Dodge & Cox Income Fund Is Still Leading the Pack

Key Morningstar Metrics for Dodge & Cox Income Fund

• Morningstar Medalist Rating: Gold
• Process Pillar: High
• People Pillar: High
• Parent Pillar: High

Dodge & Cox Income Fund’s DODIX adept investment team and robust investment approach make it tough to beat.

This fund’s success owes to its patient approach and willingness to go against the grain. The seven managers, who average more than two decades of experience, start with an investment horizon of three to five years. They tend to favor corporate bonds, noting that the yield advantage these securities offer is an important contributor to total returns over time, and they run a compact, mostly cash-bond portfolio.

The team’s value-driven approach has led to adjustments to its corporate credit stake over time. For instance, the team was quick to ramp up corporate credit exposure during the first-quarter 2020 selloff and did the same amid 2022′s rocky first half. But it saw fewer opportunities recently and reduced the portfolio’s corporate bond allocation to 32% of assets as of June 2024, at the short end of its historical range. At the same time, it increased the allocation to Treasuries to 15% of assets and securitized debt, primarily agency mortgage-backed securities, to 49%—these are typically used as dry powder, so their weight in the portfolio is inversely correlated to corporate valuations. The team also brought its duration in line with the Bloomberg US Aggregate Bond Index’s after being consistently underweight in recent years, based on the belief that both rates and inflation should decrease over the next three to five years.

While Dodge & Cox Income’s current makeup is uncharacteristically defensive, the tilt toward corporate bonds has often made it more sensitive than peers to credit market swings, as did its longtime shorter duration stance. However, the team has demonstrated strong security-selection skills, and its knack for exploiting market dips has served investors well: The I shares’ 2.7% 10-year annualized gain through August 2024 topped more than 90% of its distinct peers.

The fund’s growth in assets under management over the past year is notable. While we don’t believe capacity issues are imminent, we are keeping a close eye on its girth to make sure it stays as nimble as it has been in the past.

Dodge & Cox Income Fund: Performance Highlights

A tilt toward corporate bonds has made this fund more sensitive to credit market swings, though it typically rebounds sharply from such setbacks. For instance, during the 2020 credit selloff from Feb. 20 through March 23, the I shares’ 6.9% loss trailed two thirds of distinct intermediate core-plus bond peers. However, the strategy’s hallmark of scooping up corporates at attractive valuations helped it rebound better than most rivals over the following nine months through December 2020. That is characteristic of how it tends to fare during credit rallies; as credit bounced back in 2023, it posted a best-decile 7.7% return over the first eight months of the year.

The fund’s long-standing practice of keeping its duration shorter than that of the Bloomberg US Aggregate Bond Index makes it less sensitive than many of its competitors to changes in interest rates. This structural stance helps it hold up better than its benchmark and most peers when rates spike but also leads it to lag when rates are falling. As rates soared in 2022, the strategy fell 10.9%, which was less of a drop than that of more than 90% of category peers. Over the long haul, patience, a focus on fundamentals, and topnotch corporate credit selection have paid off. The fund’s trailing 15-year volatility-adjusted return (as measured by Sharpe ratio) landed in the best decile of its Morningstar Category through August 2024.