The Dodge & Cox Global Stock Fund had a total return of –3.4% for the third quarter of 2021, compared to flat for the MSCI World Index. For the nine months ended September 30, 2021, the Fund had a total return of 16.9%, compared to 13.0% for the MSCI World.
After appreciating for three consecutive quarters, global equity markets were essentially flat in the third quarter of 2021, and the MSCI World Value Index slightly pulled back relative to the MSCI World Growth Index, amid the spread of the COVID-19 Delta variant. Overall, not much has changed, and we continue to observe that parts of the market provide compelling opportunities for active, value-oriented investment managers like Dodge & Cox.
As we have noted before, the valuation gap between value and growth stocks2 remains remarkably wide. In fact, it has almost returned to its peak from this January. The MSCI World Value trades at 13.7 times forward earnings compared to 28.3 times for the MSCI World Growth.3 The Financials, Energy, and Materials sectors are demonstrably cheaper than the rest of the market and remain large overweight areas of the MSCI World Value.
Similarly, and somewhat related, stocks that benefit from higher rates trade at historically wide discounts to stocks that benefit from lower rates. If interest rates rise in coming years, this will be a headwind to many growth stocks that have benefited from lower discount rates, and should benefit parts of the value universe, such as Financials.
International markets also continue to be priced at a meaningful discount to U.S. markets. The S&P 500 Index trades at 20.8 times forward earnings compared to 15.3 times for the MSCI EAFE Index and 12.6 times for the MSCI Emerging Markets Index. Emerging market valuations were impacted by China, which has tumbled 17% year
to date amid concerns about the Chinese government’s increased regulations across multiple industries. The government’s attempts to pursue common prosperity have disproportionately affected education and Internet companies so far. China internet stocks, as defined by the CSI Overseas China Internet Index, have dropped 54% from their peak in February 2021 through September 30, significantly lagging both the MSCI ACWI ex USA Index (down 1%) and the NASDAQ 100 Index (up 8%).4
At Dodge & Cox, we look past headlines to assess whether valuations appropriately reflect risk and opportunity or are either too pessimistic or optimistic. We conduct thorough, in-depth due diligence and update our thinking to incorporate short-term and long-term financial impacts as facts change. In addition, we incorporate the experience and judgment of a seasoned investment team to develop the insights and perspectives that enable us to build conviction.
We have found what we believe are highly attractive opportunities across the market, often in areas that receive the most debate. Built on a bottom-up basis, the Fund remains overweight Financials and Energy based on low valuations that reflect overly pessimistic expectations for future earnings and return of capital to shareholders. The
Fund is also overweight companies with research and development-driven earnings growth, such as in Health Care (18.0% of the Fund) and China Internet5 (5.8% of the Fund).
In Health Care, we have added to the Fund’s pharmaceutical holdings year to date given their compelling valuations and strong innovation pipelines which should drive attractive earnings growth over the coming years. We also started a new position in Fresenius Medical Care (
FMS, Financial) 6 (the world’s largest vertically integrated provider of dialysis
products and services) at an attractive valuation relative to its respective franchise strength and market leading position.
We added to the Fund’s China Internet holdings in Alibaba (
BABA, Financial), Baidu (BIDU, Financial), and JD.com (JD, Financial) after analyzing regulatory changes, revisiting the risk-reward outlook, and taking into account the significant pullback in the group. We recognize that we do not have a crystal ball when it comes to predicting future changes in regulations. However, the following factors weighed in favor of increasing the Fund’s exposure to these holdings. First, several of the government’s actions are quite similar to data privacy and anti-monopoly policies that can already be observed in other markets around the world. Second, government officials and publications have reached out to investors to clarify the government’s agenda, and stressed the government’s support of private enterprise. Third, these companies’ valuations now embed much more conservative assumptions for growth and profitability.
