N-CSR 1 dncsr.htm FORM N-CSR Form N-CSR

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

 

 

Investment Company Act file number

   811-173

 

 

 

 

 

 

 

DODGE & COX FUNDS

(Exact name of registrant as specified in charter)

 

555 California Street, 40th Floor

San Francisco, CA

  94104
(Address of principal executive offices)   (Zip code)

 

 

Thomas M. Mistele, Esq.

555 California Street, 40th Floor

San Francisco, CA 94104

(Name and address of agent for service)

 

Registrant’s telephone number, including area code: 415-981-1710

 

Date of fiscal year end: DECEMBER 31, 2007

 

 

Date of reporting period: DECEMBER 31, 2007

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507.


ITEM 1. REPORTS TO STOCKHOLDERS.

The following are the December 31, 2007 annual reports for the Dodge & Cox Funds, a Delaware statutory trust, consisting of four series: Dodge & Cox Stock Fund, Dodge & Cox International Stock Fund, Dodge & Cox Balanced Fund and Dodge & Cox Income Fund. The reports of each series were transmitted to their respective shareholders on February 15, 2008.


LOGO     LOGO

 

Stock Fund

 

www.dodgeandcox.com

For Fund literature, transactions and account

information, please visit the Funds’ web site.

or write or call:

DODGE & COX FUNDS

c/o Boston Financial Data Services

P.O. Box 8422

Boston, Massachusetts 02266-8422

(800) 621-3979

INVESTMENT MANAGER

Dodge & Cox

555 California Street, 40th Floor

San Francisco, California 94104

(415) 981-1710

This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.

This report reflects our views, opinions and portfolio holdings as of December 31, 2007, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.

12/07 SF AR    LOGO   Printed on recycled paper

 

2007    

Annual Report

December 31, 2007

Stock Fund

ESTABLISHED 1965

TICKER:  DODGX



Dodge & Cox Stock Fund reopened to new investors on February 4, 2008.

 

TO OUR SHAREHOLDERS

 

In last year’s annual letter to shareholders, we concluded that going forward, “outperforming the S&P 500 (Standard & Poor’s 500 Index) at all given this valuation landscape will be a formidable challenge.” Indeed, 2007 turned out to be the first year since 1999 in which the Fund underperformed the S&P 500. The Fund returned 0.1% in 2007 compared to 5.5% for the S&P 500. At year end, the Fund had net assets of $63.3 billion, including a cash position of 1.3%.

Longer-term results appear on page three. As you can see, over the past 20 years the Fund has returned an annualized 14.2% compared to 11.8% for the S&P 500. However, its year-to-year success has fluctuated—underperforming the S&P 500 in ten of those years and outperforming in ten. What has not changed over this period is our investment approach—a stable team of investment professionals analyzing company fundamentals in relationship to stock valuations over a three-to-five year investment horizon.

Beginning in the third quarter, equity market volatility increased dramatically as investors began digesting what has seemed like a constant stream of negative news regarding the U.S. housing market, the Financials sector and the broader economy. A long-term investment horizon is particularly important in the face of volatility. In our experience, some of the best investment opportunities are created during periods of uncertainty. What follows is a recap of the Fund’s relative performance and strategy in 2007, focusing on four areas—Technology, Health Care, Media and Financials.

TECHNOLOGY

From time to time, it matters as much what is not held in the portfolio as what is held. This was the case for the Information Technology sector in 2007. Four high valuation Information Technology stocks—Apple, Google, Intel and Microsoft—had extraordinary performance, and in fact represented nearly one-third of the S&P 500’s total return for the year. The S&P 500 Information Technology sector produced a total return of 17% last year, but excluding these four stocks, the sector return would have been 5%. Clearly, not owning these four companies detracted from relative performance. The Information Technology holdings in the Fund returned 4%. Motorola (down 21%) and EDS (down 24%) were particularly weak.

We tend to avoid high valuation technology companies which incorporate high investor expectations for continued growth and high net margins. Over a three-to-five year time frame, we believe the probability for disappointment is higher for these companies as increased competition and technological changes could erode their present positions. We prefer lower valuation technology companies as long as they have core competencies, established customer bases, adequate finances and a management that is working hard for their shareholders. At year end, the Fund had 19% of its value invested in Information Technology and other technology-related companies (e.g., Hewlett-Packard, Sony and Matsushita) with low valuations (i.e., price-to-sales ratios at 1.3 times or below).

HEALTH CARE

Health Care was also a weak sector of the Fund during 2007, as holdings finished the year flat while companies in the S&P 500 sector were up 7% collectively. Boston Scientific (down 20% from date of purchase), Cardinal Health (down 10%) and Pfizer (down 8%) were the largest detractors. We have increased the Fund’s exposure to Health Care stocks from 15% at the beginning of the year to 21% at year end (compared to 12% for the S&P 500). We continue to be especially attracted to pharmaceutical stocks. Concerns over patent expirations and regulatory factors have driven valuations down to some of their lowest levels in 15 years relative to the market. We believe that drug development and technological innovation in biosciences will continue longer term, while growth in the developing world is creating new consumers. We expect that the major pharmaceutical companies will continue to be the prime conduit between this technological progress and a growing global customer base. New positions in the Fund in 2007 include Amgen and Novartis. We also added significantly to the Fund’s investment in GlaxoSmithKline.

MEDIA

The Fund’s Media-related holdings (e.g., Comcast down 35%, Time Warner down 23% and Interpublic Group down 34%) also detracted from the Fund’s results in 2007. Comcast and Time Warner shares were buffeted by growth issues in their core cable television business


 

PAGE 1 § DODGE & COX STOCK FUND


stemming from satellite TV and telephone company competition, and a weak housing market. In our opinion, Comcast and Time Warner have built durable business franchises providing service to a combined 37 million U.S. households. In addition, both companies are large scale competitors to the telephone companies in delivering broadband internet service and digital phone services, which when bundled with video, create a compelling “triple play” offering for consumers. Reflecting our long-term conviction, we added to both Comcast and Time Warner during 2007.

The Fund also has significant exposure to entertainment “content” through its holdings in News Corp., Liberty Media and the non-cable businesses of Time Warner. We believe that expansion in international markets and online media represents major growth opportunities for these companies. News Corp. and Time Warner also possess vast libraries of films and TV shows which can be re-distributed globally via digital formats. With media and cable TV companies now trading at historically low multiples of cash flow and earnings, we remain optimistic about the long-term prospects for these holdings in the Fund.

FINANCIALS

The past year was difficult for the Financials sector. Due to the widening perimeter of subprime mortgage problems, equity prices for many financial companies have declined significantly. In 2006 and early-2007, the rapid earnings growth for financial companies led us to be skeptical. By the end of 2006, we had lowered the Fund’s Financial weighting to 14% versus 22% for the S&P 500, and this lower weighting contributed positively to relative results last year. Now that valuations are significantly lower in this sector, we are researching new opportunities and have added to current holdings, including Wachovia and Capital One Financial. We also started new positions in American International Group and HSBC.

We believe our investment in Wachovia is a good example of finding opportunity in the face of investor uncertainty. Wachovia is the third largest bank in the U.S. (based on deposits) and has a strong presence in retail banking, brokerage and mortgage lending. While the company is not immune to the turmoil in subprime mortgages and the weaker housing environment, it has historically been a prudent lender (i.e., below average credit losses). Most of its mortgage operations were acquired through its purchase of Golden West Financial, which had a well earned reputation for conservative lending practices. Wachovia has relatively low exposure to many of the areas that are under stress in the current

environment; the company’s presence in subprime lending, LBO financing, structured finance and hedge funds appears relatively modest, based on publicly available reports. We believe the long-term prospects for Wachovia appear attractive, especially at today’s valuation of about ten times expected 2008 earnings. Consequently, we have increased the Fund’s weighting in Wachovia to 3.3%; it was the Fund’s fourth largest holding at year end.

IN CLOSING

As valuations in the market and the Fund have dropped, our return outlook for the next three-to-five years has improved. At year end, the Fund’s forward price-to-earnings ratio was 12.9 times compared to 16.3 times for the S&P 500. We are finding attractive investment opportunities and have lowered the Fund’s cash position to 1.3%. We also remain encouraged about the long-term prospects for the global economy. Despite the turmoil during the last six months of 2007 and the market’s downturn thus far in 2008, the forces of technological innovation and free market economic principles are creating unprecedented wealth in the developing world and compelling investment opportunities for the patient investor. We will continue to work hard to uncover these potential opportunities and counsel you to have patience and take a long-term view of investing in general.

Thank you for your continued confidence in our firm as a shareholder of the Dodge & Cox Stock Fund. As always, we welcome your comments and questions.

For the Board of Trustees,

 

LOGO  

LOGO

John A. Gunn,

Chairman

 

Kenneth E. Olivier,

President

February 14, 2008


 

   DODGE & COX STOCK FUND  n     PAGE   2


GROWTH OF $10,000 OVER 10 YEARS

FOR AN INVESTMENT MADE ON DECEMBER 31, 1997

 

LOGO

AVERAGE ANNUAL TOTAL RETURN

FOR PERIODS ENDED DECEMBER 31, 2007

 

     1 Year     5 Years     10 Years     20 Years  

Dodge & Cox Stock Fund

  0.14 %   15.41 %   11.43 %   14.18 %

S&P 500

  5.51     12.82     5.91     11.81  

Past performance does 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. Performance is updated and published monthly. Visit the Fund’s web site at www.dodgeandcox.com or call 1-800-621-3979 for current performance figures.

The Fund’s 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. The Standard & Poor’s 500 (S&P 500) is a broad-based unmanaged measure of common stocks. Index returns include dividends and/or interest income and, unlike Fund returns, do not reflect fees or expenses.

Standard & Poor’s, Standard & Poor’s 500, and S&P 500® are trademarks of The McGraw-Hill Companies, Inc.


 

FUND EXPENSE EXAMPLE

As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.

ACTUAL EXPENSES

The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER MUTUAL FUNDS

Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expense Paid During the Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.

 

Six Months Ended
December 31, 2007
   Beginning Account
Value 7/1/2007
   Ending Account
Value 12/31/2007
   Expenses Paid
During Period*

Based on Actual Fund Return

   $ 1,000.00    $ 933.80    $ 2.52

Based on Hypothetical 5% Yearly Return

     1,000.00      1,022.60      2.63
*  

Expenses are equal to the Fund’s annualized six-month expense ratio of 0.52%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. While other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).

 

PAGE 3 § DODGE & COX STOCK FUND


FUND INFORMATION   December 31, 2007

 

GENERAL INFORMATION      

Net Asset Value Per Share

   $138.26

Total Net Assets (billions)

   $63.3

2007 Expense Ratio

   0.52%

2007 Portfolio Turnover Rate

   27%

30-Day SEC Yield(a)

   1.33%

Fund Inception

   1965

No sales charges or distribution fees

  

Investment Manager: Dodge & Cox, San Francisco. Managed by the Investment Policy Committee, whose nine members’ average tenure at Dodge & Cox is 22 years.

 

PORTFOLIO CHARACTERISTICS   Fund      S&P 500

Number of Stocks

  85      500

Median Market Capitalization (billions)

  $26      $13

Weighted Average Market Capitalization (billions)

  $78      $109

Price-to-Earnings Ratio(b)

  12.9x      16.3x

Foreign Stocks(c)

  19.2%      0.0%

 

TEN LARGEST HOLDINGS(d)    Fund  

Hewlett-Packard Co.

   4.4 %

Comcast Corp.

   4.0  

Wal-Mart Stores, Inc.

   3.4  

Wachovia Corp.

   3.3  

Sanofi-Aventis (France)

   3.1  

Sony Corp. (Japan)

   3.0  

News Corp.

   3.0  

Motorola, Inc.

   3.0  

Matsushita Electric Industrial Co., Ltd. (Japan)

   2.9  

Chevron Corp.

   2.8  

 

ASSET ALLOCATION

LOGO

 

SECTOR DIVERSIFICATION    Fund      S&P 500  

Consumer Discretionary

   21.6 %    8.5 %

Health Care

   20.8      12.0  

Information Technology

   16.2      16.7  

Financials

   14.4      17.7  

Energy

   10.0      12.9  

Industrials

   6.1      11.5  

Consumer Staples

   4.4      10.2  

Materials

   3.8      3.3  

Telecommunication Services

   1.4      3.6  

Utilities

   0.0      3.6  

 

 

(a)

SEC yield is an annualization of the Fund’s total net investment income per share for the 30-day period ended on the last day of the month.

(b)

Price-to-earnings (P/E) ratios are calculated using 12-month forward earnings estimates.

(c)

Foreign stocks are U.S. dollar-denominated.

(d)

The Fund’s portfolio holdings are subject to change without notice. The mention of specific securities is not a recommendation or solicitation for any person to buy, sell or hold any particular security.

 

DODGE & COX STOCK FUND § PAGE 4


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

COMMON STOCKS: 98.7%           
    SHARES    VALUE
CONSUMER DISCRETIONARY: 21.6%   

CONSUMER DURABLES & APPAREL: 6.3%

  

Matsushita Electric Industrial Co., Ltd. ADR(b) (Japan)

  90,921,597    $ 1,858,437,443

Nike, Inc., Class B

  2,359,058      151,545,886

Sony Corp. ADR(b) (Japan)

  35,113,600      1,906,668,480

Thomson ADR(b) (France)

  5,987,300      83,941,946
        
       4,000,593,755

CONSUMER SERVICES: 1.2%

    

McDonald’s Corp.

  13,124,400      773,158,404

MEDIA: 10.9%

    

Comcast Corp., Class A(a),(c)

  138,558,560      2,530,079,306

EchoStar Communications Corp.(a)

  7,442,570      280,733,740

Interpublic Group of Companies, Inc.(a),(c)

  28,806,600      233,621,526

Liberty Capital, Series A(a)

  1,486,360      173,146,076

Liberty Global, Inc., Series A(a)

  962,207      37,708,892

Liberty Global, Inc., Series C(a)

  1,569,340      57,422,151

News Corp., Class A

  92,595,526      1,897,282,328

Time Warner, Inc.

  101,353,000      1,673,338,030
        
       6,883,332,049

RETAILING: 3.2%

    

CarMax, Inc.(a)

  6,800,400      134,307,900

Gap, Inc.

  15,561,800      331,155,104

Genuine Parts Co.(c)

  7,316,888      338,771,914

Home Depot, Inc.

  22,702,400      611,602,656

Liberty Interactive, Series A(a)

  17,458,075      333,100,071

Macy’s, Inc.

  10,573,918      273,547,259
        
       2,022,484,904
        
       13,679,569,112
CONSUMER STAPLES: 4.4%     

FOOD & STAPLES RETAILING: 3.8%

  

Wal-Mart Stores, Inc.

  45,811,000      2,177,396,830

Walgreen Co.

  6,911,875      263,204,200
        
       2,440,601,030

HOUSEHOLD & PERSONAL PRODUCTS: 0.6%

  

Avon Products, Inc.

  8,970,200      354,592,006
        
       2,795,193,036
ENERGY: 10.0%     

Baker Hughes, Inc.

  11,077,205      898,361,325

Chevron Corp.

  19,046,299      1,777,591,086

ConocoPhillips

  10,206,700      901,251,610

Occidental Petroleum Corp.

  14,481,400      1,114,922,986

Royal Dutch Shell PLC ADR(b) (United Kingdom)

  9,137,864      758,442,712

Schlumberger, Ltd.

  7,009,614      689,535,729

Spectra Energy Corp.

  5,843,650      150,883,043
        
       6,290,988,491
FINANCIALS: 14.4%     

BANKS: 4.8%

    

HSBC Holdings PLC(b) (United Kingdom)

  7,401,000      619,537,710
    SHARES    VALUE

Wachovia Corp.

  54,405,406    $ 2,069,037,590

Wells Fargo & Co.

  11,336,500      342,248,935
        
       3,030,824,235

DIVERSIFIED FINANCIALS: 3.5%

    

Capital One Financial Corp.(c)

  22,303,074      1,054,043,277

Citigroup, Inc.

  23,252,300      684,547,712

Legg Mason, Inc.

  4,350,200      318,217,130

SLM Corp.

  7,201,100      145,030,154
        
       2,201,838,273

INSURANCE: 6.1%

    

Aegon NV(b) (Netherlands)

  26,707,488      468,182,265

American International Group, Inc.

  19,851,400      1,157,336,620

Chubb Corp.

  10,550,300      575,835,374

Genworth Financial, Inc., Class A

  7,895,000      200,927,750

Loews Corp.

  6,977,200      351,232,248

The Travelers Companies, Inc.

  21,032,150      1,131,529,670
        
       3,885,043,927
        
       9,117,706,435
HEALTH CARE: 20.8%     

HEALTH CARE EQUIPMENT & SERVICES: 7.7%

  

Boston Scientific Corp.(a)

  45,219,100      525,898,133

Cardinal Health, Inc.(c)

  23,396,450      1,351,144,987

Covidien, Ltd.

  16,019,200      709,490,368

Health Management Associates, Inc.(c)

  15,307,700      91,540,046

UnitedHealth Group, Inc.

  10,434,100      607,264,620

WellPoint, Inc.(a)

  18,220,990      1,598,527,453
        
       4,883,865,607

PHARMACEUTICALS & BIOTECHNOLOGY: 13.1%

Amgen, Inc.(a)

  4,500,200      208,989,288

Bristol-Myers Squibb Co.

  15,529,395      411,839,556

GlaxoSmithKline PLC ADR(b) (United Kingdom)

  31,420,700      1,583,289,073

Johnson & Johnson

  4,571,750      304,935,725

Novartis AG ADR(b) (Switzerland)

  29,573,700      1,606,147,647

Pfizer, Inc.

  70,831,519      1,610,000,427

Sanofi-Aventis ADR(b) (France)

  42,529,842      1,936,383,706

Wyeth

  14,243,900      629,437,941
        
       8,291,023,363
        
       13,174,888,970
INDUSTRIALS: 6.1%     

CAPITAL GOODS: 2.4%

    

General Electric Co.

  18,468,400      684,623,588

Koninklijke Philips Electronics NV(b) (Netherlands)

  5,552,800      237,382,200

Masco Corp.

  12,914,000      279,071,540

Tyco International, Ltd.

  7,568,800      300,102,920
        
       1,501,180,248

COMMERCIAL SERVICES & SUPPLIES: 0.4%

  

Pitney Bowes, Inc.

  6,426,150      244,450,746

 

PAGE 5 § DODGE & COX STOCK FUND   See accompanying Notes to Financial Statements


PORTFOLIO OF INVESTMENTS    December 31, 2007

 

COMMON STOCKS (continued)      
    SHARES    VALUE

TRANSPORTATION: 3.3%

    

FedEx Corp.

  12,040,250    $ 1,073,629,092

Union Pacific Corp.(c)

  8,062,900      1,012,861,498
        
       2,086,490,590
        
       3,832,121,584
INFORMATION TECHNOLOGY: 16.2%   

SOFTWARE & SERVICES: 4.3%

    

BMC Software, Inc.(a),(c)

  10,602,400      377,869,536

Citrix Systems, Inc.(a)

  7,219,622      274,417,832

Computer Sciences Corp.(a),(c)

  11,677,300      577,676,031

Compuware Corp.(a),(c)

  19,325,400      171,609,552

EBay, Inc.(a)

  17,754,800      589,281,812

Electronic Data Systems Corp.(c)

  34,224,100      709,465,593
        
       2,700,320,356

TECHNOLOGY, HARDWARE & EQUIPMENT: 11.9%

Hewlett-Packard Co.

  55,258,943      2,789,471,443

Hitachi, Ltd. ADR(b) (Japan)

  10,342,600      756,457,764

Kyocera Corp. ADR(b) (Japan)

  730,200      63,688,044

Maxim Integrated Products, Inc.

  12,167,100      322,184,808

Molex, Inc.

  6,200      169,260

Molex, Inc., Class A

  7,761,782      203,902,013

Motorola, Inc.(c)

  116,820,111      1,873,794,581

Sun Microsystems, Inc.(a)

  5,843,888      105,949,689

Tyco Electronics, Ltd.

  17,483,900      649,177,207

Xerox Corp.(c)

  48,387,700      783,396,863
        
       7,548,191,672
        
       10,248,512,028
MATERIALS: 3.8%     

Alcoa, Inc.

  2,336,833      85,411,246

Cemex SAB de CV ADR(b) (Mexico)

  11,124,091      287,557,752

Domtar Corp.(a)

  16,401,200      126,125,228

Dow Chemical Co.

  33,946,923      1,338,187,705

Nova Chemicals Corp.(b),(c) (Canada)

  1,136,713      36,829,501

Rohm and Haas Co.

  6,735,700      357,463,599

Vulcan Materials Co.

  2,272,300      179,716,207
        
       2,411,291,238
TELECOMMUNICATION SERVICES: 1.4%

Sprint Nextel Corp.

  68,591,289      900,603,625
        
       900,603,625
        

TOTAL COMMON STOCKS
(Cost $51,684,214,046)

   $ 62,450,874,519
        
SHORT-TERM INVESTMENTS: 0.5%       
    PAR VALUE     VALUE

MONEY MARKET FUND: 0.1%

 

 

SSgA Prime Money Market Fund

  $ 58,546,005     $ 58,546,005

REPURCHASE AGREEMENT: 0.4%

 

 

Fixed Income Clearing Corporation(d) 3.75%, 1/2/08, maturity value $285,107,385

    285,048,000       285,048,000
       

TOTAL SHORT-TERM INVESTMENTS
(Cost $343,594,005)

  

    343,594,005
       

TOTAL INVESTMENTS
(Cost $52,027,808,051)

    99.2 %     62,794,468,524

OTHER ASSETS LESS LIABILITIES

    0.8 %     496,170,402
             
NET ASSETS     100.0 %   $ 63,290,638,926
             

 

(a)

Non-income producing

(b)

Security issued by a foreign entity, denominated in U.S. dollars

(c)

See Note 6 regarding holdings of 5% voting securities

(d)

Repurchase agreement is collateralized by Fannie Mae 2.50%, 6/15/08; Federal Home Loan Bank 4.30%-5.125%, 5/12/08-5/14/08; and Freddie Mac Discount Note 0.00%, 4/25/08. Total collateral value is $290,749,263.

ADR: American Depository Receipt


 

See accompanying Notes to Financial Statements   DODGE & COX STOCK FUND § PAGE 6


STATEMENT OF ASSETS AND LIABILITIES

 

    December 31, 2007  

ASSETS:

 

Investments, at value

 

Unaffiliated issuers (cost $42,362,847,265)

  $ 53,040,227,226  

Affiliated issuers (cost $9,664,960,786)

    9,754,241,298  
       
    62,794,468,524  

Receivable for investments sold

    310,974,422  

Receivable for Fund shares sold

    395,027,799  

Dividends and interest receivable

    98,463,126  

Prepaid expenses and other assets

    345,009  
       
    63,599,278,880  
       

LIABILITIES:

 

Payable for investments purchased

    148,868,933  

Payable for Fund shares redeemed

    129,955,832  

Management fees payable

    27,280,201  

Accrued expenses

    2,534,988  
       
    308,639,954  
       

NET ASSETS

  $ 63,290,638,926  
       

NET ASSETS CONSIST OF:

 

Paid in capital

  $ 50,672,541,102  

Undistributed net investment income

     

Undistributed net realized gain on investments

    1,851,437,351  

Net unrealized appreciation on investments

    10,766,660,473  
       
  $ 63,290,638,926  
       

Fund shares outstanding (par value $0.01 each, unlimited shares authorized)

    457,758,907  

Net asset value per share

    $138.26  

STATEMENT OF OPERATIONS

 

    Year Ended
December 31, 2007
 

INVESTMENT INCOME:

 

Dividends (net of foreign taxes of $14,346,165)

 

Unaffiliated issuers

  $ 1,033,660,947  

Affiliated issuers

    207,832,459  

Interest

    104,739,886  
       
    1,346,233,292  
       

EXPENSES:

 

Management fees

    344,516,929  

Custody and fund accounting fees

    887,758  

Transfer agent fees

    5,136,940  

Professional services

    172,790  

Shareholder reports

    3,604,062  

Registration fees

    560,168  

Trustees’ fees

    179,000  

Miscellaneous

    1,466,513  
       
    356,524,160  
       

NET INVESTMENT INCOME

    989,709,132  
       

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

 

Net realized gain

 

Unaffiliated issuers

    6,018,616,669  

Affiliated issuers

    976,581,370  

Net change in unrealized appreciation

    (7,782,329,189 )
       

Net realized and unrealized loss

    (787,131,150 )
       

NET INCREASE IN NET ASSETS FROM OPERATIONS

  $ 202,577,982  
       

STATEMENT OF CHANGES IN NET ASSETS

 

   

Year Ended

December 31, 2007

   

Year Ended

December 31, 2006

 

OPERATIONS:

   

Net investment income

  $ 989,709,132     $ 865,519,931  

Net realized gain

    6,995,198,039       3,209,367,265  

Net change in unrealized appreciation

    (7,782,329,189 )     5,995,600,442  
               

Net increase in net assets from operations

    202,577,982       10,070,487,638  
               

DISTRIBUTIONS TO SHAREHOLDERS FROM:

  

 

Net investment income

    (1,007,606,492 )     (850,295,361 )

Net realized gain

    (5,606,655,304 )     (2,847,558,997 )
               

Total distributions

    (6,614,261,796 )     (3,697,854,358 )
               

FUND SHARE TRANSACTIONS:

   

Proceeds from sale of shares

    8,202,384,871       10,571,607,422  

Reinvestment of distributions

    6,303,311,198       3,483,584,887  

Cost of shares redeemed

    (10,988,379,298 )     (6,427,028,935 )
               

Net increase from Fund share transactions

    3,517,316,771       7,628,163,374  
               

Total increase (decrease) in net assets

    (2,894,367,043 )     14,000,796,654  

NET ASSETS:

   

Beginning of year

    66,185,005,969       52,184,209,315  
               

End of year (including undistributed net investment income of $0 and $17,897,360, respectively)

  $ 63,290,638,926     $ 66,185,005,969  
               

SHARE INFORMATION:

   

Shares sold

    52,502,799       71,830,464  

Distributions reinvested

    44,317,981       22,836,316  

Shares redeemed

    (70,354,563 )     (43,682,824 )
               

Net increase in shares outstanding

    26,466,217       50,983,956  
               

 

PAGE 7 § DODGE & COX STOCK FUND   See accompanying Notes to Financial Statements


NOTES TO FINANCIAL STATEMENTS

 

NOTE 1—ORGANIZATION AND SIGNIFICANT
ACCOUNTING POLICIES

Dodge & Cox Stock Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The Fund commenced operations on January 4, 1965, and seeks long-term growth of principal and income. Risk considerations and investment strategies of the Fund are discussed in the Fund’s Prospectus.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Significant accounting policies are as follows:

Security valuation The Fund’s net assets are valued as of the close of trading on the New York Stock Exchange (NYSE), generally 4:00 p.m. Eastern Time, each day that the NYSE is open for business. Stocks are valued at the official quoted close price or the last sale of the day at the close of the NYSE or, if not available, at the mean between the exchange listed bid and ask prices for the day. A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Security values are not discounted based on the size of the Fund’s position. Securities for which market quotations are not readily available are valued at fair value as determined in good faith by or at the direction of the Board of Trustees. Short-term securities are valued at amortized cost which approximates current value. All securities held by the Fund are denominated in U.S. dollars.

Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.

Dividend income and corporate action transactions are recorded on the ex-dividend date, except for certain

dividends or corporate actions from foreign securities where the ex-dividend date may have passed, which are recorded as soon as the Fund is informed of the ex-dividend date. Withholding taxes on foreign dividends have been provided for in accordance with the Fund’s understanding of the applicable country’s tax rules and rates. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Distributions received in excess of income are recorded as a reduction of cost of investments and/or realized gain. The Fund may estimate the character of distributions received from Real Estate Investment Trusts (“REITs”). Interest income is recorded on the accrual basis.

Expenses are recorded on the accrual basis. Most expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust.

Distributions to shareholders are recorded on the ex-dividend date.

Repurchase agreements The Fund may enter into repurchase agreements secured by U.S. government and agency securities which involve the purchase of securities from a counterparty with a simultaneous commitment to resell the securities at an agreed-upon date and price. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the securities and to apply the proceeds in satisfaction of the obligation.

NOTE 2—RELATED PARTY TRANSACTIONS

Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays an annual management fee of 0.50% of the Fund’s average daily net assets to Dodge & Cox, investment manager of the Fund. The agreement further provides that Dodge & Cox shall waive its fee to the extent that such fee plus all other ordinary operating expenses of the Fund exceed 0.75% of the average daily net assets for the year.


 

DODGE & COX STOCK FUND § PAGE 8


NOTES TO FINANCIAL STATEMENTS

 

Fund officers and trustees All officers and three of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.

Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.

NOTE 3—INCOME TAX INFORMATION

A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, which may differ from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character.

Book/tax differences are primarily due to wash sales and differing treatments of net short-term realized gain. At December 31, 2007, the cost of investments for federal income tax purposes was $52,028,239,770.

Distributions during the years ended December 31, 2007 and 2006 were characterized as follows for federal income tax purposes:

 

     2007   2006

Ordinary income

  $1,382,138,076   $952,202,374
  ($3.197 per share)   ($2.367 per share)

Long-term capital gain

  $5,232,123,720   $2,745,651,984
  ($12.403 per share)   ($6.663 per share)

 

At December 31, 2007, the tax basis components of distributable earnings were as follows:

 

Unrealized appreciation

   $ 13,375,949,241  

Unrealized depreciation

     (2,609,720,487 )
        

Net unrealized appreciation

     10,766,228,754  

Undistributed ordinary income

     22,158,965  

Undistributed long-term capital gain

     1,829,710,105  

NOTE 4—PURCHASES AND SALES OF INVESTMENTS

For the year ended December 31, 2007, purchases and sales of securities, other than short-term securities, aggregated $18,037,283,315 and $18,039,570,094, respectively.

NOTE 5—ACCOUNTING PRONOUNCEMENTS

Effective June 29, 2007, the Fund adopted the Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements. At December 31, 2007, FIN 48 was applied to the period from January 1, 2004 through December 31, 2007, the open tax years subject to regulatory examination. There was no impact to the Fund’s financial statements as a result of applying FIN 48.

In September 2006, FASB issued “Statement of Financial Accounting Standards No. 157, Fair Value Measurements” (SFAS 157). SFAS 157 is effective for the Fund beginning January 1, 2008. It defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Fund’s financial statement disclosures; however, it is not expected to have a material impact on the Fund’s net assets or results of operations.


 

PAGE 9 § DODGE & COX STOCK FUND


NOTES TO FINANCIAL STATEMENTS

 

NOTE 6—HOLDINGS OF 5% VOTING SECURITIES

Each of the companies listed below is considered to be an affiliate of the Fund because the Fund owned 5% or more of the company’s voting securities during the year ended December 31, 2007. Transactions during the year in securities of affiliated companies were as follows:

 

     Shares at
Beginning of Year
   Additions     Reductions     Shares at
End of Year
   Dividend
Income(a)
   

Value at

End of Year

 

American Power Conversion Corp.

  13,409,652        (13,409,652 )      $     $  

Avaya, Inc.

  31,094,924    6,100     (31,101,024 )               

BMC Software, Inc.

  10,876,500    53,900     (328,000 )   10,602,400       (b)     377,869,536  

Capital One Financial Corp.

