Dodge & Cox Emerging Markets Stock Fund Q3 2024 Shareholder Letter

Dodge & Cox
67 Followers

Summary

  • Emerging market equities performed strongly during the third quarter of 2024, riding the momentum of a late quarter rally fueled by Chinese stocks.
  • Overall, the MSCI Emerging Markets had a total return of 8.7% for the third quarter and 16.9% for the first nine months of the year.
  • The Fund's holdings in India, as well as exposure to Health Care stocks, detracted from relative performance for the quarter and year to date.

Emerging market

aluxum

Performance[1]

Total Returns (%) Average Annual Total Returns

3 Months

YTD

1 Year

3 Years

Since Inception (5/11/2021)

Emerging Markets Stock Fund

10.10

17.58

25.52

3.78

0.67

MSCI Emerging Markets Index

8.72

16.86

26.05

0.40

-1.01

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. Mutual 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 atdodgeandcox.com or by calling 800-621-3979.

Market Commentary

Emerging market equities performed strongly during the third quarter of 2024, riding the momentum of a late quarter rally fueled by Chinese stocks. China's Politburo sent very strong indications of support for the economy in an unexpected September meeting, and this was accompanied by a series of monetary easing and supportive measures for the property market. Financial markets reacted positively to the news, as the magnitude of the stimulus was larger than expected. The MSCI China Index returned 23.5% for the quarter.

Overall, the MSCI Emerging Markets had a total return of 8.7% for the third quarter and 16.9% for the first nine months of the year. The consensus belief is that the global economy will not suffer a hard landing in the wake of recent interest rate increases. This view has buoyed stocks despite ongoing concerns about inflation and significant geopolitical conflicts. As is typical in emerging markets, third quarter returns varied among individual markets, with strong results from India and Brazil and weaker results from South Korea and Latin America ex-Brazil.

Relative valuations for emerging market equities continue to look attractive, especially relative to the U.S. equity market: the MSCI Emerging Markets trades at 12.4 times forward earnings, while the S&P 500 Index trades at 22.5 times.[2] This relative value of emerging market stocks to U.S. stocks is in the 97th percentile of observations over the past 20 years. Furthermore, spreads are extremely wide within emerging market equities, as measured by dispersions in sector and regional valuations. This presents attractive opportunities for discerning investors.

Portfolio Strategy

The first three quarters of 2024 have underscored the breadth and depth of the emerging markets asset class as certain regions demonstrated strong market leadership. Individual emerging markets continue to generate divergent, heterogeneous results, and these disparities provide opportunities for our disciplined team to uncover attractive investments.

The Fund's holdings and overweight position in Greater China[3] contributed to relative performance during the third quarter as the Chinese equity market rallied across multiple sectors. E-commerce companies Alibaba (BABA) and JD.com (JD), residential property manager Greentown Service Group (OTCPK:GRTNF), and restaurant operator Yum China (YUMC) all posted strong results, underscoring the Fund's diversity of holdings in the region. Meanwhile, South Korean multinational Samsung Electronics (OTCPK:SSNLF) has underperformed this year due to investor concerns around peaking demand for memory chips and rising inventory levels. While Samsung Electronics is among its larger holdings, the Fund's relative performance benefited from its underweight position in both the third quarter and first nine months of 2024. Elsewhere in South Korea, our stock selection has been strong, as software developer Hancom and banking group Shinhan Financial (SHG) have both outperformed in 2024 through September 30.

The Fund's holdings in India, as well as exposure to Health Care stocks, detracted from relative performance for the quarter and year to date. Despite improved results in the third quarter, Brazilian Financials Itau Unibanco and XP (XP) underperformed during the first nine months of 2024, and we added to several of the Fund's Financials positions at lower prices this year. In addition, we actively initiated positions in consumer-related companies, including South Korean e-commerce leader Coupang (CPNG), Chinese e-bike manufacturer Yadea Holdings (OTCPK:YADGF), and electric car producer BYD (OTCPK:BYDDF).[4]

Within emerging markets, certain regions (Latin America, Greater China, and Africa) and the Financials sector look quite compelling by historical standards. Using our price-disciplined approach, we continue to find idiosyncratic investment opportunities across these areas of the market and remain enthusiastic about the long-term prospects for the Fund. Thank you for your continued confidence in Dodge & Cox.

Performance Review (Fund vs. MSCI Emerging Markets)

Third Quarter

Key contributors to relative results included the Fund's:

  • Greater China holdings, including Alibaba, JD.com, Greentown Service, and Yum China, combined with an overweight position in the region;
  • Underweight position in the Information Technology sector and select holdings, including an underweight position in Samsung Electronics;
  • Industrials holdings; and
  • Utilities holdings.

Key detractors from relative results included the Fund's:

  • Overweight position in Latin America;
  • Health Care holdings;
  • Underweight position in the Communication Services sector and select holdings, including Tencent;[5] and
  • Positions in Axis Bank, National Energy Services Reunited (NESR), Wistron Neweb, and Powertech Technology (OTCPK:PWOGF).

