Market Commentary
Global equity markets rose during the first quarter of 2023, extending the market recovery that started in the fourth quarter of 2022. The MSCI ACWI appreciated 7.3% during the quarter, as the slowing pace of interest rate hikes encouraged investors and boosted performance, despite persistent inflation, bank failures, geopolitical tensions, and recessionary concerns.
Global growth stocks2 outperformed value stocks by 12.6 percentage points in the first quarter of 2023. Value-oriented sectors—such as Energy, Health Care, and Financials—performed the worst during the quarter, whereas the growth-oriented Information Technology, Communication Services, and Consumer Discretionary sectors performed the best within the MSCI ACWI. As a result, the valuation gap between value and growth stocks widened. The MSCI ACWI Value Index3 now trades at 11.6 times forward earnings4 versus 23.2 times for MSCI ACWI Growth Index.5
Portfolio Strategy
The Fund had a positive return in the first quarter of 2023, but underperformed the MSCI ACWI by 2.2 percentage points.6 Two factors primarily drove this underperformance. First, the Fund’s underweight in Information Technology, the best-performing sector in the MSCI ACWI, hurt relative performance. Second, the Fund’s overweight in Financials, specifically within U.S. Financials, hurt relative performance. While the Fund did not own Silicon Valley Bank or Signature Bank, their failures weighed on the broader U.S. Financials sector. Against this backdrop, the Fund outperformed the MSCI ACWI Value by 3.8 percentage points.7
We believe volatile market environments can provide opportunities for investors with patience, discipline, and a long-term investment approach. We are actively assessing market developments and making portfolio decisions as investment opportunities or risks materialize. During the quarter, for example, we sold the Fund's remaining small position in Credit Suisse (CS, Financial) prior to its merger with UBS Group (UBS, Financial) (2.2% position in the Fund) after internal discussions on Credit Suisse’s loan and deposit quality, range of potential outcomes, and alternatives to other holdings.8 In our view, UBS received favorable deal terms, including a low purchase price, downside protection from the Swiss government, unique synergies, and concentrated market share in the Swiss banking business. However, the merger also introduces new risks (e.g., increased complexity, integration challenges, litigation) that we have factored into our analysis. During the quarter, there were no new purchases in the Fund. Our largest trims by sector came from Communication Services and Consumer Discretionary.
We believe the Fund’s diversified portfolio is well positioned over the long term and are encouraged by the Fund’s attractive valuation of 10.2 times forward earnings, well below the MSCI ACWI at 15.6 times forward earnings. We remain confident in our approach and believe a long-term investment horizon is essential for investors to navigate challenging economic and market conditions. Thank you for your continued confidence in Dodge & Cox.
Performance Review (Fund’s Class I Shares vs. MSCI ACWI) First Quarter
Key contributors to relative results included the Fund's:
- Industrials holdings (up 18% compared to up 6% for the MSCI ACWI sector), notably General Electric (GE, Financial) and FedEx (FDX, Financial);
- Communication Services holdings—particularly Baidu (BIDU, Financial) and Meta Platforms (META, Financial)—and overweight position in the sector; and,
- Health Care holdings, particularly Fresenius Medical Care (FMS, Financial) and Sanofi (SNY, Financial).
Key detractors from relative results included the Fund's:
- Information Technology holdings, due to negative stock selection and an underweight position in the sector;
- Financials holdings, due to an overweight position in the sector and negative stock selection, most notably Charles Schwab (SCHW, Financial), but also Fidelity National Information Services (FIS, Financial) and Axis Bank (BOM:532215, Financial); and,
- Position in Ovintiv (OVV, Financial).
Returns represent past performance and do not guarantee future results. Investment return and share price will fluctuate with market conditions, and investors may have a gain or loss when shares are sold. Fund performance changes over time and currently may be significantly lower than stated above. Performance is updated and published monthly. Current month-end performance can be obtained at dodgeandcox.com or call 800-621-3973.
The information provided is not a complete analysis of every material fact concerning any market, industry or investment. Data has been obtained from sources considered reliable, but Dodge & Cox makes no representations as to the completeness or accuracy of such information. The information provided is historical and does not predict future results or profitability. This is not a recommendation to buy, sell, or hold any security and is not indicative of Dodge & Cox’s current or future trading activity. Any securities identified are subject to change without notice and do not represent a Fund’s entire holdings. Dodge & Cox does not guarantee the future performance of any account (including Dodge & Cox Funds) or any specific level of performance, the success of any investment decision or strategy that Dodge & Cox may use, or the success of Dodge & Cox’s overall management of an account.
