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Monthly Model Portfolio Performance Update
Posted by: gurufocus (IP Logged)
Date: March 1, 2012 07:13AM

Focusing on Predictable High Quality Companies, GuruFocus Value Strategies Continue to Outperform.

As the stock market marches to new highs, GuruFocus value strategies continue to outperform. Year to date S&P500 gained 8.59%, in the mean time Top 25 Undervalued Predictable Companies, Top 25 Historical Low P/S Ratio Companies, and Top 25 Historical Low P/B Ratio Companies gained 9.5%, 13.1%, and 13.1% respectively. Especially Undervalue Predictable Portfolio has doubled since inception in January 2009, while S&P 500 index gained about half as much.

Buffett-Munger top 25 idea portfolio gained 5.9%. Since inception in 2009, Buffett-Munger model portfolio outperformed the market in every calendar year. So far this year it is underperforming the market. The 13% decline of World Acceptance (WRLD) has contributed to the underperformance of the portfolio. This stock has been in the portfolio since inception in 2009, and gained 221% cumulatively. It is now the largest position in the portfolio.

All numbers in the article do not include dividends.

Since incepted in 2009, Buffett-Munger top 25 and Top 25 Undervalued Predictable Companies have outperformed the market cumulatively by 19.6% and 46.8%, respectively. The low P/S and low P/B portfolios have outperformed 9.4% and 6.8% cumulatively since 2010.

Among the four value strategies, Buffett-Munger top 25 idea portfolio has shown the lowest volatility and the most consistent performances. It has outperformed the S&P 500 every single year since incepted in 2009. The other three portfolios underperformed slightly in 2011. They have more than made up their underperformances of 2011 this year.

All of these portfolios are rebalanced just once a year. During the Jan. 2012 rebalance, 13 out of the 25 stocks in Buffett-Munger portfolio are replaced. So the annual turnover is slightly above 50%. Among the best performers this year BioReference Laboratories Inc. (BRLI) gained 23.8%; Express Scripts Inc. (ESRX) gained 19.3%.

The outperformance of these strategies is achieved by focusing on high quality companies that are traded at fair or undervalued prices. Thus we believe that the portfolios carry smaller risk than the general market. This is clearly shown in the performance of the positions in the portfolio. It is almost always the case that the outperformance is driven by the universal outperformance of all the positions. Even for the positions that underperformed, the underperformances of these positions are usually small.

This is just what we expected when we developed the Concept of Business Predictability. By investing the companies that have consistent and predictable revenue and earnings growth traded at fair prices, we will avoid the losers, and the winners will take care of themselves.

Although all these strategies, we like the Buffett-Munger portfolio the most. As mentioned above, this portfolio invests in the top 25 stocks in the Buffett-Munger screener and rebalanced once a year. The reasons are:

1. These companies are of high quality. They can grow their revenues and profits consistently.
2. These companies can maintain and even grow their profit margins over time. They have the “moat” that prevents others to enter their market.
3. They incur little debt while growing business
4. They are at the low end of their historical valuations.

They may not have the market momentum with them, and they may face headwinds which bring the valuations low. But if business continues to grow, we believe it is safer to invest in these companies. Indeed, these companies have outperformed the market every year since inception.

These companies also outperformed the market by wide margins over long period of time in our backtesting. For details, go to: What Worked In The Market From 1998-2008? Part II. Under-Valued Predictable Companies And Buffett-Munger Screener.

GuruFocus premium membership is needed to access the details of the portfolios and screeners. We also publish a monthly Buffett-Munger newsletter which features the picks from Buffett-Munger Screener. If you are a premium member, you can download this for free. If you are not a Premium Member, we invite you for a 7-day Free Trial.

Stocks Discussed: WRLD, BRLI, ESRX,
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