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Will Railroads Keep These Funds on Track?

Warren Buffett and a diverse group of funds like the industry's prospects.

Warren Buffett's recently released  Berkshire Hathaway (BRK.B) annual shareholder letter prominently featured Berkshire's purchase of Burlington Northern Santa Fe as one of the highlights of 2010. Buffett said the purchase is working out "even better than I expected," and explained why he and vice chairman Charlie Munger are enthusiastic about BNSF's future. Railroads are much more fuel-efficient than trucking, giving them a big cost advantage, especially when fuel prices are rising. Buffett presented the purchase of BNSF as a bet on the long-term economic growth of the United States, about which he's more optimistic than many right now.

It's no longer possible to invest directly in Burlington Northern Santa Fe now that Berkshire owns it, but other railroad stocks have done pretty well during the last year as the economy has started to mend. The average railroad stock has handily beaten the S&P 500 Index over the past year, with such big names as  Union Pacific (UNP),  CSX (CSX), and  Canadian National Railway (CNI) gaining more than 30%. Results have been mixed in the past few months, but short-term volatility is to be expected in stocks as cyclical as these.

To get an idea which mutual fund managers share Buffett's optimistic view of railroads, we looked at the funds with the highest percentage of their portfolio in railroad stocks. Topping the list are a couple of specialty funds, Fidelity Select Transportation (FSRFX) and Rydex Transportation (RYPIX), with 31% and 28%, respectively, in railroad stocks. Several global infrastructure funds, such as Lazard Global Listed Infrastructure (GLIFX), are also high up on the list. We eliminated these in order to focus on diversified funds, and also left out funds with less than $100 million in assets. Within those limitations, the following table shows the 10 funds with the highest percentage of railroad stocks, including each fund's size and its percentile ranking in its category for the year to date and the past year (as of March 10).

 

Funds with the Most Railroad ExposureCategorySize ($M)Railroad %% Rank Cat YTD% Rank Cat 1 YrING Corp Lead Trst (LEXCX)Large value503.311.0822SunAmerica FocVal Large blend208.07.788076WHV Int'l Equity (WHVIX)Foreign lg blend221.77.74259USAA Aggressive Gr (USAUX)Large growth1337.16.634133Columbia Marsico FocGr (NFEAX)Large growth2848.86.438849Aberdeen Small Cap (GSXAX)Small blend263.46.197626Keeley Sm-MidCapVal (KSMVX)Mid-cap blend128.06.071347DFA US Lg Cap Value (DFLVX)Large value7895.75.8823Marsico Focus (MFOCX)Large growth1323.05.809049Keeley Sm Cap Value Small blend4127.15.603929

 

The top fund on this list, ING Corporate Leaders Trust (LEXCX), is a somewhat unusual case. It was launched in 1935 with a portfolio equally weighted among the 30 leading dividend-paying stocks traded on the New York Stock Exchange, and since then the only changes to the portfolio have come from mergers and acquisitions involving the original 30 stocks. Thus, it's heavily weighted toward energy, industrial, and utility stocks, which were the leaders in 1935. The fund's 11.08% railroad stake comes entirely from Union Pacific, its second-largest holding, but it previously held a big position in Burlington Northern Santa Fe, which is why Berkshire Hathaway is now the third-largest holding at 10.73%.

The rest of the list shows a strikingly diverse mix of funds, with six different categories represented among 10 funds. That diversity results from the fact that railroad stocks aren't always easy to classify; they tend to have modest valuations and are often thought of as value stocks, but their growth potential looks pretty good right now, for the reasons Buffett outlined in his letter. A good illustration of this dichotomy is the fact that Marsico and Keeley, a pair of diametrically opposed fund shops, are prominently represented on this list.

Marsico is a classic, though sometimes unorthodox, large-growth shop that combines top-down and bottom-up analysis. Lead manager Tom Marsico and his team tend to prefer steady growers with good long-term prospects, but they sometimes hold more-aggressive or cyclical names if the conditions are right.  Marsico Focus (MFOCX) and  Columbia Marsico Focused Growth (NFEAX) are near-clones with concentrated portfolios of approximately 30 stocks; both have Union Pacific among their top holdings, and the latter also had a small position in  Norfolk Southern (NSC) as of Jan. 31.

Keeley, on the other hand, is a value shop that primarily focuses on small- and mid-cap stocks, especially those that are going through turnarounds or have recently been spun off from another company. The firm's flagship fund, the $4 billion  Keeley Small Cap Value , has three railroad stocks among its top six holdings: short-line railroad operator  Genesee & Wyoming ; Westinghouse Air Brake (WAB), which makes components for locomotives; and Greenbrier (GBX), which makes and leases rail cars.  Keeley Small-Mid Cap Growth (KSMVX) also has Greenbrier among its top holdings, with midsized railroad  Kansas City Southern  also among its top 20.

Despite their differences, Marsico Growth and Keeley Small Cap Value both feature fine long-term records, and in general the funds on this list are pretty good ones. Railroads may not be as sexy as technology or biotech stocks, but they can be attractive to a wide variety of investors, as Buffett's endorsement and this list of funds suggest.

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