  13,183,778    9,119,296         22,303,074      1,822,762       1,054,043,277  

Cardinal Health, Inc.

  24,264,150    507,300     (1,375,000 )   23,396,450      10,687,007       1,351,144,987  

Comcast Corp., Class A

  60,418,191    79,140,369  (d)   (1,000,000 )   138,558,560       (b)     2,530,079,306  

Computer Sciences Corp.

  12,858,900    4,500     (1,186,100 )   11,677,300       (b)     577,676,031  

Compuware Corp.

  19,312,600    12,800         19,325,400       (b)     171,609,552  

Electronic Data Systems Corp.

  34,711,300    12,800     (500,000 )   34,224,100      6,893,565       709,465,593  

Genuine Parts Co.

  8,931,300    3,700     (1,618,112 )   7,316,888      11,905,675       —  (c)

Health Management Associates, Inc.

  15,303,200    4,500         15,307,700      134,229,235       91,540,046  

Interpublic Group of Companies, Inc.

  27,499,200    1,307,400         28,806,600       (b)     233,621,526  

Motorola, Inc.

  50,722,100    66,098,011         116,820,111      20,870,896       1,873,794,581  

Nova Chemicals Corp. (Canada)

  4,740,470    1,400     (3,605,157 )   1,136,713      1,057,665       —  (c)

Union Pacific Corp.

  15,120,650    4,350     (7,062,100 )   8,062,900      18,309,177       —  (c)

Xerox Corp.

  63,334,900    16,700     (14,963,900 )   48,387,700      2,056,477       783,396,863  
                         
            $ 207,832,459     $ 9,754,241,298  
                         

(a)

Net of foreign taxes, if any

(b)

Non-income producing

(c)

Company was not an affiliate at the end of the year

(d)

Includes 30,209,095 shares obtained in a 3 for 2 stock split on February 22, 2007

 

FINANCIAL HIGHLIGHTS

 

SELECTED DATA AND RATIOS

(for a share outstanding throughout each year)

    

Year Ended December 31,

 
       2007      2006      2005      2004      2003  

Net asset value, beginning of year

     $153.46      $137.22      $130.22      $113.78      $  88.05  

Income from investment operations:

                

Net investment income

     2.30      2.15      1.68      1.54      1.60  

Net realized and unrealized gain (loss)

     (1.90 )    23.12      10.36      20.08      26.59  
        

Total from investment operations

     0.40      25.27      12.04      21.62      28.19  
        

Distributions to shareholders from:

                

Net investment income

     (2.34 )    (2.12 )    (1.70 )    (1.53 )    (1.62 )

Net realized gain

     (13.26 )    (6.91 )    (3.34 )    (3.65 )    (0.84 )
        

Total distributions

     (15.60 )    (9.03 )    (5.04 )    (5.18 )    (2.46 )
        

Net asset value, end of year

     $138.26      $153.46      $137.22      $130.22      $113.78  
        

Total return

     0.14 %    18.54 %    9.36 %    19.16 %    32.35 %

Ratios/supplemental data:

                

Net assets, end of year (millions)

     $63,291      $66,185      $52,184      $43,266      $29,437  

Ratios of expenses to average net assets

     0.52 %    0.52 %    0.52 %    0.53 %    0.54 %

Ratios of net investment income to average net assets

     1.44 %    1.48 %    1.29 %    1.32 %    1.72 %

Portfolio turnover rate

     27 %    14 %    12 %    11 %    8 %

See accompanying Notes to Financial Statements

 

DODGE & COX STOCK FUND § PAGE 10


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Trustees of Dodge & Cox Funds and Shareholders of Dodge & Cox Stock Fund

In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Dodge & Cox Stock Fund (the “Fund”, one of the series constituting Dodge & Cox Funds) at December 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2007 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 14, 2008

 

SPECIAL 2007 TAX INFORMATION (unaudited)

The following information is provided pursuant to provisions of the Internal Revenue Code:

The Fund designates up to a maximum amount of $1,272,591,504 of its distributions paid to shareholders in 2007 as qualified dividends (treated for federal income tax purposes in the hands of shareholders as taxable at a maximum rate of 15%).

For shareholders that are corporations, the Fund designates 71% of its ordinary dividends (including short-term gains) paid to shareholders in 2007 as dividends from domestic corporations eligible for the corporate dividends received deduction, provided that the shareholder otherwise satisfies applicable requirements to claim that deduction.

BOARD APPROVAL OF FUNDS’
INVESTMENT MANAGEMENT

AGREEMENTS AND MANAGEMENT FEES

(unaudited)

The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment

manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 19, 2007, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2008. During the course of the year, the Board received a wide variety of materials relating to the services provided by Dodge & Cox and the performance of the Funds.

INFORMATION RECEIVED

In advance of the meeting, the Board, including each of the Independent Trustees, requested, received and reviewed materials relating to the Agreements. The Independent Trustees retained Morningstar® to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Morningstar®. The Morningstar® materials


 

PAGE 11 § DODGE & COX STOCK FUND


included information regarding advisory fee rates, expense ratios, and transfer agency, custodial and distribution expenses, as well as performance comparisons to an appropriate index or combination of indices. The materials reviewed by the Board also included information concerning Dodge & Cox’s profitability, financial results and condition, including advisory fee revenue and separate account advisory fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates and sales and redemption data for the Funds, including “soft dollar” payments made for research benefiting the Funds and other accounts managed by Dodge & Cox, and brokerage commissions and expenses paid by Dodge & Cox. Other aspects of Dodge & Cox’s services to the Funds which were reviewed included compliance and supervision of third-party service providers (e.g., custodian, fund accountant, transfer agent and state registration administrator), shareholder servicing, accounting and administrative services, web services, the character of non-advisory services, the record of compliance with the Funds’ investment policies and restrictions and the Funds’ Code of Ethics, investment management staffing and biographies, information furnished to investors and shareholders (including the Funds’ Prospectus, Statement of Additional Information, shareholder reports, and quarterly reports), and third-party retirement plan administrator reimbursements by Dodge & Cox for the same periods.

The Board received copies of the Agreements and a memorandum from the Independent Legal Counsel to the Independent Trustees, discussing the factors generally regarded as appropriate to consider in evaluating advisory arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the Independent Legal Counsel on December 3, 2007 and again on December 19, 2007 to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements.

In considering the Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the

Agreements, the Board, which was advised by Independent Legal Counsel, considered the following factors, among others, and reached the conclusions described below.

NATURE, QUALITY, AND EXTENT
OF THE SERVICES

The Board considered that Dodge & Cox provides a wide range of services to the Funds in addition to portfolio management and that the quality of these services has been excellent in all respects. The extensive nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality and extent of portfolio management, administrative and shareholder services performed by Dodge & Cox, including: Dodge & Cox’s established long-term history of care and conscientiousness in the management of the Funds; demonstrated consistency in investment approach and depth, background and experience of the Dodge & Cox Investment Policy Committee, International Investment Policy Committee, Fixed Income Investment Policy Committee and research analysts responsible for managing the Funds; Dodge & Cox’s organizational structure; Dodge & Cox’s performance in the areas of compliance, administration and shareholder communication and services, supervision of Fund operations and general oversight of other service providers; favorable peer group comparisons of expense ratios, management fee comparisons, expenses (e.g., transfer agent, custody and other fees and expenses) and asset comparisons and performance and risk summaries prepared independently by Morningstar® and favorable fiduciary grade and “Star” rankings by Morningstar®. The Board concluded that it was satisfied with the nature, extent and quality of investment management and other services provided to the Funds by Dodge & Cox.

INVESTMENT PERFORMANCE

The Board considered short-term and long-term investment performance for each Fund (including periods of outperformance or underperformance) as compared to both relevant indices and the performance of such Fund’s peer group. In light of recent market volatility, the Board


 

DODGE & COX STOCK FUND § PAGE 12


also reviewed recent performance in the context of long-term investment goals. The performance information prepared by Morningstar® and Dodge & Cox demonstrated consistently favorable performance over the long term in keeping with the stated goals in the Prospectus. The Board considered that the performance of the Funds is the result of a team-oriented investment management process that emphasizes a long-term investment horizon, independence, comprehensive research, price discipline and focus. The Board also noted that the investment performance delivered by Dodge & Cox to the Funds appeared to be consistent with the performance delivered for other (non-fund) clients of Dodge & Cox. The Board concluded that Dodge & Cox delivers favorable performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.

COSTS AND ANCILLARY BENEFITS

Costs of Services to Funds: Fees and Expenses. The Board considered each Fund’s management fee rates and expense ratios relative to industry averages for similar mutual funds and relative to management fees charged by Dodge & Cox to other (non-fund) clients. The Board evaluated the operating structures of the Funds and Dodge & Cox, including the following: Dodge & Cox has a centralized focus on investment management operations and derives revenue solely from management fees; its outsourcing of non-advisory support services to unaffiliated third-party service providers is efficient and less costly to investors; Dodge & Cox does not charge front-end sales commissions or distribution fees and bears all third party research and distribution-related costs as well as reimbursements to third-party retirement plan administrators; the Funds receive numerous administrative, regulatory compliance, and shareholder support services from Dodge & Cox without any additional administrative fee; and the fact that the Funds have relatively low transaction costs and portfolio turnover rates. The Board noted that the Funds are substantially below peer group averages in expense ratios and management fee rates and that many media and industry reports specifically comment on the low expense ratios of Dodge & Cox, which along with excellent performance,

has been a defining characteristic of Dodge & Cox for many years. The Board also noted that the range of services under the Agreements is much more extensive than under Dodge & Cox’s separate advisory (non-fund) client agreements and that many of the separate accounts were opened decades ago when fees were lower, and considered that, when coupled with the greater risks and regulatory burdens associated with the high profile mutual fund business, there is reasonable justification for differences in fee rates charged between the two lines of business. The Board concluded that costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation and performance of Dodge & Cox and the low overall expense ratios of the Funds.

Profitability and Costs of Services to Dodge & Cox; “Fall-out” Benefits. The Board reviewed reports of Dodge & Cox’s financial position, profitability and estimated overall value, and they considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the favorable services provided. The Board considered recent increases to Dodge & Cox’s gross revenues, and noted the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that revenues reflect the continued success of the Funds and that such revenues are not generated by fees that are high compared to its peers. They noted that Dodge & Cox’s profitability is enhanced due to its efficient internal business model, and that the compensation/profit structure at Dodge & Cox is vital for remaining independent and facilitating retention of its management and investment professionals. The Board considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers) that Dodge & Cox might receive in its association with the Funds. The Board also noted the extent of additional administrative services performed by Dodge & Cox for the Funds, and that the magnitude of costs and risks borne by Dodge & Cox in rendering advisory services to the Funds (including risks in the


 

PAGE 13 § DODGE & COX STOCK FUND


compliance, securities valuation and investment management processes) are continuing to increase. The Board concluded that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) was fair and reasonable.

THE BENEFIT OF ECONOMIES OF SCALE

The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee structure and the considerable efficiencies of the Funds’ organization and fee structure that has been realized by shareholders at the outset of their investment (i.e., from the first dollar). Shareholders also realize efficiencies from the outset of their investment due to organizational efficiencies derived from Dodge & Cox’s investment management process (e.g., low portfolio turnover) and the avoidance of distribution and marketing structures whose costs would ultimately be borne by shareholders of the Funds. The Board noted that Dodge & Cox’s internal costs of providing investment management, administrative and compliance services to the Funds are continuing to increase. Thus, the Funds provide access by small investors to top-rank investment management at a relatively low cost. The Board’s decision to renew the Agreements was made after consideration of economies of scale and review of comparable fund expense ratios and historical expense ratio patterns for the Funds. Their review also included consideration of the desirability of adding breakpoints to the Funds’ fee schedules. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately reflects economies of scale.

 

CONCLUSION

Based on their evaluation of all material factors and assisted by the advice of Independent Legal Counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the advisory fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that the scope and quality of Dodge & Cox’s services has provided substantial value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.

FUND HOLDINGS

The Fund provides a complete list of its holdings four times each fiscal year, as of the end of each quarter. The lists appear in the Fund’s First Quarter, Semi-Annual, Third Quarter and Annual Reports to shareholders. The Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-CSR (second and fourth quarters) and Form N-Q (first and third quarters). Shareholders may view the Fund’s Forms N-CSR and N-Q on the SEC’s website at www.sec.gov. Forms N-CSR and N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by 1-202-942-8090 (direct) or 1-800-732-0330 (general SEC number). A complete list of the Fund’s quarter-end holdings is also available at www.dodgeandcox.com on or about 15 days following each quarter end and remains available on the web site until the list is updated in the subsequent quarter.

PROXY VOTING

For a free copy of the Fund’s proxy voting policies and procedures, please call 1-800-621-3979, visit the Fund’s web site at www.dodgeandcox.com or visit the SEC’s web site at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ending June 30 is also available at www.dodgeandcox.com or at www.sec.gov.


 

DODGE & COX STOCK FUND § PAGE 14


DODGE & COX FUNDS—EXECUTIVE OFFICER & TRUSTEE INFORMATION

 

Name (Age) and
Address*
  Position with Trust
(Year of Election or
Appointment)
  Principal Occupation During Past 5 Years   Other Directorships Held by Trustees
INTERESTED TRUSTEES & OFFICERS
John A. Gunn
(64)
 

Chairman and

Trustee
(Trustee since 1985)

  Chairman (since 2007), Chief Executive Officer (since 2005) and Director of Dodge & Cox, Portfolio Manager and member of Investment Policy Committee (IPC), Fixed Income Investment Policy Committee (FIIPC) and International Investment Policy Committee (IIPC)  
Kenneth E. Olivier (55)   President and Trustee
(Trustee since 2005)
  President (since 2005) and Director of Dodge & Cox, Portfolio Manager and member of IPC  
Dana M. Emery (46)  

Senior Vice President and Trustee

(Trustee since 1993)

  Executive Vice President (since 2005) and Director of Dodge & Cox, Manager of the Fixed Income Department, Portfolio Manager and member of FIIPC  
Charles F. Pohl
(50)
 

Senior Vice President

(Officer since 2004)

 

Senior Vice President and Director of Dodge & Cox, Chief Investment Officer (since 2007), Director of Credit Research, Portfolio Manager, Investment Analyst and member of IPC, IIPC (since 2007) and FIIPC

 
Diana S. Strandberg (48)   Senior Vice President
(Officer since 2005)
  Vice President of Dodge & Cox, Portfolio Manager and member of IPC and IIPC  

David H. Longhurst (50)

 

Treasurer

(Officer since 2006)

  Fund Administration and Accounting Senior Manager of Dodge & Cox (since 2004); Vice President, Treasurer, Controller and Secretary of Safeco Mutual Funds, Safeco Asset Management Company, Safeco Services, Safeco Securities, and Safeco Investment Services (2000-2004)  
Thomas M. Mistele (54)   Secretary
(Officer since 2000)
  Chief Operating Officer (since 2004), Director (since 2005), Secretary and General Counsel of Dodge & Cox  
Marcia P. Venegas (39)   Chief Compliance Officer
(Officer since 2004)
  Chief Compliance Officer of Dodge & Cox (since 2005), Compliance Officer of Dodge & Cox (2003-2004)  
INDEPENDENT TRUSTEES
William F. Ausfahl (67)  

Trustee

(Since 2002)

 

CFO, The Clorox Co. (1982-1997);

Director, The Clorox Co. (1984-1997)

 
L. Dale Crandall (66)  

Trustee

(Since 1999)

  President, Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals (2000-2002); Senior Vice President—Finance and Administration & CFO, Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals (1998-2000)   Director, Union BanCal Corporation (bank holding company) and Union Bank of California (commercial bank) (2001-Present); Director, Covad Communications Group (broadband communications services) (2002-Present); Director, Ansell Limited (medical equipment and supplies) (2002-Present); Director, BEA Systems, Inc. (software and programming) (2003-Present); Director, Coventry Health Care, Inc. (managed health care) (2004-Present); Director, Metavante Technologies, Inc. (software) (2007 to present); Director, Serena Software, Inc. (software) (2007 to present)
Thomas A. Larsen (58)  

Trustee

(Since 2002)

  Director in Howard, Rice, Nemerovski, Canady, Falk & Rabkin (law firm)  

John B. Taylor
(61)

 

Trustee

(Since 2005)

  Professor of Economics, Stanford University; Senior Fellow, Hoover Institution; Under Secretary for International Affairs, United States Treasury (2001-2005)  
Will C. Wood
(68)
 

Trustee

(Since 1992)

  Principal, Kentwood Associates, Financial Advisers   Director, Banco Latinoamericano de Exportaciones S.A. (Latin American foreign trade bank) (1999-Present)

 

*  

The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all four series in the Dodge & Cox Funds complex and serves for an indefinite term.

Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Funds’ website at www.dodgeandcox.com or calling 1-800-621-3979.

 

PAGE 15 § DODGE & COX STOCK FUND


LOGO     LOGO

 

International Stock Fund

 

www.dodgeandcox.com

For Fund literature, transactions and account information, please visit the Funds’ web site.

or write or call:

DODGE & COX FUNDS

c/o Boston Financial Data Services

P.O. Box 8422

Boston, Massachusetts 02266-8422

(800) 621-3979

INVESTMENT MANAGER

Dodge & Cox

555 California Street, 40th Floor

San Francisco, California 94104

(415) 981-1710

This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.

This report reflects our views, opinions and portfolio holdings as of December 31, 2007, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.

12/07 ISF AR    LOGO   Printed on recycled paper

2007    

Annual Report

December 31, 2007

International Stock Fund

ESTABLISHED 2001

TICKER:  DODFX



TO OUR SHAREHOLDERS

 

The Dodge & Cox International Stock Fund had a total return of 11.7% for the year ended December 31, 2007, compared to a total return of 11.2% for the Morgan Stanley Capital International Europe, Australasia, Far East Index (MSCI EAFE) benchmark. Longer-term returns can be found on page four. At year end, the Fund had net assets of $53.5 billion with a cash position of 3.3%.

2007 PERFORMANCE REVIEW

The Fund outperformed the MSCI EAFE by 0.5% for the year. Key contributors to relative performance are listed below.

n  

Investments in the Energy sector (up 44%) outperformed the MSCI EAFE Energy sector (up 22%). Strong performers included Petrobras (up 114%) and Schlumberger (up 57%).

n  

The Fund’s underweight position in the Financials sector (24% versus 27%) helped performance. Notable performers included Standard Chartered (up 29%) and Kasikornbank (up 56%).

n  

The Fund’s overweight position in the Information Technology sector and its stock selection (up 15%) compared to the MSCI EAFE Information Technology sector (up 7%) contributed to performance. Standouts included Nokia (up 93%) and LG.Philips (up 81%).

The following factors were key detractors from performance.

n  

The Fund’s Japanese bank holdings, Shinsei (down 37%) and Mitsubishi Tokyo UFJ (down 25%), were particularly weak.

n  

The Fund’s underweight positions in the Utilities sector and Metals & Mining industry hurt performance. The MSCI EAFE Utilities sector appreciated 24% and the Metals & Mining industry increased 45%.

n  

Other weak performers included Royal Bank of Scotland (down 29%), Mediceo (down 21%) and Toto (down 20%).

For the year ended December 31, 2007, changes in foreign currencies had a positive effect on the Fund’s performance. As a reminder, depreciation of the U.S. dollar generally increases returns from international investments, as those international investments appreciate in value in

dollar terms. Appreciation of the U.S. dollar generally has the opposite effect.

INVESTMENT STRATEGY

The past year was extremely volatile and difficult to characterize as a whole, but there were two areas of particular divergence. Since March 31st, shares of companies exposed to subprime lending and declining property markets did poorly (e.g., U.K. financials were down 14%). On the other hand, companies leveraged to China, India and commodities did very well (e.g., MSCI China up 70%).

We have been concerned about asset inflation, loose lending practices and increased leverage affecting financial institutions for quite some time, but the breadth and severity of the market reaction has been remarkable. For example, Japanese financial institutions had very little exposure to these issues, but concerns over Japan’s economy and the persistence of low interest rates led to sharply lower share prices.

In our opinion, current valuations reflect significant pessimism about asset quality and the long-term earnings power of these companies and represent an interesting investment opportunity over the next three to five years. We opportunistically added to the Fund’s holdings in Japanese Financials and started an investment in Millea, the leading Japanese property and casualty insurer by market share and profitability. At the time of our purchase, Millea's shares were trading at one of the lowest price-to-book multiples among insurers worldwide. In addition to Millea's internal efforts to improve its growth and profitability, the company's business is highly leveraged to the recovery of the Japanese economy, rising interest rates and inflation.

We also initiated a position in Unicredit SpA, a leading bank in Italy with attractive franchises in Central and Eastern Europe. Recently trading at approximately nine times forward earnings, Unicredit’s share price has suffered due to concerns about its acquisition strategy and investment banking business. After many meetings with top management and a detailed company analysis, we believe that the current exposure to problem areas appear limited, its recent acquisition of Capitalia (a mid-sized


 

PAGE 1 § DODGE & COX INTERNATIONAL STOCK FUND


Italian bank) has the potential to add value, and it has attractive growth prospects in Central and Eastern Europe.

In the developing world, we are optimistic about the prospect of five billion people, especially in China and India, becoming more integrated into the global economy. We continue to look for investments which should benefit from this prospect, but do not feel compelled to invest if we cannot find a company where fundamentals, valuation and governance align. Thus far, we have been reluctant to invest in companies listed in China or India principally due to high valuations. For example, according to MSCI, the Chinese and Indian markets trade at 27 and 33 times trailing earnings compared with 14 for the MSCI EAFE.

Telefonica, domiciled in Spain, and PT Telekom, located in Indonesia, are two positions we initiated this year that are exposed to developing world growth and satisfy our valuation and governance discipline. We think Telefonica is an interesting investment because of its meaningful cash flow generation, growth prospects from wireless markets in Latin America and reasonable valuation. PT Telekom trades at an attractive valuation and is the dominant wireline and wireless provider in Indonesia, a market with significant growth potential.

IN CLOSING

Since the end of 2007, global financial markets have been extremely turbulent—many markets declined more than 10% in the month of January alone—driven, in part, by fears of a possible U.S. recession and its impact on the global economy. We remind shareholders that we do not

construct the Fund’s portfolio based on a top-down view of any economy. Instead, we attempt to project a reasonable range of outcomes for each of the Fund’s investments over the next three to five years, and consider the risk associated with scenarios such as an adverse business cycle. In essence, we ask ourselves: What price are we paying today considering what can go wrong and what can go right with this investment? We think the market has provided us with attractive opportunities today.

Thank you for your continued confidence in our firm as a shareholder of the Dodge & Cox International Stock Fund. As always, we welcome your comments and questions.

For the Board of Trustees,

 

LOGO   LOGO

John A. Gunn,

Chairman

 

Diana S. Strandberg,

Vice President

February 14, 2008

 

 

Risks of International Investing: Foreign investing, especially in developing countries, has special risks such as currency and market volatility and political and social instability. These and other risk considerations are discussed in the Fund’s prospectus.


 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 2


FOREIGN CURRENCY HEDGING

Recently, we decided to hedge a portion of the Fund’s exposure to the Euro and the Pound Sterling using forward currency contracts. We recognize that this is a new step for the Fund, and assure you that it is not one we undertake lightly. In making this decision, we applied the same framework we use for any other investment for the Fund: a careful review of valuation in relation to long-term fundamentals; a thorough discussion covering the potential risks and benefits; a decision reached after input from many members of our team; and gradual implementation.

As investors in equities around the world, we strive to generate attractive long-term returns in U.S. dollars because our shareholders are U.S. dollar-based investors. A U.S. dollar-based investor in foreign securities can earn a return in two ways: the underlying change in the value of the investment in its local market and the change in the value of the local market currency in relation to the U.S. dollar. Since the May 1, 2001 inception of the Fund, the decline in the value of the U.S. dollar relative to other currencies has been a significant contributor to the returns of a U.S. dollar-based investor in foreign securities. Specifically, the MSCI EAFE has returned about 10% per year since May 1, 2001 in U.S. dollar terms, roughly half of which was attributable to local share price appreciation with the other half to foreign currency appreciation. The Fund returned 16% per year during this same period, roughly two-thirds of which was attributable to

local share price appreciation with one-third to currency.

We have analyzed these currency effects on the Fund’s returns closely since the Fund’s inception. As certain currencies rose appreciably relative to the U.S. dollar, benefiting the Fund’s past returns, we have grown more concerned about the possibility of a reversal of this trend and the negative effect this would have on the Fund’s future returns.

We are especially concerned about the potential for the Euro and Pound Sterling to depreciate against the U.S. dollar. These currencies caught our attention in view of how overvalued they appear based on fundamental measures such as purchasing power parity. We deemed the overvaluation sufficiently large that we sought to mitigate the potential impact on long-term returns by hedging a portion of the Fund’s exposure. As with any investment, we can not predict when or if currency hedging will benefit (or hurt) the Fund’s performance. Accordingly, we are prepared to be persistent with a long-term outlook.

We continue to find attractive long-term investment opportunities in individual companies which are predominantly Euro and Pound Sterling-centric businesses and do not want to forgo these investments because of exchange rate concerns. Hedging these currencies enables us to maintain our investment flexibility and focus on fundamental company research.


 

PAGE 3 § DODGE & COX INTERNATIONAL STOCK FUND


GROWTH OF $10,000 SINCE INCEPTION

FOR AN INVESTMENT MADE ON MAY 1, 2001

 

LOGO

AVERAGE ANNUAL TOTAL RETURN

FOR PERIODS ENDED DECEMBER 31, 2007

 

     1 Year     3 Years     5 Years     Since
Inception
(5/1/01)
 

Dodge & Cox International Stock Fund

  11.71 %   18.63 %   27.00 %*   15.86 %*

MSCI EAFE

  11.18 %   16.84 %   21.59 %   10.12 %

Past performance does 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. Performance is updated and published monthly. Visit the Fund’s web site at www.dodgeandcox.com or call 1-800-621-3979 for current performance figures.

 

*  

Expense reimbursements were paid by Dodge & Cox from the Fund’s inception through June 30, 2003 to maintain operating expenses at 0.90%. Accordingly, without the expense reimbursements, the Fund’s returns prior to June 30, 2003 would have been lower.

The Fund’s total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable on these distributions. The Morgan Stanley Capital International Europe, Australasia, Far East Index (MSCI EAFE) is a widely recognized benchmark of the world’s stock markets, excluding the United States. Index returns include dividends and, unlike Fund returns, do not reflect fees or expenses.

Morgan Stanley®, Morgan Stanley Capital International, and EAFE® are trademarks of Morgan Stanley.


 

 

FUND EXPENSE EXAMPLE

As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.

ACTUAL EXPENSES

The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER MUTUAL FUNDS

Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expense Paid During the Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.

 

Six Months Ended

December 31, 2007

  

Beginning Account

Value 7/1/2007

  

Ending Account

Value 12/31/2007

  

Expenses Paid

During Period†

Based on Actual Fund Return

   $ 1,000.00    $ 997.80    $ 3.25

Based on Hypothetical 5% Yearly Return

     1,000.00      1,021.95      3.29
 

Expenses are equal to the Fund’s annualized six-month expense ratio of 0.65%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. While other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).

 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 4


FUND INFORMATION   December 31, 2007

 

GENERAL INFORMATION      

Net Asset Value Per Share

   $46.02

Total Net Assets (billions)

   $53.5

2007 Expense Ratio

   0.65%

2007 Portfolio Turnover Rate

   16%

30-Day SEC Yield(a)

   1.62%

Fund Inception Date

   2001

No sales charges or distribution fees

  

Investment Manager: Dodge & Cox, San Francisco. Managed by the International Investment Policy Committee, whose nine members’ average tenure at Dodge & Cox is 18 years.

 

PORTFOLIO CHARACTERISTICS    Fund      MSCI
EAFE

Number of Stocks

   97      1,211

Median Market Capitalization (billions)

   $17      $6

Weighted Average Market Capitalization (billions)

   $68      $64

Price-to-Earnings Ratio(b)

   12.5x      12.9x

Countries Represented

   25      21

Emerging Markets (Brazil, Indonesia, Israel, Mexico, South Africa, South Korea, Taiwan, Thailand, Turkey)

   15.5%      0.0%

 

TEN LARGEST HOLDINGS(c)   

Fund

 

Novartis AG (Switzerland)

   2.9 %

Sanofi-Aventis (France)

   2.8  

Matsushita Electric Industrial Co., Ltd. (Japan)

   2.6  

HSBC Holdings PLC (United Kingdom)

   2.5  

Bayer AG (Germany)

   2.3  

GlaxoSmithKline PLC (United Kingdom)

   2.3  

Mitsubishi UFJ Financial Group (Japan)

   2.3  

Lafarge SA (France)

   2.3  

Royal Dutch Shell PLC (United Kingdom)

   2.1  

Hitachi, Ltd. (Japan)

   2.1  

ASSET ALLOCATION

 

LOGO

 

REGION DIVERSIFICATION    Fund      MSCI
EAFE
 

Europe (excluding United Kingdom)

   39.0 %    47.7 %

Japan

   20.5      19.9  

United Kingdom

   13.7      22.2  

Pacific (excluding Japan)

   6.4      10.2  

Latin America

   6.2      0.0  

United States

   6.1      0.0  

Africa

   2.9      0.0  

Canada

   1.0      0.0  

Middle East

   0.9      0.0  

 

SECTOR DIVERSIFICATION    Fund      MSCI
EAFE
 

Financials

   24.7 %    26.9 %

Consumer Discretionary

   14.0      10.8  

Information Technology

   11.5      5.5  

Materials

   11.2      9.9  

Industrials

   9.5      12.1  

Health Care

   8.7      6.3  

Energy

   8.5      7.9  

Consumer Staples

   4.8      8.5  

Telecommunication Services

   3.4      6.2  

Utilities

   0.4      5.9  

 

 

(a)

SEC yield is an annualization of the Fund’s total net investment income per share for the 30-day period ended on the last day of the month.

(b)

Price-to-earnings (P/E) ratios are calculated using 12-month forward earnings estimates.

(c)

The Fund’s portfolio holdings are subject to change without notice. The mention of specific securities is not a recommendation or solicitation for any person to buy, sell or hold any particular security.

