Value Investing: Is Dodge & Cox Stock Fund Still Worth It?

Value investing had a fleeting moment in the sun earlier this year. When the S&P 500 took a near 20% dive, funds like Dodge & Cox Stock (DODGX) offered some shelter, falling less dramatically.

Since then, we’ve seen Dodge & Cox Stock bounce back. The fund gained, sure, but it hasn’t kept pace with the overall market’s robust rally. This raises a crucial point: why bother with a fund that seemingly underperforms when growth stocks are soaring?
>

Portfolio diversification remains key. Right now, the S&P 500 is heavily weighted toward growth and momentum stocks. A fund like Dodge & Cox, with its focus on undervalued companies, could provide a valuable counterweight. It’s about balance, preventing your portfolio from tilting too heavily in one direction.

Dodge & Cox Stock’s top holdings give a glimpse into its strategy. You won’t find the usual tech behemoths here. Instead, the fund favors companies like Charles Schwab (SCHW), Johnson Controls International (JCI), and RTX (RTX). Interestingly, each of these has performed well, gaining over 40% in the last year. This suggests the fund managers might be onto something, even if it’s not immediately reflected in the fund’s overall performance relative to the S&P 500.

The managers at Dodge & Cox are what you might call “true-blue contrarians.” They actively seek out struggling sectors, betting that they can unearth undervalued gems. Health care, a sector that has lagged behind since 2023, has recently seen increased investment from the fund.
>

Consider their move to increase their stake in UnitedHealth Group (UNH). The company brought back a former CEO, and Dodge & Cox saw an opportunity. The fund managers noted that UNH was trading at a discount relative to the market and its historical valuation. That’s value investing in action – buying when others are fearful.

Here’s the thing about value investing: it demands patience. These investment theses take time to materialize. It’s not a get-rich-quick scheme.

That said, the five-year returns paint a more reassuring picture. Dodge & Cox Stock’s annualized return has outperformed the S&P 500. This highlights a crucial point: long-term perspective is crucial when assessing value-oriented funds.

Value Investing in a Changing Market

The real question, though, is whether the traditional value investing approach still works. The market dynamics have transformed. Intangible assets such as brand reputation, network effects, and intellectual property drive value creation now. These are less quantifiable. Classic valuation metrics might not fully capture a company’s true worth.

Yet, there’s something to be said for a strategy that prioritizes tangible assets and cash flow. In an era of sky-high valuations and speculative fervor, a dose of groundedness is welcomed. Value investing can act as an anchor, protecting your portfolio from irrational exuberance.

Moreover, interest rates affect value stocks. Value stocks tend to perform well in high interest rate environment. High interest rates are expected to prevail for sometimes now giving value stocks an edge over growth stocks.

My Take

I’ve seen investment cycles come and go. What’s hot today is often not tomorrow. A diversified portfolio, including both growth and value, is almost always the smartest path.

Dodge & Cox Stock, despite its recent underperformance relative to the S&P 500, still holds a place in many portfolios. Its focus on undervalued companies provides diversification. And its long-term track record suggests the managers know what they’re doing.

Key Considerations for Investors

Before investing in Dodge & Cox Stock, mull over the following:

Your time horizon: Value investing needs time to work. If you’re looking for quick profits, this isn’t the fund for you. Your risk tolerance: Value stocks can be volatile, especially during market downturns. Assess your comfort level with potential losses. Your portfolio allocation: Ensure Dodge & Cox Stock complements your existing investments. Avoid over-concentration in any one asset class or investment style. Fund expenses: Factor in the fund’s expense ratio. While Dodge & Cox is a no-load fund, expenses still impact your returns.

In any case, don’t chase performance. Instead, focus on building a well-diversified portfolio that aligns with your long-term financial goals. Value investing, while sometimes out of favor, remains a viable strategy for achieving those goals. It is a reminder that patience, discipline, and a contrarian mindset can pay off in the long run.

Read Original

Keywords: Value investing, Dodge Cox Stock, DODGX, undervalued companies, portfolio diversification, contrarian investing, long-term returns, interest rates