Market Commentary
After performing strongly in the first half of 2023, global equity markets posted modest declines in the third quarter, with the MSCI ACWI Index down 3.4%. The reversal in the quarter reflected concerns around potentially “higher for longer” U.S. interest rates, prospects for a soft landing in the United States, and more tepid growth rates in China. Despite the weaker quarter, year-to-date returns remain solid, with the MSCI ACWI up 10.1%, led by strength across the United States, Europe, and Japan. In contrast, emerging markets' performance was muted overall (MSCI Emerging Markets Index up 1.8%), with strong increases in Brazil (up 12.6%) and India (up 8.0%), offset by a pullback in China (down 7.3%).2
Global value stocks3 outperformed growth stocks by 3.1 percentage points4 during the quarter; however, the valuation gap remains wide. The MSCI ACWI Value Index5 traded at 11.7 times forward earnings6 compared to 22.3 times for the MSCI ACWI Growth Index.7 International equities also continue to trade at a substantial discount to U.S. equities, at 12.6 times forward earnings (MSCI EAFE Index8) compared to 18.6 times (S&P 500 Index9).
Portfolio Strategy
The Fund's Class I shares returned 0.6% in the third quarter of 2023, outperforming the MSCI ACWI by 4.0 percentage points. The Fund's overweight positions and holdings in Energy, Financials, and Communication Services were the largest contributors to relative performance. The Fund's Information Technology underweight also contributed. These contributions were modestly offset by holdings in Industrials, the only sector that detracted from relative performance.
At Dodge & Cox, we are active, value-oriented investors. As of September 30, our disciplined, long-term investment approach has helped the Fund outperform the MSCI ACWI over all standardized measurement periods: quarter, year-to-date, 1-, 3-, 5-, 10-years, and since inception.
During the third quarter, we trimmed Information Technology, namely VMware (VMW, Financial), after strong performance.10 The Fund added most to the Health Care and Consumer Discretionary sectors. We established three new positions in Health Care: Avantor (AVTR, Financial), a materials, equipment, and services provider; Neurocrine Biosciences (NBIX, Financial), a biopharmaceutical company; and Baxter International (BAX, Financial), a medical equipment firm. In Consumer Discretionary, we initiated a position in VF Corp. (VFC, Financial), an apparel and footwear company. The Fund remains overweight Financials, Health Care, and Communication Services, and meaningfully underweight Information Technology.
We continue to be optimistic about the long-term outlook for the Fund, which is exposed to a range of sectors and investment themes. We are also encouraged by the Fund's attractive valuation of 10.5 times forward earnings, compared to 15.5 times for the MSCI ACWI.
Thank you for your continued confidence in Dodge & Cox.
Performance Review (Fund's Class I Shares vs. MSCI ACWI) Third Quarter
Key contributors to relative results included the Fund's:
- Overweight position in Energy, the best-performing sector of the market, and selected holdings—specifically Ovintiv (OVV, Financial), Suncor Energy (SU, Financial), and Occidental Petroleum (OXY, Financial);
- Financials holdings—notably UBS Group (UBS, Financial)—and overweight position in the sector;
- Communication Services holdings, including Charter Communications (CHTR, Financial) and Comcast (CMCSA, Financial), and overweight position in the sector; and
- Position in VMware.
Key detractors from relative results included the Fund's:
- Industrials holdings, including RTX Corp. (RTX, Financial) and Johnson Controls International (JCI, Financial); and
- Positions in Coherent (COHR, Financial) and Entain (LSE:ENT, Financial).
Year to Date
Key contributors to relative results included the Fund's:
- Communication Services holdings, notably Alphabet (GOOG, Financial) and Charter Communications, and overweight position in the sector;
- Consumer Staples11 holdings and underweight position in the sector;
- Industrials holdings, including FedEx (FDX) and General Electric (GE); and Positions in VMware, UBS Group, and XP (XP).
Key detractors from relative results included the Fund's:
- Underweight position in Information Technology, the best-performing sector of the market, and selected holdings—particularly an underweight position in Microsoft (MSFT);
- Consumer Discretionary holdings, such as JD.com (JD) and Entain; and Positions in Charles Schwab (SCHW), RTX Corp., Incyte (INCY), and Johnson Controls International.
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.
The Fund invests in securities and other instruments whose market values fluctuate within a wide range so your investment may be worth more or less than its original cost. International investing involves more risk than investing in the U.S. alone, including currency risk and a greater risk of political and/or economic instability; these risks are heightened in emerging markets. The Fund may use derivatives to create or hedge investment exposure, which may involve additional and/or greater risks than investing in securities, including more liquidity risk and the risk of a counterparty default. Some derivatives create leverage.