 

PAGE 5 § DODGE & COX INTERNATIONAL STOCK FUND


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

COMMON STOCKS: 94.6%     
    SHARES   VALUE
CONSUMER DISCRETIONARY: 14.0%  

AUTOMOBILES & COMPONENTS: 2.8%

 

Honda Motor Co., Ltd. ADR(b) (Japan)

  23,721,300   $ 786,123,882

NGK Spark Plug Co., Ltd. (Japan)

  7,904,000     138,718,923

Yamaha Motor Co., Ltd.(c) (Japan)

  22,220,000     539,301,032
       
      1,464,143,837

CONSUMER DURABLES & APPAREL: 5.8%

 

Consorcio Ara SAB de CV(c) (Mexico)

  106,790,900     119,370,823

Corporacion Geo SAB de CV, Series B(a),(c) (Mexico)

  47,605,400     136,958,812

Matsushita Electric Industrial Co., Ltd. (Japan)

  66,504,072     1,381,399,073

Sony Corp. (Japan)

  18,337,600     1,020,126,693

Thomson(c) (France)

  17,885,792     254,438,794

Yamaha Corp.(c) (Japan)

  9,064,400     207,802,082
       
        3,120,096,277

MEDIA: 5.4%

   

Grupo Televisa SA ADR(b),(c) (Mexico)

  26,823,592     637,596,782

Liberty Global, Inc., Series A(a) (United States)

  7,701,805     301,833,738

Liberty Global, Inc., Series C(a) (United States)

  5,734,971     209,842,589

Naspers, Ltd.(c) (South Africa)

  27,060,000     641,424,569

News Corp., Class A (United States)

  52,544,892     1,076,644,837

Television Broadcasts, Ltd.
(Hong Kong)

  2,025,000     12,037,185
       
      2,879,379,700
       
      7,463,619,814
CONSUMER STAPLES: 4.2%  

FOOD & STAPLES RETAILING: 1.6%

 

Tesco PLC (United Kingdom)

  89,714,379     852,299,191

FOOD, BEVERAGE & TOBACCO: 2.4%

 

Anadolu Efes Biracilik ve Malt Sanayii AS (Turkey)

  19,764,582     234,359,300

Cott Corp.(a),(b),(c) (Canada)

  2,228,530     14,842,010

Fomento Economico Mexicano SAB de CV ADR(b) (Mexico)

  9,573,979     365,438,779

Nestle SA (Switzerland)

  1,066,000     489,617,100

Tiger Brands, Ltd. (South Africa)

  7,972,043     195,966,438
       
      1,300,223,627

HOUSEHOLD & PERSONAL PRODUCTS: 0.2%

 

Aderans Holdings Co., Ltd.(c) (Japan)

  5,062,700     79,994,748
       
      2,232,517,566
ENERGY: 7.0%    

Royal Dutch Shell PLC ADR(b) (United Kingdom)

  13,468,400     1,134,039,280

Schlumberger, Ltd. (United States)

  9,533,000     937,761,210

StatoilHydro ASA ADR(b) (Norway)

  20,167,289     615,505,660

Total SA (France)

  12,972,000     1,077,821,662
       
      3,765,127,812

 

    SHARES    VALUE
FINANCIALS: 24.7%     

BANKS: 17.2%

    

Bangkok Bank PCL Foreign (Thailand)

  36,261,800    $ 129,179,635

Bangkok Bank PCL NVDR (Thailand)

  12,850,000      45,014,101

Chinatrust Financial Holding Co., Ltd.(a) (Taiwan)

  112,115,000      79,675,985

DBS Group Holdings, Ltd. (Singapore)

  26,542,000      381,687,033

Grupo Financiero Banorte SAB de CV (Mexico)

  43,834,600      181,133,051

HSBC Holdings PLC (United Kingdom)

  80,250,000      1,345,058,633

Kasikornbank PCL NVDR (Thailand)

  77,094,600      199,116,230

Kasikornbank PCL Foreign (Thailand)

  96,725,600      251,253,971

Kookmin Bank ADR(b) (South Korea)

  8,378,100      614,282,292

Mitsubishi UFJ Financial Group ADR(b) (Japan)

  67,666,500      631,328,445

Mitsubishi UFJ Financial Group (Japan)

  64,100,000      602,177,658

Royal Bank of Scotland Group PLC (United Kingdom)

  91,802,916      811,378,565

Shinhan Financial Group Co., Ltd. ADR(b) (South Korea)

  3,728,664      427,528,614

Shinsei Bank, Ltd. (Japan)(c)

  74,153,000      271,461,857

Standard Bank Group, Ltd.
(South Africa)

  47,546,234      696,251,597

Standard Chartered PLC
(United Kingdom)

  27,755,000      1,018,793,656

The Bank of Yokohama, Ltd.(c) (Japan)

  82,015,000      576,938,179

Unicredito Italiano SPA (Italy)

  111,700,800      927,613,223
        
       9,189,872,725

DIVERSIFIED FINANCIALS: 2.5%

    

Credit Suisse Group (Switzerland)

  16,055,000      965,724,948

Haci Omer Sabanci Holding AS (Turkey)

  65,011,180      357,707,069
        
       1,323,432,017

INSURANCE: 4.0%

    

Aegon NV (Netherlands)

  23,466,087      414,790,966

Millea Holdings, Inc. (Japan)

  21,221,500      717,856,034

Swiss Life Holding (Switzerland)

  1,645,000      411,195,513

Swiss Reinsurance Co. (Switzerland)

  8,895,795      632,130,643
        
         2,175,973,156

REAL ESTATE: 1.0%

    

Cheung Kong Holdings, Ltd.
(Hong Kong)

  19,000,000      351,617,206

Hang Lung Group, Ltd. (Hong Kong)

  19,595,000      107,682,785

Hang Lung Properties, Ltd.
(Hong Kong)

  13,176,000      61,170,544
        
       520,470,535
        
       13,209,748,433

 

See accompanying Notes to Financial Statements   DODGE & COX INTERNATIONAL STOCK FUND § PAGE 6


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

COMMON STOCKS (continued)
    SHARES   VALUE
HEALTH CARE: 8.7%    

HEALTH CARE EQUIPMENT & SERVICES: 0.7%

Mediceo Paltac Holdings Co., Ltd.(c) (Japan)

  25,959,700   $ 385,493,975

PHARMACEUTICALS & BIOTECHNOLOGY: 8.0%

GlaxoSmithKline PLC ADR(b)
(United Kingdom)

  24,579,900     1,238,581,161

Novartis AG ADR(b) (Switzerland)

  28,450,000     1,545,119,500

Sanofi-Aventis (France)

  16,345,500     1,505,092,453
       
      4,288,793,114
       
      4,674,287,089
INDUSTRIALS: 9.5%    

CAPITAL GOODS: 6.2%

   

Koninklijke Philips Electronics NV (Netherlands)

  17,435,000     752,489,798

Nexans SA(c) (France)

  950,000     118,755,035

Schneider Electric SA (France)

  8,265,000       1,119,930,816

Toto, Ltd.(c) (Japan)

  37,907,000     301,691,422

Volvo AB (Sweden)

  43,058,000     722,829,713

Wienerberger AG(c) (Austria)

  5,983,876     331,839,240
       
      3,347,536,024

TRANSPORTATION: 3.3%

   

Canadian Pacific Railway, Ltd.(b) (Canada)

  1,641,169     106,085,164

Central Japan Railway Co. (Japan)

  21,141     180,774,993

Deutsche Post AG (Germany)

  18,550,000     637,615,484

Nippon Yusen Kabushiki Kaisha (Japan)

  27,950,000     222,697,173

TNT NV (Netherlands)

  14,645,249     604,891,559
       
      1,752,064,373
       
      5,099,600,397
INFORMATION TECHNOLOGY: 11.5%

SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT: 2.0%

Chartered Semiconductor Manufacturing, Ltd.(a),(c) (Singapore)

  200,000,000     134,078,988

Infineon Technologies AG(a),(c) (Germany)

  66,627,800     786,124,479

Qimonda AG ADR(a),(b),(c) (Germany)

  22,470,300     160,662,645
       
      1,080,866,112

TECHNOLOGY, HARDWARE & EQUIPMENT: 9.5%

Brother Industries, Ltd.(c) (Japan)

  19,358,500     250,644,374

Epcos AG(c) (Germany)

  6,328,100     109,821,245

Fujifilm Holdings Corp. (Japan)

  13,886,100     589,333,809

Fujitsu, Ltd. (Japan)

  17,000,000     114,858,681

Hitachi, Ltd. (Japan)

  150,318,000     1,123,507,349

Kyocera Corp. (Japan)

  5,919,200     526,328,147

Motorola, Inc. (United States)

  47,470,000     761,418,800

Nokia Oyj (Finland)

  24,262,500     940,743,833

Nortel Networks Corp.(a),(b),(c) (Canada)

  24,990,705     377,109,739

Seiko Epson Corp.(c) (Japan)

  13,865,000     301,683,490
       
      5,095,449,467
       
      6,176,315,579
    SHARES    VALUE
MATERIALS: 11.2%

Akzo Nobel NV (Netherlands)

  4,436,100    $ 355,357,053

Arkema(a),(c) (France)

  5,960,263      391,616,339

BASF AG (Germany)

  6,110,400      905,967,744

Bayer AG (Germany)

  13,777,000        1,259,520,959

Cemex SAB de CV ADR(b) (Mexico)

  30,718,482      794,072,760

Lafarge SA (France)

  6,684,625      1,216,770,613

Lanxess AG(c) (Germany)

  8,792,359      431,923,667

Makhteshim-Agan Industries, Ltd.(a),(c) (Israel)

  26,459,809      242,874,786

Norsk Hydro ASA ADR(b) (Norway)

  24,325,900      340,562,600

Nova Chemicals Corp.(b) (Canada)

  414,974      13,445,158

Siam Cement PCL NVDR (Thailand)

  2,955,900      20,358,284

Siam Cement PCL Foreign (Thailand)

  533,800      3,708,155
        
       5,976,178,118
TELECOMMUNICATION SERVICES: 3.4%

Bezeq Israeli Telecommunication Corp., Ltd. (Israel)

  114,395,000      212,800,260

KT Corp. ADR(b) (South Korea)

  15,188,834      391,871,917

Telefonica SA ADR(b) (Spain)

  2,678,600      261,404,574

Telekomunik Indonesia ADR(b) (Indonesia)

  5,153,047      216,479,504

Vodafone Group PLC ADR(b) (United Kingdom)

  19,256,562      718,654,894
        
       1,801,211,149
UTILITIES: 0.4%

Centrica PLC (United Kingdom)

  30,061,936      214,680,669
        
       214,680,669
        

TOTAL COMMON STOCKS
(Cost $44,952,829,830)

     $ 50,613,286,626
        
PREFERRED STOCKS: 2.1%
CONSUMER STAPLES: 0.6%

FOOD & STAPLES RETAILING: 0.6%

Sadia SA ADR(b) (Brazil)

  4,939,921      282,563,481
        
       282,563,481
ENERGY: 1.5%

Petroleo Brasileiro SA ADR(b) (Brazil)

  6,028,400      580,052,648

Ultrapar Participacoes SA ADR(b) (Brazil)

  6,819,785      236,237,353
        
       816,290,001
        

TOTAL PREFERRED STOCKS
(Cost $376,280,594)

     $ 1,098,853,482
        

 

PAGE 7 § DODGE & COX INTERNATIONAL STOCK FUND   See accompanying Notes to Financial Statements


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

SHORT-TERM INVESTMENTS: 2.1%
    PAR VALUE     VALUE

COMMERCIAL PAPER: 0.5%

Cardinal Health, Inc.(e)

   

1/2/08

  $ 70,000,000     $ 69,989,111

WellPoint, Inc.(e)

   

1/2/08

    50,000,000       49,992,361

1/3/08

    73,000,000       72,977,631

1/4/08

    50,000,000       49,977,083
       
      242,936,186

MONEY MARKET FUND: 0.1%

SSgA Prime Money Market Fund

    50,894,286       50,894,286

REPURCHASE AGREEMENT: 1.5%

Fixed Income Clearing Corporation(d) 3.75%, 1/2/08, maturity value $807,554,205

    807,386,000       807,386,000
       

TOTAL SHORT-TERM INVESTMENTS
(Cost $1,101,216,472)

  

  $ 1,101,216,472
       

TOTAL INVESTMENTS
(Cost $46,430,326,896)

    98.8 %   $ 52,813,356,580

OTHER ASSETS LESS LIABILITIES

    1.2 %     665,640,972
             
NET ASSETS     100.0 %   $ 53,478,997,552
             

 

(a)

Non-income producing

(b)

Security issued by a foreign entity, denominated in U.S. dollars

(c)

See Note 7 regarding holdings of 5% voting securities

(d)

Repurchase agreement is collateralized by Fannie Mae 3.875%-5.00%, 9/15/08-11/17/08; Federal Home Loan Bank 2.63%-5.80%, 4/18/08-11/19/08; and Freddie Mac Discount Note, 0.00%, 4/25/08. Total collateral value is $823,540,359.

(e)

Security exempt from registration under Rule 144A of the Securities Act of 1933. The security may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of December 31, 2007, all such securities in total represented $242,936,186 or 0.5% of total net assets.

ADR: American Depository Receipt

NVDR: Non Voting Depository Receipt


 

See accompanying Notes to Financial Statements   DODGE & COX INTERNATIONAL STOCK FUND § PAGE 8


STATEMENT OF ASSETS AND LIABILITIES

 

    December 31, 2007  

ASSETS:

 

Investments, at value

 

Unaffiliated issuers (cost $39,192,123,170)

  $ 45,621,768,452  

Affiliated issuers (cost $7,238,203,726)

    7,191,588,128  
       
    52,813,356,580  

Cash denominated in foreign currency (cost $40,623,455)

    40,630,127  

Receivable for investments sold

    613,206,190  

Unrealized appreciation on foreign currency contracts

    4,049,995  

Receivable for Fund shares sold

    231,886,627  

Dividends and interest receivable

    126,404,441  

Prepaid expenses and other assets

    208,846  
       
    53,829,742,806  
       

LIABILITIES:

 

Payable for investments purchased

    113,332,855  

Unrealized depreciation on foreign currency contracts

    7,621,917  

Payable for Fund shares redeemed

    178,980,964  

Management fees payable

    27,406,368  

Accrued foreign capital gain tax

    19,397,490  

Accrued expenses

    4,005,660  
       
    350,745,254  
       

NET ASSETS

  $ 53,478,997,552  
       

NET ASSETS CONSIST OF:

 

Paid in capital

  $ 45,745,946,926  

Undistributed net investment income

    3,380,974  

Undistributed net realized gain on investments

    1,367,456,811  

Net unrealized appreciation on investments (net of accrued foreign capital gain tax of $19,397,490)

    6,362,212,841  
       
  $ 53,478,997,552  
       

Fund shares outstanding (par value $0.01 each, unlimited shares authorized)

    1,162,039,053  

Net asset value per share

    $46.02  

STATEMENT OF OPERATIONS

 

    Year Ended
December 31, 2007
 

INVESTMENT INCOME:

 

Dividends (net of foreign taxes of $79,393,949)

 

Unaffiliated issuers

  $ 1,508,518,393  

Affiliated issuers

    67,497,394  

Interest

    97,545,113  
       
    1,673,560,900  
       

EXPENSES:

 

Management fees

    267,522,252  

Custody and fund accounting fees

    6,459,824  

Transfer agent fees

    8,177,044  

Professional services

    218,533  

Shareholder reports

    3,813,199  

Registration fees

    1,784,126  

Trustees’ fees

    179,000  

Miscellaneous

    638,105  
       
    288,792,083  
       

NET INVESTMENT INCOME

    1,384,768,817  
       

REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:

  

Net realized gain (loss)

 

Investments in unaffiliated issuers

    2,503,952,143  

Investments in affiliated issuers

    317,777,672  

Foreign currency transactions

    (1,491,725 )

Net change in unrealized appreciation/depreciation

 

Investments (including net increase in accrued foreign capital gain tax of $18,767,997)

    80,808,324  

Foreign currency transactions

    (1,359,194 )
       

Net realized and unrealized gain

    2,899,687,220  
       

NET INCREASE IN NET ASSETS
FROM OPERATIONS

  $ 4,284,456,037  
       

STATEMENT OF CHANGES IN NET ASSETS

 

    

Year Ended
December 31, 2007

   

Year Ended
December 31, 2006

 

OPERATIONS:

    

Net investment income

   $ 1,384,768,817     $ 393,714,698  

Net realized gain

     2,820,238,090       594,313,896  

Net change in unrealized appreciation

     79,449,130       4,368,035,130  
                

Net increase in net assets from operations

     4,284,456,037       5,356,063,724  
                

DISTRIBUTIONS TO
SHAREHOLDERS FROM:

  

 

Net investment income

     (1,391,722,039 )     (385,150,238 )

Net realized gain

     (1,652,535,550 )     (422,290,813 )
                

Total distributions

     (3,044,257,589 )     (807,441,051 )
                

FUND SHARE
TRANSACTIONS:

  

 

Proceeds from sale of shares

     24,577,625,079       14,647,193,582  

Reinvestment of distributions

     2,689,702,196       724,233,070  

Cost of shares redeemed

     (5,927,865,794 )     (2,377,956,549 )
                

Net increase from Fund share transactions

     21,339,461,481       12,993,470,103  
                

Total increase in net assets

     22,579,659,929       17,542,092,776  

NET ASSETS:

    

Beginning of year

     30,899,337,623       13,357,244,847  
                

End of year (including undistributed net investment income of $3,380,974 and $10,334,196, respectively)

   $ 53,478,997,552     $ 30,899,337,623  
                

SHARE INFORMATION:

 

 

Shares sold

     521,338,937       370,106,951  

Distributions reinvested

     58,269,105       16,603,234  

Shares redeemed

     (125,349,160 )     (60,274,819 )
                

Net increase in shares outstanding

     454,258,882       326,435,366  
                

 

PAGE 9 § DODGE & COX INTERNATIONAL STOCK FUND   See accompanying Notes to Financial Statements


NOTES TO FINANCIAL STATEMENTS

 

NOTE 1—ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Dodge & Cox International Stock Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The Fund commenced operations on May 1, 2001, and seeks long-term growth of principal and income, and the Fund invests primarily in a diversified portfolio of foreign stocks. Foreign investing, especially in developing countries, has special risks such as currency and market volatility and political and social instability. These and other risk considerations are discussed in the Fund’s Prospectus.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Significant accounting policies are as follows:

Security valuation The Fund’s net assets are valued as of the close of trading on the New York Stock Exchange (NYSE), generally 4:00 p.m. Eastern Time, each day that the NYSE is open for business. Listed securities are valued at market, using the official quoted close price or the last sale on the date of determination on the principal exchange on which such securities are traded or, if not available, at the mean between the exchange listed bid and ask prices for the day. A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Security values are not discounted based on the size of the Fund’s position. Short-term securities are valued at amortized cost which approximates current value.

Investments initially valued in currencies other than the U.S. dollar are converted to the U.S. dollar using prevailing exchange rates. As a result, the Fund’s net asset value (NAV) may be affected by changes in the value of currencies in relation to the U.S. dollar.

If market quotations are not readily available or if a security’s value has materially changed after the close of

the security’s primary market but before the close of trading on the NYSE, the security is valued at fair value as determined in good faith by or at the direction of the Board of Trustees. The Fund may use fair value pricing in calculating its NAV when, for example, (i) the primary market for a security is closed or if trading of a security is suspended or limited, (ii) the Fund determines that the price provided by a pricing service is inaccurate or unreliable, or (iii) the Fund determines that a significant event affecting the value of a security has occurred before the close of the NYSE but after the close of the security’s primary market. An event is considered significant if there is both an affirmative expectation that the security’s value will change in response to the event and a reasonable basis for quantifying a resulting change in value. For securities that do not trade during NYSE hours, fair value determinations are based on analyses of market movements after the close of those securities’ primary markets, and include reviews of developments in foreign markets, the performance of U.S. securities markets, and the performance of instruments trading in U.S. markets that represent foreign securities and baskets of foreign securities. Pricing services are used to obtain closing market prices and to compute certain fair value adjustments utilizing computerized pricing models. When fair value pricing is employed, the prices of securities used by the Fund to calculate its net asset value may differ from quoted or published prices for the same securities. In addition, fair values may not reflect the price that the Fund could obtain for a security if it were to dispose of that security at the time of pricing.

Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.

Dividend income and corporate action transactions are recorded on the ex-dividend date, except for certain dividends or corporate actions from foreign securities where the ex-dividend date may have passed, which are recorded as soon as the Fund is informed of the ex-dividend date. Withholding taxes on foreign dividends


 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 10


NOTES TO FINANCIAL STATEMENTS

 

have been provided for in accordance with the Fund’s understanding of the applicable country’s tax rules and rates. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Distributions received in excess of income are recorded as a reduction of cost of investments and/or realized gain. Interest income is recorded on the accrual basis.

Expenses are recorded on the accrual basis. Most expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust.

Distributions to shareholders are recorded on the ex-dividend date.

Repurchase agreements The Fund may enter into repurchase agreements secured by U.S. government and agency securities which involve the purchase of securities from a counterparty with a simultaneous commitment to resell the securities at an agreed-upon date and price. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the securities and to apply the proceeds in satisfaction of the obligation.

Foreign currency The Fund may use foreign currency contracts to hedge portfolio positions and facilitate security transactions in foreign currency-denominated securities. Losses from these transactions may arise from unfavorable changes in currency values or if the counterparties do not perform under the contracts’ terms.

Foreign currency-denominated assets (including investment securities) and liabilities are translated into U.S. dollars each business day at the prevailing exchange rate. Purchases and sales of securities, income receipts, and expenses denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date.

Net realized gains and losses on foreign currency transactions arise from sales of foreign currencies and from changes in currency values between the date recorded and the related settlement/cash payment on securities

transactions, dividends, and foreign currency contracts. The effects of currency rate changes on investment securities are included with realized and unrealized gain (loss) on investments.

NOTE 2—FORWARD FOREIGN CURRENCY CONTRACTS

As of December 31, 2007, open forward foreign currency contracts are as follows:

 

Contracts to Sell    Settlement
Date
   Value    Unrealized
Appreciation/
(Depreciation)
 

350,000,000 EUR

   March 2008    $ 512,092,667    ($ 7,621,917 )

175,000,000 GBP

   March 2008      347,612,505      4,049,995  
                  
          $ 859,705,172    ($ 3,571,922 )

Value of contracts to sell as a percentage of net assets: 1.6%

Currency Abbreviations

EUR—Euro

GBP—British Pound Sterling

NOTE 3—RELATED PARTY TRANSACTIONS

Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays an annual management fee of 0.60% of the Fund’s average daily net assets to Dodge & Cox, investment manager of the Fund.

Fund officers and trustees All officers and three of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.

Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.

NOTE 4—INCOME TAX INFORMATION AND DISTRIBUTIONS TO SHAREHOLDERS

A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated


 

PAGE 11 § DODGE & COX INTERNATIONAL STOCK FUND


NOTES TO FINANCIAL STATEMENTS

 

investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, which may differ from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character.

Certain foreign countries impose a tax on capital gains which is accrued by the Fund based on unrealized appreciation, if any, on affected securities. The tax is paid when a gain is realized on the sale of affected securities.

Book/tax differences are primarily due to differing treatments of net short-term realized gain and foreign currency realized gain (loss). At December 31, 2007, the cost of investments for federal income tax purposes was equal to the cost for financial reporting purposes.

Distributions for the years ended December 31, 2007 and 2006 were characterized as follows for federal income tax purpose.

 

    

2007

 

2006

Ordinary income

  1,767,337,129   $485,133,441
  ($1.603 per share)   ($0.709 per share)

Long-term capital gain

  1,276,920,460   $322,307,610
  ($1.158 per share)   ($0.471 per share)

At December 31, 2007, the tax basis components of distributable earnings were as follows:

 

Unrealized appreciation

   $ 8,367,541,608  

Unrealized depreciation

     (2,001,756,845 )
        

Net unrealized appreciation

     6,365,784,763  

Undistributed ordinary income

     66,520,155  

Undistributed long-term capital gain

     1,301,050,606  

Deferred loss*

     (304,899 )
*  

Represents net realized loss incurred between November 1, 2007 and December 31, 2007. As permitted by tax regulations, the Fund has elected to treat this loss as arising in 2008.

 

NOTE 5—PURCHASES AND SALES OF INVESTMENTS

For the year ended December 31, 2007, purchases and sales of securities, other than short-term securities, aggregated $26,596,164,940 and $7,018,254,338, respectively.

NOTE 6—ACCOUNTING PRONOUNCEMENTS

Effective June 29, 2007, the Fund adopted the Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements. At December 31, 2007, FIN 48 was applied to the period from January 1, 2004 through December 31, 2007, the open tax years subject to regulatory examination. There was no impact to the Fund’s financial statements as a result of applying FIN 48.

In September 2006, FASB issued “Statement of Financial Accounting Standards No. 157, Fair Value Measurements” (SFAS 157). SFAS 157 is effective for the Fund beginning January 1, 2008. It defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Fund’s financial statement disclosures; however, it is not expected to have a material impact on the Fund’s net assets or results of operations.


 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 12


NOTES TO FINANCIAL STATEMENTS

 

NOTE 7—HOLDINGS OF 5% VOTING SECURITIES

Each of the companies listed below is considered to be an affiliate of the Fund because the Fund owned 5% or more of the company’s voting securities during the year ended December 31, 2007. Transactions during the year in securities of affiliated companies were as follows:

 

      Shares at
Beginning of Year
   Additions     Reductions     Shares at
End of Year
   Dividend
Income(a)
    Value at
End of Year
 

Aderans Holdings Co., Ltd. (Japan)

   3,005,100    2,057,600         5,062,700    $ 2,389,323     $ 79,994,748  

Arkema (France)

   3,400,263    2,560,000         5,960,263      —  (b)     391,616,339  

Brother Industries, Ltd. (Japan)

   19,244,000    2,114,500     (2,000,000 )   19,358,500      3,500,279       250,644,374  

Chartered Semiconductor Manufacturing, Ltd. (Singapore)

      200,000,000         200,000,000      —  (b)     134,078,988  

Consorcio Ara SAB de CV (Mexico)

   22,105,000    84,685,900 (c)       106,790,900      1,255,021       119,370,823  

Converium Holdings AG (Switzerland)

   8,918,646        (8,918,646 )        1,143,371        

Corporacion Geo SAB de CV, Series B (Mexico)

   42,105,400    5,500,000         47,605,400      —  (b)     136,958,812  

Cott Corp. (Canada)

   3,830,800        (1,602,270 )   2,228,530      —  (b)     —  (d)

Epcos AG (Germany)

   5,828,100    500,000         6,328,100      1,302,129       109,821,245  

Grupo Televisa SA (Mexico)

   17,731,720    9,091,872         26,823,592      13,125,660       637,596,782  

Infineon Technologies AG (Germany)

   47,027,800    19,600,000         66,627,800      —  (b)     786,124,479  

Lanxess AG (Germany)

   4,092,359    4,700,000         8,792,359      1,166,908       431,923,667  

Makhteshim-Agan Industries, Ltd. (Israel)

   29,459,809        (3,000,000 )   26,459,809      —  (b)     242,874,786  

Mediceo Paltac Holdings Co., Ltd. (Japan)

   13,559,700    12,400,000         25,959,700      2,640,064       385,493,975  

Naspers, Ltd. (South Africa)

      27,060,000         27,060,000      5,026,090       641,424,569  

Nexans SA (France)

   1,866,440    90,000     (1,006,440 )   950,000      2,588,461       —  (d)

Nortel Networks Corp. (Canada)

   12,746,827    15,000,000     (2,756,122 )   24,990,705      —  (b)     377,109,739  

Oce NV (Netherlands)

   8,018,524        (8,018,524 )        3,975,883        

Qimonda AG (Germany)

      22,470,300         22,470,300      —  (b)     160,662,645  

Seiko Epson Corp. (Japan)

   13,406,900    684,600     (226,500 )   13,865,000      3,582,818       301,683,490  

Shinsei Bank, Ltd. (Japan)

   74,153,000            74,153,000      585,046       —  (d)

The Bank of Yokohama, Ltd. (Japan)

      82,015,000       82,015,000      3,033,183       576,938,179  

Thomson (France)

   15,784,838    2,100,954         17,885,792      8,039,828       254,438,794  

Toto, Ltd. (Japan)

   28,657,000    9,250,000         37,907,000      3,729,968       301,691,422  

Wienerberger AG (Austria)

   1,206,362    4,777,514       5,983,876      1,804,723       331,839,240  

Yamaha Corp. (Japan)

   14,851,000        (5,786,600 )   9,064,400      4,483,782       —  (d)

Yamaha Motor Co., Ltd. (Japan)

      22,220,000         22,220,000      4,124,857       539,301,032  
                          
             $ 67,497,394     $ 7,191,588,128  
                          
                                        

(a)

Net of foreign taxes, if any

(b)

Non-income producing

(c)

Represents shares obtained in a 4 for 1 stock split on March 8, 2007

(d)

Company was not an affiliate at the end of the year

 

PAGE 13 § DODGE & COX INTERNATIONAL STOCK FUND


FINANCIAL HIGHLIGHTS

 

SELECTED DATA AND RATIOS

(for a share outstanding throughout each year)

 

Year Ended December 31,

 
    2007        2006        2005        2004        2003  

Net asset value, beginning of year

  $43.66        $35.03        $30.64        $23.48        $15.81  

Income from investment operations:

                     

Net investment income

  1.25        0.57        0.33        0.26        0.14  

Net realized and unrealized gain

  3.87        9.24        4.80        7.36        7.67  
     

Total from investment operations

  5.12        9.81        5.13        7.62        7.81  
     

Distributions to shareholders from:

                     

Net investment income

  (1.26 )      (0.56 )      (0.35 )      (0.24 )      (0.14 )

Net realized gain

  (1.50 )      (0.62 )      (0.39 )      (0.22 )       
     

Total distributions

  (2.76 )      (1.18 )      (0.74 )      (0.46 )      (0.14 )
     

Net asset value, end of year

  $46.02        $43.66        $35.03        $30.64        $23.48  
     

Total return

  11.71 %      28.00 %      16.74 %      32.46 %      49.42 %†

Ratios/supplemental data:

                     

Net assets, end of year (millions)

  $53,479        $30,899        $13,357        $4,203        $655  

Ratios of expenses to average net assets

  0.65 %      0.66 %      0.70 %      0.77 %      0.82 %

Ratio of expenses to average net assets,
before reimbursement by investment manager

  0.65 %      0.66 %      0.70 %      0.77 %      0.84 %

Ratios of net investment income to average net assets

  3.11 %      1.82 %      1.54 %      1.90 %      1.53 %

Portfolio turnover rate

  16 %      9 %      7 %      6 %      11 %

Expense reimbursements were paid by Dodge & Cox from the Fund’s inception through June 30, 2003 to maintain operating expenses at 0.90%. Accordingly, without the expense reimbursements, the Fund’s returns prior to June 30, 2003 would have been lower.

See accompanying Notes to Financial Statements

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Trustees of Dodge & Cox Funds and Shareholders of Dodge & Cox International Stock Fund

In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Dodge & Cox International Stock Fund (the “Fund”, one of the series constituting Dodge & Cox Funds) at December 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2007 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 14, 2008

 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 14


SPECIAL 2007 TAX INFORMATION

(unaudited)

The following information is provided pursuant to provisions of the Internal Revenue Code:

In 2007, the Fund elected to pass through to shareholders foreign source income of $1,634,836,338 and foreign taxes paid of $79,421,521.

The Fund designates up to a maximum of $1,633,799,387 of its distributions paid to shareholders in 2007 as qualified dividends (treated for federal income tax purposes in the hands of shareholders as taxable at a maximum rate of 15%).

For shareholders that are corporations, the Fund designates 1% of its ordinary dividends (including short-term gains) paid to shareholders in 2007 as dividends from domestic corporations eligible for the corporate dividends received deduction, provided that the shareholder otherwise satisfies applicable requirements to claim that deduction.

BOARD APPROVAL OF FUNDS’ INVESTMENT MANAGEMENT AGREEMENTS AND MANAGEMENT FEES

(unaudited)

The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 19, 2007, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2008. During the course of the year, the Board received a wide variety of materials relating to the services provided by Dodge & Cox and the performance of the Funds.

