A recent story in Barron’s profiles the Dodge & Cox mutual fund firm, and in particular, its Dodge & Cox Stock Fund (DODGX). This $60.3 billion no-load fund sports a low 0.52% expense ratio and 17% turnover. According to the article

Three of its funds have a 15-year track record, each of which has outdone its benchmark over that period, the best relative performance of any large firm. The $60 billion Dodge & Cox Stock fund (DODGX), for example, has posted average annual returns of 8.7% over the past 15 years, twice that of the Standard & Poor’s 500.

In addition, the fund’s calendar year performance has been equally impressive:

Dodge & Cox Stock - Outperformance Over the Years

The prospectus benchmark for the fund is the S&P 500® index. Instead of using an artificial calendar year boundary for a periodical comparison of the fund with an inaccessible index, it is better to compare rolling returns of the fund with those of a practical implementation of the index. After all, many investors do not start their investments in the fund precisely on the last trading day in December, and they also consider an index mutual fund or an ETF as an investment alternative.

In the case of Dodge & Cox Stock fund, let’s use the SPDR® S&P 500® ETF (SPY) as such an alternative. Alpholio™ analysis shows that since early 2000, the fund returned more than the ETF in about 68% of all rolling 12-month periods and in only 58% of all rolling 36-month periods. With 60-month (five-year) rolling periods, this statistic further decreases to approximately 51%, with median outperformance of just 1.9% per period.

However, as Alpholio™ showed in a previous post, this does not paint a complete picture of the fund. In particular, with a single static index as a benchmark, there is no adjustment for the fund’s risk.

In the simplest application of its patented methodology, as an alternative to the analyzed fund Alpholio™ constructs an ETF portfolio with static membership and weights. This analysis shows the since 2004, the fund generated only about 0.5% of annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The fund’s top three equivalent positions were in the Health Care Select Sector SPDR® Fund (XLV; average weight of 14.5%), Financial Select Sector SPDR® Fund (XLF; 14.3%) and Consumer Discretionary Select Sector SPDR® Fund (XLY; 12.1%).

In a more elaborate approach, Alpholio™ constructs a reference ETF portfolio with fixed membership but fluctuating weights. This allows for a more accurate matching of the analyzed fund’s returns over time. The following chart presents the resulting cumulative RealAlpha™ for the Dodge & Cox Stock fund:

Cumulative RealAlpha™ for Dodge & Cox Stock Fund (DODGX)

Since late 2004, the fund generated a slightly negative annualized discounted cumulative RealAlpha™. The fund underperformed relative to its reference portfolio from mid-2007 through mid-2012. The fund’s volatility, measured as a 17.1% annualized standard deviation of monthly returns, was about 0.6% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was about 1.05.

The following chart illustrates changes of ETF weights in the reference portfolio over the same analysis period:

Reference Weights for Dodge & Cox Stock Fund (DODGX)

The fund had top equivalent positions in the iShares S&P 100 ETF (OEF; average weight of 23.4%), Vanguard Financials ETF (VFH; 12.7%), iShares Global Healthcare ETF (IXJ; 11.9%), Guggenheim S&P 500® Equal Weight ETF (RSP; 11.5%), Vanguard Consumer Discretionary ETF (VCR; 9.1%), and Vanguard Industrials ETF (VIS; 6.2%). The Other category in the chart collectively represents six additional equity ETFs with smaller average weights.

As a result of its prolonged underperformance with respect to a dynamic reference ETF portfolio of comparable risk, since late 2004 the Dodge & Cox Stock fund failed to produce a positive RealAlpha™. Even if a static ETF portfolio was used as a reference, the fund added most of the value in a short period after April 2012. While the fund’s modest expense ratio and small distributions may make it an attractive holding even in taxable account, investors should carefully consider alternatives.

To learn more about the Dodge & Cox Stock and other mutual funds, please register on our website.

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