Going forward, we remain optimistic about the long-term outlook for the Fund’s portfolio. At 11.5 times forward earnings, the Fund trades at a significant discount to the overall market and remains overweight low-priced stocks that should benefit from accelerating economic growth. Despite concerns about the COVID-19 Delta variant, the economic recovery remains on track, and successful vaccination efforts have advanced the timeframe for easing the impact of the COVID-19 pandemic. Longer term, variants will likely be more manageable due to vaccine efficacy, novel therapies, and high levels of immunity.
As always, we remain focused on the long term, and we encourage our shareholders to do the same. Thank you for your continued confidence in Dodge & Cox.
Third Quarter Performance Review
The Fund underperformed the MSCI World by 3.4 percentage points during the quarter.
Key Detractors from Relative Results
- The Fund’s Health Care holdings (down 6% compared to up 1% for the MSCI World sector) hindered results. Sanofi (SNY, Financial) and Novartis (NVS, Financial) were detractors.
- The Fund’s relative results in the Consumer Discretionary sector (down 19% compared to down 1% for the MSCI World sector) also detracted. Alibaba and Naspers (JSE:NPN, Financial) underperformed.
- Additional detractors included FedEx (FDX, Financial), Baidu, and Grupo Televisa (TV, Financial).
Key Contributors to Relative Results
- The Fund’s relative results in the Materials sector (up 5% compared to down 5% for the MSCI World sector) helped results. Glencore (LSE:GLEN, Financial) and Nutrien (NTR, Financial) were contributors.
- The Fund’s average overweight position in the Financials sector (26% versus 13% for the MSCI World sector) also contributed. ICICI Bank (IBN, Financial), Aegon (AEG, Financial), Barclays (LSE:BARC, Financial), Capital One Financial (COF, Financial), and Wells Fargo (WFC, Financial) performed well.
- Additional contributors included Dell Technologies (DELL, Financial) and Ovintiv (OVV, Financial).
Year-to-Date Performance Review
The Fund outperformed the MSCI World by 3.9 percentage points year to date.
Key Contributors to Relative Results
- The Fund’s relative returns in the Energy sector (up 58% compared to up 34% for the MSCI World sector) and an average overweight position (7% versus 3%) contributed significantly to outperformance. Ovintiv, Occidental Petroleum (OXY, Financial), and Suncor Energy (SU, Financial) were strong performers.
- The Fund’s average overweight position in the Financials sector (27% versus 14% for the MSCI World sector) also meaningfully helped results. Wells Fargo, Capital One Financial, and ICICI Bank outperformed.
- Dell Technologies was also among the top contributors.
Key Detractors from Relative Results
- The Fund’s holdings in the Consumer Discretionary sector (down 17% compared to up 9% for the MSCI World sector) hurt results. Alibaba was a key detractor.
- Stock selection in the Health Care sector (up 4% compared to up 11% for the MSCI World sector) was also a drag on relative performance. Novartis and Sanofi underperformed.
- Additional detractors included Credit Suisse (CS, Financial), FedEx, Itau Unibanco (ITUB, Financial), Credicorp (BAP, Financial), and Baidu.
1The Fund’s 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 dividends but, unlike Fund returns, do not reflect fees or expenses. The MSCI World
Index is a broad-based, unmanaged equity market index aggregated from 23 Developed Market country
indices, including the United States. Results reflect dividends net of withholding taxes. MSCI makes no
express or implied warranties or representations and shall have no liability whatsoever with respect to any
MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other
indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. All
returns are stated in U.S. dollars, unless otherwise noted.
2 Generally, stocks that have lower valuations are considered “value” stocks, while those with higher valuations
are considered “growth” stocks.
3 Unless otherwise specified, all weightings and characteristics are as of September 30, 2021.
4 The NASDAQ 100 Index is a stock market index made up of equity securities issued by 100 of the largest nonfinancial companies listed on the Nasdaq stock market. This Index includes many of the China Internet companies’counterparts in the United States.
5 China Internet comprises Alibaba, Baidu, JD.com, Naspers, and Prosus.
6 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. Fund performance changes over time and currently 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.