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These Funds Invest with Conviction

An investing legend gets us thinking about a straightforward concept.

Michael Breen, 05/29/2007

In our years of studying investors, it hasn't been lost on us that many of the best ones use concentrated, low-turnover approaches.

Exhibit A, of course, is Warren Buffett, who has generated impressive long-term returns for Berkshire Hathaway BRK.B using a high-conviction strategy. Buffett is a straight shooter whose commonsense approach has delivered extraordinary results. He looks for great companies trading at fair prices that he can buy meaningful stakes in and hold for the long haul. That's about it. Buffett owns few names because he thinks overdiversification is a poor substitute for knowledge on individual firms. He also believes that great investment opportunities are few and far between, so excessive trading is dangerous. Buffett persuasively argues that it is much better to buy large positions in the few companies you understand best and then hold them indefinitely so that you can benefit from the internal compounding of a superior business.

Buffett's conviction in his picks got us thinking about funds that load up on what they like best. We screened Morningstar's database for concentrated portfolios with low turnover, and found funds using a surprisingly wide array of styles making big, long-term bets on their top holdings.

Buffett Disciples
Of course, funds run by unabashed Buffett disciples immediately jumped out when we searched for high-concentration, low-turnover managers. Such successful value managers as Bruce Berkowitz, Larry Pitkowsky, and Keith Trauner of Fairholme FAIRX; Chris Davis and Ken Feinberg of Selected American SLASX; Robert Goldfarb and David Poppe of Sequoia SEQUX; and Wally Weitz of Weitz Partners Value WPVLX base their strategies on the same tenets as Buffett. All four funds have very low turnover and concentrate assets in their top 25 holdings. Not surprisingly, they have many top holdings in common with each other and with Buffett's portfolios. All four funds also have stakes in Berkshire Hathaway.

Safe and Cheap
Meanwhile, a set of successful, concentrated value managers use strategies that differ greatly from Buffett's. For example, Marty Whitman and his team at Third Avenue Value TAVFX don't care if a company is great as long as its shares are dirt-cheap and offer a good margin of safety to investors. They take a go-anywhere tack, and regularly buy distressed securities that they think are too inexpensive.

Likewise, the managers at Mutual Discovery TEDIX crisscross the globe looking for special situations. They don't shy away from controversial stocks in troubled industries, and they have long been big holders of global tobacco stocks. That fund's former manager, David Winters, now runs Wintergreen WGRNX, where he emphasizes cheap asset plays. A while back Winters piled into the fairly illiquid shares of Consolidated-Tomoka CTO, a holder of key tracts of land in south Florida. He says that the firms is well positioned for the next 20+ years.

A lesser-known option, Westport WPFRX is a solid mid-cap portfolio with just 30 names, half of which have been held for more than five years. Manager Ed Nicklin is a contrarian who targets firms that look cheap based on their break-up value or long-term cash flows. He buys only those where he can identify a catalyst to jump-start results. 

And as its name indicates, Franklin Rising Dividends FRDPX targets firms that have steadily boosted their dividends. The portfolio holds only 45 names, and manager Don Taylor won't sell a stock unless its fundamentals fall off a cliff or its dividend collapses. Turnover at this reliable offering rarely tops single digits.   PAGEBREAK

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