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Topnotch Funds With a Buffett Bent

These high-conviction wide-moat offerings will hold you in good stead through tough times.

Esther Pak, 04/27/2011

Warren Buffett isn't fazed by an anemic market or a bleak economic outlook. He knows that successful investing means playing a good defense, but doing so doesn't have to equal passively waiting on the sidelines. When he finds companies with long-term competitive advantages and clean balance sheets, he'll back up the truck for them.

Investors who like the Buffett philosophy can, of course, invest in Berkshire Hathaway BRK.A BRK.B shares. But to gear up for the upcoming Berkshire Hathaway annual shareholder meeting, we wanted to run a Buffett-inspired screener to seek out mutual fund managers who echo the Buffett philosophy--sharing his focus on sustainable competitive advantages and reasonable price tags and investing with conviction when they find them.

Using Morningstar.com's Premium Fund Screener, we looked for funds with some Buffettlike characteristics. We starting by homing in on funds with stocks that have sustainable competitive advantages, looking for average moat ratings of moderately wide or higher. Buffett has dabbled in overseas investments, but we kept the focus on domestic no-load stock funds with expense ratios of no more than 1%. To seek out funds whose managers demonstrate conviction, we layered on additional screens for concentration, requiring that funds have no more than 40 holdings and at least 30% of their assets are in the manager's top 10 picks.

Few mutual funds have managers with Buffett's tenure--he's been running Berkshire full-time since 1969--but we looked for at least some longevity, seeking managers who have at least five years of experience at the helm. Finally, we called up distinct portfolios of noninstitutional funds that were open to new money with initial purchase requirements of less than $5,000. Below, we highlight two of the funds the screener yielded. 

Bridgeway Blue Chip 35 Index BRLIX
Average Moat Rating: 4.243
Lead manager John Montgomery and his team pave their own path with this unique index fund, owning about 35 of the market's heavyweights in equal weightings and rebalancing them quarterly. The portfolio's holdings include moat-worthy firms such as Oracle ORCL, General Electric GE, and Microsoft MSFT, all of which have Morningstar Ratings for stocks of 4 stars. Management refrains from making sector bets or loading up in any one industry, which keeps this concentrated portfolio diversified and helps limit volatility. The fund has done well, outpacing the S&P 500 since inception. Moreover, this fund boasts notable stewardship efforts, receiving the highest marks for its standout corporate culture and ultralow fees. We think this mega-cap offering is a worthy core anchor in an investor's portfolio.

Jensen J JENSX
Average Moat Rating: 4.446
Sticking to a highly disciplined strategy has been fundamental to this fund's success. Management screens through nearly 10,000 companies before homing in on around 30 firms that have earned a 15% return on equity--a measure of profitability--for 10 consecutive years, and are trading below what management considers to be their fair values. The fund's concentration and miniscule turnover of 12% attest to management's high-conviction strategy--an approach that has rewarded investors with a strong long-term track record and limited volatility in comparison with its large-growth peers. With a portfolio that includes 4- and 5-star moat-worthy stocks such as PepsiCo PEP, Adobe Systems ADBE, and Abbott Laboratories ABT, this offering is a worthy contender as a core holding, even in a taxable account.

Data as of April 25, 2011.


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