Market Commentary
U.S. equity markets rose during the fourth quarter of 2022, after nine months of negative returns. 2022 was a challenging year; the S&P 500 had its worst calendar year return since 2008. Energy (up 66%) was the S&P 500’s standout sector during the year, and Utilities (up 2%) was the only other sector with a positive return.
Amid heightened concerns about inflation, the Federal Reserve raised U.S. interest rates to their highest level in 15 years. This clouded the outlook for economic growth and stoked fears of a recession. Many companies are facing a challenging combination of supply chain bottlenecks, higher input prices, weaker consumer demand, and tighter credit markets.
U.S. value stocks2 outperformed growth stocks by 21.6 percentage points in 2022.3 While the valuation disparity between value and growth stocks has compressed, it remains wide: the Russell 1000 Value trades at 14.6 times forward earnings4 versus 21.5 times for the Russell 1000 Growth Index.5 While rates rose throughout the year, the valuation spread between stocks benefiting from, and those hindered by, low interest rates continues to be very wide.
Portfolio Strategy
The Fund had a positive return in the fourth quarter of 2022, outperforming the S&P 500 by 5.4 percentage points and the Russell 1000 Value by 0.6 percentage points.6 For the full year, the Fund had a negative return, but declined significantly less than the S&P 500, and modestly less than the Russell 1000 Value. The Fund’s performance benefited from its overweight position in Energy and our long-held valuation discipline, as we avoided exposure to high-valuation companies that have seen dramatic share declines. We believe the Fund is well positioned over the long term. Our emphasis on individual security selection has resulted in a diversified portfolio with exposure to a variety of investment theses. Areas of emphasis include Financials, which have benefited from higher rates, and Health Care, which has below-average sensitivity to the economy. We are also encouraged by the Fund’s attractive valuation of 11.5 times forward earnings, well below the major indices.
We believe volatile market environments can provide opportunities for investors with patience, discipline, and a long-term investment approach. Our active, value-oriented management style has enabled us to navigate many uncertain environments successfully. We make investment decisions based on our long-term assessment of a company's fundamentals and are not overly influenced by short-term considerations. Our valuation discipline helps us to avoid areas where we believe valuations are not supported by a company’s long-term prospects. We seek to take advantage of valuation declines for companies where we conclude the long-term outlook is positive. Based on this approach, we started positions in a number of companies in 2022, including Amazon (AMZN, Financial), General Electric (GE, Financial) and PayPal (PYPL, Financial).7
Thank you for your continued confidence in Dodge & Cox.
Performance Review (Fund’s Class I Shares vs. S&P 500) Fourth Quarter
Key contributors to relative results included the Fund's:
- Stock selection and underweight position in Consumer Discretionary;
- Health Care holdings—especially Sanofi (SNY, Financial), Gilead Sciences (GILD, Financial), and Cigna (CI, Financial)—and overweight position in the sector;
- Information Technology holdings—notably Microsoft (MSFT, Financial) and VMware (VMW, Financial); and,
- Industrials holdings—particularly General Electric, Johnson Controls International (JCI, Financial), and Raytheon Technologies (RTX, Financial)—and overweight position in the sector.
Key detractors from relative results included the Fund's:
- Positions in Occidental Petroleum (OXY, Financial), Capital One Financial (COF, Financial), and Wells Fargo (WFC, Financial).
2022
Key contributors to relative results included the Fund's:
- Energy overweight and holdings—especially Occidental Petroleum, ConocoPhillips (COP, Financial), and Williams Companies (WMB, Financial);
- Stock selection in Information Technology—including VMware and Microsoft—and underweight position in the sector;
- Health Care holdings—particularly Cigna, Sanofi, and Gilead Sciences—and overweight position in the sector;
- Stock selection and underweight position in Consumer Discretionary;
- Financials overweight and holdings—including MetLife (MET) and Charles Schwab (SCHW); and,
- Position in Raytheon Technologies.
Key detractors from relative results included the Fund's:
- Underweight positions in the Consumer Staples and Utilities sectors; and,
- Positions in Charter Communications (CHTR), Capital One Financial, Elanco Animal Health (ELAN), FedEx (FDX), and DISH Network (DISH).
Performance Review (Fund’s Class I Shares vs. Russell 1000 Value)
Fourth Quarter
Key contributors to relative results included the Fund's:
- Health Care holdings—including Sanofi and Gilead Sciences— combined with an overweight position in the sector;
- Industrials holdings—mainly General Electric and Johnson Controls International;
- Real Estate underweight position and stock selection; and, Positions in Anheuser-Busch InBev (BUD) and MetLife.
Key detractors from relative results included the Fund's:
- Energy holdings—mainly Occidental Petroleum;
- Communication Services overweight and holdings—particularly Alphabet (GOOG) and Fox Corp. (FOXA);
- Stock selection in Consumer Discretionary—especially Amazon— combined with an underweight position in the sector; and,
- Positions in Capital One Financial and Wells Fargo.
2022
Key contributors to relative results included the Fund's:
- Energy overweight and holdings—including Occidental Petroleum, ConocoPhillips, Williams Companies, and Schlumberger (SLB);
- Health Care holdings—particularly Cigna and Gilead Sciences—and overweight position in the sector;
- Real Estate underweight position and stock selection; and,
- Positions in MetLife, Charles Schwab, and Raytheon Technologies.
Key detractors from relative results included the Fund's:
- Communication Services holdings—including Charter Communications, Alphabet, Meta Platforms (META), and DISH Network— and overweight position in the sector;
- Underweight positions in the Utilities and Consumer Staples sectors; and,
- Positions in Capital One Financial, FedEx, Elanco Animal Health, and Microsoft.
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.
