Funds That Are Berkshire Hathaway Fans

We at Morningstar have long been fans of Warren Buffett and his investment vehicle,  Berkshire Hathaway (BRK.B). Buffett has become an investing legend (and one of the world's richest men) by finding understandable businesses with strong management and wide economic moats, buying them at a discount to their intrinsic value and holding on to them for the long term. From 1965 through 2008, Berkshire's book value increased at an annualized rate of 20.3%, more than twice the total return of the S&P 500 benchmark during that period. Last year was one of the toughest in Berkshire's history, but the firm's second-quarter 2009 results, reported on August 7, showed that it's already rebounding strongly.

Given how respected Buffett is in the investment world, it's no surprise that some mutual funds have tried to emulate his style, with varying degrees of success. (See, for example, "Seven Buffett-Inspired Funds We Believe In" and "Can Funds Go Wrong with Buffett as Their Guide?".) But imitating Buffett is no easy task, so other funds invest directly in Berkshire stock. Most of these are inspired by Buffett to some degree, some more closely than others.

We thought it would be interesting to take a look at the mutual funds with the biggest Berkshire stakes and see what they might have in common. The following table shows the 10 funds with the largest percentage of their portfolio in Berkshire Hathaway stock, with each fund's ticker and Morningstar category. We also show the size of each fund's asset base, its percentile ranking in its category for the year to date as of August 11, and its percentile ranking in its category over the past 10 years.

Funds That Are Big Berkshire Fans

Overall, this is a pretty strong group. Four of the funds on the list are Analyst Picks in their categories-- Sequoia (SEQUX), managed by Bob Goldfarb and David Poppe;  Weitz Hickory , managed by Wally Weitz; and Clipper (CFIMX) and  Selected American Shares (SLASX), both managed by Chris Davis and Ken Feinberg. All of these managers are big Buffett fans who run concentrated portfolios and pay a lot of attention to stocks' intrinsic values, though they also differ in significant ways. Sequoia was originally managed by longtime Buffett friend and prot�g� Bill Ruane, and it has a bit more of a growth tilt than the other three. Wally Weitz, on the other hand, is a classic contrarian value investor who puts more emphasis on stocks that are cheap relative to the present value of their future cash flows. Davis and Feinberg are somewhere in the middle, striking more of a balance between stable growth and cheapness.

The other funds on the list are a somewhat mixed bag, but there are no real duds. Of the two that Morningstar covers,  Oak Value  is also a solid offering with a good long-term track record and managers who are big Buffett fans. The other,  Fidelity Select Insurance (FSPCX), is a highly specialized niche fund focused on insurance stocks, but it's too specialized to be a good option for most individual investors. The top fund on the list, Blue Chip Investor (BCIFX) is a tiny fund that has been around since 2001 and has had Berkshire Hathaway as its top holding since 2003. As its name implies, this fund invests in stable blue-chip stocks with high profitability and wide economic moats, though its track record has been fairly erratic.

In fact, most of these funds tend to favor stocks with wide moats and low levels of uncertainty, which is not surprising given their affinity for Buffett and Berkshire. In December 2008, we calculated weighted-average moat and fair-value uncertainty scores for all the large-cap funds in our database, and we updated the calculations in March. (You can read the original article here.) Of the seven large-cap funds in our table, six had moat scores above the large-cap median as of March 31, and Blue Chip Investor's and Oak Value's moat scores were among the highest of any large-cap funds, meaning they had an especially high concentration of wide-moat stocks. Similarly, six of the seven large-cap funds had fair-value uncertainty scores below the median, and Blue Chip Investor's and Sequoia's scores were among the lowest, meaning their holdings tended to have very stable, predictable cash flows.

Berkshire Hathaway is classified as a financial stock because it gets most of its revenue and profits from insurance, and seven of the nine diversified funds on the list (all except BBH Core Select  and Rydex/SGI Large Cap Value (SECIX)) are significantly overweight in financials relative to their category. Blue Chip Investor and Clipper are the most extreme, with nearly half of their assets in financial stocks. However, the others aren't particularly fond of financials other than Berkshire; Weitz Hickory and Oak Value would have financial weightings right around the category average if Berkshire were excluded, and Sequoia would be significantly underweight. Most of these funds appear to be attracted to Buffett and Berkshire in particular, rather than the financial sector or insurance industry in particular.

As we've noted before, merely trying to imitate Buffett doesn't automatically make a fund good, but there are plenty of excellent fund managers out there who think highly of Buffett and take his investing ideas to heart, as this list illustrates. Not all such managers own Berkshire stock; Bruce Berkowitz of the  Fairholme (FAIRX) fund, a Buffett admirer who used to own a big Berkshire stake, sold that entire stake in late 2008 because he thought he could get better returns elsewhere. Individuals can certainly get a lot from Buffett's ideas, too; good places to start include Morningstar's coverage of the Berkshire Hathaway annual meeting, as well as Buffett's candid and informative shareholder letters.