- Positions in Cigna and Meta Platforms (META, Financial).
Returns represent past performance and do not guarantee future results. Investment return and share price will fluctuate with market conditions, and investors may have a gain or loss when shares are sold. Fund performance changes over time and currently may be significantly lower than stated above. Performance is updated and published monthly. Current month-end performance can be obtained at dodgeandcox.com or call 800-621-3973.
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.
