Q:  What is the history and objective of the fund? A : Established in 1930, Dodge & Cox provides investment management to institutions and individuals through separately managed portfolios and mutual funds. We manage about $190 billion in total firm assets including $25 billion in the Dodge & Cox Income Fund, which was launched in 1989. The objective of the Fund is to provide shareholders with a high and stable rate of current income consistent with long-term preservation of capital. A secondary objective is to take advantage of opportunities to realize capital appreciation. Q:  What are the tenets of your investment philosophy? A : Our investment philosophy is based on a long-term investment horizon, independent, fundamental research that drives individual security selection, and portfolio diversification. A major tenet of our philosophy is that investment fundamentals are critical, and so fundamental research is a key driver of our investment decisions. We believe that in the bond market there are many, and at times quite significant, mispricings of individual issuers, securities and sectors, often due to temporal or short-term factors. Consequently, our research approach is based on identifying and seizing those opportunities through a combination of fundamental research and a strict valuation discipline. We seek to differentiate the short-term concerns that may be temporarily depressing an investment from the key fundamental factors that will determine investment value over the long term. When our research-informed view diverges from the market consensus, we can find investment opportunities. Q:  How does your philosophy translate into an investment strategy? A : Generally speaking, portfolio yield is a critical component of longer-term returns for a bond portfolio. To build an intelligent and durable yield advantage over a broad market benchmark, we rely on the quality of our research and our ability to pick out undervalued opportunities from higher yielding sectors like corporate securities and agency mortgage-backed securities. Our strategy is to assemble a portfolio of securities with broadly diversified risk-return profiles, focused on areas where we know, understand and appreciate the return potential of each of them. As you might expect given our yield orientation, the Fund currently features overweights to the Agency mortgage and corporate sectors and an underweight to U.S. Treasuries and other government bonds. The magnitude of these weightings varies over time depending on valuations and our view of the fundamentals of securities within each sector. As an example, corporate securities represent almost half of the Fund (as of 3/31/2012) with around 50 issuers selected individually for their specific investment merits. Speaking generally about the sector, we see strong fundamentals (high cash positions, solid cash flow relative to debt burden, etc.), and at the same time inexpensive valuations relative to U.S. Treasuries in particular. This dichotomy creates many attractive investment opportunities in our view. We see particularly compelling value in the Fund’s bank holdings, which are the cheapest sub-sector of the corporate market and represented almost 12% of the Fund at the end of the first quarter. Bank of America Corporation is one of our significant holdings. The bank obviously has had some significant challenges over the last four years but they have made clear improvements in their liquidity, earnings and capital, and dealt with the legacy problems from their Countrywide and Merrill Lynch acquisitions. We think that there is a high margin of safety in being a creditor to that institution and the valuation is very attractive. If we see situations where we think that absolutely all the positive news has been factored into the price, we will scrupulously avoid them, whether or not they make up a significant part of the benchmark or universe. A clear example of that would be the U.S. Treasury sector where our current representation is quite low. Q:  How do you carry out your research? A : We have a deep and experienced team who follow the many sectors of the bond market. The team is divided into those that research credit-based investments (including corporates and municipal bonds) and those that research structured products such as Mortgage- and Asset-backed securities. The credit-focused group includes our 24 industry analysts, whom we share with our firm’s equity team. They conduct research on an on-going basis, focusing on the fundamental factors that impact a company's or industry's credit risk. This typically includes meeting with company management, visiting company facilities, analyzing company filings, and reading Wall Street and other third-party research. They also speak with competitors, customers, and suppliers to gain a greater understanding of industry dynamics. Through this research we gain valuable insights into industries and companies that we may be considering. Importantly, the breadth and experience of the industry analysts enable us to build and retain deep knowledge of individual companies that we can call upon when a good opportunity comes along. We apply a similar process to the structured products sector, though it is targeted less at credit risk as our investments are primarily in Agency MBS, which benefit from a high degree of government support. Instead, our structured products team conducts intensive research on issues relevant to prepayments, the primary risk faced by these securities. Q:  How do you build your portfolio? A : We essentially “build” the Fund’s portfolio bond-by-bond along the term structure, taking into consideration the risk/reward profile of securities and security types within each duration range. We are of course mindful of overall exposures and the interplay between securities and sectors, but the goal is to produce a broadly diversified portfolio of fixed income securities which is positioned to benefit from the insights developed through our research and focus on valuation. Our portfolio turnover averages somewhere between 25% and 35% per year, in line with our investment horizon of three to five years. Most of our ongoing investment decisions are incremental ones, raising exposure to securities or sectors that have become more attractive, lowering them in the reverse case. Q:  What risks do you primarily focus on? How do you mitigate risk in the portfolio? A : The three primary risks that we focus on are credit risk, interest rate risk and prepayment risk. A core belief of ours is that understanding and having deep knowledge of the underlying securities the Fund is invested in is perhaps the most important risk mitigator. In addition, we believe that having a broadly diversified portfolio of securities is a significant way to contain risk. And, of course, in trying to avoid overvalued securities and focusing on issues that are undervalued by the market, our value orientation tends to help as well.