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Fund Spy

Funds That Buy Like Buffett, 2018

These funds hold some of the same stocks as the Oracle of Omaha and tend to have similar investment philosophies.

This coming Saturday, May 5, Omaha, Nebraska will host the event sometimes referred to as "Woodstock for Capitalists": the annual  Berkshire Hathaway (BRK.B) shareholder meeting, led by chairman Warren Buffett and vice chairman Charlie Munger. (For those who can’t make it in person, the meeting will be livestreamed.) That means it's time for our annual look at the mutual funds with the biggest stakes in the stocks held in Berkshire Hathaway's investment portfolio, as listed in Buffett's annual letter to shareholders and in Berkshire's annual report.

This year's letter, like previous ones, included Buffett's explanations and opinions on a variety of topics. Morningstar's Jeremy Glaser discussed all that back in late February when the letter came out. The list of the top stocks in Berkshire's investment portfolio comes near the end. This portfolio used to be managed entirely by Buffett, but for the past few years some of it has been run independently by Todd Combs and Ted Weschler, who each now manage more than $10 billion. (Thus, a more accurate title for this article might be "Funds That Buy Like Buffett, Combs, and Weschler," but that's not as snappy.)

The top holding by market value as of Dec. 31, 2017, was longtime Buffett favorite  Wells Fargo (WFC), with another longtime favorite,  Coca-Cola (KO), at number four. Berkshire's second- and third-largest stock holdings were relative newcomers:  Apple (AAPL), which joined the top 10 last year, and  Bank of America (BAC), which was new to the top 10 this year. The fifth through tenth biggest holdings were  American Express (AXP),  Phillips 66 (PSX),  U.S. Bancorp (USB), Moody's (MCO),  Southwest Airlines (LUV), and  Delta Air Lines (DAL). Bank of America and Southwest were the two newcomers to the top 10, replacing  IBM (IBM) (a longtime favorite that Buffett sold last year) and  Goldman Sachs (GS) (which barely missed the top 10).

Following the release of the past eight 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, 2013, 2014, 2015, and 2016. The table below shows funds with the biggest combined weightings in Berkshire's top 10 stock holdings at the end of 2017, as listed above. We left out sector funds such as Fidelity Select Computers (FDCPX), which would otherwise be the top fund because of its Apple stake, as well as funds with under $1 billion in assets, those with less than a five-year track record, and those that are clones of other funds on the list. 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 through April 30, 2018:

The top fund on this list,  Smead Value (SMVLX), has Berkshire Hathaway as its biggest holding, taking up almost 6% of the March 31, 2018, portfolio. Thus, it makes sense that the managers' investment philosophy is similar to Buffett's, focusing on companies with strong competitive advantages, long histories of profitability, high free cash flows, and low price tags relative to their intrinsic value. In addition to Berkshire, the fund has American Express and Bank of America among its top 10 holdings, with a combined 10.2% of assets, and it also has a substantial position in Wells Fargo. The fund has been a solid long-term performer, but it only earns a Morningstar Analyst Rating of Neutral because of its high expenses.

The tenth fund on the list,  Dreyfus Strategic Value (DAGVX), similarly has Berkshire Hathaway as its top holding, with 5% of the portfolio, and managers Brian Ferguson, John Bailer, and David Intoppa employ a similar strategy that emphasizes stocks having strong fundamentals but attractive valuations. Berkshire holdings Bank of America and Phillips 66 are among this fund's top holdings, and another four of Buffett's top 10 (Delta Air Lines, Wells Fargo, Apple, and Coca-Cola) are also in the portfolio. The fund has put up pretty good performance numbers, but it also features low expenses relative to its peers, helping earn it a Silver rating.

Of the other funds on this list, several have broadly diversified portfolios focused on blue-chip stocks, which include several of the "Buffett stocks" among many other holdings. This is the case for Fidelity Mega Cap Stock (FGRTX) and Fidelity Disciplined Equity (FDEQX), each of which holds more than 100 different stocks. Although they're managed by different people, both of these funds have Bank of America, Apple, and Wells Fargo among their top 10 holdings, and each also holds several other Buffett stocks. Both of these funds have been middling performers over the past five years.

On the other hand,  Akre Focus (AKRIX) has a highly concentrated portfolio of fewer than 25 stocks, which the managers choose using very Buffett-like criteria and then hang on to for the long term. The fund does hold a small position in Berkshire Hathaway, but it makes this list thanks to its position in a single stock: Moody's, which took up 11.51% of the Jan. 31, 2018, portfolio. Similarly,  Lazard US Equity Concentrated (LEVIX) only holds 20 stocks, and it makes this list because of its 12.19% stake in Coca-Cola, the top holding as of March 31, 2018. The concentrated nature of such funds tends to make them more volatile than their peers, but it also makes it possible for such funds to distinguish themselves and to outperform over the long term if they're managed skillfully. Both of these funds have done that, helping them earn Analyst Ratings of Silver for the Akre fund and Bronze for the Lazard fund.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.