Funds That Buy Like Buffett 2015
Funds that emulate the Oracle of Omaha have done well over time.
The annual Berkshire Hathaway (BRK.B) shareholder meeting, sometimes known as "Woodstock for Capitalists," is coming up on May 2 in Omaha. The meeting puts Warren Buffett in the spotlight again, discussing Berkshire's 2014 results while drinking Cherry Cokes and dispensing his nuggets of business wisdom. Berkshire's stock gained 27% in 2014, easily beating the broader market, even though it wasn't as successful a year for the company according to Buffett's preferred measure, growth in per-share book value. By that metric, Berkshire grew 8.3% in 2014, below the 13.7% book-value growth of the S&P 500 benchmark. This was the fifth year out of the past six that Berkshire's book-value growth has lagged that of the S&P 500, but it has tended to lag the broader market in strong bull markets like we've seen since the 2007-09 financial crisis. Before this six-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. He discusses the performance of Berkshire's many different subsidiaries and the handful of acquisitions it made in 2014, though he doesn't mention the biggest recent acquisition, Berkshire teaming up with Brazilian private equity firm 3G Capital to buy Kraft Foods (KRFT) and merge it into Heinz, because that deal was announced after the letter was written. Because 2015 is the 50th anniversary of Buffett taking control of Berkshire Hathaway, then a New England textile manufacturer, a long section of the letter consists of Buffett's reminiscences about the firm's history under him and Charlie Munger, a defense of its conglomerate structure, and a discussion of the future, including the type of CEO who is likely to succeed him.
This 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, 2014, didn't change much from a year ago. The top holding by market value 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 IBM (IBM), Wal-Mart (WMT), Procter & Gamble (PG), US Bancorp (USB), Munich Re (MUV2), Goldman Sachs (GS), and Moody's (MCO). The last two are the only newcomers to the top 10, replacing Exxon Mobil (XOM) and Sanofi (SNY) 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 five 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 2009, 2010, 2011, 2012, and 2013. 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 less than $100 million in assets and those with track records shorter than five years. 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 Morningstar Category as of April 27, 2015:
This list includes three notable management teams who manage a total of four of the 10 funds. Like Buffett, these managers all like 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 AMG Yacktman Focused (YAFFX) and AMG Yacktman (YACKX), the number-two and number-three funds on the list. 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 each company's 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. AMG Yacktman Focus and AMG Yacktman each has four stocks from Buffett's top 10 among its top 25 holdings (Procter & Gamble, Coca-Cola, US Bancorp, and Wal-Mart). 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, though both have had a tougher time over the past five years, when their high-quality, valuation-conscious approach has largely been out of favor. AMG Yacktman Focused has a Morningstar Analyst Rating of Silver, while AMG Yacktman is rated Gold.
A six-person team led by Fayez Sarofim and his son Christopher manages two funds on this list, Dreyfus Core Equity (DLTSX) and Dreyfus Tax-Managed Growth (DTMGX), plus Silver-rated Dreyfus Appreciation (DGAGX), which was in the top 10 last year but just missed it this year. 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 this team stays fully invested. The three funds sport very similar portfolios, with each having four of Buffett's top 10 stocks among its top 25 holdings: Coca-Cola, Procter & Gamble, IBM, 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; that's why they, like the Yacktman funds, have lagged over the past five years.
Finally, there's Silver-rated Bridgeway Blue Chip 35 (BRLIX), managed by John Montgomery and his team at Bridgeway. Unlike managers who use fundamentals and valuation to try to identify the most attractive stocks, the Bridgeway team simply ranks the 150 largest U.S. stocks by market capitalization, then builds an equal-weighted portfolio of 35 stocks that's diversified by sector, holding no more than four stocks from any one industry and rebalancing occasionally to keep any position from getting too large or too small. Since size is the primary consideration here, it's no surprise that this fund has one of the highest average market caps of any domestic-equity fund or that its holdings are all well-established blue chips that are leaders in their industries. Three of Buffett's top 10 holdings (Wal-Mart, Procter & Gamble, and Wells Fargo) are among this fund's top 25 holdings, with IBM and Coca-Cola just missing the top 25. This fund's returns tend to track the large-blend category pretty closely most of the time, but it has held up better than its peers in tough markets where investors flee to safety, such as 2008 and 2011.
Although most of these funds have strong long-term track records, nine of the 10 have trailed the large-blend category over the past five years. That's not too surprising, for the same reason it's not surprising that Berkshire Hathaway has lagged the broader market over the same period: the best performers over the past five years have been relatively risky stocks with a lot of debt rather than the stable cash cows Buffett favors. But it's worth noting that the two Yacktman funds are the only ones on this list to have outperformed Berkshire Hathaway over the past 10 years, illustrating how tough it is to beat Buffett over the long term. That long-term strength illustrates why so many people pay attention to Buffett's portfolio and why emulating his general approach has been a winner over time.Morningstar for Apple Watch
Morningstar is Now Available on Apple Watch
Staying on top of the markets is easier than ever:
Watch the markets with Morningstar. Update your iPhone app or download for FREE.
David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.