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Taking a Hint From Warren Buffett

Funds with big industrial and energy stakes that may be on Warren's wavelength.

Russel Kinnel, 10/08/2015

The article was published in the September 2015 issue of Morningstar FundInvestor.Download a complimentary copy of FundInvestor here.

Warren Buffett in August made Precision Castparts PCP the biggest investment of his life by offering $37 billion for the maker of complex aerospace and power system parts. Shares of the firm had been depressed because it is partly dependent on the flagging energy industry, though it has even greater exposure to the thriving aerospace industry. Buffett is betting that energy prices will come back at some point and Precision Castparts will prove to be a bargain. He’s long made investments in companies where short-term problems make a company attractive to the long-term investor.

To follow Buffett’s lead on this theme you could pick a beat-up fund that invests heavily in industrials and energy. I looked for diversified funds in the Morningstar 500--theMorningstar FundInvestor newsletter’s list of funds that should be on investors’ radars for management, process, stewardship, track record, and fees--with the most combined investments in those sectors. Naturally, most have poor recent performance because of their investments in those lagging sectors.

Delafield Fund DEFIX has 38% of assets in industrials and 7% in energy. This fund, which has a Morningstar Analyst Rating of Bronze, has suffered dismal performance during the past five years, but perhaps there’s a rebound in the offing. Dennis Delafield and Vince Sellecchia have long bought unglamorous companies attempting turnarounds, and they’ve done quite well until recently when their sector biases have hurt returns in a big way. Expectations for many of their companies are beaten down, so it might not take a lot to bring them back.

Lateef LIMAX doesn’t own any energy names, but it has a huge 36% of assets investment in industrials. Because it doesn’t have energy, performance has merely been mediocre of late. The fund tends to focus a little higher on the quality spectrum than Delafield, as it has both industrials such as Westinghouse Air Brake Technologies WABalongside growth and technology sector favorites such as Facebook FB and the parent of Internet titan Google, Alphabet Inc Class A GOOGL.

AMG Managers Skyline Special Equities SKSEX is the rare outperformer on our list. Despite having 35% in industrials and 2% in energy, the fund is in the top decile of its peer group for the past three- and five-year periods. The Bronze-rated fund is closed to new investors. Although the managers also seek companies with depressed earnings, they are looking for companies that can produce above-average earnings growth. Thus, they are not going after the most beat-up companies. As a result, they have few holdings in the red and many more like Avery Dennison AVY, which is up 25% this year.

Mairs & Power Growth MPGFX is a bit of a surprise entry given its emphasis on steady growers. But many are industrials such as Honeywell HON, 3M MMM, and Graco GGG. In fact, 3M and Graco shares are down this year, and the fund’s returns reflect the challenges of 2015, even if it isn’t as hard-hit as Delafield. All told, the fund has 32% in industrials and 3% in energy. Lead manager Mark Henneman looks for well-run companies that can grow at a steady clip. However, he likes to get in on the cheap end and thus tends to buy amid downturns.

Royce Premier RYPRX is much more in the Delafield mold. It owns deep-value names, and it has been punished severely for it. So, this and Delafield prob­ably would give you the most bang for your buck should energy and deep-value industrials rebound, but of course, they also have the greatest downside if the slide continues. Chuck Royce became sole lead manager here when Whitney George exited because of some bad bets on materials stocks. The fund has 30% in industrials and 5% in energy. Royce wants companies with clean balance sheets that are also trading at a steep discount. It is the latter part that has gotten the fund into challenging situations, as the market isn’t offering many great companies at big discounts these days.



Russel Kinnel is Morningstar's director of mutual fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for greater gains. (Click here for a free issue). Mr. Kinnel would like to hear from readers, but no financial-planning questions, please. Follow Russel on Twitter: @russkinnel.

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