INFORMATION RECEIVED

In advance of the meeting, the Board, including each of the Independent Trustees, requested, received and reviewed materials relating to the Agreements. The Independent Trustees retained Morningstar® to prepare an

independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Morningstar®. The Morningstar® materials included information regarding advisory fee rates, expense ratios, and transfer agency, custodial and distribution expenses, as well as performance comparisons to an appropriate index or combination of indices. The materials reviewed by the Board also included information concerning Dodge & Cox’s profitability, financial results and condition, including advisory fee revenue and separate account advisory fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates and sales and redemption data for the Funds, including “soft dollar” payments made for research benefiting the Funds and other accounts managed by Dodge & Cox, and brokerage commissions and expenses paid by Dodge & Cox. Other aspects of Dodge & Cox’s services to the Funds which were reviewed included compliance and supervision of third-party service providers (e.g., custodian, fund accountant, transfer agent and state registration administrator), shareholder servicing, accounting and administrative services, web services, the character of non-advisory services, the record of compliance with the Funds’ investment policies and restrictions and the Funds’ Code of Ethics, investment management staffing and biographies, information furnished to investors and shareholders (including the Funds’ Prospectus, Statement of Additional Information, shareholder reports, and quarterly reports), and third-party retirement plan administrator reimbursements by Dodge & Cox for the same periods.

The Board received copies of the Agreements and a memorandum from the Independent Legal Counsel to the Independent Trustees, discussing the factors generally regarded as appropriate to consider in evaluating advisory arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the Independent Legal Counsel on December 3, 2007 and again on December 19, 2007 to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements.


 

PAGE 15 § DODGE & COX INTERNATIONAL STOCK FUND


In considering the Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board, which was advised by Independent Legal Counsel, considered the following factors, among others, and reached the conclusions described below.

NATURE, QUALITY, AND EXTENT OF THE SERVICES

The Board considered that Dodge & Cox provides a wide range of services to the Funds in addition to portfolio management and that the quality of these services has been excellent in all respects. The extensive nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality and extent of portfolio management, administrative and shareholder services performed by Dodge & Cox, including: Dodge & Cox’s established long-term history of care and conscientiousness in the management of the Funds; demonstrated consistency in investment approach and depth, background and experience of the Dodge & Cox Investment Policy Committee, International Investment Policy Committee, Fixed Income Investment Policy Committee and research analysts responsible for managing the Funds; Dodge & Cox’s organizational structure; Dodge & Cox’s performance in the areas of compliance, administration and shareholder communication and services, supervision of Fund operations and general oversight of other service providers; favorable peer group comparisons of expense ratios, management fee comparisons, expenses (e.g., transfer agent, custody and other fees and expenses) and asset comparisons and performance and risk summaries prepared independently by Morningstar® and favorable fiduciary grade and “Star” rankings by Morningstar®. The Board concluded that it was satisfied with the nature, extent and quality of investment management and other services provided to the Funds by Dodge & Cox.

 

INVESTMENT PERFORMANCE

The Board considered short-term and long-term investment performance for each Fund (including periods of outperformance or underperformance) as compared to both relevant indices and the performance of such Fund’s peer group. In light of recent market volatility, the Board also reviewed recent performance in the context of long-term investment goals. The performance information prepared by Morningstar® and Dodge & Cox demonstrated consistently favorable performance over the long term in keeping with the stated goals in the Prospectus. The Board considered that the performance of the Funds is the result of a team-oriented investment management process that emphasizes a long-term investment horizon, independence, comprehensive research, price discipline and focus. The Board also noted that the investment performance delivered by Dodge & Cox to the Funds appeared to be consistent with the performance delivered for other (non-fund) clients of Dodge & Cox. The Board concluded that Dodge & Cox delivers favorable performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.

COSTS AND ANCILLARY BENEFITS

Costs of Services to Funds: Fees and Expenses. The Board considered each Fund’s management fee rates and expense ratios relative to industry averages for similar mutual funds and relative to management fees charged by Dodge & Cox to other (non-fund) clients. The Board evaluated the operating structures of the Funds and Dodge & Cox, including the following: Dodge & Cox has a centralized focus on investment management operations and derives revenue solely from management fees; its outsourcing of non-advisory support services to unaffiliated third-party service providers is efficient and less costly to investors; Dodge & Cox does not charge front-end sales commissions or distribution fees and bears all third party research and distribution-related costs as well as reimbursements to third-party retirement plan administrators; the Funds receive numerous administrative, regulatory compliance, and shareholder support services from Dodge & Cox without any additional administrative fee; and the fact that the Funds


 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 16


have relatively low transaction costs and portfolio turnover rates. The Board noted that the Funds are substantially below peer group averages in expense ratios and management fee rates and that many media and industry reports specifically comment on the low expense ratios of Dodge & Cox, which along with excellent performance, has been a defining characteristic of Dodge & Cox for many years. The Board also noted that the range of services under the Agreements is much more extensive than under Dodge & Cox’s separate advisory (non-fund) client agreements and that many of the separate accounts were opened decades ago when fees were lower, and considered that, when coupled with the greater risks and regulatory burdens associated with the high profile mutual fund business, there is reasonable justification for differences in fee rates charged between the two lines of business. The Board concluded that costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation and performance of Dodge & Cox and the low overall expense ratios of the Funds.

Profitability and Costs of Services to Dodge & Cox; “Fall-out” Benefits. The Board reviewed reports of Dodge & Cox’s financial position, profitability and estimated overall value, and they considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the favorable services provided. The Board considered recent increases to Dodge & Cox’s gross revenues, and noted the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that revenues reflect the continued success of the Funds and that such revenues are not generated by fees that are high compared to its peers. They noted that Dodge & Cox’s profitability is enhanced due to its efficient internal business model, and that the compensation/profit structure at Dodge & Cox is vital for remaining independent and facilitating retention of its management and investment professionals. The Board considered potential “fall-out” benefits

(including the receipt of research from unaffiliated brokers) that Dodge & Cox might receive in its association with the Funds. The Board also noted the extent of additional administrative services performed by Dodge & Cox for the Funds, and that the magnitude of costs and risks borne by Dodge & Cox in rendering advisory services to the Funds (including risks in the compliance, securities valuation and investment management processes) are continuing to increase. The Board concluded that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) was fair and reasonable.

THE BENEFIT OF ECONOMIES OF SCALE

The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee structure and the considerable efficiencies of the Funds’ organization and fee structure that has been realized by shareholders at the outset of their investment (i.e., from the first dollar). Shareholders also realize efficiencies from the outset of their investment due to organizational efficiencies derived from Dodge & Cox’s investment management process (e.g., low portfolio turnover) and the avoidance of distribution and marketing structures whose costs would ultimately be borne by shareholders of the Funds. The Board noted that Dodge & Cox’s internal costs of providing investment management, administrative and compliance services to the Funds are continuing to increase. Thus, the Funds provide access by small investors to top-rank investment management at a relatively low cost. The Board’s decision to renew the Agreements was made after consideration of economies of scale and review of comparable fund expense ratios and historical expense ratio patterns for the Funds. Their review also included consideration of the desirability of adding breakpoints to the Funds’ fee schedules. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately reflects economies of scale.


 

PAGE 17 § DODGE & COX INTERNATIONAL STOCK FUND


CONCLUSION

Based on their evaluation of all material factors and assisted by the advice of Independent Legal Counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the advisory fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that the scope and quality of Dodge & Cox’s services has provided substantial value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.

FUND’S HOLDINGS

The Fund provides a complete list of its holdings four times each fiscal year, as of the end of each quarter. The lists appear in the Fund’s First Quarter, Semi-Annual, Third Quarter and Annual Reports to shareholders. The Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-CSR (second and fourth quarters) and Form N-Q (first and third quarters).

Shareholders may view the Fund’s Forms N-CSR and N-Q on the SEC’s website at www.sec.gov. Forms N-CSR and N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by 1-202-942-8090 (direct) or 1-800-732-0330 (general SEC number). A complete list of the Fund’s quarter-end holdings is also available at www.dodgeandcox.com on or about 15 days following each quarter end and remains available on the web site until the list is updated in the subsequent quarter.

PROXY VOTING

For a free copy of the Fund’s proxy voting policies and procedures, please call 1-800-621-3979, visit the Fund’s web site at www.dodgeandcox.com or visit the SEC’s web site at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ending June 30 is also available at www.dodgeandcox.com or at www.sec.gov.


 

DODGE & COX INTERNATIONAL STOCK FUND § PAGE 18


DODGE & COX FUNDS—EXECUTIVE OFFICER & TRUSTEE INFORMATION

 

Name (Age) and
Address*
  Position with Trust
(Year of Election or
Appointment)
  Principal Occupation During Past 5 Years   Other Directorships Held by Trustees
INTERESTED TRUSTEES & OFFICERS
John A. Gunn
(64)
 

Chairman and

Trustee
(Trustee since 1985)

  Chairman (since 2007), Chief Executive Officer (since 2005) and Director of Dodge & Cox, Portfolio Manager and member of Investment Policy Committee (IPC), Fixed Income Investment Policy Committee (FIIPC) and International Investment Policy Committee (IIPC)  
Kenneth E. Olivier (55)   President and Trustee (Trustee since 2005)   President (since 2005) and Director of Dodge & Cox, Portfolio Manager and member of IPC  
Dana M. Emery (46)  

Senior Vice President and Trustee

(Trustee since 1993)

  Executive Vice President (since 2005) and Director of Dodge & Cox, Manager of the Fixed Income Department, Portfolio Manager and member of FIIPC  

Charles F. Pohl

(50)

 

Senior Vice President
(Officer since 2004)

  Senior Vice President and Director of Dodge & Cox, Chief Investment Officer (since 2007), Director of Credit Research, Portfolio Manager, Investment Analyst and member of IPC, IIPC (since 2007) and FIIPC  
Diana S. Strandberg (48)   Senior Vice President
(Officer since 2005)
  Vice President of Dodge & Cox, Portfolio Manager and member of IPC and IIPC  
David H. Longhurst (50)   Treasurer
(Officer since 2006)
  Fund Administration and Accounting Senior Manager of Dodge & Cox (since 2004); Vice President, Treasurer, Controller and Secretary of Safeco Mutual Funds, Safeco Asset Management Company, Safeco Services, Safeco Securities, and Safeco Investment Services (2000-2004)  
Thomas M. Mistele (54)   Secretary
(Officer since 2000)
  Chief Operating Officer (since 2004), Director (since 2005), Secretary and General Counsel of Dodge & Cox  
Marcia P. Venegas (39)   Chief Compliance Officer
(Officer since 2004)
  Chief Compliance Officer of Dodge & Cox (since 2005), Compliance Officer of Dodge & Cox (2003-2004)  
INDEPENDENT TRUSTEES
William F. Ausfahl (67)  

Trustee

(Since 2002)

 

CFO, The Clorox Co. (1982-1997);

Director, The Clorox Co. (1984-1997)

 
L. Dale Crandall (66)  

Trustee

(Since 1999)

  President, Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals (2000-2002); Senior Vice President—Finance and Administration & CFO, Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals (1998-2000)   Director, Union BanCal Corporation (bank holding company) and Union Bank of California (commercial bank) (2001-Present); Director, Covad Communications Group (broadband communications services) (2002-Present); Director, Ansell Limited (medical equipment and supplies) (2002-Present); Director, BEA Systems, Inc. (software and programming) (2003-Present); Director, Coventry Health Care, Inc. (managed health care) (2004-Present); Director, Metavante Technologies, Inc. (software) (2007 to present); Director, Serena Software, Inc. (software) (2007 to present)
Thomas A. Larsen (58)  

Trustee

(Since 2002)

  Director in Howard, Rice, Nemerovski, Canady, Falk & Rabkin (law firm)  

John B. Taylor
(61)

 

Trustee

(Since 2005)

  Professor of Economics, Stanford University; Senior Fellow, Hoover Institution; Under Secretary for International Affairs, United States Treasury (2001-2005)  

Will C. Wood

(68)

 

Trustee

(Since 1992)

  Principal, Kentwood Associates, Financial Advisers   Director, Banco Latinoamericano de Exportaciones S.A. (Latin American foreign trade bank) (1999-Present)

 

*  

The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all four series in the Dodge & Cox Funds complex and serves for an indefinite term.

Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Fund’s website at www.dodgeandcox.com or calling 1-800-621-3979.

 

PAGE 19 § DODGE & COX INTERNATIONAL STOCK FUND


LOGO     LOGO

 

Balanced Fund

 

www.dodgeandcox.com

For Fund literature, transactions and account
information, please visit the Funds’ web site.

or write or call:

DODGE & COX FUNDS

c/o Boston Financial Data Services

P.O. Box 8422

Boston, Massachusetts 02266-8422

(800) 621-3979

INVESTMENT MANAGER

Dodge & Cox

555 California Street, 40th Floor

San Francisco, California 94104

(415) 981-1710

This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.

This report reflects our views, opinions and portfolio holdings as of December 31, 2007, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.

12/07 BF AR    LOGO   Printed on recycled paper

2007    

Annual Report

December 31, 2007

Balanced

Fund

ESTABLISHED 1931

TICKER:  DODBX



Dodge & Cox Balanced Fund reopened to new investors on February 4, 2008.

TO OUR SHAREHOLDERS

 

After eight consecutive years of outperforming its benchmark, the Combined Index1, the Dodge & Cox Balanced Fund struggled in 2007. The Fund returned 1.7%, which compared to 6.2% for the Combined Index. Longer-term results appear on page three. At year end, the Fund’s net assets of $26.9 billion were invested in 65.9% common stocks, 33.0% fixed income securities and 1.1% cash equivalents.

2007 PERFORMANCE REVIEW

The Fund’s weak relative performance in 2007 resulted from the poor relative performance of both its equity and fixed income portfolios. In addition, the Fund held a higher relative proportion of equities in 2007 than the Combined Index and equity returns lagged fixed income returns over the year.

Beginning in the third quarter, financial market volatility increased dramatically as investors began digesting what has seemed like a constant stream of negative news regarding subprime mortgages, the U.S. housing market and the Financials sector. While the Fund has no holdings of subprime mortgage securities, the impact of the unfolding crisis has extended well beyond this sector and created a tremendous amount of investor uncertainty about lending conditions and the broader economy. In our experience, some of the best investment opportunities are created during such periods of uncertainty.

Equity Portfolio

What follows is a recap of the Fund’s relative equity performance and strategy in 2007, focusing on three areas—Technology, Health Care and Financials.

Technology

From time to time, it matters as much what is not held in the portfolio as what is held. Four high valuation Information Technology stocks—Apple, Google, Intel and Microsoft—had extraordinary performance and in fact represented nearly one-third of the Standard & Poors 500 Index’s (S&P 500) 5.5% total return for the year. The Information Technology sector of the S&P 500 produced a total return of 17% last year, but excluding these four stocks not held in the Fund, the sector return would have been only 5%. The Information Technology holdings in

the Fund returned 4%. Motorola (down 21%) and EDS (down 24%) were particularly weak.

We tend to avoid high valuation technology companies which incorporate high investor expectations for continued growth and high net margins. Over a three-to-five year time frame, we believe the probability for disappointment is higher for these companies as increased competition and technological changes could erode their present positions. We prefer lower valuation technology companies as long as they have core competencies, established customer bases, adequate finances and a management that is working hard for their shareholders. At year end, the equity portion of the Fund had 16% of its value invested in Information Technology and other technology-related companies (e.g., Hewlett-Packard, Sony and Matsushita) with low valuations (i.e., price-to-sales ratios at 1.3 times or below).

Health Care

Health Care was also a weak sector of the portfolio during 2007, as equity holdings finished the year up 1% while Health Care companies in the S&P 500 sector were up 7% collectively. Cardinal Health (down 10%) and Pfizer (down 8%) were the largest detractors. We increased the portfolio’s exposure to Health Care stocks from 15% of the portfolio at the beginning of the year to 21% at year end. We continue to be attracted to pharmaceutical stocks. Concerns over patent expirations and regulatory factors have driven valuations down to some of their lowest levels in 15 years relative to the market. We believe that drug development and technological innovation in biosciences will continue longer term, while growth in the developing world is creating new consumers. We expect that the major pharmaceutical companies will continue to be the prime conduit between this technological progress and a growing global customer base. New positions in the portfolio in 2007 include Amgen and Novartis.

Financials

The past year was a difficult one for the Financials sector. Due to the widening perimeter of subprime mortgage problems, equity prices for many financial companies have declined significantly. In 2006 and early-2007, the rapid earnings growth of financial companies led us to be skeptical. By the end of 2006, we had lowered the


 

PAGE 1 § DODGE & COX BALANCED FUND


financial weighting of the equity portfolio of the Fund to 15% versus 22% for the S&P 500. This lower weighting contributed positively to relative results last year. Now that valuations are significantly lower in this sector, we are researching new opportunities and have added to current holdings, including Wachovia and Capital One Financial. We also started new positions in American International Group and HSBC during 2007.

We believe our investment in Wachovia is a good example of finding opportunity in the face of investor uncertainty. Wachovia is the third largest bank in the U.S. (based on deposits) and has a strong presence in retail banking, brokerage and mortgage lending. While the company is not immune to the turmoil in subprime mortgages and the weaker housing environment, it has historically been a prudent lender (i.e., below average credit losses). Most of its mortgage operations were acquired through its purchase of Golden West Financial, which had a well earned reputation for conservative lending practices. Wachovia has relatively low exposure to many of the areas that are under stress in the current environment. We believe the long-term prospects for Wachovia appear attractive, especially at today’s valuation of about ten times expected 2008 earnings. Consequently, we have increased the portfolio’s weighting in Wachovia to 3.3%; it was the Fund’s fourth largest equity holding at year end.

Fixed Income Portfolio

The fixed income portion of the Fund underperformed the Lehman Brothers Aggregate Bond Index (LBAG) in 2007. Much of the “collateral damage” inflicted by the subprime turmoil has come in the form of a dramatic underperformance by corporate bonds (particularly lower-rated ones) over the last six months of the year. Even corporate issuers whose businesses are unrelated to the mortgage or housing industries have been significantly affected. Investors are concerned that tighter credit conditions, higher relative corporate borrowing costs, and a general slowing of economic growth could reduce corporate profits and borrowers’ ability to repay debt. As the Fund’s fixed income portfolio entered the second half of 2007 with an overweight of corporate securities, their poor performance detracted from the portfolio’s relative performance. In addition, several of the fixed income portfolio’s corporate holdings were meaningfully affected. In particular, the bonds of Ford Motor Credit and GMAC (together comprising 7.0% of the fixed income portfolio) performed very poorly. Further, the difficulties experienced by the Financials sector led to significant underperformance for bond holdings of Kaupthing Bank, JP Morgan Chase, HSBC and Bank of America.

 

The portfolio’s mortgage-related investments are in Government or GSE-guaranteed “prime” Mortgage-Backed Securities (MBS), predominantly the latter. Despite the Fannie Mae or Freddie Mac guarantee of timely payment of principal and interest on these securities2, the GSE-guaranteed MBS market was not immune from the turmoil and substantially trailed Treasury returns in 2007. MBS yield premiums approximately doubled over the second half of the year, rising to levels last seen in 2001. Since MBS comprise nearly half of the fixed income portion of the Fund, the weak performance from this sector detracted from relative returns as well.

Finally, the portfolio’s duration (a measure of a bond portfolio’s price exposure to changing interest rates) was lower than the LBAG throughout 2007, a positioning largely achieved by holding much shorter Treasury securities than the LBAG. As interest rates fell in the second half, this positioning meant that the portfolio’s U.S. Treasury holdings participated to a much smaller degree in the strong Treasury rally than did the Treasuries in the LBAG.

On the positive side, the portfolio’s nominal yield advantage translated into a greater income stream than the LBAG and added to relative returns.

We made a number of fixed income portfolio changes in 2007, primarily during the second half of the year. Among corporate and MBS securities, we selectively increased the portfolio’s weightings in each sector to 42% and 49% respectively. We continue to position the Fund’s fixed income portfolio with a shorter duration than that of the LBAG. Anticipating economic weakness, a recession, or worse, fixed income investors have pushed U.S. Treasury rates down to levels last seen in 2003, when the world was a far different place. As we survey the situation at the end of 2007, the inflation outlook is not nearly as benign, despite the near-term slowdown in the economy. We find the potential returns from Treasuries unappealing and believe that interest rates are likely to rise from these low levels to re-establish more attractive prospective after-inflation returns for bond investors. The portfolio’s Treasury holdings continue to be short in maturity, protecting them from significant price declines if interest rates do rise. The longer-maturity holdings in the portfolio are corporate securities with far more substantial income streams to mitigate the price declines associated with rising interest rates.

IN CLOSING

As valuations in the equity markets and the Fund’s equity portfolio have dropped, our return outlook for the next three to five years has improved. We have recently


 

DODGE & COX BALANCED FUND § PAGE 2


increased the Fund’s purchases of equities. At year end, the Fund’s equity portfolio forward price-to-earnings ratio was 12.9 times compared to 16.3 times for the S&P 500. We also remain encouraged about the long-term prospects for the global economy. Despite the turmoil during the last six months of 2007 and the market’s downturn thus far in 2008, the forces of technological innovation and free market economic principles are creating unprecedented wealth in the developing world and compelling investment opportunities for the patient investor.

Our fixed income investment approach is also characterized by a three-to-five year investment horizon, independent research of the fundamental and structural properties of each investment, and a focus on the income component of total return. This approach typically leads us to overweight the higher-yielding Corporate and MBS sectors of the bond market. In the wake of their substantial underperformance during the second half of 2007, we believe that the current valuation of many securities in these sectors is very attractive. In addition, the higher yield premiums offered by these securities have created a large yield advantage at year end for the Fund’s fixed income portfolio relative to the LBAG.

We counsel our shareholders to have patience during these volatile markets and take a long-term view of investing in general. Thank you for your continued confidence in our firm as a shareholder of the Dodge & Cox Balanced Fund. As always, we welcome your comments and questions.

For the Board of Trustees,

 

LOGO

 

LOGO

John A. Gunn,

Chairman

 

Kenneth E. Olivier,

President

February 14, 2008

 

 

1

 

The Combined Index reflects an unmanaged portfolio of 60% of the Standard & Poor’s 500 Index (S&P 500) and 40% of the Lehman Brothers Aggregate Bond Index (LBAG). The Fund may, however, invest up to 75% of its total assets in stocks.

2

 

The U.S. Government does not guarantee the Fund’s shares, yield and net asset value. The guarantee does not eliminate market risk.

GROWTH OF $10,000 OVER 10 YEARS

FOR AN INVESTMENT MADE ON DECEMBER 31, 1997

LOGO

AVERAGE ANNUAL TOTAL RETURN

FOR PERIODS ENDED DECEMBER 31, 2007

 

     1 Year     5 Years     10 Years     20 Years  

Dodge & Cox Balanced Fund

  1.74 %   11.72 %   9.85 %   12.18 %

Combined Index

  6.22     9.50     6.26     10.33  

S&P 500

  5.51     12.82     5.91     11.81  

Lehman Brothers Aggregate
Bond Index (LBAG)

  6.96     4.42     5.97     7.56  

Past performance does 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. Performance is updated and published monthly. Visit the Fund’s web site at www.dodgeandcox.com or call 1-800-621-3979 for current performance figures.

The Fund’s 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. Index returns include dividends and/or interest income and, unlike Fund returns, do not reflect fees or expenses.

Lehman Brothers® is a trademark of Lehman Brothers, Inc.; Standard & Poor’s, Standard & Poor’s 500, and S&P 500® are trademarks of The McGraw-Hill Companies, Inc.


 

PAGE 3 § DODGE & COX BALANCED FUND


FUND EXPENSE EXAMPLE

As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.

ACTUAL EXPENSES

The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER MUTUAL FUNDS

Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expense Paid During the Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.

 

Six Months Ended
December 31, 2007
   Beginning Account
Value 7/1/2007
   Ending Account
Value 12/31/2007
   Expenses Paid
During Period*

Based on Actual Fund Return

   $ 1,000.00    $ 965.60    $ 2.60

Based on Hypothetical 5% Yearly Return

     1,000.00      1,022.56      2.67
*  

Expenses are equal to the Fund’s annualized six-month expense ratio of 0.52%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. While other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).

 

DODGE & COX BALANCED FUND § PAGE 4


FUND INFORMATION   December 31, 2007

 

GENERAL INFORMATION      

Net Asset Value Per Share

   $81.00

Total Net Assets (billions)

   $26.9

30-Day SEC Yield(a)

   2.83%

2007 Expense Ratio

   0.53%

2007 Portfolio Turnover Rate

   27%

Fund Inception

   1931

No sales charges or distribution fees

  

 

Investment Manager: Dodge & Cox, San Francisco. Managed by the Investment Policy Committee, whose nine members’ average tenure at Dodge & Cox is 22 years, and by the Fixed Income Investment Policy Committee, whose nine members’ average tenure is 18 years.

 

STOCK PORTFOLIO (65.9%)    Fund

Number of Stocks

   85

Median Market Capitalization (billions)

   $26

Price-to-Earnings Ratio(b)

   12.9x

Foreign Stocks(c)

   12.7%

 

SECTOR DIVERSIFICATION (FIVE LARGEST)

 

Consumer Discretionary

   14.4 %

Health Care

   13.6  

Information Technology

   10.9  

Financials

   9.7  

Energy

   6.6  

 

TEN LARGEST HOLDINGS(d)        

Hewlett-Packard Co.

   3.0 %

Comcast Corp.

   2.7  

Wal-Mart Stores, Inc.

   2.2  

Wachovia Corp.

   2.2  

Sony Corp. (Japan)

   1.9  

Sanofi-Aventis (France)

   1.9  

Matsushita Electric Industrial Co., Ltd. (Japan)

   1.9  

News Corp.

   1.9  

Motorola, Inc.

   1.9  

Chevron Corp.

   1.8  

 

ASSET ALLOCATION

LOGO

 

 

FIXED INCOME PORTFOLIO (33.0%)    Fund

Number of Fixed Income Securities

   332

Effective Maturity

   6.7 years

Effective Duration

   4.0 years

 

SECTOR DIVERSIFICATION        

U.S. Treasury & Government Related

   2.2 %

Mortgage-Related Securities

   16.2  

Asset-Backed Securities

   0.8  

Corporate

   13.8  

 

CREDIT QUALITY(e)        

U.S. Government & Government Related

   18.4 %

Aaa

   1.5  

Aa

   2.8  

A

   2.0  

Baa

   4.4  

Ba

   2.0  

B

   1.1  

Caa

   0.8  

Average Quality

   Aa3  

 

CORPORATE ISSUERS (FIVE LARGEST)(d)        

GMAC, LLC

   1.4 %

Ford Motor Credit Co.

   0.9  

Wachovia

   0.8  

HCA, Inc.

   0.8  

Time Warner, Inc.

   0.8  

 

 

(a)

 

SEC yield is an annualization of the Fund’s total net investment income per share for the 30-day period ended on the last day of the month.

(b)

 

Price-to-earnings (P/E) ratio is calculated using 12-month forward earnings estimates.

(c)

 

Foreign stocks are U.S. dollar-denominated.

(d)

 

The Fund’s portfolio holdings are subject to change without notice. The mention of specific securities is not a recommendation or solicitation for any person to buy, sell or hold any particular security.

(e)

 

Credit quality ratings are from Moody’s Investor Services. If no Moody’s rating is available, the Standard & Poor’s rating is reported. If unrated, the investment manager determines a comparable rating. In calculating average quality, the investment manager assigns ratings to U.S. Government and Government Related securities that are higher than the ratings assigned to securities rated Aaa. The credit quality of the investments in the portfolio does not apply to the stability or safety of the Fund or its shares.

 

PAGE 5 § DODGE & COX BALANCED FUND


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

COMMON STOCKS: 65.9%
    SHARES    VALUE
CONSUMER DISCRETIONARY: 14.4%

CONSUMER DURABLES & APPAREL: 4.1%

Matsushita Electric Industrial Co., Ltd. ADR(b) (Japan)

  25,153,828    $ 514,144,244

Nike, Inc., Class B

  774,329      49,742,895

Sony Corp. ADR(b) (Japan)

  9,761,700      530,060,310

Thomson ADR(b) (France)

  1,900,000      26,638,000
        
       1,120,585,449

CONSUMER SERVICES: 0.9%

McDonald’s Corp.

  3,974,450      234,134,850

MEDIA: 7.2%

Comcast Corp., Class A(a)

  38,999,089      712,123,365

EchoStar Communications Corp.(a)

  2,305,365      86,958,368

Interpublic Group of Companies, Inc.(a)

  7,617,000      61,773,870

Liberty Capital, Series A(a)

  533,129      62,104,197

Liberty Global, Inc., Series A(a)

  264,221      10,354,821

Liberty Global, Inc., Series C(a)

  391,068      14,309,178

News Corp., Class A

  25,007,900      512,411,871

Time Warner, Inc.

  28,384,600      468,629,746
        
         1,928,665,416

RETAILING: 2.2%

CarMax, Inc.(a)

  1,800,000      35,550,000

Gap, Inc.

  5,152,800      109,651,584

Genuine Parts Co.

  2,459,462      113,873,090

Home Depot, Inc.

  6,500,000      175,110,000

Liberty Interactive, Series A(a)

  4,787,300      91,341,684

Macy’s, Inc.

  3,043,272      78,729,447
        
       604,255,805
        
       3,887,641,520
CONSUMER STAPLES: 2.9%

FOOD & STAPLES RETAILING: 2.5%

Wal-Mart Stores, Inc.

  12,743,300      605,689,049

Walgreen Co.

  1,909,399      72,709,914
        
       678,398,963

HOUSEHOLD & PERSONAL PRODUCTS: 0.4%

Avon Products, Inc.

  2,647,700      104,663,581
        
       783,062,544

ENERGY: 6.6%

    

Baker Hughes, Inc.

  3,200,960      259,597,856

Chevron Corp.

  5,241,102      489,152,049

ConocoPhillips

  2,880,700      254,365,810

Occidental Petroleum Corp.

  3,945,000      303,725,550

Royal Dutch Shell PLC ADR(b) (United Kingdom)

  2,766,127      229,588,541

Schlumberger, Ltd.

  2,070,121      203,637,803

Spectra Energy Corp.

  1,693,600      43,728,752
        
       1,783,796,361
    SHARES   VALUE
FINANCIALS: 9.7%

BANKS: 3.2%

HSBC Holdings PLC(b) (United Kingdom)

  2,000,000   $ 167,420,000

Wachovia Corp.

  15,569,661     592,114,208

Wells Fargo & Co.

  3,121,900     94,250,161
       
      853,784,369

DIVERSIFIED FINANCIALS: 2.2%

Capital One Financial Corp.

  6,413,959     303,123,702

Citigroup, Inc.

  6,290,900     185,204,096

Legg Mason, Inc.

  1,050,000     76,807,500

SLM Corp.

  2,200,000     44,308,000
       
      609,443,298

INSURANCE: 4.3%

Aegon NV(b) (Netherlands)

  7,083,971     124,182,012

American International Group, Inc.

  5,630,000     328,229,000

Chubb Corp.

  3,334,224     181,981,946

Genworth Financial, Inc., Class A

  2,448,000     62,301,600

Loews Corp.

  2,345,200     118,057,368

Travelers Cos., Inc.

  6,352,900     341,786,020
       
        1,156,537,946
       
      2,619,765,613
HEALTH CARE: 13.6%

HEALTH CARE EQUIPMENT & SERVICES: 5.0%

Boston Scientific Corp.(a)

  12,173,800     141,581,294

Cardinal Health, Inc.

