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Funds That (Still) Buy Like Buffett, 2012

Funds with similar stock holdings to Warren Buffett have great long-term records.

David Kathman, CFA, 05/08/2012

The upcoming Berkshire Hathaway BRK.B shareholder meeting in Omaha, Neb., means that Warren Buffett will be in the spotlight again. Buffett's health is bound to be a major topic of concern and conversation, after he revealed on April 17 that he has stage-1 prostate cancer. Although the cancer was caught early and isn't considered life-threatening, the news still highlights the fact that Buffett is 82 years old and won't be around forever. This health scare is bound to increase speculation about succession planning, a hot topic for Berkshire watchers in recent years.

Buffett did address the succession issue in this year's Berkshire shareholder letter, which you can read here. He wrote that his successor as CEO has been selected and approved by the board, though, as expected, he did not reveal the person's name. Buffett also discussed the recent hiring of Todd Combs and Ted Wechsler to run portions of Berkshire's investment portfolio. Presumably, Combs and Wechsler will eventually succeed Buffett in running the entire portfolio, which is a big deal because 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.

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, 2011, weren't much different from a year ago. The top holding is still Coca-Cola KO, where Buffett is the largest shareholder, though the second-largest holding is newcomer IBM IBM, which Buffett just purchased in March 2011. These are followed by longtime Buffett favorites Wells Fargo WFCAmerican Express AXPProcter & Gamble PG, and KraftKFT. Last year's sole newcomer, Munich Re MUV2, remained in Buffett's top 10 this year, followed by Wal-Mart WMTConoco-Phillips COP, and U.S. Bancorp USB.

Plenty of mutual fund managers are Buffett fans who emulate his investment approach in one way or another. Following the release of the past two Berkshire Hathaway annual reports, we looked at the funds with the highest percentage of their portfolios in Berkshire's top 10 stock holdings at the end of 2009 and 2010. In honor of this weekend's shareholder meeting, we revisited the question and calculated what funds have the biggest weightings in Berkshire's latest top 10 holdings, as listed above. We left out sector funds such as Vanguard Consumer Staples Index VCSAX and Fidelity Select Consumer Staples FDFAX, both of which would otherwise be in the top 10, as well as funds with less than $100 million in assets and those with less than a five-year track record. With those constraints, the following table shows the 10 funds with the most Buffett-like taste in stocks, including each fund's five-year return and percentile rank in its category as of April 30, 2012.

  - source: Morningstar Analysts

This list is dominated by three management teams, who manage a total of five 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 Yacktman Focused YAFFX and Yacktman YACKX. They follow a Buffettesque strategy that focuses on profitable companies, usually with little debt, that are trading at substantial discounts to their estimates of the companies' intrinsic values. 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, ConocoPhillips, US Bancorp, and Wal-Mart) among its top 22 holdings. Both funds have been outstanding long-term performers, and Donald Yacktman was a finalist for the Morningstar Domestic-Stock Fund Manager of the Decade in 2010.

David Kathman, CFA, is a senior fund analyst with Morningstar.
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