Dodge & Cox grows on performance, PIMCO flow

Charles Pohl
Charles Pohl said Dodge & Cox prefers to concentrate on investing client assets over marketing.

Dodge & Cox is on a roll.

Assets under management at the San Francisco-based firm reached $270 billion as of Dec. 31, the highest in its 84-year history, company data show.

Net mutual fund inflows in 2014 were a firm-record $26 billion with 92% of that going into two strategies. Inflows into separate accounts were also up, but the firm could not provide those numbers.

In part, firm officials can thank the turmoil at Pacific Investment Management Co., Newport Beach, Calif., for the stellar year.

The $39 billion core bond fund, the Dodge & Cox Income Fund, garnered $13 billion in net inflows in 2014, data from Morningstar Inc. show. The firm also has $31 billion in separate accounts built on the strategy, $1 billion of which came in during the last quarter of 2014.

Its largest offering, the $64 billion international stock fund, took in $11 billion in net inflows in 2014, Morningstar data show.

While performance at both funds is strong, it's clear the Dodge & Cox bond strategy benefited from outflows at PIMCO, said investment consultant Michael Rosen, a principal of Angeles Investment Advisors LLC, Santa Monica, Calif.

Clients pulled more than $100 billion from PIMCO's Total Return Fund in 2014 because of performance problems and personnel changes, including the departure of William H. Gross, PIMCO's co-founder and co-CIO, who joined Janus Capital Group in September.

Morningstar data show the Dodge & Cox mutual fund garnered $7 billion — more than half of its inflows for 2014 — in the last three months of the year, after Mr. Gross' departure from PIMCO.

Investors who moved to the Dodge & Cox fixed-income strategy from PIMCO include the $1.2 billion San Luis Obispo County (Calif.) Pension Trust; the $835 million 401(k) plan of Parsons Corp., Pasadena, Calif.; the Yuma (Ariz.) Regional Medical Center's $24 million 401(k) plan; the $177 million West Palm Beach (Fla.) Firefighters Pension Fund; and $114 million 401(k) plan of GoDaddy.com LLC, Scottsdale, Ariz.

Dodge & Cox officials expect to pick up more separate account inflows in the next few months, noting many institutions still are in the process of finding a replacement for PIMCO.

But you won't find officials of the employee-owned value-oriented money manager bragging about 2014's inflows. (The core bond fund inflows ranked it fifth last year among the 1,365 peer fixed-income funds followed by Morningstar and the international stock fund ranked second among 1,145 international equity mutual funds.)

Dodge & Cox does no advertising and only limited marketing. It has no public relations staff.

That approach, is “very unique,” Mr. Rosen said, describing himself as a fan of the way Dodge & Cox operates.

But it's the way Dodge & Cox has operated since its founding in 1930. Dodge & Cox Chairman and Chief Investment Officer Charles Pohl said the firm's philosophy is to focus on client investments.

“You have to ask yourself the question: Are you focused on investing the money for the benefit of your clients long term; is that what you're coming in and doing every day? Or are you thinking about marketing strategies or operational complexity, those other sorts of things?”

The key tenets of the firm's investment and management philosophy date to its founding: find undervalued investments, buying low and selling high.

66% institutional

Firm officials say 66% of total assets under management are institutional. Dodge & Cox offers six mutual funds, three of which have separate accounts associated with them. The firm also offers institutional-only fixed-income strategies that are not connected to a mutual fund.

Dana M. Emery — the firm's CEO, president and director of fixed income — said that for “simplicity,” key products such as the international stock fund offer no separate accounts. She said using mutual funds has allowed the firm to keep administrative costs low and pass along those savings to investors.

While the firm offers some separate accounts, Ms. Emery said a decision was made that newer offerings, such as the international stock fund which was launched in 2001, would be offered as stand-alone funds only.

Having too many investment products would get “unwieldy,” she said, adding Dodge & Cox wants to stay foremost an investment firm run by investment professionals, “rather than creating products for the supermarket of investment vehicles.”

Dodge & Cox officials on Jan. 5 announced they had closed the $64 billion international stock fund, its largest offering, to new investors. “We want to tap the brakes on the fund's growth,” said Diana S. Strandberg, Dodge & Cox's senior vice president and director of international equity, in an interview. If the fast pace of inflows to the fund continued, it could impair fund managers' stock picking, she said.

Performance for both the international stock and core bond funds has been strong overall.

The Dodge & Cox Income Fund slightly underperformed the Barclay's Aggregate Bond index, its benchmark, in 2014, but outperformed for the three- and five-year periods ended Dec. 31, Morningstar data show.

For the 12 months ended Dec. 31, the Dodge & Cox fund returned 5.4% compared to the benchmark's 5.9%. But the fund returned a three-year annualized 4.6% vs. the benchmark's 2.6%, and a five-year annualized return of 5.1% vs. 4.4%.

The international stock fund had a 0.08% investment return in 2014, significantly outperforming its benchmark, the MSCI All Country World index, ex-U.S., at -4.9%, according to Morningstar data. That put it in the ninth percentile of similarly rated funds.

For the three years ended Dec. 31, the fund's annualized 15.2% return topped the benchmark's 11.06%; for five years, the fund returned an annualized 7.8% vs. 5.3%.

The fund drew large inflows because of its investment performance, said Gregg Wolper, a senior analyst with Morningstar in Chicago. Portfolio managers bought stocks in recent years that have been out of favor, he said, like those in the pharmaceutical industry where there was investor concern about the lack of new drugs in the pipeline.

The growth at Dodge & Cox is a dramatic reversal from the depths of the financial crisis, when its value-oriented portfolio managers favored financial stocks like AIG, Fannie Mae and Wachovia Corp.

Dodge & Cox had $235 billion in assets under management at the end of 2007; 15 months later, on March 31, 2009, assets had plummeted to $126 billion, its low point.

"Up from the ashes'

“It's an up-from-the-ashes story,” said Donald Putnam, a managing partner in San Francisco with investment bank Grail Partners, and an observer of the asset management scene. Mr. Putnam said that despite the asset losses, investment personnel held to their fundamental, team-oriented investment process. “They've shown that self-discipline and focus really matters,” he said.

Mr. Wolper said the philosophy did create some problems for Dodge & Cox during the crisis.

“They were following the strategy of buying when things were low; they bought into the banks and the insurance companies in the middle of the crisis, and some of the usual (immediate) bounce back did not happen,” he said.

But Dodge & Cox officials learned lessons from that, said Ms. Strandberg. One change made, she said, was to charge at least one member of each strategy's investment committee to make the case against buying any particular security, to further the debate over which securities to purchase.

But top executives say the key premise of buying undervalued securities low and selling high has not changed. “We stuck with our philosophy and our investment strategy that served us well for decades,” said Mr. Pohl.

One thing is certain — the stability of Dodge & Cox would never be threatened by the departure of one portfolio manager. The firm emphasizes a team approach, and big egos don't make it inside the firm's office.

“That's one of the things that we try to screen for while we're hiring. There are some people that have a need ... to have the spotlight on themselves, and those are not the people we're going to have working at Dodge & Cox,” said Mr. Pohl.

The firm doesn't launch new strategies very often. Its global bond strategy opened May 1, 2014, Mr. Pohl said. Before that, the newest strategy was the international stock fund, in 2001.

Ms. Emery said “we want to be very careful and gradual in terms of how we grow.” n

This article originally appeared in the January 12, 2015 print issue as, "Dodge & Cox grows on performance, PIMCO flow".