Dodge & Cox Income Fund
Contrary to popular belief, stock-fund managers aren't the only ones who engage in wild trading. Intermediate-term bond funds have an average turnover ratio of 194%, meaning their entire portfolios change almost twice a year. In contrast, the $9.8 billion Dodge & Cox Income Fund, a repeat winner of the Standard & Poor's/BusinessWeek Excellence in Fund Management award, has just a 24% ratio.
"We look to hold each bond in our portfolio for three to five years," says co-manager Tom Dugan. "That long-term horizon affects every decision we make -- from the types of bonds we own to the credit quality and maturity of the portfolio."
This long-term focus has enabled the fund to be bold when other investors are running scared, and conservative when they're irrationally exuberant. In 2002 and 2003, when many bond managers were avoiding corporate debt in the wake of the Enron scandal, this fund was backing up the truck. More recently, the fund has been acquiring debt from the financial subsidiaries of troubled auto makers Ford Motor Credit and General Motors Acceptance Corp.
Despite their recent downgrades, Dugan says these companies will survive in the long term. While embracing the beaten-down financiers, he has been shunning favored long-term Treasury bonds because they yield only 4.7%. "We look at the 30-year Treasury and ask what payout will we get relative to inflation 10 or 20 years down the road," Dugan says. "For the long-term investor it just doesn't make sense." Right now, the fund owns no U.S. Treasuries with maturities longer than four years.
Among this fund's many other strengths are a broad, seasoned management team. The fund has nine co-managers, with an average tenure of 16 years at the firm, as well as 10 bond traders and analysts and 20 industry analysts who cover both stocks and bonds. Each of the lead managers must agree before any new position can enter the portfolio.
Such thoroughness has paid off: The fund's 5.9% five-year annualized return beats 90% of its peers. The fund's 0.44% expense ratio is also less than half the 1.01% category average. In a low-yielding bond market, having that low fee enables this fund to produce a decent yield, currently 4.39%, without taking on an undue amount of risk.
"We're in a time where most bonds are not undervalued," Dugan says. "It pays to be selective." Given the cautiousness of its management team, this fund is more selective than most.