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Warren Buffett did not make billions investing the way all of the popular kids invested. And so it should be that mutual fund investors should not look for solutions that all of the popular equity funds when they are looking for where to invest their money. In fact, our article about contrarian investing suggest that investors seek the complete opposite of what everyone else is doing. Granted, our point has been used more to steer investors back into equity funds and out of those bond funds they seem to want to buy in the face of all of the risks, but there is a lot to be said about swimming against the current. Especially if it seems to work, as it seems to work for this particular fund.

The Dodge & Cox Stock fund (DODGX) is a large cap value fund. Morningstar does not really like this fund based on its risk assessments and star ratings (currently rated as a 3-star fund), but on the more subjective and human side, analysts at Morningstar have chosen it as one of their top picks. So while we do not have the numbers to support our appreciation for this value fund, we are not alone in our assessment that it is an attractive equity fund. (Then again, who cares what the popular kids think anyway?).

Who Cares What The Popular Kids Think?

With a YTD return of 4.76%, the Dodge & Cox Stock Fund lags its peers in the Large Cap Value Equity class by almost 2%. But what regular readers to the Mutual Fund Site will attest, we are not much about investing for the future while looking in the rearview mirror of historical performance. In fact, we are more about what this fund has to offer in terms of tangible value than anything else. And what we see here is that nearly 17% of this fund’s total assets of $40.7 Billion is invested outside of the United States. Yes, we love diversification.

What appeals to us about this mutual fund’s foreign exposure is that most of that 17% (about 14% if you want specifics) is invested in Europe where returns have actually been quite favorable on a year-to-date basis. And besides, European companies pay bigger dividends, allowing this equity fund to yield 1.24%. Nothing that will knock you off your feet, but respectable as far as a non-dividend fund goes.

Can Sectors Be Unpopular?

This value fund is like any other in that it will look for unpopular pockets as a place to invest. What do unpopular sectors look like? That the funny thing: sector popularity shifts from one investment group (e.g. large cap to small cap, growth to value and everything in between) to another. Sector popularity is pretty tough to pin down because no two funds invest alike.

But what we see with this particular value fund is that it has a shade more than 20.6% of its assets invested in Healthcare, arguably one of the least popular sectors we have seen (other large cap value funds will risk a little more than 11%, on average). Its next largest sector holding is financial services at 16.2% (compared to a little more than 20% for its peers), followed by Media at 12.8% (compared to its peers at 4.8%).

What we can see from the above is that it has found a way to isolate unpopular sectors in a field that typically looks for those sectors by virtue of their existence. (Although if you really think about it, value investing is quite different than contrarian investing; it just works out here that there is some overlap in the sectors). On the surface, we actually question that could look so attractive in Healthcare and Media, although we do take some comfort in seeing its fairly substantial investment in Financial Services.

A final note on sectors is this: this equity fund has no exposure to Utilities. We mention this not because such assets are likely overbought, but because this equity fund can still generate a yield of 1.24% without holding those types of securities that generally yield a lot.

So what makes this fund so attractive if we are not dazzled by its sector choices? Perhaps the underlying portfolio will shed more light on this. But keep in mind that there are just 82 different companies that this equity fund holds. That’s a pretty tight portfolio and with turnover at just 18%, this is one value fund that is purposely taking the positions it has. So what are the big holdings?

HP at 4.6% of holdings with a YTD return of -19.6%

How about that for an OUCH!? Notwithstanding the drama surrounding Hewlett-Packard’s new Chief, but HP is not only this mutual fund’s biggest holding, it is its biggest loser… a position this value fund added to recently (thank goodness). But for a Hardware company, HP cannot be faulted for finding itself in such a prominent position in this fund’s portfolio. Despite the YTD number, HP is a progressive company that will deliver good returns over the long haul. Yes, it is unpopular, but its expansion into non-hardware services at a time when IBM is reaching all-time highs sure speaks to the future. And when investors put money into equity funds, it is the future that counts, no so much the past.

Comcast at 3.6% with a YTD return of 9.12%

As a Media company, Comcast is one to own. Its yield of 2.1% speaks for itself; a decent number from a domestic equity. But where this 2nd top holding really impresses is in its execution. With revenue growth in a period where one would expect contraction, Comcast has been able to deliver on multiple fronts. With cable, phone and internet access points into consumer homes and as a way in to small and medium enterprise, not to mention the NBC Universal acquisition, this Media company is surely one of the better positioned companies. Remember, there is a shift happening in media, and Comcast’s size and scope should help it survive this and emerge stronger, particularly with its continued spending on improving its consumers’ experiences with these media types.

Dodge & Cox obviously echo our optimism about Comcast because the mutual fund has continued to add to its position.

Merck & Co. at 3.4% and a YTD return of 4%

Healthcare sure is not knocking the ball out of the park and Merck is no exception. With a mild return of 4%, Merck has a healthy dividend yield of 4.1%. And that is about it; the company is showing mild growth rates and with the loss of several patents, its recent acquisition of Schering (which many see as a way to create value through synergies and restructuring) and its soon-to-expire patent on its biggest revenue contributor, Singulair, Merck is not much of a value play, in our opinion. Some might see it as a growth play due to its growing size and scope, but we see more drawbacks to this 4th largest holding and would avoid it if not for that dividend yield. Yet the fund continues to add to its position here. (Now, Novartis on the other hand, is one of its top holdings that we like…).

What These Top Holdings Suggest

The way this mutual fund has positioned itself with some of its holdings tells us that the fund will either continue with fairly substandard returns or it will start hitting grand slams. While we may not be big on Merck, this holding represents just one of its 82 positions and we trust, based on many of its other positions, that the managers overlooking this value fund know what they are doing. Not only that, but Dodge & Cox is rumored for having a strong research and analysis team, so some of the more suspect holdings could actually be golden eggs waiting to hatch.

Why Own This Fund?

We like this value fund. It is an equity fund that is most domestic, but explores better and contarian-type ways of making returns. Unfortunately, returns have been its soft spot with its 3-year Total Return still at -10%. Ouch. But this is a fund that is not unfamiliar with finding its name in the Top 5 performers for its group. It is due to find itself in this area again. And in fairness to the fund, it has only underperformed the Index and category in 2 of the past 10 years, one of the reasons it has earned a 5-star rating at Morningstar for its 10-year record.

So investors who want an atypical equity fund with a large value bias, this will make sense for the long-haul. It is a good fund, we like how it invests and believe some of its newer positions will really contribute to its objective of achieving above average returns for the risks it is taking.