NEW YORK (TheStreet) -- Dodge & Cox is on a roll. During the past five years, all four of the company's stock mutual funds have landed in the top 10% of their Morningstar categories.
For the period, Dodge & Cox Stock (DODGX) returned 23% annually, outdoing the S&P 500 by more than 2 percentage points and topping 91% of large value funds. Dodge & Cox International (DODFX) returned 20% annually, surpassing 94% of foreign large blend funds.
The strong showing is particularly notable because the company's funds were clobbered during the financial crisis. Dodge & Cox Stock lost 43% in 2008, lagging 91% of peers. Dodge & Cox Balanced (DODBX) and Dodge & Cox International also finished in the bottom quarter of their categories. The disappointing results occurred because the portfolio managers placed big bets on unloved financial stocks. That proved to be the wrong move in a year when investors feared that banks would collapse.
Longtime shareholders should not have been surprised by the setbacks. Dodge & Cox has practiced a form of value investing that focuses on bold contrarian moves. The portfolio managers look for unloved companies that have the potential to bounce back. The current portfolio includes such controversial names as Nokia (NOK), the mobile phone maker that has been given up for dead by some Wall Street analysts. The out-of-favor names often keep sinking after Dodge & Cox buys them. Even the most successful holdings can struggle for years before they rebound. As a result, the funds can be out of sync with the markets.
Temporary disappointments do not deter the Dodge & Cox managers. When one of their holdings sinks, they often buy more shares. The goal is to own unloved stocks and wait years for them to recover. Many holdings have been in the portfolios for more than 10 years. Over the long term, the strategy has worked brilliantly. During the past 20 years, Dodge & Cox Stock returned 11% annually, topping the S&P 500 by more than 2 percentage points. The performance was particularly impressive because the mutual fund was much less volatile than the benchmark.
Unfortunately, many shareholders lack the patience to wait out the downturns. All too often investors poured into the funds just as they were peaking. The shareholders bailed as the returns were reaching a trough. That behavior is a recipe for obtaining miserable returns.
The latest cycle started in the years before the financial crisis when Dodge & Cox seemed to do no wrong. After the Internet bubble burst, the S&P 500 dropped 9% in 2000. By avoiding highfliers, Dodge & Cox Stock returned 16% for the year. The fund went on to outpace the benchmark by a wide margin in the years through 2006. Investors took notice. Assets in Dodge & Cox Stock climbed from $14 billion in 2002 to $63 billion in 2007. After the weak showing in 2008, shareholders fled. Assets fell to $39 billion in 2009. Lately, the trend has reversed, and the fund now holds $51 billion.
The Dodge & Cox style is not for the fainthearted. But for those who understand that there will inevitably be setbacks, the funds remain among the very best choices. Among the hottest performers lately has been Dodge & Cox Stock, which returned 36% this year, compared to 29% for the S&P 500. For the stock fund, a big winner has been Hewlett-Packard (HPQ), which has long been troubled by concerns about management turmoil and sluggish sales of desktop computers. This year investors gained confidence that CEO Meg Whitman could stabilize the business, and the shares climbed 80%.
Another star lately has been Dodge & Cox International, which returned 23% this year, outdoing 95% of peers. A winning holding is Vodafone, the U.K. phone giant. As the euro crisis intensified, the shares languished. But this year, the stock returned 51% as European economies showed more life and the phone company received a large price for its U.S wireless holdings.
At the time of publication, Luxenberg had no positions in stocks or funds mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.