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Funds That Buy Like Buffett, 2014

These funds emulate the Oracle of Omaha in many ways.

David Kathman, CFA, 05/01/2014

The Berkshire Hathaway BRK.A BRK.B shareholder meeting on May 3 in Omaha means that Warren Buffett will be in the spotlight again. There hasn't been much drama at Berkshire over the past year, which is just the way Buffett likes it. The firm's per-share book value grew 18.2% in 2013, which looks pretty good in absolute terms but is well below the 32.4% book-value growth of the S&P 500 benchmark. This was the fourth year out of the past five that Berkshire's growth has lagged that of the S&P 500, but it has always tended to lag the broader market in strong bull markets like we've seen during the recovery following the 2007-09 financial crisis. Before this five-year stretch, Berkshire's book-value growth had only trailed the S&P 500's in six out of 44 years.

Buffett explains all this and much more in this year's Berkshire shareholder letter, which you can read here. He discusses the acquisitions that Berkshire has made in the past year, including Nevada utility NV Energy and half of H. J. Heinz (a deal that had just been announced at the time of last year's letter). He sings the praises of Todd Combs and Ted Wechsler, the portfolio managers who now each runs a portfolio of $7 billion for Berkshire. He discusses at length two of the major types of businesses that Berkshire owns--insurance and regulated, capital-intensive businesses--and adds some thoughts on his investing philosophy.

Buffett's shareholder letter (which can also be found in Berkshire's annual report) also lists the top stocks in Berkshire's investment portfolio. This year's list shows that the top 10 stock holdings as of Dec. 31, 2013, didn't change much from a year ago. The top holding is still longtime Buffett favorite Wells Fargo WFC, with another longtime favorite, Coca-Cola KO, in second place. The third-largest holding is American Express AXP, followed by International Business MachinesIBMWal-Mart WMT, Munich Re MUV2Procter & Gamble PGExxon Mobil XOM,U.S. Bancorp USB, and Sanofi SNY. The only newcomer to the top 10 is Exxon Mobil, replacing Tesco TSCDF from last year's letter.

Plenty of mutual fund managers are Buffett fans who emulate his investment approach in one way or another. Following the release of the past four Berkshire Hathaway annual reports, we looked at the funds with the highest percentage of their portfolio in Berkshire's top 10 stock holdings at the end of 200920102011, and 2012. 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 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 under $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 29, 2014:

This list includes three notable 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 the Yacktman fund YACKX, which made the top 10 last year and just missed it this year). They follow a Buffett-esque 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 Yacktman Focus has five stocks from Buffett's top 10 (Procter & Gamble, Coca-Cola, Exxon Mobil, U.S. Bancorp, and Wells Fargo) among its top 25 holdings. Both funds have been outstanding long-term performers, and Donald Yacktman was a finalist for Morningstar Domestic-Stock Fund Manager of the Decade in 2010. Yacktman Focused has a Morningstar Analyst Rating of Silver, while the Yacktman fund is rated Gold.

A six-person team led by Fayez Sarofim and his son Christopher manages three funds on this list: Dreyfus Core Equity DLTSX, Dreyfus Tax-Managed Growth DTMGX, and Silver-rated Dreyfus Appreciation Investor DGAGX. Their strategy is similar to the Yacktmans' in that it focuses on high-quality blue chips, though here there's somewhat less emphasis on valuation. Also, the Yacktmans sometimes put up to 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. The three funds sport very similar portfolios, with each having five of Buffett's top 10 stocks among its top 25 holdings: Exxon Mobil, Coca-Cola, IBM, Procter & Gamble, and Wal-Mart. They've been solid performers over time but have tended to trail their peers in aggressive bull markets like 2009 and 2013.

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

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