To Our Shareholders,
The Dodge & Cox Global Stock Fund—Class I had a total return of 5.30% for the six-month period ended June 30, 2024, compared to a return of 11.30% for MSCI ACWI Index.1
MARKET COMMENTARY
Global equity markets rose during the first half of 2024, extending the strong market uptrend that began in late 2022. Investors were encouraged by better-than-expected earnings growth,2 improving inflation indicators, and easing recession concerns.
All major market regions rose in the first half of 2024, with the MSCI USA Index3 (up 14.6%) significantly outperforming single-digit returns posted by Europe, Japan, and the emerging markets. China recovered, led by a rebound in the second quarter.
Information Technology and Communication Services were clear leaders, returning 24.8% and 20.4%, well above the returns of the remaining sectors. The outperformance of these two sectors, traditionally home to more growth-oriented stocks, fueled the increasing divergence in valuation between growth and value stocks.4 The MSCI ACWI Growth Index5 now trades at 26.2 times forward earnings6—twice that of the MSCI ACWI Value Index (13.0 times).7
INVESTMENT STRATEGY
During the first half of 2024, the Fund generated a positive absolute return but underperformed the MSCI ACWI. The Fund's biggest detractors from relative performance were its underweight position in Information Technology; Health Care holdings, including CVS Health (CVS, Financial); Communication Services names, particularly Comcast (CMCSA, Financial) and Charter Communications (CHTR, Financial); and positions in XP (XP, Financial) and Akzo Nobel (BOM:500710, Financial). Meanwhile, key contributors were stock selection in Industrials and individual positions in Barclays (BCS, Financial), Coherent (COHR, Financial), and Alphabet (GOOG, Financial).
The widening valuation gaps between U.S. and non-U.S. stocks, as well as between growth and value stocks, create opportunities for bottom-up, value-oriented investors like Dodge & Cox. As active investors, we also follow our holdings closely and respond to changes in valuation.
This year, following strong performance, we trimmed the Fund's developed market bank and Energy holdings. We found new opportunities across many sectors, including Health Care and Industrials where we increased the Fund's allocations. Relative to MSCI ACWI, the Fund remains overweight Financials, Health Care, and Communication Services, and underweight Information Technology, Consumer Staples, Real Estate, and Utilities.
Opportunities in Health Care
An element of our investment philosophy is to be contrarian, searching for opportunities in companies that may be currently out-of-favor but show signs of attractive long-term prospects.
During the first half of 2024, the Fund's overweight position and holdings in the Health Care sector significantly detracted from the Fund's results relative to the MSCI ACWI. Regulatory concerns weighed on the sector broadly, while continued market optimism around GLP-1 inhibitor drugs8 benefited only select companies.
Within Health Care, the Health Care Providers and Services industry has faced significant challenges this year due to concerns around the profitability of Medicare Advantage (MA)9 providers, the Change Healthcare cyber-attack,10 increased regulatory scrutiny, and proposed legislation designed to improve transparency around Pharmacy Benefit Managers (PBMs). Additionally, the COVID-19 pandemic's aftermath continues to hurt industry profitability, with previously deferred health care activity on the rise, raising expenses, and drug and medical cost inflation.
We believe this challenging environment has created attractive long-term investment opportunities, particularly in MA plan providers—where the recent weak underwriting cycle contrasts with attractive long-term growth prospects—such as Humana and CVS Health.11
Humana (HUM, Financial) is a leading health services provider focused on the MA insurance market, which provides supplemental coverage for seniors in the U.S. federal Medicare program. The company has a long history of relatively stable profit margins and strong growth, but recent high utilization rates and weak government reimbursement weighed on profitability. While acknowledging these headwinds, we believe Humana is strategically positioned to regain strong profitability and revenue growth. Thus, we initiated a position in Humana during the second quarter of 2024.
While best known for its retail pharmacy, CVS Health also has health insurance (primarily MA) and PBM businesses that account for a significant portion of its revenues. Like Humana, CVS Health recently faced margin pressures due to higher medical loss ratios in its MA plans. The company also faces financial pressures in its retail pharmacy and regulatory risks related to its PBM business. These risks created an attractive opportunity to increase the Fund's position in this leading diversified health care services company at a compelling valuation.
Industrials
At first glance, the Industrials sector appears to be relatively expensive at 18.8 times forward earnings, compared to 17.7 times for the MSCI ACWI. However, our Global Industry Analysts have been monitoring the opportunity set and identified attractive investments even in this fully valued segment of the market. The Fund's new positions in Ashtead (LSE:AHT, Financial) and DHL Group (XTER:DHL, Financial) are good examples of these.