Year to Date

Key contributors to relative results included the Fund's:

  • Underweight position in South Korea and select holdings, including Samsung Electronics and Hancom, respectively;
  • Consumer Staples[6] holdings;
  • Underweight position in MENA;
  • Utilities holdings; and
  • Positions in National Energy Services Reunited, Greentown Service, and Prosus.[7]

Key detractors from relative results included the Fund's:

  • Underweight position and select holdings in India;
  • Financials holdings, particularly XP, Prudential PLC, and Itau Unibanco;
  • Greater China holdings, including Tencent;[7]
  • Health Care holdings; and
  • Position in Cemex.

Top Ten Holdings

% of Fund

Taiwan Semiconductor Manufacturing Co., Ltd. (TSM)

7.2%

Alibaba Group Holding, Ltd. (BABA)

4.5%

HDFC Bank, Ltd. (HDB)

2.8%

Itau Unibanco Holding SA (ITUB)

2.5%

Axis Bank, Ltd.

2.4%

Tencent Holdings, Ltd. (OTCPK:TCTZF)

2.3%

Prosus NV (OTCPK:PROSF)

2.0%

National Energy Services Reunited Corp. (NESR)

1.8%

Credicorp, Ltd. (BAP)

1.8%

Glencore PLC (OTCPK:GLCNF)

1.8%

Fund Expense Ratios

Ticker

Net

Gross

Emerging Markets Stock Fund

DODEX

0.70%*

1.08%

* Dodge & Cox has contractually agreed to reimburse the Fund for all ordinary expenses to the extent necessary to maintain Total Annual Fund Operating Expenses at 0.70% until April 30, 2026. This agreement cannot be terminated prior to April 30, 2026 other than by resolution of the Fund's Board of Trustees. For purposes of the foregoing, ordinary expenses shall not include nonrecurring shareholder account fees, fees and expenses associated with Fund shareholder meetings, fees on portfolio transactions such as exchange fees, dividends and interest on short positions, fees and expenses of pooled investment vehicles that are held by the Fund, interest expenses and other fees and expenses related to any borrowings, taxes, brokerage fees and commissions and other costs and expenses relating to the acquisition and disposition of Fund investments, other expenditures which are capitalized in accordance with generally accepted accounting principles, and other non-routine expenses or extraordinary expenses not incurred in the ordinary course of the Fund's business, such as litigation expenses. The term of the agreement will automatically renew for subsequent three-year terms unless terminated with at least 30 days' written notice by either party prior to the end of the then-current term. The agreement does not permit Dodge & Cox to recoup any fees waived or payments made to the Fund for a prior year.

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.

The Fund invests in securities and other instruments whose market values fluctuate within a wide range so your investment may be worth more or less than its original cost. International investing involves more risk than investing in the U.S. alone, including currency risk and a greater risk of political and/or economic instability; these risks are heightened in emerging markets. The Fund may use derivatives to create or hedge investment exposure, which may involve additional and/or greater risks than investing in securities, including more liquidity risk and the risk of a counterparty default. Some derivatives create leverage.

Before investing in any Dodge & Cox Fund, you should carefully consider the Fund's investment objectives, risks, and charges and expenses. To obtain a Fund's prospectus and summary prospectus, which contain this and other important information, or for current month-end performance figures, visit Investment Focus | Dodge & Cox or call 800- 621-3979. Please read the prospectus and summary prospectus carefully before investing.

Dodge & Cox Funds are distributed by Foreside Fund Services, LLC, which is not affiliated with Dodge & Cox.

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

Footnotes

  1. All returns are stated in U.S. dollars, unless otherwise noted. The Funds' total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include dividend and/or interest income but, unlike Fund returns, do not reflect fees or expenses.
  2. Unless otherwise specified, all weightings and characteristics are as of September 30, 2024.
  3. Greater China includes China, Hong Kong, and Macao.
  4. The use of specific examples does not imply that they are more or less attractive investments than the Fund's other holdings.
  5. Prosus and Naspers derive significant portions of their value from their respective stakes in Tencent. During the attribution period shown, the Fund held Prosus and Tencent but did not hold Naspers. The combined total impact on return versus the Index for all three names was a negative contribution of three basis points.
  6. The Fund's performance and attribution results reflect the sale of both X5 Retail Group (Russia, Consumer Staples) and TCS Group Holding (Russia, Financials) and a new fair-valuation assigned to Globaltrans Investment PLC (Russia, Industrials) occurring in the first quarter of 2024. Immediately prior to their respective actions, each of these positions was fair-valued at 0.01 Ruble.
  7. See end note 4. During the attribution period shown, the Fund held Prosus and Tencent but did not hold Naspers. The combined total impact on return versus the Index for all three names was a negative contribution of 19 basis points.

See Disclosures for a full list of financial terms and Index definitions.

Original Post

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This article was written by

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Dodge & Cox is one of the largest independently owned investment firms in the world. Dodge & Cox manages money for individuals and institutions globally with a single investment philosophy applied across a focused set of offerings. Note: This page reports on news relating to Dodge & Cox. It is not managed by Dodge & Cox or otherwise affiliated with it. For contact with Dodge & Cox, please contact the firm directly.

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