These Topnotch Funds Are Banking on Buffett
Some fund managers can't resist ample helpings of Berkshire Hathaway for their portfolios.
Pretend, for a moment, that you're a mutual fund manager. It's your job to provide the strongest possible risk-adjusted returns for your fund's shareholders while beating your peers and, while you're at it, the broader market.
Now imagine there's a genius investor who lives down the street from you and whose talents you can buy in the form of shares in his holding company. Many believe he's the greatest equity investor of all time, having led his firm to a 47-year record of 19.8% average annual gains (based on book value per share through 2011) and beating the market (S&P 500) by an average of more than 10 percentage points per year along the way. Now imagine the temptation to add this world-class investor--and his firm's juicy returns--to your portfolio.
For some fund managers, following the Warren Buffett investment style--buying and holding attractively-priced shares in quality companies with sustainable competitive advantages--isn't enough. They add ample helpings of Berkshire Hathaway (BRK.A) (BRK.B), the company Buffett has led since 1965 and which has its annual meeting Saturday in Omaha, Neb., to their list of holdings. Not that a mutual fund's investment in Berkshire doesn't make sense in many cases. The company's shares provide instant diversification from a well-vetted stable of quality names such as American Express (AXP), ConocoPhillips (COP), Kraft Foods (KFT), Procter & Gamble (PG), and Wal-Mart Stores (WMT).
Among mutual funds, the largest single owner of Berkshire Hathaway stock is
Fidelity Contrafund (FCNTX), which also happens to be one of the largest funds around with $84 billion in assets, with about $2.5 billion of that, or 3%, in Berkshire. At the other end of the spectrum is tiny ($15.6 million in assets) Blue Chip Investor (BCIFX). Although its stake in Berkshire is small in dollar terms, it holds a whopping 30.8% of its assets in the company, far and away the most concentrated position in Berkshire shares of any fund.
In honor of Berkshire's upcoming annual meeting, we used Morningstar's proprietary database to search for high-quality funds with at least 5% of their portfolios in Berkshire. We stuck to funds with Gold or Silver Morningstar Analyst Ratings, and below we highlight three of the funds we found.
Allocation to Berkshire Hathaway: 7.7%
Perhaps the best-known of the Buffett-style funds (and one Buffett himself referred investors to after closing his own investment partnership in 1969), this fund holds on tightly to its concentrated portfolio of about 34 stocks, with just a 3% annual turnover rate. Berkshire is the fund's second-largest holding, trailing only Valeant Pharmaceuticals (VRX) at 10.8% of assets. In years past, Berkshire had made up as much as 37% of the fund's holdings (in 2004). Other top holdings include off-price retailer TJX Companies (TJX) and fastener-distributor Fastenal (FAST) at around 6% each. Fund managers Bob Goldfarb and David Poppe, Morningstar's domestic-equity fund managers of the year in 2010, place a greater emphasis on company management than does Buffett. The fund underweights basic materials, technology, and energy while overweighting consumer discretionary, industrial, and health-care stocks.
Allocation to Berkshire Hathaway: 7.8%
After staging a nice comeback from a brutal 2008, in which this fund lost half its value versus a 37% loss for the S&P 500, Clipper has underwhelmed so far in 2012, with a gain of about 9% that trails that of the broader market by 3 points. Financials make up nearly half of this fund's high-concentration portfolio of fewer than 30 names, with American Express and Costco (COST) its top holdings, each at a little more than 10%. Turnover is a low 15%. Fund managers Chris Davis and Ken Feinberg look for undervalued high-quality stocks with competitive advantages that perform well even in economic downturns. Dan Culloton, Morningstar associate director of fund analysis, gives the fund a Gold Analyst Rating on the strength of its experienced management team, its consistent process, its A Stewardship Grade, and its below-category-average 0.75% expense ratio.
BBH Core Select
Allocation to Berkshire Hathaway: 5.5%
Warren Buffett's firm is this fund's top holding among the roughly 30 companies in its eclectic portfolio, but no single name dominates. Other top holdings include
Comcast (CMCSA), U.S. Bancorp (USB), and Nestle (NSRGY). Morningstar associate director of fund analysis Shannon Zimmerman says managers Richard Witmer, Tim Hartch, and Michael Keller run the fund as a "concentrated, benchmark-agnostic best-ideas vehicle." They target companies with strong balance sheets, high free cash flow, and high returns on invested capital with share prices discounted by at least 25% of their estimated fair value. Turnover is 17% annually. The fund has provided top decile returns among the large-blend category in the most recent one-, five-, and 10-year periods.
Portfolio data as of Dec. 31, 2011; performance data as of April 30, 2012.
Adam Zoll does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.