Market Commentary
U.S. equity markets rose during the fourth quarter of 2023 ending a standout year for stocks. The S&P 500 was up 11.7% during the quarter and 26.3% for the year, driven by a resilient economy, easing inflation, and market optimism about the prospect of lower interest rates.
In 2023, the S&P 500's performance was led by the dramatic rise of the “Magnificent Seven” stocks2 and their respective sectors: Information Technology (Microsoft, Apple, and NVIDIA), Communication Services (Alphabet and Meta), and Consumer Discretionary (Amazon and Tesla). These seven stocks rose 76%3, increasing their share of the S&P 500's market capitalization from 20% to 28% during the year. In the fourth quarter, market breath increased and there were gains across a broader group of stocks and sectors, including Real Estate and Financials.
In a reversal of 2022 trends, U.S. growth stocks4 outperformed value stocks during the year, and the valuation disparity between value and growth stocks widened. The Russell 1000 Value ended the year trading at 16.0 times forward earnings5 versus 26.8 times for the Russell 1000 Growth Index.6
During the fourth quarter, we also established a new position in International Flavors & Fragrances (IFF), a leading global provider of flavors, scents, and other key ingredients to companies in the Food & Beverage and Consumer Products industries. IFF's stock price had declined considerably since its merger with DuPont Nutrition, providing us with an opportunity to invest in an attractive company with strong profitability, at a discounted valuation.
The Fund remains overweight the Financials, Health Care, and Communication Services sectors compared to both the S&P 500 and the Russell 1000 Value, and underweight Consumer Staples, Materials, Utilities, and Real Estate.
We continue to be optimistic about the long-term outlook for the Fund, which is diversified across a broad range of sectors and investment themes. We are also encouraged by the Fund's attractive valuation of 13.0 times forward earnings, compared to 20.4 and 16.0 times for the S&P 500 and the Russell 1000 Value, respectively. Thank you for your continued confidence in Dodge & Cox.
Portfolio Strategy
The Fund had a return of 9.8% in the fourth quarter of 2023, underperforming the S&P 500 while slightly outperforming the Russell 1000 Value.7 For the full year, the Fund had a total return of 17.5%, trailing the S&P 500's and surpassing the Russell 1000 Value's performance.7
For the full year, the Fund's underweight position and holdings in the Information Technology sector, along with its overweight position and holdings in the Financials sector, were the biggest detractors from its relative performance versus the S&P 500. Compared to the Russell 1000 Value, the Fund's underweight position and holdings in the Consumer Discretionary sector were the biggest positive contributors. While the Financials sector had a negative impact on the Fund's returns during 2023, the sector recovered later in the year. The Fund's overweight position and holdings in Financials were the largest contributors to the Fund's relative performance versus both the S&P 500 and the Russell 1000 Value during the fourth quarter.
At Dodge & Cox, we seek to build a portfolio of individual companies whose current market valuation does not adequately reflect the company's long-term opportunities. We maintain a long-term focus, conduct our own research, and employ a rigorous price discipline. This approach led us to reduce the Fund's exposure to companies that saw their valuations increase, such as Broadcom/VMware, Meta, and Alphabet, and increase exposure to companies in more defensive and stable sectors such as Health Care and Utilities.8
Performance Review (Fund's Class I Shares vs. S&P 500) Fourth Quarter
Key contributors to relative results included the Fund's:
- Financials overweight and holdings, notably Charles Schwab (SCHW, Financial), Capital One (COF, Financial), and Wells Fargo (WFC, Financial);
- Underweight and stock selection in Consumer Staples;
- Consumer Discretionary holdings; and
- Position in VMware (VMW, Financial).
Key detractors from relative results included the Fund's:
- Information Technology underweight and holdings, including underweight position in Microsoft (MSFT, Financial);
- Communication Services holdings, notably Charter Communications (CHTR, Financial);
- Overweight and stock selection in Health Care, particularly Sanofi (SNY, Financial);
- Energy overweight, including Occidental Petroleum (OXY, Financial); and
- Position in FedEx (FDX, Financial).
2023
Key contributors to relative results included the Fund's:
- Stock selection and underweight position in Consumer Staples;
- Utilities underweight;
- Stock selection in Industrials, particularly General Electric (GE, Financial) and FedEx
- Materials underweight and holdings; and
- Position in VMware.
Key detractors from relative results included the Fund's:
- Stock selection and underweight position in Information Technology, mainly underweight position in Microsoft;
- Overweight position and holdings in Financials, including Charles Schwab;
- Health Care overweight; and
- Position in Occidental Petroleum.
Performance Review
(Fund's Class I Shares vs. Russell 1000 Value)
Fourth Quarter
Key contributors to relative results included the Fund's:
- Financials overweight and holdings, notably Charles Schwab, Capital One, and Wells Fargo;
- Stock selection and underweight position in Consumer Staples;
- Underweight and stock selection in Energy; and
- Position in VMware.
Key detractors from relative results included the Fund's:
- Stock selection in Communication Services, especially Charter Communications;
- Industrials underweight and stock selection, particularly FedEx;
- Underweight position in Real Estate; and
- Positions in Occidental Petroleum and Sanofi.
2023
Key contributors to relative results included the Fund's:
- Stock Selection in Consumer Discretionary;
- Overweight in Information Technology, especially VMware and Microsoft;
- Consumer Staples underweight and holdings;
- Underweight position in Utilities; and
- Positions in Alphabet (GOOG, Financial) and General Electric.
Key detractors from relative results included the Fund's:
- Financials holdings, particularly Charles Schwab and MetLife (MET, Financial);
- and Positions in Occidental Petroleum, Meta Platforms (META, Financial), and RTX Corp. (RTX, Financial).
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.