  6,491,400     374,878,350

Covidien, Ltd.

  4,466,400     197,816,856

Health Management Associates, Inc.

  3,900,000     23,322,000

UnitedHealth Group, Inc.

  2,998,800     174,530,160

WellPoint, Inc.(a)

  4,898,000     429,701,540
       
      1,341,830,200

PHARMACEUTICALS & BIOTECHNOLOGY: 8.6%

Amgen, Inc.(a)

  1,970,000     91,486,800

Bristol-Myers Squibb Co.

  4,366,750     115,806,210

GlaxoSmithKline PLC ADR(b) (United Kingdom)

  8,930,400     450,002,856

Johnson & Johnson

  1,277,226     85,190,974

Novartis AG ADR(b) (Switzerland)

  8,016,000     435,348,960

Pfizer, Inc.

  19,436,367     441,788,622

Sanofi-Aventis ADR(b) (France)

  11,312,400     515,053,572

Wyeth

  3,901,800     172,420,542
       
      2,307,098,536
       
      3,648,928,736
INDUSTRIALS: 4.4%

CAPITAL GOODS: 1.8%

General Electric Co.

  5,762,700     213,623,289

Koninklijke Philips Electronics NV(b) (Netherlands)

  2,400,000     102,600,000

Masco Corp.

  3,251,000     70,254,110

Tyco International, Ltd.

  2,066,400     81,932,760
       
      468,410,159

 

See accompanying Notes to Financial Statements   DODGE & COX BALANCED FUND § PAGE 6


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

COMMON STOCKS (continued)
    SHARES    VALUE

COMMERCIAL SERVICES & SUPPLIES: 0.3%

Pitney Bowes, Inc.

  2,306,650    $ 87,744,966

TRANSPORTATION: 2.3%

FedEx Corp.

  3,440,250      306,767,093

Union Pacific Corp.

  2,494,300      313,333,966
        
       620,101,059
        
       1,176,256,184
INFORMATION TECHNOLOGY: 10.9%

SOFTWARE & SERVICES: 2.9%

BMC Software, Inc.(a)

  2,851,000      101,609,640

Citrix Systems, Inc.(a)

  2,042,010      77,616,800

Computer Sciences Corp.(a)

  3,636,400      179,892,708

Compuware Corp.(a)

  6,038,700      53,623,656

EBay, Inc.(a)

  5,117,600      169,853,144

Electronic Data Systems Corp.

  9,533,700      197,633,601
        
       780,229,549

TECHNOLOGY, HARDWARE & EQUIPMENT: 8.0%

Hewlett-Packard Co.

  15,837,331      799,468,469

Hitachi, Ltd. ADR(b) (Japan)

  2,690,000      196,746,600

Kyocera Corp. ADR(b) (Japan)

  610,000      53,204,200

Maxim Integrated Products, Inc.

  3,487,700      92,354,296

Molex, Inc.

  1,900      51,870

Molex, Inc., Class A

  2,276,669      59,808,095

Motorola, Inc.

  30,977,700      496,882,308

Sun Microsystems, Inc.(a)

  1,856,575      33,659,705

Tyco Electronics, Ltd.

  4,926,700      182,928,371

Xerox Corp.(a)

  13,816,850      223,694,801
        
         2,138,798,715
        
       2,919,028,264
MATERIALS: 2.5%

Alcoa, Inc.

  564,050      20,616,027

Cemex SAB de CV ADR(b) (Mexico)

  2,880,907      74,471,446

Domtar Corp.(a)

  4,600,000      35,374,000

Dow Chemical Co.

  8,944,059      352,574,806

Nova Chemicals Corp.(b) (Canada)

  458,220      14,846,328

Rohm and Haas Co.

  2,440,700      129,527,949

Vulcan Materials Co.

  600,000      47,454,000
        
       674,864,556

TELECOMMUNICATION SERVICES: 0.9%

Sprint Nextel Corp.

  18,630,000      244,611,900
        
       244,611,900
        

TOTAL COMMON STOCKS
(Cost $14,212,192,921)

     $ 17,737,955,678
        
FIXED INCOME SECURITIES: 33.0%
   

PAR VALUE

   VALUE
U.S. TREASURY AND GOVERNMENT RELATED: 2.2%

U.S. TREASURY: 1.1%

    

U.S. Treasury Notes

    

3.375%, 2/15/08

  $ 200,000,000    $ 200,015,600

4.875%, 4/30/08

    105,000,000      105,508,620
        
       305,524,220

GOVERNMENT RELATED: 1.1%

Arkansas Dev. Fin. Auth. Ginnie Mae

Guaranteed Bonds 9.75%, 11/15/14

    2,791,882      2,992,367

Small Business Administration — 504 Program

  

Series 96-20L, 6.70%, 12/1/16

    1,843,944      1,905,025

Series 97-20F, 7.20%, 6/1/17

    2,843,721      2,962,862

Series 97-20I, 6.90%, 9/1/17

    4,302,395      4,464,091

Series 98-20D, 6.15%, 4/1/18

    5,409,177      5,562,590

Series 98-20I, 6.00%, 9/1/18

    2,965,966      3,045,237

Series 99-20F, 6.80%, 6/1/19

    4,134,787      4,318,385

Series 00-20D, 7.47%, 4/1/20

    10,793,740      11,453,477

Series 00-20E, 8.03%, 5/1/20

    4,490,637      4,842,875

Series 00-20G, 7.39%, 7/1/20

    7,676,063      8,143,989

Series 00-20I, 7.21%, 9/1/20

    4,691,420      4,971,154

Series 01-20E, 6.34%, 5/1/21

    10,363,902      10,830,164

Series 01-20G, 6.625%, 7/1/21

    9,262,630      9,852,587

Series 03-20J, 4.92%, 10/1/23

    19,040,954      19,110,937

Series 05-20F, 4.57%, 6/1/25

    39,801,835      38,391,855

Series 05-20K, 5.36%, 11/1/25

    33,811,407      34,467,088

Series 06-20D, 5.64%, 4/1/26

    47,439,576      48,689,419

Series 06-20F, 5.82%, 6/1/26

    52,450,384      54,491,936

Series 07-20F, 5.71%, 6/1/27

    11,849,907      12,236,647
        
         282,732,685
        
       588,256,905
MORTGAGE-RELATED SECURITIES: 16.2%

FEDERAL AGENCY CMO & REMIC: 1.0%

  

Dept. of Veterans Affairs

    

Trust 1995-1A 1, 7.207%, 2/15/25

    1,182,562      1,256,613

Trust 1995-2C 3A, 8.793%, 6/15/25

    589,910      647,504

Fannie Mae

    

SMBS I-1, 6.50%, 4/1/09

    9,479      9,499

Trust 1993-207 G, 6.15%, 4/25/23

    1,674,855      1,680,104

Trust 2002-73 PM, 5.00%, 12/25/26

    4,201,594      4,192,622

Trust 2002-33 A1, 7.00%, 6/25/32

    4,662,930      4,925,271

Trust 2005-W4 1A2, 6.50%, 8/25/35

    30,685,929      32,131,497

Trust 2001-T7 A1, 7.50%, 2/25/41

    4,667,440      4,932,274

Trust 2001-T8 A1, 7.50%, 7/25/41

    4,909,767      5,186,771

Trust 2001-W3 A, 7.00%, 9/25/41

    1,787,698      1,862,093

Trust 2002-W6 2A1, 7.00%, 6/25/42

    4,718,698      4,982,279

Trust 2002-W8 A2, 7.00%, 6/25/42

    5,331,318      5,612,437

Trust 2003-W2 1A1, 6.50%, 7/25/42

    9,952,257      10,414,144

Trust 2003-W2 1A2, 7.00%, 7/25/42

    4,036,850      4,274,059

Trust 2003-W4 4A, 7.50%, 10/25/42

    5,883,921      6,300,476

Trust 2004-T1 1A2, 6.50%, 1/25/44

    9,242,874      9,616,976

Trust 2004-W2 5A, 7.50%, 3/25/44

    21,125,358      22,685,206

 

PAGE 7 § DODGE & COX BALANCED FUND   See accompanying Notes to Financial Statements


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

FIXED INCOME SECURITIES (continued)
   

PAR VALUE

   VALUE

Freddie Mac

    

Series 1512 I, 6.50%, 5/15/08

  $ 179,161    $ 178,835

Series 2100 GS, 6.50%, 12/15/13

    6,937,641      7,186,921

Series 2430 UC, 6.00%, 9/15/16

    11,187,723      11,382,669

Series 1078 GZ, 6.50%, 5/15/21

    1,036,394      1,062,434

Series (GN) 16 PK, 7.00%, 8/25/23

    12,152,436      12,721,655

Series T-48 1A4, 5.538%, 7/25/33

    74,259,426      75,875,230

Series T-051 1A, 6.50%, 9/25/43

    466,062      486,268

Series T-59 1A1, 6.50%, 10/25/43

    29,717,036      31,268,063
        
       260,871,900

FEDERAL AGENCY MORTGAGE PASS-THROUGH: 15.2%

Fannie Mae, 10 Year

    

6.00%, 1/1/12-10/1/14

    22,920,979      23,448,138

Fannie Mae, 15 Year

    

5.50%, 1/1/14-1/1/21

    378,337,842      385,041,414

6.00%, 12/1/13-8/1/22

    621,777,575        637,285,805

6.50%, 1/1/13-11/1/18

    143,648,403      148,633,185

7.00%, 7/1/11-11/1/18

    11,884,969      12,373,369

7.50%, 9/1/15-8/1/17

    47,608,157      49,685,486

Fannie Mae, 20 Year

    

5.50%, 1/1/23

    16,064,041      16,175,244

6.50%, 1/1/22-10/1/26

    29,330,452      30,207,359

Fannie Mae, 30 Year

    

5.00%, 3/1/34

    240,070,057      234,597,422

5.50%, 6/1/33-8/1/35

    253,532,971      253,932,404

6.00%, 8/25/32-11/1/35

    502,237,559      511,495,847

6.50%, 12/1/32-11/1/37

    413,369,052      424,468,015

7.50%, 8/1/10-7/1/19

    38,203      38,949

8.00%, 1/1/09

    8,013      8,089

Fannie Mae, Hybrid ARM

    

3.846%, 6/1/34

    52,536,349      52,207,085

4.142%, 1/1/35

    17,099,926      17,202,289

4.437%, 7/1/33

    29,131,502      29,168,961

4.658%, 9/1/34

    17,085,331      17,017,721

4.75%, 1/1/35

    10,269,785      10,352,502

4.752%, 3/1/35

    18,674,986      18,662,716

4.757%, 12/1/34

    16,609,147      16,609,176

4.839%, 8/1/35

    10,887,827      10,905,607

5.03%, 7/1/35

    131,410,221      132,527,501

5.06%, 7/1/35

    46,648,840      47,072,065

5.296%, 1/1/36

    53,427,835      53,768,058

5.571%, 5/1/36

    51,876,029      52,507,178

Fannie Mae, Multifamily DUS

    

Pool 555728, 4.019%, 8/1/13

    379,946      369,942

Pool 555162, 4.835%, 1/1/13

    17,328,708      17,506,754

Pool 760762, 4.89%, 4/1/12

    16,115,000      16,292,415

Pool 555316, 4.918%, 2/1/13

    4,350,393      4,407,552

Pool 735387, 4.926%, 4/1/15

    13,700,556      13,804,795

Pool 555148, 4.975%, 1/1/13

    4,644,598      4,715,082

Pool 555806, 5.081%, 10/1/13

    3,307,384      3,371,744

Pool 461628, 5.32%, 4/1/14

    10,393,869      10,708,193
    PAR VALUE    VALUE

Pool 462086, 5.355%, 11/1/15

  $ 28,292,663    $ 29,086,352

Pool 545316, 5.63%, 12/1/11

    4,786,209      4,956,856

Pool 323350, 5.662%, 11/1/08

    1,637,127      1,639,061

Pool 545387, 5.897%, 1/1/12

    5,984,206      6,252,725

Pool 545685, 5.931%, 4/1/12

    23,145,433      24,230,623

Pool 545258, 5.94%, 11/1/11

    964,271      1,005,866

Pool 380735, 5.965%, 10/1/08

    11,330,406      11,344,417

Pool 323492, 6.012%, 1/1/09

    2,524,985      2,538,751

Freddie Mac, 30 Year

    

8.00%, 11/1/10

    7,793      7,850

8.25%, 2/1/17

    3,063      3,079

8.75%, 5/1/10

    12,202      12,510

Freddie Mac Gold, 15 Year

    

5.50%, 8/1/14-1/1/17

    24,876,617      25,181,977

6.00%, 10/1/13-10/1/18

    127,036,445      130,163,856

6.50%, 7/1/14-3/1/18

    56,555,999      58,473,422

7.00%, 5/1/08-4/1/15

    903,262      920,005

7.75%, 7/25/21

    1,366,595      1,451,519

Freddie Mac Gold, 20 Year
6.50%, 10/1/26

    56,182,363      57,813,748

Freddie Mac Gold, 30 Year

    

5.00%, 8/1/33

    92,672,025      90,731,968

6.00%, 6/1/35

    51,379,138      52,379,480

6.50%, 9/1/18-4/1/33

      105,345,518        108,943,801

7.47%, 3/17/23

    364,586      385,850

8.50%, 1/1/23

    37,381      40,092

Freddie Mac Gold, Hybrid ARM

    

3.807%, 5/1/34

    19,256,487      18,975,068

4.807%, 10/1/35

    28,973,555      28,930,778

4.844%, 5/1/35

    88,852,862      89,300,597

5.386%, 11/1/35

    52,089,746      52,489,628

6.325%, 11/1/36

    36,711,049      37,343,616

Ginnie Mae, 30 Year

    

7.50%, 11/15/24-10/15/25

    4,308,385      4,582,205

7.97%, 4/15/20-1/15/21

    2,147,074      2,303,479
        
       4,098,057,241

PRIVATE LABEL CMO & REMIC SECURITIES: 0.0%(e)

Union Planters Mortgage Finance Corp.
7.70%, 12/25/24

    3,486,720      3,662,950
        
       4,362,592,091
ASSET-BACKED SECURITIES: 0.8%

STUDENT LOAN: 0.8%

SLM Student Loan Trust

    

Series 2006-3 A2, 5.084%, 1/25/16

    2,184,245      2,185,027

Series 2006-09 A2, 5.084%, 4/25/17

    37,676,567      37,573,069

Series 2007-2 A2, 5.084%, 7/25/17

    124,000,000      122,874,564

Series 2006-10 A2, 5.094%, 10/25/17

    52,776,428      52,794,076
        
       215,426,736

 

See accompanying Notes to Financial Statements   DODGE & COX BALANCED FUND § PAGE 8


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

FIXED INCOME SECURITIES (continued)
    PAR VALUE    VALUE
CORPORATE: 13.8%

FINANCIALS: 4.8%

Bank of America Corp.
5.30%, 3/15/17

  $ 61,000,000    $ 59,314,936

8.00%, 12/15/26(c) (callable)

    17,355,000      18,173,653

5.625%, 3/8/35(c)

    10,000,000      8,540,770

6.625%, 5/23/36(c)

    41,040,000      40,607,286

Boston Properties, Inc.

    

6.25%, 1/15/13

    49,070,000      49,898,012

5.625%, 4/15/15

    29,500,000      28,637,465

5.00%, 6/1/15

    2,890,000      2,681,922

Capital One Financial Corp.
6.75%, 9/15/17

    76,630,000      73,497,442

CIGNA Corp.

    

7.00%, 1/15/11

    14,705,000      15,609,534

6.375%, 10/15/11

    17,820,000      18,629,652

7.65%, 3/1/23

    9,745,000      10,883,226

7.875%, 5/15/27

    12,970,000      14,672,448

8.30%, 1/15/33

    9,050,000      10,521,946

6.15%, 11/15/36

    5,500,000      5,102,982

Citigroup, Inc.
6.125%, 11/21/17

    45,000,000      46,223,730

General Electric Co.
5.041%, 11/1/12

    190,000,000        187,224,290

Health Net, Inc.
6.375%, 6/1/17

    18,675,000      18,211,841

HSBC Holdings PLC(b) (United Kingdom)

    

6.50%, 5/2/36

    23,000,000      22,360,025

6.50%, 9/15/37

    45,000,000      43,615,305

JPMorgan Chase & Co.
8.75%, 9/1/30(c)

    28,187,000      32,636,402

5.85%, 8/1/35(c)

    5,955,000      5,083,373

Kaupthing Bank hf(b),(d) (Iceland)
7.125%, 5/19/16

    65,060,000      59,644,015

Safeco Corp.

    

4.875%, 2/1/10

    15,131,000      15,137,416

7.25%, 9/1/12

    13,672,000      14,732,947

Travelers Cos., Inc.

    

8.125%, 4/15/10

    19,885,000      21,480,016

5.00%, 3/15/13

    10,250,000      10,243,542

5.50%, 12/1/15

    9,160,000      9,096,915

6.25%, 6/20/16

    22,000,000      22,708,906

5.75%, 12/15/17

    21,660,000      21,306,227

Unum Group

    

7.625%, 3/1/11

    8,426,000      8,988,242

6.85%, 11/15/15(d)

    10,200,000      10,572,065

7.19%, 2/1/28

    8,500,000      8,391,021

7.25%, 3/15/28

    12,130,000      12,638,538

6.75%, 12/15/28

    11,633,000      11,681,731

Wachovia Corp.
5.281%, 4/23/12

    186,000,000      180,305,796

6.00%, 11/15/17

    46,000,000      46,307,372
    PAR VALUE    VALUE

WellPoint, Inc.

    

5.00%, 12/15/14

  $ 13,070,000    $ 12,519,897

5.25%, 1/15/16

    77,600,000      75,130,613

5.875%, 6/15/17

    1,275,000      1,283,673

Wells Fargo & Co.
5.625%, 12/11/17

    44,000,000      44,026,884
        
         1,298,322,056

INDUSTRIALS: 7.9%

AT&T, Inc.
8.00%, 11/15/31

    91,955,000      112,927,453

Boston Scientific Corp.

    

5.45%, 6/15/14

    24,085,000      22,158,200

6.40%, 6/15/16

    21,905,000      20,590,700

Comcast Corp.

    

5.30%, 1/15/14

    63,050,000      61,827,019

5.85%, 11/15/15

    26,500,000      26,690,244

5.90%, 3/15/16

    22,880,000      23,019,362

6.50%, 1/15/17

    27,500,000      28,672,930

6.30%, 11/15/17

    14,810,000      15,365,775

Covidien Ltd.(b),(d) (Bermuda)
6.00%, 10/15/17

    19,550,000      20,229,050

Cox Communications, Inc.

    

5.45%, 12/15/14

    75,530,000      74,021,892

5.50%, 10/1/15

    15,265,000      14,941,351

5.875%, 12/1/16(d)

    25,145,000      24,997,298

Dillard’s, Inc.

    

6.30%, 2/15/08

    6,000,000      5,977,500

7.85%, 10/1/12

    14,000,000      13,352,500

7.13%, 8/1/18

    10,831,000      8,718,955

7.875%, 1/1/23

    8,860,000      6,910,800

7.75%, 7/15/26

    50,000      38,500

7.75%, 5/15/27

    550,000      423,500

7.00%, 12/1/28

    15,490,000      11,307,700

Dow Chemical Co.

    

4.027%, 9/30/09(d)

    33,950,000      33,730,581

6.00%, 10/1/12

    5,800,000      6,029,239

7.375%, 11/1/29

    35,170,000      38,683,940

Ford Motor Credit Co.(g)

    

7.375%, 2/1/11

    166,700,000      149,280,850

7.25%, 10/25/11

    118,160,000      102,345,347

GMAC, LLC

    

7.75%, 1/19/10

    6,145,000      5,732,179

6.875%, 9/15/11

    201,105,000      172,044,121

6.875%, 8/28/12

    20,691,000      17,191,005

8.00%, 11/1/31

    209,640,000      175,861,755

HCA, Inc.

    

8.75%, 9/1/10

    27,750,000      27,992,813

7.875%, 2/1/11

    23,798,000      23,203,050

6.95%, 5/1/12

    50,090,000      46,583,700

6.30%, 10/1/12

    11,400,000      10,146,000

6.25%, 2/15/13

    47,740,000      41,772,500

6.75%, 7/15/13

    27,400,000      24,386,000

 

PAGE 9 § DODGE & COX BALANCED FUND   See accompanying Notes to Financial Statements


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

FIXED INCOME SECURITIES (continued)
    PAR VALUE    VALUE

5.75%, 3/15/14

  $ 20,420,000    $ 16,948,600

6.50%, 2/15/16

    22,000,000      18,590,000

Lafarge SA(b) (France)
6.50%, 7/15/16

    33,715,000      33,481,504

Liberty Media Corp.

    

8.50%, 7/15/29

    32,630,000      31,960,857

4.00%, 11/15/29 (exchangeable)

    15,970,000      10,300,650

8.25%, 2/1/30

    25,143,000      24,128,254

Lockheed Martin Corp.

    

7.65%, 5/1/16

    18,500,000      21,223,829

7.75%, 5/1/26

    8,500,000      10,079,045

Macy’s, Inc.

    

7.625%, 8/15/13

    5,900,000      6,355,834

7.45%, 10/15/16

    11,675,000      11,613,800

6.90%, 4/1/29

    8,080,000      7,400,011

6.90%, 1/15/32

    55,984,000      51,225,640

6.70%, 7/15/34

    21,275,000      19,192,007

Time Warner, Inc.

    

7.625%, 4/15/31

    107,980,000      119,492,828

7.70%, 5/1/32

    79,490,000      88,317,762

Wyeth

    

5.50%, 2/1/14

    70,724,000      71,831,891

5.50%, 2/15/16

    10,665,000      10,838,658

5.45%, 4/1/17

    35,000,000      35,402,115

Xerox Corp.

    

7.125%, 6/15/10

    18,425,000      19,303,578

6.875%, 8/15/11

    135,655,000      141,912,630

6.40%, 3/15/16

    10,000,000      10,232,830
        
         2,126,986,132

TRANSPORTATION: 1.1%

Burlington Northern Santa Fe Corp.

    

4.30%, 7/1/13

    7,320,000      6,981,809

8.251%, 1/15/21

    1,350,058      1,566,648

4.967%, 4/1/23

    13,274,493      12,660,288

5.72%, 1/15/24

    25,818,507      25,888,679

5.629%, 4/1/24

    29,724,645      29,633,512

5.342%, 4/1/24

    19,387,326      19,018,238

5.996%, 4/1/24

    25,163,000      25,652,445

Consolidated Rail Corp.
6.76%, 5/25/15

    3,095,096      3,357,127

CSX Corp.
9.75%, 6/15/20

    5,351,000      6,908,515

FedEx Corp.
6.72%, 7/15/23

    16,722,122      17,914,088

Norfolk Southern Corp.

    

7.70%, 5/15/17

    13,000,000      14,721,226

9.75%, 6/15/20

    7,389,000      10,083,369

Union Pacific Corp.

    

6.125%, 1/15/12

    15,720,000      16,387,864

6.50%, 4/15/12

    3,550,000      3,752,400

5.375%, 5/1/14

    2,935,000      2,884,706

4.875%, 1/15/15

    8,320,000      7,930,033
    PAR VALUE     VALUE  

6.33%, 1/2/20

  $ 33,981,213     $ 36,197,506  

5.866%, 7/2/30

    36,921,430       40,041,291  

6.176%, 1/2/31

    23,175,000       24,729,527  
         
      306,309,271  
         
      3,731,617,459  
         

TOTAL FIXED INCOME SECURITIES
(Cost $8,915,379,385)

  

  $ 8,897,893,191  
         
SHORT-TERM INVESTMENTS: 1.1%  

MONEY MARKET FUND: 0.1%

 

SSgA Prime Money Market Fund

    25,547,179       25,547,179  

REPURCHASE AGREEMENT: 1.0%

 

Fixed Income Clearing Corporation(f)

3.75%, 1/2/08, maturity value

$276,971,690

    276,914,000       276,914,000  
         

TOTAL SHORT-TERM INVESTMENTS
(Cost $302,461,179)

  

  $ 302,461,179  
         

TOTAL INVESTMENTS
(Cost $23,430,033,485)

    100.0 %   $ 26,938,310,048  

OTHER ASSETS LESS LIABILITIES

    0.0 %     (5,936,851 )
               
NET ASSETS     100.0 %   $ 26,932,373,197  
               

 

(a)

Non-income producing

(b)

Security issued by a foreign entity, denominated in U.S. dollars

(c)

Cumulative preferred security

(d)

Security exempt from registration under Rule 144A of the Securities Act of 1933. The security may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of December 31, 2007, all such securities in total represented $149,173,009 or 0.6% of total net assets.

(e)

Rounds to 0.0%

(f)

Repurchase agreement is collateralized by Fannie Mae 3.875%, 7/15/08; Federal Home Loan Bank 4.97%, 8/18/08; Freddie Mac Discount Note 0.00%, 8/18/08; and U.S. Treasury Inflation-Indexed Note 0.875%, 4/15/10; total collateral value is $282,456,488.

(g)

Subsidiary (see Note below)

Note: Except as noted, investments are grouped by parent company. Actual securities may be issued by the listed parent company or one of its subsidiaries.

ADR: American Depository Receipt

ARM: Adjustable Rate Mortgage

CMO: Collateralized Mortgage Obligation

DUS: Delegated Underwriting and Servicing

REMIC: Real Estate Mortgage Investment Conduit


 

See accompanying Notes to Financial Statements   DODGE & COX BALANCED FUND § PAGE 10


STATEMENT OF ASSETS AND LIABILITIES

 

    December 31, 2007  

ASSETS:

 

Investments, at value (cost $23,430,033,485)

  $ 26,938,310,048  

Receivable for investments sold

    71,755,398  

Receivable for paydowns on
mortgage-backed securities

    2,995,102  

Receivable for Fund shares sold

    12,734,706  

Dividends and interest receivable

    123,475,975  

Prepaid expenses and other assets

    142,419  
       
    27,149,413,648  
       

LIABILITIES:

 

Payable for investments purchased

    60,714,418  

Payable for Fund shares redeemed

    143,211,503  

Management fees payable

    11,595,594  

Accrued expenses

    1,518,936  
       
    217,040,451  
       

NET ASSETS

  $ 26,932,373,197  
       

NET ASSETS CONSIST OF:

 

Paid in capital

  $ 22,990,831,971  

Undistributed net investment income

     

Undistributed net realized gain on investments

    433,264,663  

Net unrealized appreciation on investments

    3,508,276,563  
       
  $ 26,932,373,197  
       

Fund shares outstanding (par value $0.01 each, unlimited shares authorized)

    332,503,144  

Net asset value per share

    $81.00  

STATEMENT OF OPERATIONS

 

    Year Ended
December 31, 2007
 

INVESTMENT INCOME:

 

Dividends (net of foreign taxes of $3,923,512)

  $ 340,971,654  

Interest

    546,058,888  
       
    887,030,542  
       

EXPENSES:

 

Management fees

    142,298,069  

Custody and fund accounting fees

    419,917  

Transfer agent fees

    4,635,252  

Professional services

    160,819  

Shareholder reports

    2,074,697  

Registration fees

    337,288  

Trustees’ fees

    179,000  

Miscellaneous

    466,503  
       
    150,571,545  
       

NET INVESTMENT INCOME

    736,458,997  
       

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

 

Net realized gain

    1,956,206,007  

Net change in unrealized appreciation

    (2,205,494,423 )
       

Net realized and unrealized loss

    (249,288,416 )
       

NET INCREASE IN NET ASSETS
FROM OPERATIONS

  $ 487,170,581  
       

STATEMENT OF CHANGES IN NET ASSETS

 

    Year Ended
December 31, 2007
    Year Ended
December 31, 2006
 

OPERATIONS:

   

Net investment income

  $ 736,458,997     $ 636,379,100  

Net realized gain

    1,956,206,007       1,120,034,743  

Net change in unrealized appreciation

    (2,205,494,423 )     1,552,806,112  
               

Net increase in net assets
from operations

    487,170,581       3,309,219,955  
               

DISTRIBUTIONS TO
SHAREHOLDERS FROM:

  

 

Net investment income

    (755,711,777 )     (653,483,566 )

Net realized gain

    (1,662,945,292 )     (969,143,303 )
               

Total distributions

    (2,418,657,069 )     (1,622,626,869 )
               

FUND SHARE
TRANSACTIONS:

  

 

Proceeds from sale of shares

    3,783,203,996       3,661,818,984  

Reinvestment of distributions

    2,319,059,647       1,554,510,730  

Cost of shares redeemed

    (4,696,208,213 )     (3,056,236,439 )
               

Net increase from Fund
share transactions

    1,406,055,430       2,160,093,275  
               

Total increase (decrease) in
net assets

    (525,431,058 )     3,846,686,361  

NET ASSETS:

   

Beginning of year

    27,457,804,255       23,611,117,894  
               

End of year (including undistributed net investment income of $0 and $6,332,329, respectively)

  $ 26,932,373,197     $ 27,457,804,255  
               

SHARE INFORMATION:

   

Shares sold

    42,672,570       42,976,777  

Distributions reinvested

    27,828,536       17,977,977  

Shares redeemed

    (53,297,703 )     (35,942,189 )
               

Net increase in shares outstanding

    17,203,403       25,012,565  
               

 

PAGE 11 § DODGE & COX BALANCED FUND   See accompanying Notes to Financial Statements


NOTES TO FINANCIAL STATEMENTS

 

NOTE 1—ORGANIZATION AND SIGNIFICANT
ACCOUNTING POLICIES

Dodge & Cox Balanced Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The Fund commenced operations on June 26, 1931, and seeks regular income, conservation of principal and an opportunity for long-term growth of principal and income. Risk considerations and investment strategies of the Fund are discussed in the Fund’s Prospectus.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Significant accounting policies are as follows:

Security valuation The Fund’s net assets are valued as of the close of trading on the New York Stock Exchange (NYSE), generally 4:00 p.m. Eastern Time, each day that the NYSE is open for business. Stocks are valued at the official quoted close price or the last sale of the day at the close of the NYSE or, if not available, at the mean between the exchange-listed bid and ask prices for the day. A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Fixed income securities with original maturities of one year or more are priced on the basis of valuations furnished by pricing services which utilize both dealer-supplied valuations and computerized pricing models. Under certain circumstances, fixed income securities that are not valued by pricing services are temporarily valued by the investment manager utilizing both dealer-supplied valuations and computerized pricing models. Valuations of fixed income securities take into account appropriate factors such as institutional-size trading markets in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data and do not rely exclusively upon exchange or over-the- counter listed prices. Security values are not discounted

based on the size of the Fund’s position. Securities for which market quotations are not readily available are valued at fair value as determined in good faith by or at the direction of the Board of Trustees. Short-term securities are valued at amortized cost which approximates current value. All securities held by the Fund are denominated in U.S. dollars.

Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.

Dividend income and corporate action transactions are recorded on the ex-dividend date, except for certain dividends or corporate actions from foreign securities where the ex-dividend date may have passed, which are recorded as soon as the Fund is informed of the ex-dividend date. Withholding taxes on foreign dividends have been provided for in accordance with the Fund’s understanding of the applicable country’s tax rules and rates. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Distributions received in excess of income are recorded as a reduction of cost of investments and/or realized gain. The Fund may estimate the character of distributions received from Real Estate Investment Trusts (“REITs”).

