3 reasons not to ditch Dodge & Cox International

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(Money Magazine) -- Last fall Dodge & Cox International (DODFX) made big bets in the emerging markets and in economically sensitive stocks it considered undervalued, such as financials. By the end of 2008 the portfolio had sunk 47%, making it one of the worst-performing foreign large-value funds last year.

Still, it stuck to its game plan of seeking out beaten-down or cheap stocks -- and that perseverance is paying off. There's a strong case why you should be patient with this fund too.

1. Delivers a bumpy ride

Don't confuse Dodge & Cox's strict value investing principles with safety. There's a reason the stocks this fund favors are cheap to begin with.

"You have to be willing to accept temporary problems depressing the value of a business," says co-manager Diana Strandberg. That risk, combined with the managers' willingness to ride out periods of underperformance, can lead to a volatile trip. "It's not for you if you can't stomach downturns," says Morningstar senior analyst Bill Rocco.

The managers admit they underestimated the problems in financials during the credit crisis. Still, International has soared 45% this year as many beaten-down holdings have rebounded since early March.

2. Makes concentrated bets

This fund goes after undervalued shares only, even if those investments happen to be concentrated in a few areas of the market, sectors, or regions. Today it holds just 95 stocks in its portfolio, vs. an average of 198 among its foreign-fund peers.

In addition, International now maintains a bigger-than-average stake in emerging-market shares. The managers also favor developed-market firms that stand to benefit from fast-growing emerging economies. An example is London-based banking giant HSBC, which has a strong presence in China and Hong Kong.

Dodge & Cox managers say they are finding good values as well in global pharmaceutical companies, such as Novartis and Bayer.

3. Is stubbornly patient

While Dodge & Cox International's performance may be rocky from time to time, over the long run you know exactly what to expect: consistency. "They won't reverse their strategy on you," says mutual fund consultant Geoff Bobroff.

Last year the fund replaced only about a third of its holdings. In normal years its turnover rate is often less than 20%, says Strandberg. That's less than half the turnover of the average foreign large-value fund.

This patience has paid off. The fund's annualized return of 9% over the past five years is better than 90% of its peers. "They have the courage of their convictions," says Morningstar's Rocco. "This is a good long-term fund."