Dodge & Cox Stock Joins the Kiplinger 25

After being closed for four years, Dodge & Cox Stock recently reopened its doors to new investors. We're taking full advantage of the open door by adding the fund to our new Kiplinger 25 list, which appears in the May 2008 issue of Kiplinger's Personal Finance.

With total assets of $56 billion, Dodge & Cox Stock is huge. But size shouldn't hinder performance because the fund (symbol DODGX) invests almost exclusively in the stocks of large companies and because the managers tend to hold stocks for years-seven years, on average. Moreover, Dodge & Cox has a reputation for treating fund shareholders well, as evidenced by unusually low fees (Stock's annual expense ratio is 0.52%).

The fund's long-term record is superb. Over the past ten years through February 29, Stock returned an annualized 10%, an average of six percentage points better than Standard & Poor's 500-stock index. Like most other domestic stock funds, however, Dodge & Cox is having a difficult '08. Through March 28, it was down 13%, trailing the S&P index by three percentage points.

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Like the other Dodge & Cox funds, Stock is run by a committee, which in this case numbers nine manager-analysts. John Gunn, chairman of the firm and one of the nine, describes his team as "patient and persistent."

The managers conduct rigorous research before purchasing a stock and then hold for long periods. "We're long-term capitalists," quips Gunn, who notes that he looks out four to five years when valuing a stock. The yardstick, he says, is if he feels that the investment will be like stashing money for four to five years in a "safe deposit box."

Here are a few areas of the market that Gunn likes now. Drug stocks are selling at their lowest valuations in 20 years, he calculates. So Stock has been a buyer of big pharma shares including Sanofi-Aventis (SNY), Novartis (NVS), Amgen (AMGN) and GlaxoSmithKline (GSK).

The world is struggling to pump out enough oil, which helps to explain why the fund has built a large position in Schlumberger (SLB), the leading oil-services firm. Schlumberger is a good example of a stock that's not typical fare for bargain hunters. But Gunn says it is reasonably priced given the company's growth potential. In fact, he notes that the valuation range between so-called growth stocks and value stocks is unusually narrow at the moment.

Gunn predicts that two "tidal forces" acting out over the next several years will be the quick pace of technological innovation and economic growth in the developing world of 5.5 billion people. He notes that denizens of the third world are increasingly "plugging in to the global economy," which is one reason why Hewlett-Packard (HPQ) is the fund's largest holding.

Here's how Gunn describes the way he serves investors. "Part of our role is we have the responsibility for our clients' wealth. Going down this mysterious river, we have to watch out for the sandbars, rocks and all kinds of dangers." This is one fund that plays a strong game of defense and offense.