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Fund Times

Dodge & Cox Income Back on Track

The Gold-rated fund’s exposure to corporate bonds has gone from a headwind to a tailwind.


The following is our latest Fund Analyst Report for Dodge & Cox Income (DODIX). Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

With a three- to five-year investment time horizon, Dodge & Cox Income’s managers have an eye for the long term. This approach leads to low turnover (typically a third of the portfolio each year) as the team is willing to be patient with its picks. A veteran and well-resourced team, time-tested process, low expenses, and an impressive long-term track record earn this fund a Morningstar Analyst Rating of Gold.

A focus on income as a component of total returns leads to a yield that's generally higher than peers' (3% as of September 2016) and to an overweighting to corporates, including an often 10%-plus allocation to junk bonds. Corporate exposure tends to be concentrated in around 50 issuers, and managers aren’t afraid to take sizable positions in downtrodden names, including Brazilian energy firm Petrobras, which the firm stuck with through its more recent troubles. Meanwhile, as the firm has built its global bond resources, this fund has added to its non-U.S. stake. As of September 2016, the fund had about 18% in non-U.S. corporate bonds, from both emerging and developed markets.

The focus on corporates and a duration that has historically run short of its Bloomberg Barclays U.S. Aggregate Bond Index benchmark can leave the fund out of step with the index and peers at times. For example, during the most recent credit sell-off from June 2014 to February 2016, the fund underperformed both peers and the index. As the market turned, however, and credit rallied, it outperformed 85% of peers and the index for the year to date through October 2016. Investors can also expect the fund to hold up better than most during periods of rising rates. For example, it did better than most peers and the benchmark during the taper tantrum of 2013. Going forward, the fund’s lower allocation to Treasury bonds and shorter duration (4 years versus 5.5 for the index) should lead to better returns if rates rise, though the large allocation to corporate bonds will hurt if credit sells off. In all, over a market cycle, investors remain in good hands.

Cara Esser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.