The upcoming Berkshire Hathaway (BRK.B) shareholder meeting in Omaha means that Warren Buffett will be in the spotlight again. The past 12 months have not been as eventful for Buffett as some previous years, but he did make headlines in February of this year by announcing that Berkshire will spend $12 billion to buy 50% of HJ Heinz (HNZ), with a group of Brazilian investors buying the other half.
Buffett discussed the Heinz deal and many other matters in this year's Berkshire shareholder letter, which you can read here. He sang the praises of Todd Combs and Ted Wechsler, whom he hired in recent years to run portions of Berkshire's investment portfolio, and revealed that each of them is now managing around $5 billion. Buffett reserved the most space in this year's letter for discussing capital allocation decisions, including an explanation of why Berkshire has resisted paying a dividend. In his typical clear fashion, the Oracle of Omaha explained why he prefers to spend available funds on capital expenditures, acquisitions, and share repurchases before he would consider paying a dividend.
Berkshire's annual report lists the top stocks in Buffett's investment portfolio, and this year's report shows that his top 10 stock holdings as of Dec. 31, 2012, didn't change much from a year ago. The top holding is longtime Buffett favorite Wells Fargo (WFC), moving up from third place last year to overtake another longtime favorite, Coca-Cola (KO), where Buffett is the largest shareholder. The third-largest holding is IBM (IBM), which Buffett just purchased in March 2011, followed by American Express (AXP), Wal-Mart (WMT), Munich Re (MUV2), Procter & Gamble (PG), and U.S. Bancorp (USB), all of which were also in last year's top 10. The two newcomers this year are Sanofi (SNY), which just missed the top 10 last year, and Tesco PLC (TSCDY), which jumped into the top 10 after Berkshire added to its previous stake.
Plenty of mutual fund managers are Buffett fans who emulate his investment approach in one way or another. Following the release of the past three 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, and 2011. 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 less than a five-year track record. 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 category as of April 29, 2013:
- source: Morningstar Analysts
This list includes three notable management teams that manage a total of four of the 10 funds. Not surprisingly, these managers all follow Buffett in liking 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 Yacktman Focused (YAFFX) and Yacktman (YACKX). They follow a Buffettesque strategy that focuses on profitable companies, usually with little debt, that are trading at a substantial discount to their estimate of the companies' intrinsic value. These funds have sometimes had significant weightings in small- and mid-cap stocks, but they are currently dominated by mega-cap blue chips of the type Buffett holds, and each of the funds has four stocks from Buffett's top 10 (Procter & Gamble, Coca-Cola, U.S. Bancorp, and Wal-Mart) among its top 25 holdings. Both funds have been outstanding long-term performers, and Donald Yacktman was a finalist for the Morningstar Domestic-Stock Fund Manager of the Decade in 2010.
Dreyfus Core Equity (DLTSX) is managed by a six-person team led by Fayez Sarofim and his son Christopher. (They also manage the much larger Dreyfus Appreciation (DGAGX), which made this list last 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, which is why this fund lands in the large-blend category rather than large-value. 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 the Fayez Sarofim team stays fully invested. Dreyfus Core Equity holds Coca-Cola, IBM, Procter & Gamble, Wal-Mart, and American Express from among Buffett's top 10, along with similar blue-chip stocks such as Exxon Mobil (XOM) and Johnson & Johnson (JNJ). They've been strong performers over time but have tended to trail their peers in aggressive bull markets like 2009.
Finally, there's Clipper (CFIMX), managed by Chris Davis and Ken Feinberg. Davis and Feinberg are well-known fans of Warren Buffett, and under their management the Clipper fund has often been one of the biggest holders of Berkshire Hathaway stock. Berkshire was Clipper's second-largest holding as of Dec. 31, 2012, with 9.34% of assets, topped only by Berkshire holding American Express at 12.44%. Clipper also holds Wells Fargo from among Buffett's top 10, and American Express and Wells Fargo are the two biggest holdings of Davis Financial (RPFGX), a fund managed by Feinberg that would rank second on this list but is excluded because it is a sector fund. Both of these funds got hit hard in 2007 and 2008 by big financial stock holdings, but these managers have shown themselves to be savvy stock-pickers over the long term. Davis Financial has earned a Morningstar Analyst Rating of Gold, as have Davis and Feinberg's Davis NY Venture (NYVTX) and Selected American Shares (SLASX); Clipper currently has an Analyst Rating of Silver.
The funds on this list have mostly been strong long-term performers, with seven of the 10 beating their categories over the past five years. Six of them have also outperformed Berkshire Hathaway stock over that time, a period that includes two years (2009 and 2011) when Berkshire badly trailed the S&P 500 Index. Still, of the 10 funds on this list, only the two Yacktman funds have beaten Berkshire 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.
David Kathman, CFA does not own shares in any of the securities mentioned above.