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Dodge & Cox Stages Turnaround Without Abandoning Value Strategy

The low-key firm ignores tech, for the most part, even though it's headquartered in San Francisco.

It's the kind of move that might make even the sexiest of stock funds blush: from the very bottom 10% of its category to the top of the charts in less than a year. And after the

S&P 500

index beat it by nearly 25% in 1998, this portfolio is now giving the benchmark a run for the money in 1999, almost dead even.

But you won't catch

Dodge & Cox

bragging about this dramatic turnaround. No flash or frills here. The 70-plus-year-old firm, which does no advertising, prefers the words "safe" and "steady" to "sizzling." And recent -- though admittedly uncharacteristic -- volatility is the very last thing the fund firm wants to highlight.

"We don't seek big volatility!" laughs Dodge & Cox investment committee member Wendell Birkhofer. "But last year all the rules were broken in terms of volatility," he admits.

Apparently, just the numbers changed, though, not the strategy. The

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Dodge & Cox Stock fund has been steeped in the same investing approach, and has been run in large part by the same investment team, for decades now. So unlike many value funds, which shifted style in a go-go growth market led by a few tech leaders, it kept bargain hunting for strong franchises, even as they got cheaper and cheaper.

"The question shareholders most often ask -- 'Is there a change in strategy?' -- No. The performance you're seeing this year is coming from the same portfolio we held last year," says Dodge & Cox's David Edwards.

It's a portfolio you don't often see in a Bay Area-based investment company. Despite a spectacular view from its downtown San Francisco office overlooking one of the biggest tech hotbeds in the world, Dodge & Cox is a decidedly less-than-fashionable fund. Technology makes up less than one-fifth of its holdings, and the committee in charge of choosing the large-cap value buys keeps a keen eye on prices and profits.

That attention to valuation leads to companies such as


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, the fund's No. 1 holding, and

Dow Chemical

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, two U.S. stocks Birkhofer believes are a good bet on a growing global economic recovery.

"The prices of their products were severely impacted by what went on overseas. But they've done a fabulous job in a very tough environment of keeping profits up by cutting costs and restructuring. In a better worldwide economy, you're going to see surprisingly good profits there," he says.

Another favorite:


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. "It's definitely not as cheap as it was. I'm not gonna say it's dirt-cheap," says Birkhofer. "But even though we trimmed it a bit this year as it moved up, we continue to like it. We think it could have a long way to go."

Those kinds of calls didn't do much for the firm in 1998, one of the fund's worst years ever, with a meager 5% return. But despite those tough times, the media-shy Dodge & Cox has a track record that's worth watching. For four of the last five years, it delivered annual returns well in the double digits, ranging from 22% to 33%. And its five-year annualized numbers are quite respectable at 21% a year, ranking in the top quarter of its category, according to



Expenses, at just 0.57%, are less than half the cost of the average U.S. stock fund and make it an interesting value option. Turnover's low, too -- about 15% to 20% annually. "We own 75 stocks and like them all. And if we didn't, we wouldn't own them. Our time frame is long," Birkhofer adds. Indeed, the Dodge & Cox team holds a stock on average at least five years.

But that discipline means the fund steers clear of any of the trendy dot-coms, even of the so-called old tech names.

"Today it's tech that is completely in vogue -- but if you look at what people are paying for


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America Online


, it's pretty ludicrous."

Still, Dodge & Cox managed to make an early call on one technology stock that has paid off well. "We owned



when it was hit hard, rode it down, but added to it at the lowest levels. Yes, they stumbled a bit. But this is a classic way we look at technology investing -- it's got a very strong brand that we feel will continue to allow the company to be successful in the long run, sometimes in spite of themselves," Birkhofer says.

Still, shareholders have been skittish -- money started pouring out of the fund in the last quarter of 1998 -- and have only recently regained confidence in Dodge & Cox. They had a net inflow for the first time in a year last quarter.

But no matter what the money does, don't expect the folks at Dodge & Cox to change anytime soon. Although, hopefully, its numbers will continue heading in the right direction.

Brenda Buttner's column, Under the Hood, appears Thursdays. At time of publication, Buttner held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While she cannot provide investment advice or recommendations, Buttner appreciates your feedback at