Over the years several fund managers have tried to recreate billionaire US investor Warren Buffett's investment style and process for the UK stock market. But now we have the launch of a new fund that is specifically allied to the Buffett philosophy.
The Premier Sanford DeLand UK Buffettology fund may win prizes for the longest fund title but the "Buffettology" part is the one for investors to note. It refers to the name of a 1999 book written by Mary Buffett, who was married to Peter Buffett, Warren Buffett's third son, for 12 years.
In it she describes how Warren Buffett takes a business perspective to investing. He doesn't think of buying stocks the way many people think about buying them. He understands that they represent an ownership interest in a business, and evaluates whether or not he wants to own a piece of that business.
The fund has licensed the Buffettology name from Mary Buffett for 10 years and launched on 28 March 2011. The underlying investments are managed by Buffett devotee Keith Ashworth-Lord who says he has met Warren Buffett in person for private talks a couple of times.
While Warren Buffett is based in the US and takes a global perspective on investing, Mr Ashworth-Lord intends to replicate the Warren Buffett strategy purely for the UK.
The fund's investment premise is that there is no philosophical distinction between part ownership (ie buying shares in a company) and outright ownership (ie buying the business in its entirety).
The fund will look for businesses with strong organic growth potential, trustworthy management teams and strong, cash generative balance sheets. Mr Ashworth-Lord says ideally he will invest in 30-35 companies over time. He says he has already invested over one-third of the fund's cash in companies that fit the Buffettology mould (see 'Buffettology fund investment criteria' below).
The evidence that Mr Ashworth-Lord's investment process works is provided by his own self-invested personal pension (Sipp), which he has invested using "business perspective" investing principles for the past 11 years. Over this time he produced an absolute return of 113.7 per cent, according to independently audited figures from State Street.
"My own portfolios have been 20-25 companies," he says. "But I think I will manage to get an extra 10." He admits that this concentrated approach does result in volatility. "I am seeking to achieve a bumpy 15 per cent rather than a smooth 10 per cent in average annual returns over a period of 5-10 years," he says.
As to conflicts of interest he puts potential investors at ease. "Everything I have is in the fund," he says. "I put £300k in." The fund is backed by a group of serious investors who include the former managing director of Vantage and broking operations at Hargreaves Lansdown Andrew Christian. You can buy the fund at a discount via Hargreaves' Vantage fund platform.
|Buffettology fund investment criteria:|
Warren Buffett said: "Look for the durability of the franchise. The most important thing to me is figuring out how big a moat there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles."
More specifically, if a company is to be considered for investment in the UK Buffettology fund it must exhibit the following criteria in abundance:
■ Business model is easily comprehensible
■ Produces transparent financial statements
■ Demonstrates consistent operational performance with earnings being relatively predictable
■ Generates high returns on capital employed
■ Converts a high proportion of accounting earnings into free cash
■ Balance sheet is strong without unduly high financial leverage
■ Management is focused on delivering shareholder value and is candid with the owners of the business
■ Growth strategy is more likely to rely on organic initiatives than frenetic acquisition activity.
FOUR BUFFETTOLOGY COMPANIES
Over the years Keith Ashworth-Lord has invested through his pension fund in plenty of good companies. Here are some of the companies that he "broke his heart" to sell to put seed cash in the fund.
Croda International (speciality chemicals business) "I am a long time investor of that company."
International Personal Finance (personal lender in central Europe) "It has been a solid holding over the years,"
James Halstead (floor coverings specialist) "It is what Buffett would call an 'inevitable' - about 45 per cent of equity is held by the extended family."
Reckitt Benckiser (household goods specialist) "It has been a 10 bagger for me."