Q: Why are Dodge and Cox International and Dodge and Cox Balanced rated four and five stars by Morningstar? A: Morningstar rates funds by...

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Q: Why are Dodge and Cox International and Dodge and Cox Balanced rated four and five stars by Morningstar?

A: Morningstar rates funds by considering the risk-adjusted return of the fund.

This reduces the ratings of funds that take extreme risks in pursuit of returns and increases the ratings of funds that take modest risks in pursuit of returns.

Basically, they rate funds by the amount of return they provide per unit of risk. In this respect, Dodge and Cox funds continue to compare well against their value-oriented peers.

Over the five years ending Dec. 7, for instance, Dodge and Cox Balanced fund (ticker: DODBX) earned 12.08 percent a year, putting it in the top 18 percent of its “moderate-allocation” peers.

Performance was off in 2007, but one year isn’t a reliable measure of performance.

The level of risk in the Dodge and Cox Balanced fund, as measured by standard deviation, is usually slightly lower than average. Sadly, Dodge and Cox Balanced fund is closed to new investors.

Dodge and Cox International (ticker: DODFX), an international large-cap value fund, is a similar story. It returned 27.64 percent annually over the five years ending Dec. 7, putting it in the top 5 percent of its peer group. The average return in the category was 21.96 percent, according to Morningstar.

In this case, the Dodge and Cox fund has somewhat more risk than the group average, but it still provides more return per unit of risk.

Dodge and Cox International is rated five stars, has a minimum investment of $2,500, and a net expense ratio of only 0.66 percent. That’s less than half the 1.42 percent average of expense ratios in its category.

Questions: scott@scottburns.com