Interest income is recorded on the accrual basis. Interest income includes coupon interest, amortization of premium and accretion of discount on debt securities, and gain/loss on paydowns of mortgage-backed securities. The ability of the issuers of the debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry, state or region. Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectibility of interest is reasonably assured.

Expenses are recorded on the accrual basis. Most expenses of the Trust can be directly attributed to a


 

DODGE & COX BALANCED FUND § PAGE 12


NOTES TO FINANCIAL STATEMENTS

 

specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust.

Distributions to shareholders are recorded on the ex-dividend date.

Repurchase agreements The Fund may enter into repurchase agreements secured by U.S. government and agency securities which involve the purchase of securities from a counterparty with a simultaneous commitment to resell the securities at an agreed-upon date and price. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the securities and to apply the proceeds in satisfaction of the obligation.

NOTE 2—RELATED PARTY TRANSACTIONS

Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays an annual management fee of 0.50% of the Fund’s average daily net assets to Dodge & Cox, investment manager of the Fund.

Fund officers and trustees All officers and three of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.

Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.

NOTE 3—INCOME TAX INFORMATION AND
DISTRIBUTIONS TO SHAREHOLDERS

A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to

shareholders. Distributions are determined in accordance with income tax regulations, which may differ from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character.

Book/tax differences are primarily due to differing treatments of net short-term realized gain and paydown loss. At December 31, 2007 investments for federal income tax purposes was equal to the cost for financial reporting purposes.

Distributions for the years ended December 31, 2007 and 2006 were characterized as follows for federal income tax purposes:

 

     2007   2006

Ordinary income

  $822,777,430   $677,362,327
  ($2.575 per share)   ($2.279 per share)

Long-term capital gain

  $1,595,879,639   $945,264,542
  ($5.072 per share)   ($3.124 per share)

At December 31, 2007, the tax basis components of distributable earnings were as follows:

 

Unrealized appreciation

   $ 4,325,387,512  

Unrealized depreciation

     (817,110,949 )
        

Net unrealized appreciation

     3,508,276,563  

Undistributed ordinary income

     4,759,571  

Undistributed long-term capital gain

     428,505,092  

NOTE 4—PURCHASES AND SALES OF INVESTMENTS

For the year ended December 31, 2007, purchases and sales of securities, other than short-term securities and U.S. government securities, aggregated $6,688,712,590 and $5,206,885,650 respectively. For the year ended December 31, 2007, purchases and sales of U.S. government securities aggregated $1,936,129,404 and $2,550,079,011, respectively.


 

PAGE 13 § DODGE & COX BALANCED FUND


NOTES TO FINANCIAL STATEMENTS

 

NOTE 5—ACCOUNTING PRONOUNCEMENTS

Effective June 29, 2007, the Fund adopted, the Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements. At December 31, 2007, FIN 48 was applied to the period from January 1, 2004 through December 31, 2007, the open tax years subject to regulatory examination. There was no impact to the Fund’s financial statements as a result of applying FIN 48.

In September 2006, FASB issued “Statement of Financial Accounting Standards No. 157, Fair Value Measurements” (SFAS 157). SFAS 157 is effective for the Fund beginning January 1, 2008. It defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Fund’s financial statement disclosures; however, it is not expected to have a material impact on the Fund’s net assets or results of operations.

FINANCIAL HIGHLIGHTS

 

SELECTED DATA AND RATIOS

(for a share outstanding throughout each year)

     Year Ended December 31,  
       2007      2006      2005      2004      2003  
        

Net asset value, beginning of year

     $87.08      $81.34      $79.35      $73.04      $60.75  

Income from investment operations:

                

Net investment income

     2.35      2.21      1.84      1.60      1.66  

Net realized and unrealized gain (loss)

     (0.78 )    8.93      3.31      7.99      12.96  
        

Total from investment operations

     1.57      11.14      5.15      9.59      14.62  
        

Distributions to shareholders from:

                

Net investment income

     (2.37 )    (2.20 )    (1.84 )    (1.60 )    (1.66 )

Net realized gain

     (5.28 )    (3.20 )    (1.32 )    (1.68 )    (0.67 )
        

Total distributions

     (7.65 )    (5.40 )    (3.16 )    (3.28 )    (2.33 )
        

Net asset value, end of year

     $81.00      $87.08      $81.34      $79.35      $73.04  
        

Total return

     1.74 %    13.84 %    6.59 %    13.31 %    24.44 %

Ratios/supplemental data:

                

Net assets, end of year (millions)

     $26,932      $27,458      $23,611      $20,741      $13,196  

Ratios of expenses to average net assets

     0.53 %    0.52 %    0.53 %    0.54 %    0.54 %

Ratios of net investment income to average net assets

     2.59 %    2.52 %    2.15 %    1.97 %    2.40 %

Portfolio turnover rate

     27 %    20 %    18 %    18 %    19 %

See accompanying Notes to Financial Statements

 

DODGE & COX BALANCED FUND § PAGE 14


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Trustees of Dodge & Cox Funds and Shareholders of Dodge & Cox Balanced Fund

In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Dodge & Cox Balanced Fund (the “Fund”, one of the series constituting Dodge & Cox Funds) at December 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2007 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 14, 2008

 

 

 

SPECIAL 2007 TAX INFORMATION

(unaudited)

The following information is provided pursuant to provisions of the Internal Revenue Code:

The Fund designates $349,155,342 of its distributions paid to shareholders in 2007 as qualified dividends (treated for federal income tax purposes in the hands of shareholders as taxable at a maximum rate of 15%).

For shareholders that are corporations, the Fund designates 32% of its ordinary dividends (including short-term gains) paid to shareholders in 2007 as dividends from domestic corporations eligible for the corporate dividends received deduction, provided that the shareholder otherwise satisfies applicable requirements to claim that deduction.

BOARD APPROVAL OF FUNDS’
INVESTMENT MANAGEMENT
AGREEMENTS AND MANAGEMENT FEES

(unaudited)

The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment

manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 19, 2007, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2008. During the course of the year, the Board received a wide variety of materials relating to the services provided by Dodge & Cox and the performance of the Funds.

INFORMATION RECEIVED

In advance of the meeting, the Board, including each of the Independent Trustees, requested, received and reviewed materials relating to the Agreements. The Independent Trustees retained Morningstar® to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers


 

PAGE 15 § DODGE & COX BALANCED FUND


identified by Morningstar®. The Morningstar® materials included information regarding advisory fee rates, expense ratios, and transfer agency, custodial and distribution expenses, as well as performance comparisons to an appropriate index or combination of indices. The materials reviewed by the Board also included information concerning Dodge & Cox’s profitability, financial results and condition, including advisory fee revenue and separate account advisory fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates and sales and redemption data for the Funds, including “soft dollar” payments made for research benefiting the Funds and other accounts managed by Dodge & Cox, and brokerage commissions and expenses paid by Dodge & Cox. Other aspects of Dodge & Cox’s services to the Funds which were reviewed included compliance and supervision of third-party service providers (e.g., custodian, fund accountant, transfer agent and state registration administrator), shareholder servicing, accounting and administrative services, web services, the character of non-advisory services, the record of compliance with the Funds’ investment policies and restrictions and the Funds’ Code of Ethics, investment management staffing and biographies, information furnished to investors and shareholders (including the Funds’ Prospectus, Statement of Additional Information, shareholder reports, and quarterly reports), and third-party retirement plan administrator reimbursements by Dodge & Cox for the same periods.

The Board received copies of the Agreements and a memorandum from the Independent Legal Counsel to the Independent Trustees, discussing the factors generally regarded as appropriate to consider in evaluating advisory arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the Independent Legal Counsel on December 3, 2007 and again on December 19, 2007 to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements.

In considering the Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or

controlling. In reaching the decision to approve the Agreements, the Board, which was advised by Independent Legal Counsel, considered the following factors, among others, and reached the conclusions described below.

NATURE, QUALITY, AND EXTENT
OF THE SERVICES

The Board considered that Dodge & Cox provides a wide range of services to the Funds in addition to portfolio management and that the quality of these services has been excellent in all respects. The extensive nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality and extent of portfolio management, administrative and shareholder services performed by Dodge & Cox, including: Dodge & Cox’s established long-term history of care and conscientiousness in the management of the Funds; demonstrated consistency in investment approach and depth, background and experience of the Dodge & Cox Investment Policy Committee, International Investment Policy Committee, Fixed Income Investment Policy Committee and research analysts responsible for managing the Funds; Dodge & Cox’s organizational structure; Dodge & Cox’s performance in the areas of compliance, administration and shareholder communication and services, supervision of Fund operations and general oversight of other service providers; favorable peer group comparisons of expense ratios, management fee comparisons, expenses (e.g., transfer agent, custody and other fees and expenses) and asset comparisons and performance and risk summaries prepared independently by Morningstar® and favorable fiduciary grade and “Star” rankings by Morningstar®. The Board concluded that it was satisfied with the nature, extent and quality of investment management and other services provided to the Funds by Dodge & Cox.

INVESTMENT PERFORMANCE

The Board considered short-term and long-term investment performance for each Fund (including periods of outperformance or underperformance) as compared to both relevant indices and the performance of such Fund’s


 

DODGE & COX BALANCED FUND § PAGE 16


peer group. In light of recent market volatility, the Board also reviewed recent performance in the context of long-term investment goals. The performance information prepared by Morningstar® and Dodge & Cox demonstrated consistently favorable performance over the long term in keeping with the stated goals in the Prospectus. The Board considered that the performance of the Funds is the result of a team-oriented investment management process that emphasizes a long-term investment horizon, independence, comprehensive research, price discipline and focus. The Board also noted that the investment performance delivered by Dodge & Cox to the Funds appeared to be consistent with the performance delivered for other (non-fund) clients of Dodge & Cox. The Board concluded that Dodge & Cox delivers favorable performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.

COSTS AND ANCILLARY BENEFITS

Costs of Services to Funds: Fees and Expenses. The Board considered each Fund’s management fee rates and expense ratios relative to industry averages for similar mutual funds and relative to management fees charged by Dodge & Cox to other (non-fund) clients. The Board evaluated the operating structures of the Funds and Dodge & Cox, including the following: Dodge & Cox has a centralized focus on investment management operations and derives revenue solely from management fees; its outsourcing of non-advisory support services to unaffiliated third-party service providers is efficient and less costly to investors; Dodge & Cox does not charge front-end sales commissions or distribution fees and bears all third party research and distribution-related costs as well as reimbursements to third-party retirement plan administrators; the Funds receive numerous administrative, regulatory compliance, and shareholder support services from Dodge & Cox without any additional administrative fee; and the fact that the Funds have relatively low transaction costs and portfolio turnover rates. The Board noted that the Funds are substantially below peer group averages in expense ratios and management fee rates and that many media and industry reports specifically comment on the low expense ratios of Dodge & Cox, which along

with excellent performance, has been a defining characteristic of Dodge & Cox for many years. The Board also noted that the range of services under the Agreements is much more extensive than under Dodge & Cox’s separate advisory (non-fund) client agreements and that many of the separate accounts were opened decades ago when fees were lower, and considered that, when coupled with the greater risks and regulatory burdens associated with the high profile mutual fund business, there is reasonable justification for differences in fee rates charged between the two lines of business. The Board concluded that costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation and performance of Dodge & Cox and the low overall expense ratios of the Funds.

Profitability and Costs of Services to Dodge & Cox; “Fall-out” Benefits. The Board reviewed reports of Dodge & Cox’s financial position, profitability and estimated overall value, and they considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the favorable services provided. The Board considered recent increases to Dodge & Cox’s gross revenues, and noted the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that revenues reflect the continued success of the Funds and that such revenues are not generated by fees that are high compared to its peers. They noted that Dodge & Cox’s profitability is enhanced due to its efficient internal business model, and that the compensation/profit structure at Dodge & Cox is vital for remaining independent and facilitating retention of its management and investment professionals. The Board considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers) that Dodge & Cox might receive in its association with the Funds. The Board also noted the extent of additional administrative services performed by Dodge & Cox for the Funds, and that the magnitude of costs and risks borne by Dodge & Cox in rendering


 

PAGE 17 § DODGE & COX BALANCED FUND


advisory services to the Funds (including risks in the compliance, securities valuation and investment management processes) are continuing to increase. The Board concluded that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) was fair and reasonable.

THE BENEFIT OF ECONOMIES OF SCALE

The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the management fee rate is reasonable in relation to the Fund assets and any economies of scale that may exist. The Board noted that the considerable efficiencies of the Funds’ organization and fee structure have been realized by shareholders at the outset of their investment (i.e., from the first dollar), as a result of management fee rates that start lower than industry and many peer group averages and management fees and overall expense ratios that are lower than averages for peer group funds with approximately the same level of assets. Shareholders also realize efficiencies from the outset of their investment due to organizational efficiencies derived from Dodge & Cox’s investment management process and the avoidance of distribution and marketing structures whose costs would ultimately be borne by shareholders of the Funds. The Board noted that Dodge & Cox’s internal costs of providing investment management, administrative and compliance services to the Funds are continuing to increase. The Board’s decision to renew the Agreements was made after consideration of economies of scale and review of comparable fund expense ratios and historical expense ratio patterns for the Funds. Their review also included consideration of the desirability of adding breakpoints to the Funds’ fee schedules. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately reflects economies of scale.

 

CONCLUSION

Based on their evaluation of all material factors and assisted by the advice of Independent Legal Counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the advisory fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that the scope and quality of Dodge & Cox’s services has provided substantial value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.

FUND HOLDINGS

The Fund provides a complete list of its holdings four times each fiscal year, as of the end of each quarter. The lists appear in the Fund’s First Quarter, Semi-Annual, Third Quarter and Annual Reports to shareholders. The Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-CSR (second and fourth quarters) and Form N-Q (first and third quarters). Shareholders may view the Fund’s Forms N-CSR and N-Q on the SEC’s website at www.sec.gov. Forms N-CSR and N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by 1-202-942-8090 (direct) or 1-800-732-0330 (general SEC number). A complete list of the Fund’s quarter-end holdings is also available at www.dodgeandcox.com on or about 15 days following each quarter end and remains available on the web site until the list is updated in the subsequent quarter.

PROXY VOTING

For a free copy of the Fund’s proxy voting policies and procedures, please call 1-800-621-3979, visit the Fund’s web site at www.dodgeandcox.com or visit the SEC’s web site at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ending June 30 is also available at www.dodgeandcox.com or at www.sec.gov.


 

DODGE & COX BALANCED FUND § PAGE 18


DODGE & COX FUNDS—EXECUTIVE OFFICER & TRUSTEE INFORMATION

 

Name (Age) and
Address*
  Position with Trust
(Year of Election or
Appointment)
  Principal Occupation During Past 5 Years   Other Directorships Held by Trustees
INTERESTED TRUSTEES & OFFICERS

John A. Gunn

(64)

 

Chairman and

Trustee
(Trustee since 1985)

  Chairman (since 2007), Chief Executive Officer (since 2005) and Director of Dodge & Cox, Portfolio Manager and member of Investment Policy Committee (IPC), Fixed Income Investment Policy Committee (FIIPC) and International Investment Policy Committee (IIPC)  

Kenneth E. Olivier

(55)

  President and Trustee (Trustee since 2005)   President (since 2005) and Director of Dodge & Cox, Portfolio Manager and member of IPC  

Dana M. Emery

(46)

 

Senior Vice President and Trustee

(Trustee since 1993)

  Executive Vice President (since 2005) and Director of Dodge & Cox, Manager of the Fixed Income Department, Portfolio Manager and member of FIIPC  

Charles F. Pohl

(50)

  Senior Vice President (Officer since 2004)   Senior Vice President and Director of Dodge & Cox, Chief Investment Officer (since 2007), Director of Credit Research, Portfolio Manager, Investment Analyst and member of IPC, IIPC (since 2007) and FIIPC  

Diana S. Strandberg

(48)

  Senior Vice President (Officer since 2005)   Vice President of Dodge & Cox, Portfolio Manager and member of IPC and IIPC  

David H. Longhurst

(50)

 

Treasurer

(Officer since 2006)

  Fund Administration and Accounting Senior Manager of Dodge & Cox (since 2004); Vice President, Treasurer, Controller and Secretary of Safeco Mutual Funds, Safeco Asset Management Company, Safeco Services, Safeco Securities, and Safeco Investment Services (2000-2004)  

Thomas M. Mistele

(54)

  Secretary
(Officer since 2000)
  Chief Operating Officer (since 2004), Director (since 2005), Secretary and General Counsel of Dodge & Cox  

Marcia P. Venegas

(39)

  Chief Compliance Officer
(Officer since 2004)
  Chief Compliance Officer of Dodge & Cox (since 2005), Compliance Officer of Dodge & Cox (2003-2004)  
INDEPENDENT TRUSTEES

William F. Ausfahl

(67)

 

Trustee

(Since 2002)

 

CFO, The Clorox Co. (1982-1997);

Director, The Clorox Co. (1984-1997)

 

L. Dale Crandall

(66)

 

Trustee

(Since 1999)

  President, Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals (2000-2002); Senior Vice President—Finance and Administration & CFO, Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals (1998-2000)   Director, Union BanCal Corporation (bank holding company) and Union Bank of California (commercial bank) (2001-Present); Director, Covad Communications Group (broadband communications services) (2002-Present); Director, Ansell Limited (medical equipment and supplies) (2002-Present); Director, BEA Systems, Inc. (software and programming) (2003-Present); Director, Coventry Health Care, Inc. (managed health care) (2004-Present); Director, Metavante Technologies, Inc. (software) (2007 to present); Director, Serena Software, Inc. (software) (2007 to present)

Thomas A. Larsen

(58)

 

Trustee

(Since 2002)

  Director in Howard, Rice, Nemerovski, Canady, Falk & Rabkin (law firm)  

John B. Taylor

(61)

 

Trustee

(Since 2005)

  Professor of Economics, Stanford University; Senior Fellow, Hoover Institution; Under Secretary for International Affairs, United States Treasury (2001-2005)  

Will C. Wood

(68)

 

Trustee

(Since 1992)

  Principal, Kentwood Associates, Financial Advisers   Director, Banco Latinoamericano de Exportaciones S.A. (Latin American foreign trade bank) (1999-Present)

 

*  

The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all four series in the Dodge & Cox Funds complex and serves for an indefinite term.

Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Fund’s website at www.dodgeandcox.com or calling
1-800-621-3979.

 

PAGE 19 § DODGE & COX BALANCED FUND


LOGO     LOGO

 

Income Fund

 

www.dodgeandcox.com

For Fund literature, transactions and account

information, please visit the Funds’ web site.

or write or call:

DODGE & COX FUNDS

c/o Boston Financial Data Services

P.O. Box 8422

Boston, Massachusetts 02266-8422

(800) 621-3979

INVESTMENT MANAGER

Dodge & Cox

555 California Street, 40th Floor

San Francisco, California 94104

(415) 981-1710

This report is submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless it is accompanied by a current prospectus.

This report reflects our views, opinions and portfolio holdings as of December 31, 2007, the end of the reporting period. Any such views are subject to change at any time based upon market or other conditions and Dodge & Cox disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Dodge & Cox Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Dodge & Cox Fund.

12/07 IF AR    LOGO   Printed on recycled paper

2007    

Annual Report

December 31, 2007

Income Fund

ESTABLISHED 1989

TICKER:  DODIX



TO OUR SHAREHOLDERS

 

The Dodge & Cox Income Fund had a total return of 4.7% for 2007, compared to 7.0% for the Lehman Brothers Aggregate Bond Index (LBAG). Longer-term returns can be found on page three. At year end, the Fund had net assets of $15.9 billion with a cash position of 4.3%.

Financial markets were particularly volatile in the second half of 2007, primarily related to issues surrounding subprime mortgage lending and falling home prices. While the Fund had no direct subprime Mortgage-Backed Securities (MBS) exposure, it was significantly impacted by the effect the subprime crisis had on Corporate and high quality Agency MBS. In this volatile and uncertain environment, the safe and liquid U.S. Treasury sector posted strong returns, outperforming all other major sectors of the U.S. bond market. In contrast, Corporate bonds and MBS, as measured by Lehman Brothers indices, registered their worst-ever annual returns relative to Treasuries. The Lehman Treasury Index returned 9.0% for the year, while the Lehman (investment grade) Corporate Index returned 4.6% and the Lehman MBS Index (100% Government or Government Sponsored Enterprise (GSE)-guaranteed securities) returned 6.9%.

SUBPRIME MORTGAGE RECAP

In the spring of 2007, delinquencies on recently-originated subprime mortgage loans began rising at an unprecedented rate. This led to significant price declines of subprime MBS and related derivative securities [e.g., Collateralized Debt Obligations (CDOs)] due to increased loss expectations, some forced selling by entities holding them, and vastly reduced liquidity. Rating agencies downgraded thousands of subprime MBS and related securities and belatedly acknowledged the risks associated with them.

Subprime concerns spilled over into other markets for a variety of reasons. For one, there has been a lack of transparency about which entities have subprime mortgage exposure and in what quantity, as subprime MBS became the building blocks for a wide variety of often complex financial instruments. In addition, losses related to troubled mortgage loans take time to be realized

as the process of loan delinquency, foreclosure, forced sale and realized loss runs its course. In fact, most of the announcements regarding subprime-related losses were estimates of losses that will not be realized for months or even years. This has added considerably to the uncertainty in estimating total losses. Finally, companies in the Financials sector have been weakened by the subprime-related turmoil because many have retained exposure on their balance sheets, brought exposures back onto their balance sheets, and/or have subprime-related securities in their investment portfolios. Taken together, these effects have put additional pressure on an already declining housing market, sparked the risk of credit rationing from retrenching financial institutions, and raised the specter of broader economic weakness.

2007 PERFORMANCE REVIEW

The Fund underperformed the LBAG by 2.3% for the year. Much of the “collateral damage” inflicted by the subprime turmoil on the Fund’s 2007 performance has come in the form of a dramatic underperformance by corporate securities (particularly lower-rated ones) over the last six months of the year. Even corporate issuers whose businesses are unrelated to the mortgage or housing industries have been significantly affected. Investors are concerned that tighter credit conditions, higher relative corporate borrowing costs, and a general slowing of economic growth could reduce corporate profits and borrowers’ ability to repay debt. As the Fund entered the second half of 2007 with an overweight of corporate securities, their poor performance detracted from the Fund’s relative performance. In addition, several of the Fund’s corporate holdings were meaningfully affected. In particular, the bonds of Ford Motor Credit and GMAC (together comprising 5.5% of the Fund) performed very poorly, as did holdings of Dillard’s Department Stores. Further, the difficulties experienced by the Financials sector led to significant underperformance for holdings of Kaupthing Bank, JP Morgan Chase, HSBC and Bank of America.

The Fund’s mortgage-related investments are in Government or GSE-guaranteed “prime” MBS, predominantly the latter. Despite the Fannie Mae or


 

PAGE 1 § DODGE & COX INCOME FUND


Freddie Mac guarantee of timely payment of principal and interest on these securities1, the GSE-guaranteed MBS market was not immune from the turmoil and substantially trailed Treasury returns in 2007. MBS yield premiums relative to Treasuries approximately doubled over the second half of the year, rising to levels last seen in 2001. Since MBS comprise nearly half (over 47%) of the Fund, the weak performance from this sector detracted from relative returns as well.

Finally, the Fund’s duration (a measure of a bond portfolio’s price exposure to changing interest rates) was lower than the LBAG throughout 2007, a positioning largely achieved by holding much shorter Treasury securities than the LBAG. As interest rates fell, this positioning meant that the Fund’s U.S. Treasury holdings participated to a much smaller degree in the strong Treasury rally in the second half of the year than did the Treasuries in the LBAG.

On the positive side, the Fund’s nominal yield advantage translated into a greater income stream than the LBAG and added to relative returns.

INVESTMENT STRATEGY

Our investment approach is characterized by a three-to-five year investment horizon, independent research of the fundamental and structural properties of each investment, and a focus on the income component of total return. This approach typically leads us to overweight the higher-yielding Corporate and MBS sectors of the bond market. In the wake of their substantial underperformance during the second half of 2007, we believe that the current valuation of many securities in these sectors is very attractive. In addition, the higher yield premiums offered by these securities have created a large yield advantage at year end for the Fund relative to the LBAG.

We made a number of portfolio changes in 2007, primarily during the second half of the year. Among corporate securities, we selectively increased the Fund’s weighting. We initiated positions in eight new companies, three of them banks or finance companies, as we sought to take advantage of the broad weakness of this sector to establish positions in companies with dominant franchises and good long-term prospects. We also added to several

existing holdings at substantially more attractive valuations. The net result of these changes was a 4.0% increase in the Corporate weighting, to 34.6% of the Fund. The Fund features 40 corporate issuers representing over 15 distinct industries, providing a substantial amount of economic diversification. The yield-to-maturity of this portion of the Fund is 7.2% (compared to approximately 4% for the Treasury sector), offering attractive income generation potential2. A slowing or shrinking U.S. economy does increase the risk of lending to corporations; however, the magnitude of current yield premiums would seem to reward the corporate bond investor well for taking these risks. Importantly, we spend a significant amount of our time understanding the companies we invest in and examining their ability to withstand difficult operating environments. While no guarantee, these efforts have allowed the Fund to navigate past periods of stress, be they macroeconomic or related to a specific industry or company.

Within the MBS sector, we increased the Fund’s holdings of GSE-guaranteed MBS by 4.7% to 47.3%. In our view, these securities were very attractively priced, particularly given that the principal and interest payments are guaranteed by Fannie Mae or Freddie Mac. Therefore, we do not believe there is significant credit risk in this part of the Fund. Further, we expect a more muted prepayment response to the low absolute level of interest rates than otherwise might be the case, as the mortgage lending environment is tighter than at any point in recent history. Despite these attributes, yield premiums for GSE-guaranteed MBS have doubled over the past six months. We are encouraged by the relative prospects for this part of the Fund.

We continue to position the Fund with a shorter duration than that of the LBAG. Anticipating economic weakness, a recession, or worse, fixed income investors have pushed U.S. Treasury rates down to levels last seen in 2003, when the world was a far different place. Back then, global economic growth was sluggish, disinflation ruled the day, and there was legitimate concern over the possibility of deflation. As we survey the situation at the end of 2007, the inflation outlook is not nearly as benign, despite the near-term slowdown in the economy. A trip to the gas station or supermarket provides ample evidence of


 

DODGE & COX INCOME FUND § PAGE 2


this. Outside of these more volatile items, “core” consumer inflation remains at or above 2%, approximately double the rate four years ago. In fact, using current market expectations for inflation over the next ten years (2.3% per the Treasury Inflation-Protected Securities market), the investor in 10-year U.S. Treasuries has the opportunity to lock in a “real” (i.e., after-inflation) return of 1.7% for that period. We find this potential return unappealing and believe that interest rates are likely to rise from these low levels.

The Fund’s Treasury holdings continue to be short in maturity, protecting them from significant price declines if interest rates do rise. The longer-maturity holdings in the Fund are corporate securities with far more substantial income streams to mitigate the price declines associated with rising interest rates.

IN CLOSING

In this market environment we are guided by our investment compass: investing with an extended time horizon, focusing intensely on individual company research and structural analysis, paying close attention to the risks associated with each investment, and exercising price discipline. This fundamental approach has served the Fund well over many market cycles, and we will continue to utilize it diligently on your behalf in the years ahead.

Thank you for your continued confidence in our firm as a shareholder of the Dodge & Cox Income Fund. As always, we welcome your comments and questions.

For the Board of Trustees,

 

LOGO

 

LOGO

John A. Gunn,

Chairman

  Dana M. Emery, Vice President

February 14, 2008

 

 

1

 

The U.S. Government does not guarantee the Fund’s shares, yield and net asset value. The guarantee does not eliminate market risk.

2

 

“Yield-to-maturity” is the return anticipated if the bond is held to the maturity date. The Fund’s actual SEC yield may be substantially different.

GROWTH OF $10,000 OVER 10 YEARS

FOR AN INVESTMENT MADE ON DECEMBER 31, 1997

LOGO

AVERAGE ANNUAL TOTAL RETURN

FOR PERIODS ENDED DECEMBER 31, 2007

 

     1 Year     5 Years     10 Years  
     

Dodge & Cox Income Fund

  4.68 %   4.31 %   6.00 %

Lehman Brothers
Aggregate Bond Index (LBAG)

  6.96     4.42     5.97  

Past performance does 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. Performance is updated and published monthly. Visit the Fund’s web site at www.dodgeandcox.com or call 1-800-621-3979 for current performance figures.

The Fund’s 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. The Lehman Brothers Aggregate Bond Index is an unmanaged index of investment-grade fixed income securities. Index returns include dividends and/or interest income and, unlike Fund returns, do not reflect fees or expenses.

Lehman Brothers® is a trademark of Lehman Brothers, Inc.


 

PAGE 3 § DODGE & COX INCOME FUND


FUND EXPENSE EXAMPLE

As a Fund shareholder, you incur ongoing Fund costs, including management fees and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following example shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The example assumes a $1,000 investment held for the six months indicated.

ACTUAL EXPENSES

The first line of the table below provides information about actual account values and expenses based on the Fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER MUTUAL FUNDS

Information on the second line of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% annual rate of return before expenses (not the Fund’s actual return). The amount under the heading “Expense Paid During the Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other mutual funds.

 

Six Months Ended

December 31, 2007

   Beginning Account
Value 7/1/2007
   Ending Account
Value 12/31/2007
   Expenses Paid
During Period*

Based on Actual Fund Return

   $ 1,000.00    $ 1,034.40    $ 2.24

Based on Hypothetical 5% Yearly Return

     1,000.00      1,023.01      2.22
*  

Expenses are equal to the Fund’s annualized six-month expense ratio of 0.44%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

The expenses shown in the table highlight ongoing costs only and do not reflect any transactional fees or account maintenance fees. While other mutual funds may charge such fees, please note that the Fund does not charge transaction fees (e.g., redemption fees, sales loads) or universal account maintenance fees (e.g., small account fees).

 

DODGE & COX INCOME FUND § PAGE 4


FUND INFORMATION   December 31, 2007

 

GENERAL INFORMATION      

Net Asset Value Per Share

   $12.51

Total Net Assets (billions)

   $15.9

30-Day SEC Yield(a)

   5.53%

2007 Expense Ratio

   0.44%

2007 Portfolio Turnover Rate

   27%

Fund Inception

   1989

No sales charges or distribution fees

  

Investment Manager: Dodge & Cox, San Francisco. Managed by the Fixed Income Investment Policy Committee, whose nine members’ average tenure at Dodge & Cox is 18 years, and by the Investment Policy Committee, whose 12 members’ (for fixed income decisions) average tenure is 21 years.

 

PORTFOLIO CHARACTERISTICS    Fund    LBAG

Number of Fixed Income Securities

   471    9193

Effective Maturity (years)

   6.2    7.1

Effective Duration (years)

   3.8    4.4

 

FIVE LARGEST CORPORATE ISSUERS(c)    Fund  

GMAC, LLC

   2.8 %

Ford Motor Credit Co.

   2.7  

Time Warner, Inc.

   2.2  

HCA, Inc.

   2.2  

Comcast Corp.

