These Funds Invest With Conviction

Warren Buffett is arguably the world's greatest focused investor. In addition to his analytical prowess, a huge part of his long-term success owes to his willingness to invest with conviction. He takes stakes in companies that are likely to produce above-average returns over the long term, invests in them heavily both in terms of time and money, and then holds on to them during market gyrations.

In his 1978  Berkshire Hathaway (BRK.A) (BRK.B) letter to shareholders, Buffett wrote: "Our policy is to concentrate holdings. We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts." Buffett has also written that Berkshire Hathaway's "favorite holding period is forever," a testament to his commitment to buy-and-hold investing.

So are there any mutual funds that invest with Buffett's conviction, both in terms of concentration and holding period, and have also generated exceptional results? To help answer that question, we turned to our  Premium Fund Screener to search for domestic stock funds whose managers have been at the helm for at least five years and hold at least 40% of their assets in their portfolios' top 10 holdings. A low turnover rate is indicative that a manager subscribes to a buy-and-hold strategy, so we sought funds with turnover ratios of less than 20%.

To narrow down the pool even further, we eliminated index funds, funds of funds, and any funds that were closed to new investments. Furthermore, we gave the remaining funds a stress-test for long-term performance by requiring that they have ranked in the top quartile of their peer group for the trailing 10-year period. On the fees front, we required that the funds' expense ratios be less than the category average and layered on a screen for no-load offerings. When focusing on single share classes for each fund, the screener yielded a compact list of offerings as of Oct. 12, 2010, three of which we highlight below. Premium members can run the screen by  clicking here.

 Mairs & Power Growth (MPGFX)
Expenses: 0.71% | Minimum Investment: $2,500
Lead manager Bill Frels' strategy is to stick to what he knows, which means that his portfolio is composed of fewer than 50 Midwest-based companies, with the majority concentrated in Minnesota. The portfolio's concentration in industrial-materials stocks courts risk, but the fund held up better than most of its peers when materials stocks tanked during 2008's deep recession. In fact, the fund boasts an infinitesimal turnover rate of 3.2%, indicating that Frels displays a staunch conviction in his investment decisions through thick and thin.

 Sequoia (SEQUX)
Expenses: 1.01% | Minimum Investment $5,000
This fund has long been among our analysts' favorites. Managers Bob Goldfarb and David Poppe keep the fund tightly concentrated with anywhere between 10 to 25 names. But being picky about their investments--even if it means holding a significant portion of the portfolio in cash until they find a company they like--has paid off with handsome returns for relatively low risk. The fund's performance pattern--it tends to underperform in big speculative rallies and beats its peers when the going gets rough--makes it a good choice for equity exposure in a retirement portfolio.

 Yacktman (YACKX)
Expenses: 0.93% | Minimum Investment $2,500
Armed with a high-conviction buy-and-hold approach, managers Donald and Stephen Yacktman invest in profitable firms with a steady cash flows and healthy balance sheets that are selling at a discount to what they believe they're worth. The fund's lineup reveals a concentration of consumer- and service-oriented stocks, including several mega-cap pharmaceutical and consumer-staples stocks as well as large media companies. When stocks seem overvalued, the Yacktmans are willing to wait patiently on the sidelines with a sizable cash stake until they find the next bargain. And their long-term performance validates their valuation calls. This fund is a solid fund to own for both its long-term potential and its ability to ride out market turbulence relatively unscathed.