While Warren Buffett may be considered the “world’s greatest living investor,” it’s possible to find mutual funds that employ a similar patient, quality-conscious strategy and do so in a more nimble package, according to a recent Morningstar video.
Two senior manager research analysts for Morningstar Research Services — Alec Lucas and David Kathman — identified three such funds that buy like Buffett.
1. FMI Large Cap Fund
FMI Large Cap‘s long-time manager, Patrick English, helped install the firm’s now committee-based, value-oriented approach that has produced “fantastic results over full market cycles,” according to Lucas.
Lucas explains that their approach is “very value-oriented” because they look for a meaningful discount to a company’s intrinsic value.
While FMI Large Cap’s top holding is Berkshire Hathaway, Lucas says what really makes them like Warren Buffett is in how they invest in terms of looking for good businesses, trading at reasonable if not great prices.
“They are more prone than Buffett, perhaps, to take advantage of Mr. Market’s 1:00 highs and lows and are willing to sell based on valuation,” Lucas explained.
According to Lucas, FMI Large Cap also pays heed to Buffett’s dictum that “size is an anchor to investment performance.”
“They pay close attention to the fund’s capacity and are willing to close it to new investors to protect current shareholders,” Lucas said.
2. BBH Core Select Fund
Kathman says that BBH Core Select has a lot of “Buffett-esque features.”
Berkshire Hathaway is also the fund’s top holding as of Jan. 31 with about 7.5% of assets.
According to Kathman, the managers — Tim Harch and Michael Keller, who are big fans of Buffett — pick stocks in a way very much like Buffett.
“They prefer to own companies that dominate their market niches and which generate a lot of cash flow without having too much debt on their balance sheets,” he explained.
They also prefer to own stocks that are trading at least 25% below their estimated intrinsic value, which the managers estimate using a discounted cash flow model based on future cash flows, according to Kathman.
3. Akre Focus Fund
Akre Focus‘ manager, Chuck Akre, and co-managers Tom Saberhagen and John Neff run a focused portfolio of few stocks, according to Lucas.
Lucas says that what makes Akre Focus like Warren Buffett is how they invest.
“They like to liken their process to a three-legged stool in terms of the kinds of companies they look for,” he explained.
The first leg of that stool is the business model that produces high free cash flow. The second leg is shareholder-oriented management. And the third leg is the ability to invest that high free cash flow in areas that will produce attractive rates of return.
According to Lucas, “they have built a strong track record in managing money this way.”
They also hold on to their companies for the long haul.