Ashtead, a U.K. equipment rental company, primarily operates in non-residential construction, facilities maintenance, and industrial markets. While domiciled in the United Kingdom, Ashtead generates most of its revenue and operating profit from its U.S. subsidiary, Sunbelt Rentals, which is the second-largest player in the highly fragmented U.S. equipment rental industry. Over the past decade, management has demonstrated its ability to execute on growth opportunities, improve fleet productivity, and integrate acquisitions across multiple cycles. Given the company's advantaged scale, we believe efficiency initiatives and continued industry consolidation should create value over our investment horizon.
DHL, a global transportation and logistics conglomerate, is the largest player in the consolidated international express market, competing with FedEx (FDX, Financial) and UPS (UPS, Financial). The company operates five business segments, and its Express business comprises approximately half of the group's operating profit. In the past two years, DHL has been impacted by an extended downturn where volume, pricing, and margins have deteriorated from pandemic highs. Nevertheless, volume is beginning to show signs of recovery, pointing to potential opportunities for margin expansion. Furthermore, over the past decade, DHL's business quality and free cash flow have significantly improved, yet both its absolute and relative valuations remain flat.
Energy
In the first half of 2024, we trimmed the Fund's Energy exposure, reducing our overweight position in the sector. We also sold Ovintiv (OVV, Financial)—an oil and gas exploration company—on concerns about future inventory replacement for the company's shale resources as well as its energy transition strategy. At the same time, we initiated a position in BP (BP, Financial), one of the largest integrated oil companies in the world. BP has a large and profitable portfolio of upstream and downstream assets but has experienced a great deal of turmoil over the past decade. The company endured the substantial cost of the Macondo oil spill, the loss of its Russian business, a failed strategy pivot of aggressively investing in its energy transition, and an unexpected CEO transition. Even though it trades at a steep discount to its global peers, we view BP's portfolio as being of comparable quality, and management is committed to being more disciplined with investments in renewables and low carbon ventures. With a low starting valuation of 7.1 times forward earnings, attractive assets, and shareholder-friendly behavior in the form of capital returns, we are enthusiastic about BP's prospects.
IN CLOSING
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 11.8 times forward earnings, compared to 17.7 times for the MSCI ACWI. Thank you for your continued confidence in Dodge & Cox. As always, we welcome your comments and questions.
For the Board of Trustees,
Dana M. Emery, Chair and President
July 31, 2024
1. All returns are stated in U.S. dollars, unless otherwise noted. The Funds' total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include dividend and/or interest income but, unlike Fund returns, do not reflect fees or expenses. The MSCI ACWI (All Country World Index) Index is a broad-based, unmanaged equity market index aggregated from developed market and emerging market country indices.
2. Earnings growth is the percentage change in a firm's earnings per share (EPS) in a period, as compared with the same period from the previous year.
3. The MSCI USA Index measures the performance of large- and mid-cap companies in the United States and covers approximately 85% of the market capitalization in the United States.
4. Generally, stocks that have lower valuations are considered “value” stocks, while those with higher valuations are considered “growth” stocks.
5. The MSCI ACWI Growth Index captures large- and mid-cap securities exhibiting overall value style characteristics across developed and emerging markets countries. The growth investment style characteristics for index construction are defined using five variables: long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate, long-term historical EPS growth trend, and long-term historical sales per share growth trend.
6. Unless otherwise specified, all weightings and characteristics are as of June 30, 2024. Price-to-earnings (forward) ratios are calculated using 12-month forward earnings estimates from third-party sources as of the reporting period. Estimates reflect a consensus of sell-side analyst estimates, which may lag as market conditions change.
7. The MSCI ACWI Value Index captures large- and mid-cap securities exhibiting overall value style characteristics across developed and emerging markets countries. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price, and dividend yield.
8. GLP-1 inhibitors are a class of drugs used in patients with type-2 diabetes as glucose-lowering therapies. They also have additional benefits of weight loss and blood pressure reduction.
9. Medicare Advantage (MA) is a health insurance option for Medicare beneficiaries, which offers a single plan to combine various types of insurance such as hospital insurance, medical insurance, prescription drug coverage, and often other benefits
10. In February 2024, the Change Healthcare cyber attack exposed medical records and disrupted U.S. health care services, prompting intervention from the U.S. Department of Health and Human Services.
11. The use of specific examples does not imply that they are more or less attractive investments than the portfolio's other holdings.
Returns represent past performance and do not guarantee future results. Investment return and share price will fluctuate with market conditions, and investors may have a gain or loss when shares are sold. Mutual fund performance changes over time and may be significantly lower than stated above. Performance is updated and published monthly. Visit the Fund's website at dodgeandcox.com or call 800-621-3979 for current month-end performance figures.
