The Dodge and Cox Stock Fund (NASDAQMUTFUND:DODGX) is one of the oldest and most successful stock-based mutual funds out there. Founded in 1965, this mutual fund has more than $59 billion in assets, and has historically outperformed the benchmark S&P 500 over long periods of time, even when factoring in its management fees:
However, the fund's performance in recent years hasn't been quite as strong:
As you can see, the fund has basically kept up with the market over the past four years, and has actually underperformed since the beginning of 2014. Is the Dodge and Cox Stock Fund losing its edge, or still a great long-term mutual fund? Let's take a closer look.
Smart kid in a class of dummies
While mutual funds remain the most common investment for most people, there has been a major shift over the past few years from actively managed funds (like the Dodge and Cox Stock Fund) to passive, index-based mutual funds. The biggest reason? Most actively managed funds simply underperform index funds, and at a higher fund management cost to boot.
According to the S&P Dow Jones Indices SPIVA U.S. scorecard, which tracks the performance of actively managed mutual funds against their benchmarks, the majority of actively managed funds have underperformed their benchmark indices in most years. According to the most recent report, more than 86% of actively managed large-cap mutual funds (the class that the Dodge and Cox Fund belongs to) underperformed the S&P 500 last year. Since 2000, there have been only three years in which more than half of these mutual funds didn't underperform the market.
It gets worse for the active crowd, too. According to S&P's Persistence Scorecard, which measures the consistency of performance among actively managed funds, it's really hard to stay on top. Less than 10% of the large-cap funds in the top quartile in 2012 were still there at the end of 2014.
What sets Dodge and Cox Stock Fund apart
The only edge that actively managed funds can really have is also their source of weakness: the fund managers and their strategy. The Dodge and Cox Stock Fund is run by a committee of nine (very) long-tenured managers, with an average of 27 years working for the firm. It's quite likely that this continuity has contributed strongly to the fund's track record.
Furthermore, Dodge and Cox's process is somewhat unique, in that it has remained independent and separate from Wall Street and is operated as a partnership, with all of the fund managers being shareholders in the firm. Dodge and Cox has also remained as small and nimble as possible, housing its entire operation in a single office just blocks away from where it was founded in San Francisco more than 80 years ago.
The firm -- with all of its funds, not just the Stock Fund -- has always maintained a disciplined approach to investing, one heavily focused on value and on capital preservation. The valuation focus can be easily seen in the average price-to-earnings ratio of the fund's holdings, which at 14.9 times the prior 12 months' earnings is 15% lower than the 17.5 times P/E ratio of the S&P 500 as of March 31. It has been said that the firm's heavy value focus is in its DNA -- after all, Dodge & Cox was founded in the heart of the Great Depression.
Another notable aspect of Dodge & Cox is that every member of the Investment Policy Committee started as an analyst at the firm, working on equities and fixed-income. It's rare for Dodge & Cox to bring an investment manager in from outside of the firm.
The impact of management fees
According to a report from Morningstar, high management fees -- measured by the expense ratio -- tend to correlate with underperformance of actively managed funds. In 2013, the average U.S. stock mutual fund charged 1.25%, while the Dodge and Cox Stock Fund had an expense ratio of 0.52% through March 2015, fully 58% cheaper than the average.
That puts the fund in the top 20% of cheapest stock funds; according to the same Morningstar report, that correlates with better performance. In other words, cheaper funds tend to perform better than more expensive ones. And by a pretty wide margin, too: Funds in the cheapest quintile are almost twice as likely to outperform than funds in the most expensive three quintiles.
Whether it's simply a factor of poor fund management, a misalignment with shareholder interests, or some combination of these things, there is significant evidence that Dodge & Cox's low-cost and disciplined approach to fund management has contributed to its success.
Is this the right fund for you?
Frankly, I'm not usually a big fan of actively managed mutual funds, simply because there's so much evidence of underperformance of the entire class. However, Dodge and Cox seems to be an exception to the rule -- not to mention, an exceptionally well-run firm.
While I would never suggest anyone invest all of their capital in a single fund, anymore than I would urge them to buy just one stock, the Dodge and Cox Stock Fund seems like a solid choice. Its recent performance hasn't been market-beating, but the fund managers' value-focused, long-term approach -- and the historical performance -- shouldn't be overlooked.
Historical performance is no promise of future returns, but that doesn't mean it should be ignored.