Dodge & Cox Balanced’s Makeover Is Going Well

Key Morningstar Metrics for Dodge & Cox Balanced

• Morningstar Medalist Rating: Bronze
• Process Pillar: Average
• People Pillar: Above Average
• Parent Pillar: High

Dodge & Cox Balanced DODBX is performing as expected, and management’s recent efforts to control the fund’s risks are proving effective. A longer track record of execution would increase our confidence that the changes will continue to provide a more balanced experience for investors.

In May 2022, a newly formed balanced fund committee, which features a well-rounded mix of the firm’s equity, fixed-income, and quantitative veterans, officially took over the Dodge & Cox Balanced’s management from the US equity committee and a rotating cast of fixed-income experts. Following the fund’s sharp losses during the 2020 coronavirus-driven bear market, the committee started as a working group. This new structure has driven a more integrated approach as portfolio decisions rely less on one asset-class team.

The committee has made several tangible changes to the portfolio that have helped reduce the fund’s volatility. The team has added more international stocks and short-term Treasury Inflation-Protected Securities to increase diversification. It chooses international stocks that are vetted and approved by the firm’s global investment committee, which is made up of members of both the US and international investment committees, including CIO David Hoeft, a named manager on this strategy since 2002. At the end of June 2024, the portfolio held about 15% in non-US stocks, more than double the weighting at the end of March 2020. TIPS are new to the portfolio. Dodge & Cox Balanced is expected to keep about a 5% weighting in the inflation-linked bonds, which adds some higher quality to its typically credit-heavy bond sleeve.

The team also keeps a steady 5% short position in the S&P 500; it’s not an ideal hedge for a value-focused portfolio given the mismatch in holdings and company weightings, but it does add some protection against broader stock market drawdowns.

The changes have led to a smoother ride thus far. Over the trailing three-year period ended June 2024, the fund’s annualized standard deviation was 12%, right in line with the Morningstar Category average. Before the formation of the multi-asset committee, it had typically been one of the most volatile in the category over any given three-year period.

Investors should continue to expect Dodge & Cox Balanced to shine when value stocks are outperforming, and the recent portfolio changes should make the fund more resilient during unfavorable periods.

Dodge & Cox Balanced: Performance Highlights

This fund’s long-term track record has been excellent, though it has had bumps along the way.

Over the trailing 10 years ended June 30, 2024, the I share class’ 7.77% annualized return far outpaced the typical moderate-allocation peer’s 6.20% annualized return and the Morningstar Moderate Target Risk Index’s 5.50% annualized return. Its performance versus its prospectus benchmark of 60% S&P 500 and 40% Bloomberg US Aggregate Bond Index was more modest, though the fund did still beat it. On a risk-adjusted basis, however, Dodge & Cox Balanced still lagged its benchmark over the trailing five and 10 years because of its higher volatility. Its 10-year annualized standard deviation, for example, was 12% as of the end of June; that’s about 25% higher than its benchmark.

Since the multi-asset committee started making changes to the process after 2020, volatility has come down. Its 12.3% standard deviation over the trailing three years was less than its benchmark’s 13.1%.

Lower volatility should help reduce drawdowns when the fund’s value focus is out of favor. In the past, Dodge & Cox Balanced regularly landed in the worst decile during stock market selloffs when bonds rallied. During the bear market in the first quarter of 2020, for example, Dodge & Cox Balanced lost 31% from peak to trough, trailing its benchmark by almost 10 percentage points. Its value tilt and lower-duration profile did greatly benefit investors during 2022′s tumultuous rising interest-rate environment when it beat 90% of peers.