Uncovering the Ethical Conduct of Dodge & Cox’s Leader’s Personal Trading

A recent investigative news report uncovers trading practices at Dodge & Cox, raising questions about ethical lapses at the investment firm.

According to ProPublica, a nonprofit organization known for its investigative journalism, Dodge & Cox’s chief investment officer, David Hoeft, made trades involving certain stocks around the same time as its funds. Both ProPublica and Dodge & Cox acknowledge that these trades were cleared by the firm’s compliance procedures and personal trading policies.

While investment firms commonly allow employees, including investment professionals, to invest in personal accounts outside the firm’s funds, Dodge & Cox defends such independence as crucial for attracting top talent. The firm emphasizes that this level of involvement motivates investment staff to make well-informed decisions and aligns them more closely with clients due to the personal stake in their investments.

Nevertheless, granting fund managers the freedom to trade individual stocks personally presents its own set of risks. A multibillion-dollar mutual fund manager could potentially gain an unfair advantage by acting on knowledge of his fund’s investment plans.

ProPublica’s data does not definitively indicate that Hoeft engaged in such practices. Their analysis, based on Hoeft’s tax records, is limited by the fact that Dodge & Cox’s mutual funds only disclose their holdings quarterly, not the specific timing of trades. This means that at best, it is known that Hoeft personally traded some stocks around the same time as his firm’s funds.

Dodge & Cox maintains a code of ethics and asserts that Hoeft’s trades adhered to the firm’s standards. They emphasize that Hoeft sought and received preapproval for his trading activities, with all employees’ trading activity being closely monitored by a compliance team, which did not flag any issues or take disciplinary action in the instances highlighted by ProPublica.

Given Dodge & Cox’s robust compliance policies and investment principles, it appears unlikely that Hoeft’s trading was unethical. Moreover, it is noted that Hoeft held the stocks featured in the exposé for extended periods, contrary to the behavior of many investors who engage in “front-running” for quick profits. In fact, two stocks cited by ProPublica, VMware BZF1 and NetApp NTAP, were held by Hoeft for at least two to three years before being sold, aligning with the firm’s long-term investment approach which prohibits short-term profits within 60 days of purchase.

The characterization of Hoeft’s trading as front-running appears to be exaggerated, as explained by Hoeft and Dodge & Cox in an interview with Morningstar. Hoeft’s purchase of VMware preceded the funds’ decision, following which the stock was put on the firm’s restricted list and later removed after Hoeft pitched the idea to an investment committee. Only after securing permission did Hoeft personally buy the stock, later suggesting it again, at which point Dodge & Cox began acquiring VMware shares for its portfolios.

In conclusion, there is no basis to revise Dodge & Cox’s High Parent rating or the Morningstar Medalist Ratings of its strategies.