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Same old, same old

The fund manager in question, Sanford DeLand, has credibility via the record of its £1.4bn CFP SDL UK Buffettology Fund (GB00BF0LDZ31). The open-ended fund claims a total return of 237 per cent since its launch in 2011 against a 62 per cent return from its benchmark and 54 per cent from the FTSE All-Share index. Now it aims to raise at least £100m to launch the Buffettology Smaller Companies Investment Trust, which will be run on much the same lines as the established fund. However, by dint of the closed-end nature of investment trusts, it may be a better vehicle for pursuing the long-term aims implicit in Buffett-style investing, especially as it will run a comparatively small – and therefore potentially volatile – portfolio. The Buffettology unit trust gets by on 31 holdings and the manager envisages 30 to 50 holdings for the investment trust.

Perhaps what’s so surprising about the cult of Warren Buffett is that it took so long to become established. Even in the mid-1980s – 30 years after he had set up as a fund manager – the Buffett name was little known outside the US. It took John Train’s The Money Masters, published 1980, to eventually trigger widespread recognition. And not until Robert Hagstrom’s The Warren Buffett Way (1994) was there a forensic attempt to explain Mr Buffett’s methods. After that, the Buffett hagiography got into full swing, not that Mr Hagstrom’s explanation has been bettered.

Simultaneously, there were fund-manager look-alikes. These folk, too, were almost all based in North America and what they really followed was Benjamin Graham’s ‘cigar-butt’ approach to investing, which focused on numbers in a company’s balance sheet, took little interest in how well a company traded and made a fetish out of buying $1 of value for 50¢.

True, it was from this background – and Graham’s tutelage – that Mr Buffett emerged and following Graham’s quantitative approach was sufficient to make Mr Buffett and others in the Buffett Partnership extremely rich. But it was not until value investing evolved into what I have labelled ‘Buffett Mk 2.0’ (Bearbull, 20 February 2014) that there was sufficient intellectual coherence to label this investment approach as an ‘ology’.

So what does Sanford DeLand’s Buffettology approach bring? Conventional Buffett Mk 2.0, if truth be told. That’s fine, but the chief tenets of this generic approach have become predictable. It’s pretty much like saying ‘I want to invest in good companies’. Of course. Why would you want to invest in bad ones?

The fund manager runs through the familiar wish list – buy shares in companies with pricing power, seek high returns on capital, strong free cash flow generation and so on. Go to the website of Fundsmith, a firm that also invests along the lines of Buffett Mk 2.0, plus, I dare say, a few others, and you will find aims and sentiments much the same. There is nothing wrong with this. On the contrary, the record of both Fundsmith and Sanford DeLand, both of which launched their first funds at about the same time, indicates there is much to commend it.

One problem is that such headlines gloss over the difficulties. Sure, we all want to hold shares in companies with pricing power, but at what point, for example, did Aggreko (AGK) cease to be a price maker and become, mostly, a price taker? Is Unilever (ULVR) a price maker or a taker? Answer, both, it varies between products and markets.

Similarly, return on capital is, indeed, a key investment metric, but how to calculate it when it’s often a major challenge to know how much capital a group employs? Quantifying the debt is usually easy enough; it’s the equity that’s often the great unknown since this is as much an accounting concept as a cash figure. How much deferred tax and pension fund deficit should really count as equity? How many earlier years’ accounts should be trawled for amounts charged to equity for failed projects? The absence of such amounts can do wonderful things to a group’s claimed returns.

An additional difficulty is that so many analysts ask these and similar questions, get similar answers and light on similar – or the same – stocks. Small wonder then fund managers’ collective adoration of, say, Unilever or Nestlé (SIX:NESN). Quite possibly equally small wonder that the biggest holding in the UK Buffettology Fund is Games Workshop (GAW), accounting for a mighty 9.3 per cent of the portfolio at the end of August. The success of these stocks is as much about the self-reinforcing effects of popularity as the merits of the underlying companies. How else is it that Games Workshop’s £270m of annual sales can justify a market value of £3.3bn, a figure that has more than doubled since the UK went into lockdown in mid-March?

But since so many investors are doing much the same research and getting similar answers, the big question for retail investors is whether the game is worth the effort? Why bust a gut to end up with much the same portfolio as a perfectly capable fund manager? Only if you really enjoy it.