Morningstar recently issued a new Stewardship Grade for Dodge Cox. The firm’s overall grade–which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history–is an A. What follows is Morningstar’s analysis of the firm’s corporate culture, for which Dodge Cox receives an A. This text, as well as analytical text on the other four Stewardship Grade criteria, is available to subscribers of Morningstar’s software for advisors and institutions: Morningstar Principia®, Morningstar Advisor Workstation(SM), Morningstar Office(SM), and Morningstar Direct(SM).
In May 2013, Dana Emery was named CEO and president, and Charles Pohl became chairman. The two had been co-presidents since 2011, and they have spent their careers at the firm. (Emery joined in 1983 and Pohl in 1984.) Emery continues to serve as director of fixed income, and Pohl remains the firm’s chief investment officer. Chairman emeritus Kenneth Olivier, who was named CEO in 2010 and chairman in 2011, remains chairman of the funds’ board of trustees. Meanwhile, former chairman John Gunn remains a member of three of Dodge Cox’s four investment policy committees.
There are plenty of experienced people advancing up the ranks after Emery and Pohl. The median tenure of the firm’s equity and fixed-income analysts and managers is more than 10 years. Among members of the four investment policy committees that manage the funds, the average tenure at the firm ranges from 18 to 25 years.
More important, all of the top executives began their careers as analysts or managers at the firm and are still involved in the investment process. Just as they invest with a three- to five-year time frame in mind, they take a long-term view in running their business, planning transitions several years in advance, and keep their clients’ interests in mind. Although assets under management have declined since 2007, Dodge Cox has continued to add to its investment team and build its compliance and operations staff to handle an increasingly complex regulatory environment. The firm now has more than 55 portfolio managers and analysts, and its staff overall has grown from 176 at the end of 2007 to 232 at the end of 2013’s third quarter.
A key to Dodge Cox’s success has been its ability to attract and retain qualified people who share the same investing temperament and ability to work as part of a team. The firm has a five-year manager-retention rate of 98%, among the highest rates in the mutual fund industry, according to Morningstar data. Because of its strong reputation and track record, the firm has been able to increase its staff over the years with minimal recruiting. Even in the throes of the financial crisis and bear market of 2007-09, when the firm’s funds suffered poor performance and outflows, it was able to attract and keep people. Dodge Cox has kept hiring one or two new graduates a year from top business schools and has given newcomers time to imbibe the firm’s approach ethos. The firm also supports its analysts and tracks prospective talent via an extensive research assistant program: Every analyst has an assistant who works on a two-year contract between college and business school. Some of these assistants return to join the analyst staff after graduate school.
Investment personnel can be invited to become owners of the firm after several years and only rarely is someone not extended an invitation–a rigorous recruiting process, often beginning with an internship, ensures that new hires fit comfortably within the firm’s consensus-driven investment culture. Equity in the firm, which partners buy and sell at book value (which is based on firm revenue and profits and is independently calculated and audited by PricewaterhouseCoopers), can become a big portion of compensation and an incentive to stick around.
No firm keeps everybody. As Dodge Cox has grown, people have been able to make more money faster. Some of them might feel secure enough to break off on their own. It has happened at least once–when Kouji Yamada, a veteran analyst and manager of Dodge Cox International Stock (DODFX), left in 2007 to start his own firm. But even if Dodge Cox’s employee turnover increases in the future, it’s still likely to be below average and anomalous. For example, Yasha Gofman, another experienced member of the investment policy committee running International Stock, resigned in 2011 for personal reasons requiring him to relocate.
Dodge Cox has learned that it will do well if its clients do well. The firm was founded near the beginning of the Great Depression, and patience is ingrained in its culture. Its regulatory disclosures and shareholder communications are clear and consistent. For instance, even before Dodge Cox Stock (DODGX), Dodge Cox Balanced (DODBX), and Dodge Cox Income (DODIX) slipped into slumps in 2007, the funds’ managers cautioned investors against believing that the offerings’ previous decade of strong absolute and relative returns could continue uninterrupted. That didn’t prevent some shareholders from feeling angry and frustrated with the shop’s travails, but at least the firm tried to manage expectations.
