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Invest Like Buffett

A new report urges fund managers to emulate Warren Buffett, and Morningstar highlights some Buffett-style funds

Alanna Petroff 25 July, 2012 | 11:22AM

Fund managers would be wise to follow the example of famed investor Warren Buffett, according to a new independent report released in the UK this week. 

The report by Professor John Kay, which was commissioned by Business Secretary, Vince Cable, argues that Warren Buffett uses a highly effective investment method that others should emulate.

“We believe that Buffett’s success and strategy should represent a good starting point for any discussion of good practice in asset management,” states Kay in his report.

How to Be Like Buffett
Here are the specific Buffett characteristics listed by Kay that are worth following:

- Selection of a comparatively small portfolio of businesses, based primarily on the characteristics of the company rather than the cheapness of the stock

- Very long holding periods

- Stakes in the company of sufficient size to be capable of a (rarely exercised) influence on management succession and strategy.

The report also notes that the interests of savers and the fund manager (Buffett) are nearly-perfectly aligned “since Buffett is rewarded almost entirely by the increasing value of his own holding in the fund.”

Buffett-Style Funds
In response to the Kay Review, Morningstar OBSR fund analysts have put forward a selection of UK-domiciled funds that offer a Buffett-esque approach to investing:

Aberdeen World Equity Fund
Like Buffett, this Silver-rated fund has very low turnover and invests heavily in insurance companies. The Edinburgh-based management team - headed by Stephen Docherty - prefers “investing in straightforward companies with transparent financial statements and clear business strategies,” according to Morningstar OBSR analyst, Muna Abu-Habsa. The fund is considered an attractive option for investors seeking global equity exposure.

Read the full Morningstar analyst research report here (Ensure you’re signed into your Premium account to access Morningstar research. Not a Premium member? Get instant access to Morningstar research and tools when you take a free 14-day trial.)

Veritas Global Focus Fund
The co-managers of this Gold-rated fund recently won Morningstar’s European Fund Manager of the Year Award for 2012. The managers - Andrew Headley and Charles Richardson – run a concentrated portfolio of 25 to 40 holdings and have delivered strong returns for investors in both good times and bad. This fund is also known to have extremely low turnover, which is in line with Buffett’s buy-and-hold style.

Read the full Morningstar analyst research report here

BNY Mellon Long Term Global Equity Fund
This Silver-rated fund - managed by Walter Scott – is slightly more growth-orientated compared to Buffett’s style, however, it can be considered Buffett-esque because it has very low-turnover within its portfolio and very low-turnover amongst its staff. For example, the fund had been invested in the US industrials firm, Fastenal (FAST), for the last 20 years before recently selling its stake. Buffett is also known for keeping his top-employees around for decades. Similarly, manager Walter Scott has held onto his top employees - Charles Macquaker and Roy Leckie – since the 1990s.

According to Morningstar’s latest research report by Morningstar’s OBSR analyst, Oliver Kettlewell: “The (fund’s) process is built around companies with sturdy growth characteristics rather than fast-growing, less-mature businesses. This is reflected in a portfolio full of established names such as Microsoft (MSFT) and Colgate-Palmolive (CL).”

Read the full Morningstar analyst research report here 

Fundsmith Equity Fund
This global equity fund is run by the well-known fund manager, Terry Smith, who focuses on long-term holdings, explains analyst Kettlewell.

“Terry is similar to Buffett, first of all, because he holds companies for extremely long times. His funds have very low turnover. He’ll only make a couple of buys and sells each year, while some managers will do that in a week,” says Kettlewell. “Second of all, even though this is a global equity fund, Terry generally sticks to large franchise companies in the UK and the US.”

Both Smith and Buffett hold a large stake in Procter & Gamble (PG), which boasts strong global franchises; and while Buffett owns a large stake in Coca-Cola (KO),  Smith owns a significant holding in Pepsi (PEP), says Kettlewell. 

This particular fund is currently not rated by Morningstar, however, the Morningstar OBSR team is very positive about the fund’s present investment approach.

To read the entire Kay Review, click here.

 

Want to read more Warren Buffett-related articles? Take a look at these stories:

What's on Warren Buffett's List of Concerns? European banks, energy policy, financial risk modelling and tepid real economic growth were on the agenda at Saturday's Berkshire Hathaway annual meeting.

Why Warren Buffett is Wrong About Gold With all due respect to Mr. Buffett, his argument ignores two crucial facts: gold helps to diversify a portfolio and is a recognised store of value. 

Warren Buffett Warns on Bond Shortcomings In his annual letter to shareholders, the Berkshire chairman and CEO offers more detail on succession planning, housing market predictions and a warning for bond investors.

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About Author Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.