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Commentary

Even Dodge & Cox Can't Elude Outflows

Despite low fees and a strong track record, this top fund firm is suffering outflows like most other active fund managers.

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This article originally appeared in Morningstar Direct Cloud and Morningstar Office Cloud.

Although the numbers are small, the trend is clear. Dodge & Cox, a top-rated and respected fund company, has been dogged by outflows along with most other major active fund managers. 

Looking across the past 12 months, the firm has suffered 10 months of outflows. Over the past year, the firm saw outflows totaling $11.8 billion from year-ago assets under management of $219 billion.

That Dodge & Cox is seeing outflows is an example of just how strong the headwinds facing active managers have become. Five of the firm's six funds carry Morningstar Analyst Ratings of Gold, and the sixth-- Dodge & Cox Global Bond (DODLX)--is rated Bronze. The firm has also held the top spot in the Morningstar Fund Family 150, which combines metrics on performance, fees, and flows for the 150 largest U.S. fund companies. (This report is available on Morningstar Direct.)

Over the past year, performance of the firm's funds has been middle-of-the-pack, or even poor. But that stands in sharp contrast to their medium- and long-term track records. Virtually across the board, Dodge & Cox funds rank near the top of their Morningstar Categories for most longer time frames.

Contrast Dodge & Cox's five- and 10-year performance statistics with its history of flows during the same time period. The past 10 years have seen an erosion of investor interest, the opposite of the trend for the decade before that.

It's a similar story looking back at the past few years of organic growth rates. Here's how the firm and its funds  Dodge & Cox International Stock (DODFX) and  Dodge & Cox Stock (DODGX) have fared when flows are measured against their asset bases.

Among the hurdles facing active managers are their relatively high fees when compared with passive products, especially exchange-traded funds. Dodge & Cox's experience shows it may no longer be enough to be a low-cost active manager.

Fees for Dodge & Cox funds are considerably lower than the category median among active peers, but they are still a pricier alternative to comparable passive funds.

The biggest source of the firm's outflows has been Dodge & Cox International Stock, which has seen outflows in each of the past 12 months totaling $7.2 billion.

"Dodge & Cox International Stock's outflows are surprisingly large given that it has strong performance over the long term," said Russel Kinnel, Morningstar's director of manager research. "I assume people are reacting to the loss in 2018, but one bad year is kind of par for the course here."

In a bad year for foreign-stock funds, Dodge & Cox International Stock lost 18% in 2018, lagging the foreign large-value category average by 2.5 percentage points. Kinnel included the fund in his "13 Funds for 2019 and Beyond" article.

Morningstar analyst Tony Thomas, who covers Dodge & Cox, noted one factor that may be contributing to the scale of Dodge & Cox International Stock's net outflow position is that the fund has been closed to new investors since January 2015, when its assets reached $64 billion.

A smaller contributor to the firm's overall level of outflows is  Dodge & Cox Balanced (DODBX), which has seen consistent outflows over the past year even as the fund ranked in the top 20% of its allocation–50% to 70% equity category for the past three-, five-, and 10-year periods.

The firm's largest offering and the large-value category's second-largest fund, Dodge & Cox Stock at $70 billion, has also been caught up in the firm's outflow trend.

Thomas added that an additional challenge for Dodge & Cox Stock has been the long spell of underperformance for value strategies in general. The Morningstar US Value TR Index had a 13.5% three-year average return, far behind the 18.9% average annual return for the Morningstar US Growth TR Index. Thomas included Dodge & Cox Stock in his 2019 "Buy the Unloved" report. For further analysis on top fund families, read the Morningstar Fund Family 150 Highlight.

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