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Three Ways to Complement a Buffett-Heavy Portfolio

Jason Stipp

Jason Stipp: I'm Jason Stipp from Morningstar. The Annual Berkshire Shareholders Meeting is happening this weekend and Buffett devotees and Berkshire shareholders from all over the world will be convening in Nebraska.

It got us to thinking, what does it mean to have a portfolio like Buffett's? And if you were just investing in Berkshire, what kind of portfolio would you have? Here with me to discuss is Morningstar's Christine Benz. She is director of personal finance and she has some ideas on how you might round out a Buffett like portfolio. Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So the first question for you, if you were just investing in Berkshire or if you were investing just like Buffett, what kind of portfolio would you end up with as a result of that?

Benz: Well, Buffett looks for companies that are trading cheaply and also very high-quality companies, so those are great attributes. In general, though, he tends to find his happiest hunting ground in a couple of major industries, insurance of course, and reinsurance, and also in some of the industrial manufacturing spaces. So those are big emphases for the portfolio.

Also it is a pretty domestically focused basket of companies. While Buffett has done some hunting overseas over the past several years, still quite a big domestic emphasis as well.

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Stipp: Sure. And I know one of the things that Buffett has said before is that sometimes he will put things in the "too hard" pile; if you can't understand the business or if it's too outside of his area of expertise, he just won't bother with it. So you know there are some areas where he just won't venture. What are some areas where you would be lighter if you were investing just like Buffett invests?

Benz: Well, technology certainly has historically been an area where Berkshire has gone very lightly if at all. So for someone who is interested in having full sector diversification, and again Jason not everyone wants that, but for someone who does want reasonable performance in a variety of market conditions, that might be one sector where you would find Berkshire to be light.

Stipp: So if you put together a very Buffett-like portfolio and you just decided that you weren't quite comfortable with the concentrations, you wanted to round out your portfolio and have a little bit more diversification, you have a few ideas for some funds you might want to take a look at, so let us know about those?

Benz: OK. So the first one, this is the first fund that crept to mind when I was thinking of un-Buffett like picks. This is Turner Midcap Growth. It is a very aggressively positioned mid-cap growth fund, very high turnover, which is quite un-Buffett like, and also a big emphasis on some of those information technology names that we were discussing Buffett typically doesn't invest in.

And the other thing that I like about this fund as a complement to a portfolio anchored in Buffett is that the performance patterns will be very, very different. So when you look back on '08, '09 for example, Turner Midcap Growth was a fund that lost something like 48% in 2008 and gained as much in 2009. Berkshire lost a lot less in 2008, but didn't do nearly so well in 2009. So I think if you were to plot these two together on a graph and look at their performance, you'd see very different behavior.

Stipp: So certainly a way, it sounds, to add a little bit of octane to the Buffett like portfolio.

Benz: Right. Small slice in that Turner.

Stipp: Small slice, sure. So the second one you have is, again, looking internationally, where Buffett maybe looking there a little bit more as you said, but historically he has looked domestically, so what do you have on the international front?

Benz: Well this is Artio International Equity II, and it is very different from Berkshire in a lot of ways. First of all it is mainly foreign focused and also has some emerging-markets, and its managers also think about top-down considerations. So they might decide to over- or underweight certain countries or currencies. They also do focus on bottom-up factors just like Buffett does, but not exclusively so that differentiates it somewhat as well.

Stipp: And your last pick I thought was a little bit surprising and maybe seems a little bit ordinary. Tell us a little bit about your third pick?

Benz: Well, this would be a total market index fund, and Vanguard recently ran some data and what they showed was that even people who are very confident in their ability to pick active stock-pickers which you would be if you are delegating stock-picking to Buffett, or a big share of your portfolio to Buffett, even those people could see an improved risk/reward profile for their portfolio by adding a small slice of an index fund.

So you can really choose whichever one you want. Vanguard, Fidelity, and Schwab all have nice low-cost ones. But that can help you ensure overall sector diversification in a portfolio that perhaps is anchored by Buffett or Buffett like picks.

Stipp: Well great, Christine. Sounds like some great Buffett complements that could be useful for your portfolio. Thanks for joining me today.

Benz: Thank you, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.