These Buffett-Inspired Funds Have Learned Their Lessons Well
Embracing the spirit of Buffett's teachings gives these funds an edge.
It's that time again: Investment geeks and Buffett disciples will soon descend on Omaha to soak up insights from the Oracle himself and his octogenarian sidekick, Charlie Munger. But for all the adulation that will flow this weekend, surprisingly few professional investors follow their trade's most successful practitioner's blueprint. Like Buffett's obsession with Cherry Coke, it's one of life's little mysteries.
But not all the pros shun Buffett's teachings. Last year at this time we highlighted seven funds from the tiny group that fully embodies his investment principles. They were Ariel Focus (ARFFX), Fairholme (FAIRX), FAM Value (FAMVX), Oak Value , LKCM Equity (LKEQX), Sequoia (SEQUX), and Weitz Partners Value (WPVLX).
We decided to check in to see how they've fared since we highlighted them and, more important, how they are positioned for the future.
Rearview Mirror Looks Good
How'd they do? In a word: Good. All the funds have cranked out solid returns during the past year (see table 1) but Bruce Berkowitz's Fairholme fund stands alone. It not only posted the best return the past year, but tops the heap in every other trailing period. Berkowitz will eventually stub his toe, but for the past decade he's been nearly perfect.
Charlie Bobrinskoy and Tim Fidler at Ariel Focus have also been on a hot streak. Powered by consistently strong stock-picking, their fund held up better than most in 2008's downdraft but has also outperformed in the rally that started in early 2009--a rare feat. Ditto for Oak Value and LKCM Equity.
Weitz Partners Value struggled in 2007 and lost a bit more than most in 2008, but it's been one of the top-performing funds since the market reversed in early 2009. Wally Weitz and Brad Hinton continue to generate good long-term returns that zig while others zag.
FAM Value and Sequoia lost so much less than most in 2008 and have such a quality bias that it was unrealistic to think they'd keep pace in 2009's speculative rally. They didn't. But their comparatively strong three- and five-year records show the value of not putting oneself in too deep a hole when the market tanks.
Open Road Ahead
These funds look well positioned. They mostly own firms with low debt, strong returns on equity, and good sales- and earnings-growth prospects (see table 2). But they can be split into two distinct camps.
Oak Value, Ariel Focus, FAM Value, LKCM Equity, and Sequoia hew toward the latter-day, Munger-influenced Buffett. They largely own great companies at fair prices. Such firms as Oracle (ORCL), 3M (MMM), Coca-Cola (KO), and Johnson & Johnson (JNJ) dot their top holdings. All have strong, predictable businesses. They earn wide moats from Morningstar's equity analysts, indicating they have defensible competitive advantages.Name Debt to Capital % Net Margin % ROE % Equity Style Factor P/E Equity Style Factor LT Earnings Growth Equity Style Factor Book Value Growth Equity Style Factor Sales Growth Berkshire Hathaway Inc. A 22.43 7.16 6.7 20.61 9.09 3.5 S&P 500 TR 35.73 10.6 18.23 15.34 9.35 0.26 -1.97 Oak Value 31.24 10.33 23.84 16.33 11.74 8.34 4.64 Ariel Focus 30.72 7.53 22.52 13.76 8.61 4.88 -2.4 FAM Value Inv 26.49 9.51 15.92 18.67 11.69 11.29 3.97 LKCM Equity Instl 30.24 10.63 15.03 16.59 11.01 5.91 12.53 Sequoia 27.17 6.9 12.75 17.66 13.35 5.1 24.28 Weitz Partners Value 42.52 0.1 6.16 16.64 1.81 4.96 33.64 Fairholme 30.6 -3.05 -1.01 15.54 10.86 -7.16 5.97
Weitz Partners Value and Fairholme embrace uncertainty. Their style harkens back to Buffett's early days, when he utilized a Graham-inspired, deep-value approach. This isn't cigar-butt investing, but it's a far cry from only owning sure things at fair prices. Troubled Sears Holdings is Fairholme's biggest position, and it's been a big winner for the fund. And Weitz has done well with big stakes in the various Liberty Media entities, including Liberty Interactive (LINTA).
Open to Interpretation
These funds show that following the spirit of Buffett's teaching is what matters, not mindlessly aping his every move. These funds have all generated strong long-term records putting their own spin on the Oracle's approach.
Michael Breen has a position in the following securities mentioned above: JNJ, KO, MMM, ORCL, QRTEA. Find out about Morningstar’s editorial policies.