Likewise, many investors found the firm’s October 2008 market commentary published in the throes of the financial market meltdown cold comfort. The missive acknowledged that 2008, the worst calendar ever for its stock funds in absolute terms, was a difficult year and that, as fellow fund shareholders, the managers felt investors’ pain. But the letter lacked a mea culpa for owning stocks like American International Group (AIG), Wachovia, and Fannie Mae that the government either took over or forced into the arms of rivals at catastrophic discounts. Granted, in such an environment there was little the firm could have written to assuage everyone’s angst, yet it seemed to point the finger more at the government than at itself.
Behind the scenes, however, Dodge Cox managers did a lot of soul-searching and process- and portfolio-vetting. The firm redoubled efforts to analyze companies’ short-term liquidity needs and started paying more attention to Washington, D.C. In the face of intense pressure, though, the firm stuck with the process that had served it and its clients for 80 years. That approach, while value-oriented and contrarian, doesn’t rely on any one set of measures or screens but rather is built on patient and thorough bottom-up research of individual companies to determine whether their businesses look strong enough and their shares cheap enough on a variety of metrics to hold for at least three to five years.
Dodge Cox doesn’t lean on any one person either. Analysts and managers work as a team; anyone can advocate an idea, but they have to win over, or at least answer the objections of, their peers before getting it in any of the portfolios. A team approach can lead to group-think or paralysis, but over decades Dodge Cox has refined its team method into an effective tool.
While Dodge Cox Balanced, Stock, and International suffered steep losses in the 2007-09 bear market, all three were back in the black by early 2013. All five Dodge Cox funds have outperformed their peers and benchmarks since the crisis’ March 2009 nadir. Granted, 2008 has almost entirely dropped out of the funds’ strong five-year returns as of the end of October 2013. However, the four funds with a 10-year record demonstrate the long-term category-beating performance that investors had come to expect before the financial crisis.
There are other reasons to trust the firm. It shuns marketing and advertising, has no salespeople, and has rolled out just five funds in eight decades. The last time it introduced a new fund– Dodge Cox Global Stock (DODWX) in 2008–the firm waited several years to prepare and test it before launching it with very low expenses. It is currently developing its global bond capabilities, a natural extension of the international expertise it has developed on the equity side. The firm has begun to offer its services in Europe but is doing so in a measured fashion. The firm has opened one small shareholder servicing office in London and has opened three UCITs–clones of Dodge Cox Stock, Dodge Cox International, and Dodge Cox Global–that are priced significantly below average on the continent.
That client-focused, squeaky-clean image and long track record attracted scores of new investors and about $100 billion in inflows from 2000 to 2007. Although the funds have seen net outflows since 2008, size still presents a challenge. Dodge Cox, however, has been willing to put shareholders’ interests above business considerations. It closed its Stock and Balanced funds to new investors for four years from 2004 to 2008, a period during which it could have touted its strong performance to reel in loads of new shareholders.
Morningstar Investor Returns, which measure how the offerings’ typical investors have done by including the impact of cash inflows and outflows in the total return calculation, reflect the impact of those bear-market outflows. Investors who dumped the equity funds in the midst of the crisis missed their subsequent rebounds and diminished their results. The average dollar in Dodge Cox Stock, for example, gained only 6% annualized for the 10 years ended September 2013, while the fund itself gained an annualized 8.2%, beating the SP 500’s 7.5%. One could argue the firm could have done more to manage shareholders’ expectations, but that would be like blaming the theater owner for patrons screaming fire in a crowded auditorium. There’s only so much you can do in the face of a panic.
Panic is not in Dodge Cox’s vocabulary. Over 80 years it has seen depressions and expansions, bear and bull markets, high and low interest rates, inflation and deflation, war and peace, inflows and outflows, natural and man-made calamities, and mistakes and successes. Through it all, the family has amassed a vast store of institutional memory that has helped it keep its head in both exuberant and frightening times and stay focused on the long-term interests of its clients. The firm is not above making mistakes, but it’s a cut above most other firms culturally.
This article is the Corporate Culture portion of the Morningstar Stewardship Grade for Funds for this fund family. Click hereto see Morningstar’s Stewardship Grade methodology.
Laura Lallos does not own shares in any of the securities mentioned above.
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