Quick Take: If you’re a fan of Warren Buffett, but think the premium on Berkshire Hathaway (BRK.B) is too rich because of Buffett’s wide following, Douglas Davenport, believes he has the right investment vehicle for you. Davenport runs Wisdom Fund (WSDVX), which tries to replicate Berkshire’s portfolio as close as possible, down to the same holdings, sector weightings, and cash position.
The market tumble after the 1990s tech bubble shows the Buffett touch is more important than ever, according to Davenport. Amid the current gloom, Davenport thinks investors need to stick with Buffett’s deep-value formula of buying quality companies at good prices and staying with them as long as you can.
With Wisdom Fund, Davenport has outrun his large-cap value peers in recent years, helped by the insurance stocks he picked in place of Berkshire’s privately-held holdings in the sector. For the three years through May, the fund rose an annualized 5.7%, versus a drop of 3.7% for its peers. This year through June, the fund was the best-performing large-cap value fund, gaining 4.0%, compared with a 9.3% decline for its peers.
The Full Interview:
S&P: What are your fund’s investment goals?
DAVENPORT: The fund seeks capital appreciation by emulating the investment portfolio of Berkshire Hathaway (BRK.B). We will own the same securities that Berkshire does, such as American Express (AXP), Gillette Co (G), and Coca-Cola Co (KO), in the same percentages that Berkshire does. Anytime that Berkshire acquires a publicly traded security, we’ll buy that security at the same percentage for our portfolio.
S&P: Why should someone invest in your fund rather than directly in Berkshire Hathaway?
DAVENPORT: We started the fund primarily because Berkshire Hathaway trades at a significant premium to its actual asset value. Along with other firms that track Berkshire, we calculate that Berkshire Hathaway has traded at a premium of anywhere between 40% and 70% over the last six years. The stock has been bid up because of Warren Buffett’s excellent long-term track record.
S&P: What value do you add as a money manager, since you largely follow Warren Buffett’s picks for Berkshire Hathaway?
DAVENPORT: Since our inception in February 1999, we’ve outperformed Berkshire by a very wide margin. We think that’s because of the value we add in the insurance and financial sectors. About 38% of the market capitalization of Berkshire Hathaway consists of privately-held insurance operations, such as General Re and GEICO.
Since we can’t own Berkshire’s insurance holdings, we’ve come up with insurance companies that are excellent proxies for them. Our insurance holdings include Everest Re Group (RE), Amer. Intl. Group (AIG), XL Capital Ltd (XL), and ACE Limited (ACE).
S&P: Do you always try to replicate Berkshire’s private holdings through companies in the same sectors?
DAVENPORT: Yes, that’s where we add value. Occasionally, Berkshire will buy 100% of company — for example about a year ago, Shaw Industries, the world’s largest carpet maker. We then purchased Mohawk Industries (MHK), now our fourth-largest holding, because we felt it was the next good proxy for Shaw. Mohawk has more than doubled over the last 17 months.
S&P: What will you do when Buffett no longer runs Berkshire Hathaway?
DAVENPORT: Even Berkshire shareholders worry about when he no longer manages the portfolio, but whoever controls the company will follow Buffett’s philosophy. Buffett will pick a replacement to run Berkshire the way he has. The only negative we see is that Berkshire Hathaway stock could drop when Buffett passes away because he’s so closely tied to the company.