   1.6  

 

CREDIT QUALITY(d)    Fund     LBAG  

U.S. Government & Government Related

   59.0 %   70.6 %

Aaa

   2.3     8.6  

Aa

   6.9     5.3  

A

   5.6     8.2  

Baa

   11.9     7.3  

Ba

   4.7     0.0  

B

   3.2     0.0  

Caa

   2.1     0.0  

Cash Equivalents

   4.3     0.0  

Average Quality

   Aa2     Aa1  

ASSET ALLOCATION

 

LOGO

 

 

SECTOR DIVERSIFICATION    Fund     LBAG  

U.S. Treasury & Government Related

   11.7 %   32.0 %

Mortgage-Related Securities

   47.4     38.6  

Asset-Backed Securities/CMBS(b)

   2.0     6.5  

Corporate

   34.6     19.6  

Non-Corporate Yankee

   0.0     3.3  

Cash Equivalents

   4.3     0.0  

 

MATURITY DIVERSIFICATION    Fund     LBAG  

0-1 Years to Maturity

   10.3 %   0.0 %

1-5

   48.9     45.8  

5-10

   29.4     42.7  

10-15

   1.5     3.0  

15-20

   1.0     2.3  

20-25

   6.7     2.6  

25 and Over

   2.2     3.6  

 

 

 

(a)

 

SEC yield is an annualization of the Fund’s total net investment income per share for the 30-day period ended on the last day of the month.

(b)

 

CMBS refers to commercial mortgage-backed securities, which are a component of the LBAG but not currently held by the Fund.

(c)

 

The Fund’s portfolio holdings are subject to change without notice. The mention of specific securities is not a recommendation or solicitation for any person to buy, sell or hold any particular security.

(d)

 

The Fund’s credit quality ratings are from Moody’s Investor Services. If no Moody’s rating is available, the Standard & Poor’s rating is reported. If unrated, the investment manager determines a comparable rating. The LBAG’s credit quality ratings are from Lehman Brothers and reference Moody’s, Standard & Poor’s and Fitch ratings. The LBAG’s methodology for calculating average credit quality differs from that used by the Fund. Applying the LBAG methodology, the Fund’s average credit quality would be Aa3. The credit quality of the investments in the portfolio does not apply to the stability or safety of the Fund or its shares.

 

PAGE 5 § DODGE & COX INCOME FUND


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

FIXED INCOME SECURITIES: 95.7%
    PAR VALUE   VALUE
U.S. TREASURY AND GOVERNMENT RELATED: 11.7%

U.S. TREASURY: 8.8%

   

U.S. Treasury Notes

   

3.00%, 2/15/08

  $    150,000,000   $    149,941,350

4.875%, 4/30/08

    175,000,000     175,847,700

3.25%, 8/15/08

    200,000,000     199,906,200

3.125%, 10/15/08

    325,000,000     324,441,325

3.25%, 1/15/09

    300,000,000     300,515,700

4.75%, 2/28/09

    250,000,000     254,609,500
       
      1,405,261,775

GOVERNMENT RELATED: 2.9%

   

Small Business Administration — 504 Program

Series 91-20K, 8.25%, 11/1/11

    192,042     195,180

Series 92-20B, 8.10%, 2/1/12

    232,166     235,115

Series 92-20C, 8.20%, 3/1/12

    484,898     492,012

Series 92-20D, 8.20%, 4/1/12

    410,480     417,230

Series 92-20G, 7.60%, 7/1/12

    858,594     869,721

Series 92-20H, 7.40%, 8/1/12

    542,208     549,691

Series 92-20I, 7.05%, 9/1/12

    681,452     690,912

Series 92-20J, 7.00%, 10/1/12

    1,038,318     1,053,792

Series 92-20K, 7.55%, 11/1/12

    1,012,691     1,031,510

Series 92-20L, 7.45%, 12/1/12

    464,869     473,867

Series 93-20B, 7.00%, 2/1/13

    728,724     739,959

Series 93-20C, 6.50%, 3/1/13

    2,462,651     2,496,692

Series 93-20D, 6.75%, 4/1/13

    819,131     832,358

Series 93-20E, 6.55%, 5/1/13

    3,210,662     3,261,767

Series 93-20F, 6.65%, 6/1/13

    941,899     958,373

Series 93-20L, 6.30%, 12/1/13

    1,474,055     1,500,620

Series 94-20A, 6.50%, 1/1/14

    1,839,362     1,872,177

Series 94-20D, 7.70%, 4/1/14

    444,150     459,840

Series 94-20E, 7.75%, 5/1/14

    1,795,497     1,851,480

Series 94-20F, 7.60%, 6/1/14

    1,098,578     1,133,024

Series 94-20G, 8.00%, 7/1/14

    873,210     900,737

Series 94-20H, 7.95%, 8/1/14

    709,514     732,607

Series 94-20I, 7.85%, 9/1/14

    924,820     955,503

Series 94-20K, 8.65%, 11/1/14

    713,698     743,863

Series 94-20L, 8.40%, 12/1/14

    651,210     678,484

Series 95-20A, 8.50%, 1/1/15

    208,320     216,497

Series 95-20C, 8.10%, 3/1/15

    593,146     616,395

Series 97-20E, 7.30%, 5/1/17

    1,381,811     1,440,539

Series 97-20J, 6.55%, 10/1/17

    1,842,263     1,903,229

Series 98-20C, 6.35%, 3/1/18

    8,051,287     8,302,902

Series 98-20H, 6.15%, 8/1/18

    2,680,548     2,758,338

Series 98-20L, 5.80%, 12/1/18

    1,486,336     1,521,656

Series 99-20C, 6.30%, 3/1/19

    1,903,488     1,961,615

Series 99-20G, 7.00%, 7/1/19

    4,365,907     4,572,275

Series 99-20I, 7.30%, 9/1/19

    1,391,248     1,466,362

Series 01-20G, 6.625%, 7/1/21

    10,912,618     11,607,666

Series 01-20L, 5.78%, 12/1/21

    24,008,449     24,787,226

Series 02-20L, 5.10%, 12/1/22

    6,031,874     6,047,266

Series 04-20L, 4.87%, 12/1/24

    7,181,194     7,143,194

Series 05-20B, 4.625%, 2/1/25

    9,871,706     9,723,414
    PAR VALUE   VALUE

Series 05-20C, 4.95%, 3/1/25

  $      6,685,999   $        6,578,135

Series 05-20E, 4.84%, 5/1/25

    18,834,614     18,468,513

Series 05-20G, 4.75%, 7/1/25

    17,879,053     17,552,851

Series 05-20I, 4.76%, 9/1/25

    20,436,442     20,186,592

Series 06-20A, 5.21%, 1/1/26

    20,650,132     20,923,586

Series 06-20B, 5.35%, 2/1/26

    5,992,769     6,125,707

Series 06-20C, 5.57%, 3/1/26

    30,759,591     31,638,648

Series 06-20G, 6.07%, 7/1/26

    52,838,683     55,471,455

Series 06-20J, 5.37%, 10/1/26

    17,627,818     17,951,509

Series 06-20L, 5.12%, 12/1/26

    13,798,644     13,891,088

Series 07-20A, 5.32%, 1/1/27

    27,830,504     28,275,670

Series 07-20C, 5.23%, 3/1/27

    42,213,896     42,327,464

Series 07-20D, 5.32%, 4/1/27

    42,638,697     43,081,168

Series 07-20G, 5.82%, 7/1/27

    30,445,000     31,602,163
       
      463,269,637
       
      1,868,531,412
MORTGAGE-RELATED SECURITIES: 47.4%

FEDERAL AGENCY CMO & REMIC: 3.3%

Dept. of Veterans Affairs

   

Trust 1995-2D 4A, 9.293%, 5/15/25

    404,942     444,198

Trust 1997-2Z, 7.50%, 6/15/27

    29,415,632     31,508,752

Trust 1998-1 1A, 8.177%, 10/15/27

    1,111,754     1,198,719

Fannie Mae

   

Trust 1994-72 J, 6.00%, 6/25/23

    5,345,934     5,378,831

Trust 1998-58 PX, 6.50%, 9/25/28

    2,747,577     2,840,730

Trust 1998-58 PC, 6.50%, 10/25/28

    16,091,027     16,651,659

Series 2001-69 PQ, 6.00%, 12/25/31

    24,365,908     24,890,175

Trust 2002-33 A1, 7.00%, 6/25/32

    5,298,055     5,596,129

Trust 2001-T4 A1, 7.50%, 7/25/41

    4,673,507     4,961,612

Trust 2001-T10 A1, 7.00%, 12/25/41

    7,520,922     7,848,633

Trust 2002-90 A1, 6.50%, 6/25/42

    10,009,797     10,398,574

Trust 2002-W6 2A1, 7.00%, 6/25/42

    8,423,254     8,893,767

Trust 2002-W8 A2, 7.00%, 6/25/42

    4,287,238     4,513,303

Trust 2003-W2 1A2, 7.00%, 7/25/42

    26,095,476     27,628,872

Trust 2003-W4 3A, 7.00%, 10/25/42

    7,775,180     8,211,423

Trust 2003-07 A1, 6.50%, 12/25/42

    10,701,008     11,193,340

Trust 2003-W1 1A1, 6.50%, 12/25/42

    15,834,539     16,370,328

Trust 2003-W1 2A, 7.50%, 12/25/42

    7,202,943     7,579,569

Trust 2004-W2 5A, 7.50%, 3/25/44

    33,402,349     35,868,701

Trust 2004-W8 3A, 7.50%, 6/25/44

    20,148,759     21,656,743

Trust 2005-W1 1A3, 7.00%, 10/25/44

    18,391,909     19,440,003

Trust 2001-79 BA, 7.00%, 3/25/45

    2,341,230     2,473,275

Trust 2006-W1 1A1, 6.50%, 12/25/45

    2,457,034     2,593,196

Trust 2006-W1 1A2, 7.00%, 12/25/45

    16,302,293     17,556,828

Trust 2006-W1 1A3, 7.50%, 12/25/45

    260,451     282,346

Trust 2006-W1 1A4, 8.00%, 12/25/45

    19,622,335     21,509,262

Trust 2007-W10 1A, 6.18%, 8/25/47

    110,160,725     112,103,244

Trust 2007-W10 2A, 6.157%, 8/25/47

    28,273,522     28,674,486

Freddie Mac

   

Series 1565 G, 6.00%, 8/15/08

    494,565     493,735

Series 1601 PJ, 6.00%, 10/15/08

    2,380,206     2,376,231

Series 2439 LG, 6.00%, 9/15/30

    7,574,577     7,646,399

 

See accompanying Notes to Financial Statements   DODGE & COX INCOME FUND § PAGE 6


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

FIXED INCOME SECURITIES (continued)
    PAR VALUE   VALUE

Series 3312 AB, 6.50%, 6/15/32

  $      34,839,430   $        36,399,327

Series T-48 1A, 7.096%, 7/25/33

    7,292,573     7,717,887

Ginnie Mae
Series 1999-29 PB, 7.25%, 7/16/28

    2,301,268     2,346,160
       
      515,246,437

FEDERAL AGENCY MORTGAGE PASS-THROUGH: 44.0%

Fannie Mae, 10 Year

   

6.00%, 11/1/16

    19,971,728     20,471,172

Fannie Mae, 15 Year

   

5.50%, 9/1/14-1/1/22

    429,238,709     436,361,350

6.00%, 4/1/13-8/1/22

    1,058,429,787     1,084,383,515

6.50%, 11/1/12-11/1/18

    167,460,777     173,378,414

7.00%, 7/1/08-12/1/11

    1,042,334     1,066,621

7.50%, 11/1/14-8/1/17

    16,337,425     17,053,580

Fannie Mae, 20 Year

   

6.50%, 4/1/19-10/1/24

    58,225,557     60,293,144

Fannie Mae, 30 Year

   

4.50%, 8/1/33-11/1/33

    119,844,029     113,612,463

5.00%, 11/1/33-3/1/34

    296,418,758     289,661,600

5.50%, 10/1/33-8/1/35

    425,141,888     425,686,216

6.00%, 11/1/28-3/1/36

    1,332,174,392     1,357,785,044

6.50%, 12/1/32-11/1/37

    487,251,642     499,522,419

7.00%, 4/1/32

    3,402,719     3,588,123

8.00%, 1/1/12-8/1/22

    115,698     119,542

Fannie Mae, Hybrid ARM

   

4.131%, 12/1/36

    32,600,777     32,499,972

4.226%, 9/1/34

    17,574,820     17,626,675

4.26%, 1/1/35

    17,804,006     17,685,289

4.482%, 7/1/34

    20,774,827     20,597,851

4.483%, 1/1/35

    54,950,752     54,467,275

4.488%, 1/1/35

    14,339,419     14,028,154

4.50%, 6/1/35-7/1/35

    26,000,499     25,868,191

4.543%, 8/1/34

    22,580,480     22,588,761

4.598%, 10/1/34

    20,886,412     20,797,042

4.647%, 8/1/35

    20,102,304     19,935,440

4.657%, 1/1/36

    38,041,407     37,796,336

4.689%, 8/1/34

    5,087,579     5,155,594

4.733%, 7/1/35

    16,043,926     15,995,495

4.756%, 7/1/35

    16,781,520     16,755,961

4.762%, 10/1/35

    28,236,038     28,204,000

4.768%, 11/1/36

    23,397,887     23,367,106

4.781%, 8/1/35

    50,222,183     50,161,691

4.808%, 1/1/36

    30,618,235     30,637,422

4.866%, 12/1/35

    19,129,448     19,148,582

4.885%, 10/1/35

    15,249,043     15,237,815

4.998%, 4/1/35

    26,482,984     26,593,833

5.001%, 9/1/35

    21,215,295     21,257,058

5.04%, 7/1/35

    122,132,664     123,191,077

5.092%, 7/1/35

    17,780,017     17,883,579

5.247%, 1/1/37

    29,222,272     29,445,685

5.291%, 11/1/35

    17,625,803     17,921,372
    PAR VALUE   VALUE

Fannie Mae, Multifamily DUS

   

Pool 760744, 4.75%, 3/1/15

  $     13,590,000   $        13,519,764

Pool 555162, 4.835%, 1/1/13

    16,957,379     17,131,609

Pool 555191, 4.866%, 2/1/13

    15,683,102     15,866,561

Pool 888559, 5.425%, 6/1/17

    36,536,865     37,550,365

Pool 888015, 5.55%, 11/1/16

    47,877,263     48,836,977

Pool 555172, 5.677%, 12/1/12

    2,558,142     2,661,213

Pool 545987, 5.88%, 9/1/12

    24,987,604     26,233,482

Pool 545685, 5.931%, 4/1/12

    22,048,056     23,081,795

Pool 545708, 6.056%, 5/1/12

    2,512,354     2,633,137

Pool 545547, 6.088%, 3/1/12

    12,631,465     13,257,956

Pool 545209, 6.135%, 10/1/11

    24,785,012     25,974,584

Pool 545059, 6.224%, 5/1/11

    22,400,677     23,449,353

Pool 545179, 6.253%, 9/1/11

    16,860,753     17,735,116

Pool 323822, 6.38%, 7/1/09

    1,186,232     1,207,769

Freddie Mac, 30 Year

   

7.50%, 10/1/08

    135     135

8.00%, 5/1/09

    123     123

Freddie Mac Gold, 10 Year
6.00%, 9/1/16

    9,877,333     10,117,731

Freddie Mac Gold, 15 Year

   

5.50%, 11/1/13-10/1/20

    146,716,088     148,665,429

6.00%, 4/1/13-2/1/22

    182,286,319     186,616,342

6.50%, 2/1/11-9/1/18

    62,562,794     64,774,378

7.00%, 11/1/08-3/1/12

    1,107,996     1,137,088

Freddie Mac Gold, 20 Year

   

5.50%, 11/1/23

    69,178,264     69,548,196

6.00%, 7/1/25

    16,701,611     17,029,620

6.50%, 7/1/21-10/1/26

    45,468,407     46,812,206

Freddie Mac Gold, 30 Year

   

4.50%, 7/1/33

    25,661,380     24,281,570

6.00%, 2/1/33-3/1/35

    107,582,075     109,589,112

6.50%, 5/1/17-9/1/37

    103,555,268     106,026,534

7.00%, 4/1/31

    20,820,899     21,891,044

7.90%, 2/17/21

    2,486,613     2,649,539

Freddie Mac Gold, Hybrid ARM

   

3.335%, 9/1/33

    88,293,260     87,960,034

4.148%, 1/1/35

    15,776,434     15,580,150

4.16%, 3/1/35

    10,531,347     10,568,114

4.326%, 8/1/34

    12,021,865     11,936,478

4.408%, 9/1/35

    31,375,445     31,358,729

4.498%, 4/1/35

    8,129,068     8,110,852

4.594%, 4/1/36

    35,160,857     35,385,987

4.671%, 8/1/35

    15,729,194     15,783,742

4.722%, 2/1/34

    61,893,166     61,593,107

4.724%, 8/1/35

    19,075,830     19,019,096

4.832%, 2/1/35

    11,492,272     11,532,234

4.852%, 10/1/35

    21,469,497     21,426,821

4.855%, 1/1/36

    22,056,212     22,109,542

5.131%, 1/1/36

    66,647,405     67,060,904

5.17%, 5/1/37

    27,645,085     27,856,704

5.302%, 1/1/37

    36,279,833     36,523,252

 

PAGE 7 § DODGE & COX INCOME FUND   See accompanying Notes to Financial Statements


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

FIXED INCOME SECURITIES (continued)
    PAR VALUE   VALUE

5.342%, 7/1/37

  $      69,515,127   $        69,820,483

5.465%, 3/1/37

    46,266,784     46,920,583

5.553%, 4/1/37

    67,323,214     68,209,539

5.84%, 8/1/36

    26,100,775     26,409,404

5.914%, 1/1/36

    20,459,070     20,614,949

Ginnie Mae, 15 Year
7.00%, 4/15/09

    164,615     166,093

Ginnie Mae, 30 Year

   

7.00%, 5/15/28

    1,928,945     2,047,822

7.50%, 9/15/17 - 5/15/25

    6,394,177     6,804,011

7.80%, 6/15/20 - 1/15/21

    1,689,987     1,801,304
       
      7,012,709,121

PRIVATE LABEL CMO & REMIC SECURITIES: 0.1%

GSMPS Mortgage Loan Trust 8.50%, 6/25/34(b)

    12,408,711     13,607,270
       
      7,541,562,828
ASSET-BACKED SECURITIES: 2.0%

STUDENT LOAN: 2.0%

   

SLM Student Loan Trust

   

Series 2007-1 A1, 5.054%, 4/25/12

    7,490,306     7,492,677

Series 2005-10 A2, 5.094%, 4/27/15

    4,891,037     4,890,988

Series 2006-8 A2, 5.084%, 10/25/16

    32,958,809     32,775,855

Series 2006-7 A2, 5.074%, 10/25/16

    22,417,009     22,430,295

Series 2007-2 A2, 5.084%, 7/25/17

    183,000,000     181,339,074

Series 2007-3 A2, 5.094%, 10/25/17

    10,000,000     9,948,546

Series 2006-4 A2, 5.084%, 4/25/18

    4,047,045     4,047,086

Series 2006-3A 4, 5.164%, 7/25/19

    56,000,000     56,000,000
       
      318,924,521
CORPORATE: 34.6%    

FINANCIALS: 10.3%

   

Bank of America Corp.
5.30%, 3/15/17

    105,000,000     102,099,480

8.00%, 12/15/26(a) (callable)

    14,550,000     15,236,338

5.625%, 3/8/35(a)

    21,450,000     18,319,952

6.625%, 5/23/36(a)

    64,360,000     63,681,406

Boston Properties, Inc.

   

6.25%, 1/15/13

    60,782,000     61,807,641

5.625%, 4/15/15

    35,160,000     34,131,975

5.00%, 6/1/15

    17,444,000     16,188,047

Capital One Financial Corp.
6.75%, 9/15/17

    130,000,000     124,685,730

CIGNA Corp.

   

7.00%, 1/15/11

    13,665,000     14,505,561

6.375%, 10/15/11

    28,755,000     30,061,483

7.65%, 3/1/23

    3,597,000     4,017,133

7.875%, 5/15/27

    27,840,000     31,494,291

8.30%, 1/15/33

    7,375,000     8,574,514

6.15%, 11/15/36

    38,000,000     35,256,970

Citigroup, Inc.
6.125%, 11/21/17

    77,000,000     79,093,938

Health Net, Inc.
6.375%, 6/1/17

    29,000,000     28,280,771
    PAR VALUE   VALUE

HSBC Holdings PLC(b) (United Kingdom)

   

6.50%, 5/2/36

  $    41,875,000   $        40,709,828

6.50%, 9/15/37

    78,475,000     76,060,246

JPMorgan Chase & Co.
8.75%, 9/1/30(a)

    26,355,000     30,515,216

5.875%, 3/15/35(a)

    14,625,000     12,537,296

5.85%, 8/1/35(a)

    22,090,000     18,856,709

Kaupthing Bank hf(b),(c) (Iceland)
7.125%, 5/19/16

    107,308,000     98,375,038

Safeco Corp.

   

4.875%, 2/1/10

    15,150,000     15,156,424

7.25%, 9/1/12

    18,122,000     19,528,267

Travelers Cos., Inc.

   

8.125%, 4/15/10

    21,575,000     23,305,574

5.00%, 3/15/13

    17,118,000     17,107,216

5.50%, 12/1/15

    14,067,000     13,970,121

6.25%, 6/20/16

    44,360,000     45,789,412

5.75%, 12/15/17

    35,955,000     35,367,747

Unum Group

   

7.625%, 3/1/11

    11,484,000     12,250,293

6.85%, 11/15/15(b)

    21,150,000     21,921,488

7.19%, 2/1/28

    11,640,000     11,490,764

7.25%, 3/15/28

    25,680,000     26,756,608

6.75%, 12/15/28

    7,956,000     7,989,328

Wachovia Corp.

   

5.281%, 4/23/12

    154,460,000     149,731,362

6.00%, 11/15/17

    80,000,000     80,534,560

WellPoint, Inc.

   

6.375%, 1/15/12

    7,662,000     7,965,683

5.00%, 12/15/14

    15,610,000     14,952,991

5.25%, 1/15/16

    121,440,000     117,575,536

Wells Fargo & Co.

   

5.625%, 12/11/17

    76,000,000     76,046,436
       
      1,641,929,373

INDUSTRIALS: 21.0%

   

AT&T, Inc.

   

8.00%, 11/15/31

    159,915,000     196,387,294

Boston Scientific Corp.

   

5.45%, 6/15/14

    32,375,000     29,785,000

6.25%, 11/15/15

    15,000,000     14,100,000

6.40%, 6/15/16

    46,602,000     43,805,880

Comcast Corp.

   

5.30%, 1/15/14

    75,040,000     73,584,449

5.85%, 11/15/15

    24,960,000     25,139,188

5.90%, 3/15/16

    33,925,000     34,131,637

6.50%, 1/15/17

    41,870,000     43,655,839

6.30%, 11/15/17

    31,360,000     32,536,847

5.875%, 2/15/18

    52,600,000     52,441,516

Covidien Ltd.(b),(c) (Bermuda)

   

6.00%, 10/15/17

    32,700,000     33,835,802

 

See accompanying Notes to Financial Statements   DODGE & COX INCOME FUND § PAGE 8


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

FIXED INCOME SECURITIES (continued)
    PAR VALUE   VALUE

Cox Communications, Inc.

   

5.45%, 12/15/14

  $    105,760,000   $      103,648,290

5.875%, 12/1/16(b)

    78,390,000     77,929,537

Dillard’s, Inc.

   

6.625%, 11/15/08

    4,985,000     4,953,844

9.50%, 9/1/09

    550,000     556,875

7.13%, 8/1/18

    24,015,000     19,332,075

7.75%, 7/15/26

    21,666,000     16,682,820

7.75%, 5/15/27

    12,803,000     9,858,310

7.00%, 12/1/28

    28,825,000     21,042,250

Dow Chemical Co.

   

4.027%, 9/30/09(b)

    54,087,000     53,737,436

6.00%, 10/1/12

    9,875,000     10,265,299

7.375%, 11/1/29

    35,089,000     38,594,847

Ford Motor Credit Co.(e)

   

7.375%, 2/1/11

    273,833,000     245,219,094

7.25%, 10/25/11

    220,905,000     191,338,854

General Electric Co.

   

5.00%, 2/1/13

    34,994,000     35,439,229

GMAC, LLC

   

6.875%, 9/15/11

    336,175,000     287,595,695

6.875%, 8/28/12

    43,000,000     35,726,316

8.00%, 11/1/31

    135,505,000     113,671,757

HCA, Inc.

   

8.75%, 9/1/10

    54,920,000     55,400,550

7.875%, 2/1/11

    54,800,000     53,430,000

6.95%, 5/1/12

    141,385,000     131,488,050

6.25%, 2/15/13

    39,655,000     34,698,125

6.75%, 7/15/13

    29,463,000     26,222,070

5.75%, 3/15/14

    28,700,000     23,821,000

6.50%, 2/15/16

    19,690,000     16,638,050

Lafarge SA(c) (France)

   

6.50%, 7/15/16

    57,640,000     57,240,810

Liberty Media Corp.

   

8.50%, 7/15/29

    32,975,000     32,298,782

4.00%, 11/15/29 (exchangeable)

    25,675,000     16,560,375

8.25%, 2/1/30

    65,665,000     63,014,826

Lockheed Martin Corp.

   

7.65%, 5/1/16

    15,025,000     17,237,191

6.15%, 9/1/36

    14,154,000     14,544,069

Macy’s, Inc.

   

7.625%, 8/15/13

    7,155,000     7,707,795

7.00%, 2/15/28

    29,325,000     27,494,299

6.70%, 9/15/28

    20,550,000     18,128,984

6.90%, 4/1/29

    23,815,000     21,810,801

6.90%, 1/15/32

    33,670,000     30,808,218

6.70%, 7/15/34

    60,565,000     54,635,202

Nordstrom, Inc.

   

6.95%, 3/15/28

    12,620,000     12,810,600

Sprint Nextel Corp.

   

6.00%, 12/1/16

    7,205,000     6,900,899

Time Warner, Inc.

   

7.625%, 4/15/31

    168,188,000     186,120,205

7.70%, 5/1/32

    149,823,000     166,461,593
    PAR VALUE   VALUE

Wyeth

   

5.50%, 2/1/14

  $    110,715,000   $ 112,449,350

5.50%, 2/15/16

    15,000,000     15,244,245

5.45%, 4/1/17

    47,445,000     47,990,096

Xerox Corp.

   

9.75%, 1/15/09

    17,375,000     18,164,016

7.125%, 6/15/10

    77,900,000     81,614,584

6.875%, 8/15/11

    52,625,000     55,052,539

6.40%, 3/15/16

    33,994,000     34,785,482

7.20%, 4/1/16

    17,996,000     19,280,285

6.75%, 2/1/17

    46,241,000     48,197,919
       
      3,353,246,990

TRANSPORTATION: 3.3%

   

Burlington Northern Santa Fe Corp.

   

4.30%, 7/1/13

    7,883,000     7,518,798

4.875%, 1/15/15

    7,835,000     7,493,989

7.57%, 1/2/21

    22,292,592     24,668,640

8.251%, 1/15/21

    7,003,425     8,126,985

5.72%, 1/15/24

    31,277,410     31,362,419

5.629%, 4/1/24

    44,294,810     44,159,006

5.342%, 4/1/24

    10,423,041     10,224,611

5.996%, 4/1/24

    54,625,000     55,687,511

CSX Corp.

   

9.75%, 6/15/20

    10,272,000     13,261,871

6.251%, 1/15/23

    22,896,000     23,349,598

FedEx Corp.

   

6.72%, 7/15/23

    24,193,870     25,918,428

7.65%, 7/15/24

    2,895,580     3,201,277

Norfolk Southern Corp.

   

7.70%, 5/15/17

    29,475,000     33,377,549

9.75%, 6/15/20

    14,188,000     19,361,597

Union Pacific Corp.

   

6.50%, 4/15/12

    12,337,000     13,040,382

5.375%, 5/1/14

    22,886,000     22,493,826

4.875%, 1/15/15

    10,764,000     10,259,481

6.85%, 1/2/19

    7,497,817     8,272,932

6.70%, 2/23/19

    10,566,468     11,459,669

7.60%, 1/2/20

    1,702,509     1,936,924

6.061%, 1/17/23

    16,525,773     17,042,592

4.698%, 1/2/24

    6,064,331     5,714,170

5.082%, 1/2/29

    10,973,554     10,573,218

5.866%, 7/2/30

    61,205,740     66,377,625

6.176%, 1/2/31

    41,772,000     44,573,971
       
      519,457,069
       
      5,514,633,432
       

TOTAL FIXED INCOME SECURITIES
(Cost $15,269,720,019)

  $ 15,243,652,193
       

 

PAGE 9 § DODGE & COX INCOME FUND   See accompanying Notes to Financial Statements


PORTFOLIO OF INVESTMENTS   December 31, 2007

 

SHORT-TERM INVESTMENTS: 3.0%       
    PAR VALUE     VALUE

COMMERCIAL PAPER: 1.5%

Cardinal Health, Inc.(b)
1/2/08

  $   30,000,000     $ 29,995,333

Royal Bank of Scotland Group PLC(c)
(United Kingdom)

1/3/08

    35,000,000       34,990,064

1/8/08

    25,000,000       24,974,917

Time Warner, Inc.(b)

   

1/7/08

    25,000,000       24,977,208

1/22/08

    25,000,000       24,923,729

UBS Finance (Delaware) LLC(c)
(Switzerland)

1/2/08

    25,000,000       24,996,875

WellPoint, Inc.(b)

   

1/3/08

    27,000,000       26,991,675

1/11/08

    25,000,000       24,961,806

1/17/08

    25,000,000       24,938,889
       
      241,750,496

MONEY MARKET FUND: 0.1%

 

 

SSgA Prime Money Market Fund

    15,678,126       15,678,126

REPURCHASE AGREEMENT: 1.4%

 

 

Fixed Income Clearing Corporation(d) 3.75%, 1/2/08, maturity value $228,908,679

    228,861,000       228,861,000
       

TOTAL SHORT-TERM INVESTMENTS
(Cost $486,289,622)

  

  $ 486,289,622
       

TOTAL INVESTMENTS
(Cost $15,756,009,641)

    98.7 %   $ 15,729,941,815
       

OTHER ASSETS LESS LIABILITIES

    1.3 %     202,448,018
             
NET ASSETS     100.0 %   $ 15,932,389,833
             

 

(a)

Cumulative preferred security

(b)

Security exempt from registration under Rule 144A of the Securities Act of 1933. The security may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of December 31, 2007, all such securities in total represented $456,195,211 or 2.9% of total net assets.

(c)

Security issued by a foreign entity, denominated in U.S. dollars

(d)

Repurchase agreement is collateralized by Fannie Mae 2.50%-3.875%, 6/15/08-7/15/08 and Federal Home Loan Bank 5.25%, 6/25/08; total collateral value is $233,438,613.

(e)

Subsidiary (see Note below)

Note: Except as noted, investments are grouped by parent company. Actual securities may be issued by the listed parent company or one of its subsidiaries.

