Picking Stocks Is a Team Sport

Dodge & Cox focuses on out-of-favor blue chips

At Dodge & Cox Stock Fund (DODGX ), teamwork is everything. "We have a group decision-making process here," says John Gunn, the fund's chief investment officer, "and everybody has the same investment philosophy." That philosophy: to find blue-chip companies that are now out of favor, but have good long-term growth prospects. Ten money managers and 20 analysts working toward this end have generated impressive results. The fund's 7.8% five-year average return beats 99% of its large-cap value peers.

The investment process at the San Francisco-based firm is painstakingly slow. Every Tuesday morning the 10 managers meet for a meticulous portfolio review. "We ask ourselves how would we invest today if we were putting the portfolio in a safe-deposit box that we couldn't touch for the next four years," says Gunn. As a result, portfolio turnover is exceptionally low, just 13% last year. That keeps trading costs down and improves tax efficiency.

The four-year horizon allows the team to focus on companies with short-term problems that Dodge & Cox thinks will be overcome. One example is cable company Comcast (CMCSK ). "The whole cable area has been tarnished by the scandal at Adelphia Communications," says Wendell Birkhofer, a member of the fund's policy committee. "But Comcast has a strong management team, good assets, and a catalyst for improving profits over the next three to four years. It's starting to win the battle against local phone companies for Internet service subscribers."

Fiber-optics maker Corning (GLW ) is also a new purchase, although Dodge & Cox has invested in this debt-ridden company before. The fund owned it through much of the 1990s, but sold out in 1998 when the stock became pricey in the mid-20s. Now trading at $5.50, it's a buy again.

Stocks need to be cheap relative to the average stock in the Standard & Poor's-500 stock index to get in the door. So if a whole sector is expensive, as technology was in 2000, the team will avoid it completely. This can lead to the fund concentrating its assets in a few unloved sectors. But it is still diversified, typically holding 70 to 90 positions. And rest assured, this cautious management team evaluates and selects those positions with the utmost care.

By Lewis Braham

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