Mutual Funds with the ‘Buffett Code’ — Berkshire Hathaway’s secret sauce| North Loop Official Blog
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06 Oct 2020

Mutual Funds with the ‘Buffett Code’ — Berkshire Hathaway’s secret sauce

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If you follow Buffett’s well-known investing principles, there is less chance for your portfolio returns to suffer even after Buffett stops offering his insights about the markets. A few researchers took several attempts and many years to devise a formula that can help in giving equally positive returns as that of Buffett’s portfolio. The general investing strategy behind it is to focus on cheap and safe stocks. The formula favours issues that have low price-to-book value ratio and are from companies whose profits have been growing at an above-average pace. It also includes those that have exhibited below-average volatility and pay out a significant portion of their earnings as dividends.

In the current times of uncertainty and market volatility, Buffett’s investing principles have become more crucial than ever with a couple of mutual funds aiming to have a high percentage of stocks in common with Berkshire Hathaway’s investment portfolio. A critical point to, however, remember here is that the researchers do not expect their formula to replicate a portfolio that is identical to Berkshire Hathaway’s stock holdings. Instead, they expect it to produce a list of stocks that are similar in terms of characteristics and long-term performance to those owned by Berkshire over the years. A couple of open-end mutual funds follow the same principle and create a portfolio with large combined weightings in stocks that are a part of Berkshire Hathaway’s holdings. Currently, its top 5 stocks by market value are Apple Inc. (AAPL), Bank of America Corp (BAC), Coca-Cola Co. (KO), American Express (AXP) and Kraft Heinz Co. (KHC).

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One of the funds with stocks similar to Berkshire’s holdings and that which comes closest to employing the formula that researchers have devised includes AQR: The AQR Large Cap Defensive Style Fund. Since its inception in 2016, this fund has produced a 14.4% annualized return as compared to 12.5% for Berkshire Hathaway stock. One of the first stocks the fund invested in after formation includes Kraft Heinz Co. (KHC). Even though at that time Berkshire Hathaway had no position in this particular stock, it later acquired a 50% stake in Kraft Heinz. However, there are some massive differences between the fund and Berkshire. That is why expecting it to completely replicate or outperform Berkshire’s shares with its current holdings and in the coronavirus-driven bear market would be going a little too far.

Some other funds with Buffett-like taste in stocks include Oakmark (OAKMX), Selected American Shares (SLASX), Davis New York Venture (NYVTX) and others. Both Selected American Shares and Davis New York Venture get run by mutual fund advisors who are long-time Buffett fans and whose value investing approach favours financial stocks. The other fund on this list called Oakmark has only Bank of America as its ‘Buffett stock’ as of March 2020 as part of its top 10 holdings with smaller positions in eight other stock similar to that of Buffett’s portfolio. Even though these funds that try and use Buffett’s secret formula have struggled in this year’s market crash, all of them have shown commendable results in the past that can get attributed to the solid and disciplined strategy used by their fund advisors and managers.

This formula took researchers years to devise, and summing it up is difficult. However, there is one thing common to have a Buffett-like approach to choosing stocks - it is to focus on cheap stocks with good management, competitive advantages, and strong growth potential. A skilled application of a strategy emphasizing quality and valuation can lead to stellar long-term performance and whether you use the researched formula or not, following Buffett’s popular investing principles can help you get good returns over the long run.

Are you already thinking about investing? You can do that on North Loop. We offer a digital banking and investment platform that allows you to sign up, open an account and start investing with only a few clicks. You get access to the US stock market and invest in shares and even funds that match Berkshire’s stock performance over the long term.

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