ARM: Adjustable Rate Mortgage

CMO: Collateralized Mortgage Obligation

DUS: Delegated Underwriting and Servicing

REMIC: Real Estate Mortgage Investment Conduit


 

See accompanying Notes to Financial Statements   DODGE & COX INCOME FUND § PAGE 10


STATEMENT OF ASSETS AND LIABILITIES

December 31, 2007

 

ASSETS:

 

Investments, at value (cost $15,756,009,641)

  $ 15,729,941,815  

Receivable for paydowns on mortgage-backed securities

    7,582,300  

Receivable for Fund shares sold

    56,328,922  

Interest receivable

    164,277,454  

Prepaid expenses and other assets

    67,969  
       
    15,958,198,460  
       

LIABILITIES:

 

Payable for investments purchased

    24,268  

Payable for Fund shares redeemed

    19,122,813  

Management fees payable

    5,401,740  

Accrued expenses

    1,259,806  
       
    25,808,627  
       

NET ASSETS

  $ 15,932,389,833  
       

NET ASSETS CONSIST OF:

 

Paid in capital

  $ 16,054,229,277  

Undistributed net investment income

    3,485,360  

Accumulated undistributed net realized loss on investments

    (99,256,978 )

Net unrealized depreciation on investments

    (26,067,826 )
       
  $ 15,932,389,833  
       

Fund shares outstanding (par value $0.01 each, unlimited shares authorized)

    1,273,406,077  

Net asset value per share

    $12.51  

STATEMENT OF OPERATIONS

 

    Year Ended
December 31, 2007
 

INVESTMENT INCOME:

 

Interest

  $ 784,772,551  

EXPENSES:

 

Management fees

    57,111,928  

Custody and fund accounting fees

    260,802  

Transfer agent fees

    3,044,660  

Professional services

    163,094  

Shareholder reports

    1,357,440  

Registration fees

    460,046  

Trustees’ fees

    179,000  

Miscellaneous

    74,716  
       
    62,651,686  
       

NET INVESTMENT INCOME

    722,120,865  
       

REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:

  

Net realized gain

    23,365,130  

Net change in unrealized appreciation/depreciation

    (81,102,429 )
       

Net realized and unrealized loss

    (57,737,299 )
       

NET INCREASE IN NET ASSETS FROM OPERATIONS

  $ 664,383,566  
       

 

STATEMENT OF CHANGES IN NET ASSETS

 

    Year Ended
December 31, 2007
   

Year Ended

December 31, 2006

 

OPERATIONS:

   

Net investment income

  $ 722,120,865     $ 503,896,761  

Net realized gain (loss)

    23,365,130       (3,533,509 )

Net change in unrealized appreciation/depreciation

    (81,102,429 )     66,417,029  
               

Net increase in net assets
from operations

    664,383,566       566,780,281  
               

DISTRIBUTIONS TO SHAREHOLDERS FROM:

  

 

Net investment income

    (742,086,333 )     (532,395,799 )

Net realized gain

           
               

Total distributions

    (742,086,333 )     (532,395,799 )
               

FUND SHARE TRANSACTIONS:

   

Proceeds from sale of shares

    6,536,074,931       4,115,697,531  

Reinvestment of distributions

    628,066,510       453,075,083  

Cost of shares redeemed

    (3,125,765,674 )     (2,241,206,234 )
               

Net increase from Fund share transactions

    4,038,375,767       2,327,566,380  
               

Total increase in net assets

    3,960,673,000       2,361,950,862  

NET ASSETS:

   

Beginning of year

    11,971,716,833       9,609,765,971  
               

End of year (including undistributed net investment income of $3,485,360 and $6,896,144, respectively)

  $ 15,932,389,833     $ 11,971,716,833  
               

SHARE INFORMATION:

   

Shares sold

    519,177,084       328,751,052  

Distributions reinvested

    50,291,905       36,459,332  

Shares redeemed

    (248,523,160 )     (179,356,904 )
               

Net increase in shares outstanding

    320,945,829       185,853,480  
               

 

 

PAGE 11 § DODGE & COX INCOME FUND   See accompanying Notes to Financial Statements


NOTES TO FINANCIAL STATEMENTS

 

NOTE 1—ORGANIZATION AND SIGNIFICANT
ACCOUNTING POLICIES

Dodge & Cox Income Fund (the “Fund”) is one of the series constituting the Dodge & Cox Funds (the “Trust” or the “Funds”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The Fund commenced operations on January 3, 1989, and seeks high and stable current income consistent with long-term preservation of capital. Risk considerations and investment strategies of the Fund are discussed in the Fund’s Prospectus.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions by management. Significant accounting policies are as follows:

Security valuation The Fund’s net assets are valued as of the close of trading on the New York Stock Exchange (NYSE), generally 4:00 p.m. Eastern Time, each day that the NYSE is open for business. Fixed income securities with original maturities of one year or more are priced on the basis of valuations furnished by pricing services which utilize both dealer-supplied valuations and computerized pricing models. Under certain circumstances, fixed income securities that are not valued by pricing services are temporarily valued by the investment manager utilizing both dealer-supplied valuations and computerized pricing models. Valuations of fixed income securities take into account appropriate factors such as institutional-size trading markets in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data and do not rely exclusively upon exchange or over-the-counter listed prices. Security values are not discounted based on the size of the Fund’s position. Securities for which market quotations are not readily available are valued at fair value as determined in good faith by or at the direction of the Board of Trustees. Short-term securities are valued at amortized cost which approximates current value. All securities held by the Fund are denominated in U.S. dollars.

Security transactions, investment income, expenses, and distributions Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.

Interest income is recorded on the accrual basis. Interest income includes coupon interest, amortization of premium and accretion of discount on debt securities, and gain/loss on paydowns of mortgage-backed securities. The ability of the issuers of the debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry, state or region. Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectibility of interest is reasonably assured.

Expenses are recorded on the accrual basis. Most expenses of the Trust can be directly attributed to a specific series. Expenses which cannot be directly attributed are allocated among the Funds in the Trust.

Distributions to shareholders are recorded on the ex-dividend date.

Repurchase agreements The Fund may enter into repurchase agreements secured by U.S. government and agency securities which involve the purchase of securities from a counterparty with a simultaneous commitment to resell the securities at an agreed-upon date and price. It is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. In the event of default by the counterparty, the Fund has the contractual right to liquidate the securities and to apply the proceeds in satisfaction of the obligation.

NOTE 2—RELATED PARTY TRANSACTIONS

Management fees Under a written agreement approved by a unanimous vote of the Board of Trustees, the Fund pays an annual management fee of 0.50% of the Fund’s average daily net assets up to $100 million and 0.40% of the Fund’s average daily net assets in excess of $100


 

DODGE & COX INCOME FUND § PAGE 12


NOTES TO FINANCIAL STATEMENTS

 

million to Dodge & Cox, investment manager of the Fund. The agreement further provides that Dodge & Cox shall waive its fee to the extent that such fee plus all other ordinary operating expenses of the Fund exceed 1% of the average daily net assets for the year.

Fund officers and trustees All officers and three of the trustees of the Trust are officers or employees of Dodge & Cox. The Trust pays a fee only to those trustees who are not affiliated with Dodge & Cox.

Indemnification Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that provide general indemnities to other parties. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.

NOTE 3—INCOME TAX INFORMATION AND
DISTRIBUTIONS TO SHAREHOLDERS

A provision for federal income taxes is not required since the Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. Distributions are determined in accordance with income tax regulations, which may differ from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character.

Book/tax differences are primarily due to differing treatments of net short-term realized gain and paydown loss. At December 31, 2007, the cost of investments for federal income tax purposes was equal to the cost for financial reporting purposes.

Distributions for the years ended December 31, 2007 and 2006 were characterized as follows for federal income tax purposes:

 

     2007   2006

Ordinary income

  $742,086,333   $532,395,799
  ($0.635 per share)   ($0.616 per share)

Long-term capital gain

   

 

At December 31, 2007, the tax basis components of distributable earnings were as follows:

 

Unrealized appreciation

   $ 192,283,135  

Unrealized depreciation

     (218,350,961 )
        

Net unrealized depreciation

     (26,067,826 )

Undistributed ordinary income

     3,485,360  

Capital loss carryforward

     (99,256,978 )
 

Represents accumulated capital loss which may be carried forward to offset future capital gains. During 2007, the Fund utilized $6,810,445 of this carryforward. The remaining carryforward expires as follows:

 

Expiring in 2011

   $ 7,283,144

Expiring in 2012

     32,528,048

Expiring in 2013

     19,963,019

Expiring in 2014

     39,482,767
      
   $ 99,256,978
      

NOTE 4—PURCHASES AND SALES OF INVESTMENTS

For the year ended December 31, 2007, purchases and sales of securities, other than short-term securities and U.S. government securities, aggregated $2,922,654,178 and $626,472,752, respectively. For the year ended December 31, 2007, purchases and sales of U.S. government securities aggregated $4,861,475,280 and $3,390,971,926, respectively.

NOTE 5—ACCOUNTING PRONOUNCEMENTS

Effective June 29, 2007, the Fund adopted the Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements. At December 31, 2007, Fin 48 was applied to the period from January 1, 2004 through December 31, 2007, the open tax years subject to regulatory examination. There was no impact to the Fund’s financial statements as a result of applying FIN 48.

In September 2006, FASB issued “Statement of Financial Accounting Standards No. 157, Fair Value Measurements” (SFAS 157). SFAS 157 is effective for the Fund beginning January 1, 2008. It defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Fund’s financial statement disclosures; however, it is not expected to have a material impact on the Fund’s net assets or results of operations.


 

PAGE 13 § DODGE & COX INCOME FUND


FINANCIAL HIGHLIGHTS

 

SELECTED DATA AND RATIOS

(for a share outstanding throughout each year)

     Year Ended December 31,  
       2007      2006        2005        2004        2003  
        

Net asset value, beginning of year

     $12.57      $12.54        $12.84        $12.92        $12.77  

Income from investment operations:

                      

Net investment income

     0.63      0.61        0.55        0.54        0.60  

Net realized and unrealized gain (loss)

     (0.05 )    0.04        (0.30 )      (0.08 )      0.15  
        

Total from investment operations

     0.58      0.65        0.25        0.46        0.75  
        

Distributions to shareholders from:

                      

Net investment income

     (0.64 )    (0.62 )      (0.55 )      (0.54 )      (0.60 )

Net realized gain

                                
        

Total distributions

     (0.64 )    (0.62 )      (0.55 )      (0.54 )      (0.60 )
        

Net asset value, end of year

     $12.51      $12.57        $12.54        $12.84        $12.92  
        

Total return

     4.68 %    5.30 %      1.98 %      3.64 %      5.97 %

Ratios/supplemental data:

                      

Net assets, end of year (millions)

     $15,932      $11,972        $9,610        $7,870        $5,697  

Ratios of expenses to average net assets

     0.44 %    0.44 %      0.44 %      0.44 %      0.45 %

Ratios of net investment income to average net assets

     5.07 %    4.77 %      3.99 %      3.61 %      3.93 %

Portfolio turnover rate

     27 %    30 %      24 %      30 %      41 %

See accompanying Notes to Financial Statements

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Trustees of Dodge & Cox Funds and Shareholders of Dodge & Cox Income Fund

In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Dodge & Cox Income Fund (the “Fund”, one of the series constituting Dodge & Cox Funds) at December 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2007 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 14, 2008

 

DODGE & COX INCOME FUND § PAGE 14


 

BOARD APPROVAL OF FUNDS’
INVESTMENT MANAGEMENT

AGREEMENTS AND MANAGEMENT FEES

(unaudited)

The Board of Trustees is responsible for overseeing the performance of the Dodge & Cox Funds’ investment manager and determining whether to continue the Investment Management Agreements between the Funds and Dodge & Cox each year (the “Agreements”). At a meeting of the Board of Trustees of the Trust held on December 19, 2007, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) (the “Independent Trustees”)), approved the renewal of the Agreements for an additional one-year term through December 31, 2008. During the course of the year, the Board received a wide variety of materials relating to the services provided by Dodge & Cox and the performance of the Funds.

INFORMATION RECEIVED

In advance of the meeting, the Board, including each of the Independent Trustees, requested, received and reviewed materials relating to the Agreements. The Independent Trustees retained Morningstar® to prepare an independent expense and performance summary for each Fund and comparable funds managed by other advisers identified by Morningstar®. The Morningstar® materials included information regarding advisory fee rates, expense ratios, and transfer agency, custodial and distribution expenses, as well as performance comparisons to an appropriate index or combination of indices. The materials reviewed by the Board also included information concerning Dodge & Cox’s profitability, financial results and condition, including advisory fee revenue and separate account advisory fee schedules. The Board additionally considered the Funds’ brokerage commissions, turnover rates and sales and redemption data for the Funds, including “soft dollar” payments made for research benefiting the Funds and other accounts managed by Dodge & Cox, and brokerage commissions and expenses paid by Dodge & Cox. Other aspects of Dodge & Cox’s services to the Funds which were reviewed included compliance and supervision of third-party service providers (e.g., custodian, fund accountant, transfer agent

and state registration administrator), shareholder servicing, accounting and administrative services, web services, the character of non-advisory services, the record of compliance with the Funds’ investment policies and restrictions and the Funds’ Code of Ethics, investment management staffing and biographies, information furnished to investors and shareholders (including the Funds’ Prospectus, Statement of Additional Information, shareholder reports, and quarterly reports), and third-party retirement plan administrator reimbursements by Dodge & Cox for the same periods.

The Board received copies of the Agreements and a memorandum from the Independent Legal Counsel to the Independent Trustees, discussing the factors generally regarded as appropriate to consider in evaluating advisory arrangements. The Trust’s Contract Review Committee, consisting solely of Independent Trustees, met with the Independent Legal Counsel on December 3, 2007 and again on December 19, 2007 to discuss whether to renew the Agreements. The Board, including the Independent Trustees, subsequently concluded that the existing Agreements are fair and reasonable and voted to approve the Agreements.

In considering the Agreements, the Board, including the Independent Trustees, did not identify any single factor or particular information as all-important or controlling. In reaching the decision to approve the Agreements, the Board, which was advised by Independent Legal Counsel, considered the following factors, among others, and reached the conclusions described below.

NATURE, QUALITY, AND EXTENT
OF THE SERVICES

The Board considered that Dodge & Cox provides a wide range of services to the Funds in addition to portfolio management and that the quality of these services has been excellent in all respects. The extensive nature of services provided by Dodge & Cox has been documented in materials provided to the Board and in presentations made to the Board throughout the year. In particular, the Board considered the nature, quality and extent of portfolio management, administrative and shareholder services performed by Dodge & Cox, including: Dodge & Cox’s established long-term history of care and


 

PAGE 15 § DODGE & COX INCOME FUND


conscientiousness in the management of the Funds; demonstrated consistency in investment approach and depth, background and experience of the Dodge & Cox Investment Policy Committee, International Investment Policy Committee, Fixed Income Investment Policy Committee and research analysts responsible for managing the Funds; Dodge & Cox’s organizational structure; Dodge & Cox’s performance in the areas of compliance, administration and shareholder communication and services, supervision of Fund operations and general oversight of other service providers; favorable peer group comparisons of expense ratios, management fee comparisons, expenses (e.g., transfer agent, custody and other fees and expenses) and asset comparisons and performance and risk summaries prepared independently by Morningstar® and favorable fiduciary grade and “Star” rankings by Morningstar®. The Board concluded that it was satisfied with the nature, extent and quality of investment management and other services provided to the Funds by Dodge & Cox.

INVESTMENT PERFORMANCE

The Board considered short-term and long-term investment performance for each Fund (including periods of outperformance or underperformance) as compared to both relevant indices and the performance of such Fund’s peer group. In light of recent market volatility, the Board also reviewed recent performance in the context of long-term investment goals. The performance information prepared by Morningstar® and Dodge & Cox demonstrated consistently favorable performance over the long term in keeping with the stated goals in the Prospectus. The Board considered that the performance of the Funds is the result of a team-oriented investment management process that emphasizes a long-term investment horizon, independence, comprehensive research, price discipline and focus. The Board also noted that the investment performance delivered by Dodge & Cox to the Funds appeared to be consistent with the performance delivered for other (non-fund) clients of Dodge & Cox. The Board concluded that Dodge & Cox delivers favorable performance for Fund investors consistent with the long-term investment strategies being pursued by the Funds.

 

COSTS AND ANCILLARY BENEFITS

Costs of Services to Funds: Fees and Expenses. The Board considered each Fund’s management fee rates and expense ratios relative to industry averages for similar mutual funds and relative to management fees charged by Dodge & Cox to other (non-fund) clients. The Board evaluated the operating structures of the Funds and Dodge & Cox, including the following: Dodge & Cox has a centralized focus on investment management operations and derives revenue solely from management fees; its outsourcing of non-advisory support services to unaffiliated third-party service providers is efficient and less costly to investors; Dodge & Cox does not charge front-end sales commissions or distribution fees and bears all third party research and distribution-related costs as well as reimbursements to third-party retirement plan administrators; the Funds receive numerous administrative, regulatory compliance, and shareholder support services from Dodge & Cox without any additional administrative fee; and the fact that the Funds have relatively low transaction costs and portfolio turnover rates. The Board noted that the Funds are substantially below peer group averages in expense ratios and management fee rates and that many media and industry reports specifically comment on the low expense ratios of Dodge & Cox, which along with excellent performance, has been a defining characteristic of Dodge & Cox for many years. The Board also noted that the range of services under the Agreements is much more extensive than under Dodge & Cox’s separate advisory (non-fund) client agreements and that many of the separate accounts were opened decades ago when fees were lower, and considered that, when coupled with the greater risks and regulatory burdens associated with the high profile mutual fund business, there is reasonable justification for differences in fee rates charged between the two lines of business. The Board concluded that costs incurred by the Funds for the services they receive (including the management fee paid to Dodge & Cox) are reasonable and that the fees are acceptable based upon the qualifications, experience, reputation and performance of Dodge & Cox and the low overall expense ratios of the Funds.


 

DODGE & COX INCOME FUND § PAGE 16


Profitability and Costs of Services to Dodge & Cox; “Fall-out” Benefits. The Board reviewed reports of Dodge & Cox’s financial position, profitability and estimated overall value, and they considered Dodge & Cox’s overall profitability within its context as a private, employee-owned S-Corporation and relative to the favorable services provided. The Board considered recent increases to Dodge & Cox’s gross revenues, and noted the importance of Dodge & Cox’s profitability—which is derived solely from management fees and does not include other business ventures—to maintain its independence, stability, company culture and ethics, and management continuity. The Board also considered that revenues reflect the continued success of the Funds and that such revenues are not generated by fees that are high compared to its peers. They noted that Dodge & Cox’s profitability is enhanced due to its efficient internal business model, and that the compensation/profit structure at Dodge & Cox is vital for remaining independent and facilitating retention of its management and investment professionals. The Board considered potential “fall-out” benefits (including the receipt of research from unaffiliated brokers) that Dodge & Cox might receive in its association with the Funds. The Board also noted the extent of additional administrative services performed by Dodge & Cox for the Funds, and that the magnitude of costs and risks borne by Dodge & Cox in rendering advisory services to the Funds (including risks in the compliance, securities valuation and investment management processes) are continuing to increase. The Board concluded that the profitability of Dodge & Cox’s relationship with the Funds (including fall-out benefits) was fair and reasonable.

THE BENEFIT OF ECONOMIES OF SCALE

The Board considered whether there have been economies of scale with respect to the management of each Fund, whether the Funds have appropriately benefited from any economies of scale, and whether the

management fee rate is reasonable in relation to the Fund assets and any economies of scale that may exist. In the Board’s view, any consideration of economies of scale must take account of the Funds’ low fee structure and the considerable efficiencies of the Funds’ organization and fee structure that has been realized by shareholders at the outset of their investment (i.e., from the first dollar). Shareholders also realize efficiencies from the outset of their investment due to organizational efficiencies derived from Dodge & Cox’s investment management process (e.g., low portfolio turnover) and the avoidance of distribution and marketing structures whose costs would ultimately be borne by shareholders of the Funds. The Board noted that Dodge & Cox’s internal costs of providing investment management, administrative and compliance services to the Funds are continuing to increase. Thus, the Funds provide access by small investors to top-rank investment management at a relatively low cost. The Board’s decision to renew the Agreements was made after consideration of economies of scale and review of comparable fund expense ratios and historical expense ratio patterns for the Funds. Their review also included consideration of the desirability of adding breakpoints to the Funds’ fee schedules. The Board concluded that the current Dodge & Cox fee structure is fair and reasonable and adequately reflects economies of scale.

CONCLUSION

Based on their evaluation of all material factors and assisted by the advice of Independent Legal Counsel to the Independent Trustees, the Board, including the Independent Trustees, concluded that the advisory fee structure was fair and reasonable, that each Fund was paying a competitive fee for the services provided, that the scope and quality of Dodge & Cox’s services has provided substantial value for Fund shareholders over the long term, and that approval of the Agreements was in the best interests of each Fund and its shareholders.


 

PAGE 17 § DODGE & COX INCOME FUND


FUND HOLDINGS

The Fund provides a complete list of its holdings four times each fiscal year, as of the end of each quarter. The lists appear in the Fund’s First Quarter, Semi-Annual, Third Quarter and Annual Reports to shareholders. The Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-CSR (second and fourth quarters) and Form N-Q (first and third quarters). Shareholders may view the Funds’ Forms N-CSR and N-Q on the SEC’s website at www.sec.gov. Forms N-CSR and N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by 1-202-942-8090 (direct) or 1-800-732-0330 (general SEC number). A complete list of the Fund’s quarter-end holdings is also available at www.dodgeandcox.com on or about 15 days following each quarter end and remains available on the web site until the list is updated in the subsequent quarter.

PROXY VOTING

For a free copy of the Fund’s proxy voting policies and procedures, please call 1-800-621-3979, visit the Fund’s web site at www.dodgeandcox.com or visit the SEC’s web site at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ending June 30 is also available at www.dodgeandcox.com or at www.sec.gov.

 

DODGE & COX INCOME FUND § PAGE 18


DODGE & COX FUNDS—EXECUTIVE OFFICER & TRUSTEE INFORMATION

 

Name (Age) and
Address*
  Position with Trust
(Year of Election or
Appointment)
  Principal Occupation During Past 5 Years   Other Directorships Held by Trustees
INTERESTED TRUSTEES & OFFICERS
John A. Gunn
(64)
 

Chairman and

Trustee
(Trustee since 1985)

  Chairman (since 2007), Chief Executive Officer (since 2005) and Director of Dodge & Cox, Portfolio Manager and member of Investment Policy Committee (IPC), Fixed Income Investment Policy Committee (FIIPC) and International Investment Policy Committee (IIPC)  
Kenneth E. Olivier (55)   President and Trustee
(Trustee since 2005)
  President (since 2005) and Director of Dodge & Cox, Portfolio Manager and member of IPC  
Dana M. Emery (46)  

Senior Vice President and Trustee

(Trustee since 1993)

  Executive Vice President (since 2005) and Director of Dodge & Cox, Manager of the Fixed Income Department, Portfolio Manager and member of FIIPC  
Charles F. Pohl (50)  

Senior Vice President

(Officer since 2004)

 

Senior Vice President and Director of Dodge & Cox, Chief Investment Officer (since 2007), Director of Credit Research, Portfolio Manager, Investment Analyst and member of IPC, IIPC (since 2007) and FIIPC

 
Diana S. Strandberg (48)   Senior Vice President
(Officer since 2005)
  Vice President of Dodge & Cox, Portfolio Manager and member of IPC and IIPC  
David H. Longhurst (50)   Treasurer
(Officer since 2006)
  Fund Administration and Accounting Senior Manager of Dodge & Cox (since 2004); Vice President, Treasurer, Controller and Secretary of Safeco Mutual Funds, Safeco Asset Management Company, Safeco Services, Safeco Securities, and Safeco Investment Services (2000-2004)  
Thomas M. Mistele (54)  

Secretary

(Officer since 2000)

  Chief Operating Officer (since 2004), Director (since 2005), Secretary and General Counsel of Dodge & Cox  
Marcia P. Venegas
(39)
  Chief Compliance Officer
(Officer since 2004)
  Chief Compliance Officer of Dodge & Cox (since 2005), Compliance Officer of Dodge & Cox (2003-2004)  
INDEPENDENT TRUSTEES
William F. Ausfahl (67)  

Trustee

(Since 2002)

 

CFO, The Clorox Co. (1982-1997);

Director, The Clorox Co. (1984-1997)

 
L. Dale Crandall (66)  

Trustee

(Since 1999)

  President, Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals (2000-2002); Senior Vice President—Finance and Administration & CFO, Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals (1998-2000)   Director, Union BanCal Corporation (bank holding company) and Union Bank of California (commercial bank) (2001-Present); Director, Covad Communications Group (broadband communications services) (2002-Present); Director, Ansell Limited (medical equipment and supplies) (2002-Present); Director, BEA Systems, Inc. (software and programming) (2003-Present); Director, Coventry Health Care, Inc. (managed health care) (2004-Present); Director, Metavante Technologies, Inc. (software) (2007 to present); Director, Serena Software, Inc. (software) (2007 to present)
Thomas A. Larsen (58)  

Trustee

(Since 2002)

  Director in Howard, Rice, Nemerovski, Canady, Falk & Rabkin (law firm)  

John B. Taylor
(61)

 

Trustee

(Since 2005)

  Professor of Economics, Stanford University; Senior Fellow, Hoover Institution; Under Secretary for International Affairs, United States Treasury (2001-2005)  
Will C. Wood
(68)
 

Trustee

(Since 1992)

  Principal, Kentwood Associates, Financial Advisers   Director, Banco Latinoamericano de Exportaciones S.A. (Latin American foreign trade bank) (1999-Present)

 

*  

The address for each Officer and Trustee is 555 California Street, 40th Floor, San Francisco, California 94104. Each Officer and Trustee oversees all four series in the Dodge & Cox Funds complex and serves for an indefinite term.

Additional information about the Trust’s Trustees and Officers is available in the Trust’s Statement of Additional Information (SAI). You can get a free copy of the SAI by visiting the Fund’s website at www.dodgeandcox.com or calling 1-800-621-3979.

 

PAGE 19 § DODGE & COX INCOME FUND


ITEM 2. CODE OF ETHICS.

A code of ethics applicable to the registrant’s principal executive officer and principal financial officer, as defined in Item 2 of Form N-CSR, has been adopted by the registrant and was in effect during the entire period covered by this report. A copy of the code of ethics as of January 1, 2008 is filed as an exhibit to this Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the period covered by this report.

 

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

The Board of Trustees of the registrant has determined that William F. Ausfahl and L. Dale Crandall, members of the registrant’s Audit and Compliance Committee, are each an “audit committee financial expert” and are “independent,” as defined in Item 3 of Form N-CSR.

 

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

(a) – (d) Aggregate fees billed to the registrant for the fiscal years ended December 31, 2007 and December 31, 2006 for professional services rendered by the registrant’s principal accountant were as follows:

 

     2007    2006

Audit Fees

   $ 191,720    $ 179,550

Audit-Related Fees

     22,400      19,030

Tax Fees

     66,380      66,450

All Other Fees

     —        —  

Audit fees include amounts related to the audit of the registrant’s annual financial statements and services normally provided by the accountant in connection with statutory and regulatory filings. Audit-related fees include the performance of agreed-upon procedures related to the registrant’s semi-annual financial statements and internal controls. Tax fees include amounts related to tax advice and tax return preparation, compliance, and reviews.

(e) (1) The registrant’s Audit and Compliance Committee has adopted policies and procedures (“Policies”) which require the registrant’s Audit and Compliance Committee to pre-approve all audit and non-audit services provided by the principal accountant to the registrant. The policies also require the Audit and Compliance Committee to pre-approve any engagement of the principal accountant to provide non-audit services to the registrant’s investment adviser, if the services directly impact the registrant’s operations and controls. The Policies do not apply in the case of audit services that the principal accountant provides to the registrant’s adviser. If a service (other than the engagement of the principal accountant to audit the registrant’s financial statements) is required to be pre-approved under the Policies between regularly scheduled Audit and Compliance Committee meetings, pre-approval may be authorized by a designated Audit and Compliance Committee member with ratification at the next scheduled Audit and Compliance Committee meeting.

(e) (2) No services included in (b) - (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

(f) Less than 50 percent of the hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees.


(g) For the fiscal years ended December 31, 2007 and December 31, 2006, the aggregate fees billed by the registrant’s principal accountant for non-audit services rendered to the registrant, for non-audit services rendered to the registrant’s investment adviser, and for non-audit services rendered to entities controlled by the adviser were $450,000 and $428,000, respectively.

(h) All non-audit services described under (g) above that were not pre-approved by the registrant’s Audit and Compliance Committee were considered by the registrant’s Audit and Compliance Committee and found to be compatible with maintaining the principal accountant’s independence.

 

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

Not applicable.

 

ITEM 6. SCHEDULE OF INVESTMENTS.

Not applicable. The complete schedule of investments is included in Item 1 of this Form N-CSR.

 

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

 

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

 

ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

Not applicable.

 

ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The registrant has adopted the following procedures by which shareholders may recommend nominees to the registrant’s Board of Trustees.

1. The shareholder must submit any such recommendation in writing to the registrant to the attention of the Secretary at the address of the principal executive offices of the registrant. The shareholder’s recommendation is then considered by the registrant’s Nominating Committee.

2. The shareholder recommendation must include:

(i) A statement in writing setting forth (a) the name, date of birth, business address and residence address of the person recommended by the shareholder (the “candidate”); and (b) whether the recommending shareholder believes that the candidate is or will be an “interested person” of the registrant (as defined in the Investment Company Act of 1940) and, if not an “interested person,” information regarding the candidate that will be sufficient for the registrant to make such determination and, if applicable, similar information regarding whether the candidate would satisfy the standards for independence of a Board member under listing standards of the New York Stock Exchange or other applicable securities exchange.


(ii) The written and manually signed consent of the candidate to be named as a nominee and to serve as a Trustee if elected;

(iii) The recommending shareholder’s name as it appears on the registrant’s books and the number of all shares of the registrant owned beneficially and of record by the recommending shareholder (as evidenced to the Nominating Committee’s satisfaction by a recent brokerage or account statement); and

(iv) A description of all arrangements or understandings between the recommending shareholder and the candidate and any other person or persons (including their names) pursuant to which the recommendation is being made by the recommending shareholder.

In addition, the Nominating Committee may require the candidate to furnish such other information as it may reasonably require or deem necessary to determine the eligibility of such candidate to serve on the Board or to satisfy applicable law and information regarding the candidate that would be required to be disclosed if the candidate were a nominee in a proxy statement or other filing required to be made in connection with solicitation of proxies for election of Trustees.

 

ITEM 11. CONTROLS AND PROCEDURES.

(a) An evaluation was performed within 90 days of the filing of this report, under the supervision and with the participation of the registrant’s management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures. Based on that evaluation, the principal executive officer and principal financial officer concluded that the registrant’s disclosure controls and procedures were effective.

(b) The registrant‘s principal executive officer and principal financial officer are aware of no changes in the registrant‘s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

ITEM 12. EXHIBITS.

(a) (1) The registrant‘s code of ethics pursuant to Item 2 of Form N-CSR is attached. (EX.99A)

(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are attached. (EX.99B)

(a) (3) Not applicable.

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached. (EX.99C)


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dodge & Cox Funds
By  

/s/ John A. Gunn

  John A. Gunn
  Chairman - Principal Executive Officer

 

Date   February 21, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Dodge & Cox Funds
By  

/s/ John A. Gunn

  John A. Gunn
  Chairman - Principal Executive Officer
By  

/s/ David H. Longhurst

  David H. Longhurst
  Treasurer – Principal Financial Officer
Date   February 21, 2008