Wachovia Corp's biggest institutional shareholder said on Thursday investors were misunderstanding the troubled bank's business and its stock was trading very cheap.

"The price is awfully low right now," money manager Dodge & Cox's chief investment officer, Charles Pohl, told Reuters on the sidelines of Morningstar's annual investment conference. Dodge & Cox owned 5.8 percent, or 125 million shares, of the number-four U.S. bank at end-March, according to Reuters data.

"The company does have problems. Non-performing loans have been rising. There are issues, but from our point of view, we want to take a look at what we think the underlying value of the business franchise is and its long-term potential for earnings and compare that against the valuation we are paying in the marketplace," Pohl said in rare comments to the media.

Wachovia has been hit hard by its exposure to the troubled mortgage sector, posting a $708 million loss for the March quarter, its first quarterly loss since 2001. The bank has been forced to raise about $8 billion of capital in April and cut its dividend by 41 percent. It also ousted chief executive Ken Thompson in June.

This week, Wachovia said it had hired Goldman Sachs Group Inc for advice on its loan portfolio.

Wachovia's non-performing assets more than quadrupled over the year to the end of March to $8.37 billion largely due to mounting defaults on adjustable-rate mortgages that let borrowers pay less than the interest due. Such low payments can cause amounts owed on so-called "option ARMs" to rise even as home prices fall.

Option ARMs were a specialty of Golden West Financial Corp, a California lender that Wachovia bought for $24.2 billion in October 2006 just as the five-year housing boom was peaking.

The Dodge & Cox fund manager, however, said at an investment round-table that investors were not giving credit to Golden West for its "significantly better" underwriting standards.

Wachovia shares were down 5.6 percent at $16.87 in late trade in a weak market. They hit their lowest level in 16 years this month and have lost more than half their value in 2008, prompting speculation the bank could be a takeover target.

"It's possible," Pohl told Reuters, when asked if Wachovia could be acquired. "A lot of the financials are under pressure and so they don't all have the best currency and not all are in the best position to do acquisitions now. But it's possible."