These funds share top holdings with Berkshire Hathaway.
This weekend's Berkshire Hathaway BRK.B shareholder meeting in Omaha, Neb., means that Warren Buffett will be in the spotlight again. The last time Buffett made headlines, it was not for very pleasant reasons. David Sokol, a Berkshire executive widely seen as a leading candidate to succeed Buffett as CEO, abruptly resigned on March 28 under somewhat dubious circumstances related to his purchase of Lubrizol LZ stock before Berkshire purchased the company. On April 27, Berkshire's board said that Sokol had violated the company's ethical standards and insider-trading policies. Buffett has taken some heat for his handling of the situation, and he will undoubtedly be asked about it at the shareholder meeting.
Despite this controversy, Buffett remains one of the most widely respected investors in the world. Anything he has to say about investing or the markets gets a lot of attention, and his investment moves are watched closely. That's why Buffett's annual letter to Berkshire shareholders is such an event (you can read this year's letter here), and why any disclosure about the stocks he is buying or selling has the potential to move prices significantly.
Berkshire's annual report lists the top stocks in Buffett's investment portfolio, and this year's report shows that his top 10 stock holdings as of Dec. 31, 2010, weren't much different from a year ago. The top holding is still Coca-Cola KO, where Buffett is the largest shareholder, followed by longtime Buffett favorites Wells Fargo WFC, American Express AXP, Procter & Gamble PG, and Kraft KFT. The one new name in the top 10 is reinsurer Munich Re MUV2, replacing Wesco Financial WSC, where Berkshire is buying out the portion of the company it did not already own. The other stocks in Buffett's top 10 are Johnson & Johnson JNJ, U.S. Bancorp USB, Wal-Mart WMT, and ConocoPhillips COP.
Plenty of mutual fund managers are Buffett fans who emulate his investment approach in one way or another. Following the release of last year's Berkshire Hathaway annual report, we looked at the funds with the highest percentage of their portfolio in Berkshire's top 10 stock holdings at the end of 2009. In honor of this weekend's shareholder meeting, we revisited the question and calculated which funds have the biggest weighting in Berkshire's latest top 10 holdings, as listed above. We left out sector funds such as Fidelity Select Consumer Staples FDFAX and Fidelity Select Banking FSRBX, both of which would otherwise be in the top 10, as well as funds with less than $100 million in assets. With those constraints, the following table shows the 10 funds with the most Buffettlike taste in stocks:
This list is dominated by three management teams, who manage a total of seven of the 10 funds. Not surprisingly, these managers all follow Buffett in liking big, profitable companies with strong competitive advantages, but they differ in other ways.
First, there's Donald Yacktman and his son Stephen Yacktman, who manage the top two funds on the list, Yacktman Focused YAFFX and Yacktman YACKX. They follow a Buffettesque strategy that focuses on profitable companies, usually with little debt, that are trading at a substantial discount to their estimate of the companies' intrinsic value. These funds have sometimes had significant weightings in small- and mid-cap stocks, but they're currently dominated by mega-cap blue chips of the type Buffett holds, and each of the funds has five stocks from Buffett's top 10 (Procter & Gamble, Coca-Cola, Johnson & Johnson, ConocoPhillips, and U.S. Bancorp) among its top 13 holdings. Both funds have been outstanding long-term performers, and Donald Yacktman was a finalist for the Morningstar Domestic-Stock Manager of the Decade award in 2010.
Dreyfus Tax-Managed Growth DTMGX and Dreyfus Appreciation DGAGX are both managed by a team at Fayez Sarofim. The strategy is similar to the Yacktmans' in that it focuses on high-quality blue chips, though there is somewhat less emphasis on valuation here, which is why these funds are in the large-blend category rather than large-value. (Also, the Yacktmans sometimes put as much as one third of the portfolio into cash if they can't find enough bargains, similar to Buffett, whereas the Fayez Sarofim team stays fully invested.) Both of the Dreyfus funds have Coca-Cola, Johnson & Johnson, ConocoPhillips, and Procter & Gamble among their top holdings, along with such similar blue-chip stocks as ExxonMobil XOM and Philip Morris International PM. They've been strong performers over time but have tended to trail their peers in aggressive bull markets like 2009.
Finally, there's Clipper CFIMX and MMA Praxis Core Stock MMPAX, which are managed by Chris Davis and Ken Feinberg, and Davis Financial RPFGX, which is managed by Feinberg and Charles Cavanaugh. Davis and Feinberg are well-known fans of Warren Buffett, and under their management Clipper has often been one of the biggest holders of Berkshire Hathaway stock, as we've noted before. Clipper's highly concentrated portfolio also includes American Express as its third-largest holding, with smaller positions in Procter & Gamble, ConocoPhillips, Coca-Cola, and Wells Fargo. MMA Praxis Core Stock is less concentrated, but it has Wells Fargo, Procter & Gamble, and American Express among its top five holdings. Both of these funds got hit hard in 2007 and 2008 by some ill-timed bets on financial stocks, and as a result their five-year returns look terrible. But these managers have shown themselves to be savvy stock-pickers over the long term, and Clipper remains one of our favorite large-blend funds, along with its less-concentrated counterparts, Davis NY Venture NYVTX and Selected American Shares SLASX.
Of the 10 funds on this list, only the two Yacktman funds have beaten Berkshire Hathaway's 7.33% annualized return over the past five years, illustrating how tough it is to beat Buffett. Even so, these funds have mostly been strong performers over the long term, with all but the two Davis-Feinberg funds beating their categories over the past five years. That long-term strength illustrates why so many people pay attention to Buffett's portfolio, and why emulating his general approach has been a winner over time.