Warren Buffett (Trades, Portfolio) is my hero and the greatest investor of all time, in my opinion. That he used float to leverage his investments is not something to be used against him, but part of his genius to capture the “carry” on offer. Studying Warren Buffett (Trades, Portfolio) is also how I found GuruFocus.
One of the many things I like about GuruFocus is the ability to learn from a wide range of great investors. The markets, in my opinion, are largely efficient most of the time. Put another way, I accept that it is very difficult to beat the market. So, learning from great investors who have demonstrated a long track record of beating the market is a valuable endeavour for investors who want better returns. We can do this by listening to what they have to say or by trying to understand the types of investments they are holding.
Buffett’s multi-decade performance is obviously amazing. Whitney Tilson (Trades, Portfolio) said that Bill Ackman (Trades, Portfolio)’s advice to read all of Buffett’s letters was the best advice anyone had ever given him. I feel lucky that I learned about Buffett in my early days of investing and read the letters.
I am based in the UK and I prefer to invest in UK companies because I have a better feel for these companies. I try to learn from UK gurus, and looking at their portfolios is one of the ways I come up with ideas.
So, when I came across an article written by UK brokerage AJ Bell whose analysis uncovered four comparable UK fund managers who have performed better than Warren Buffett (Trades, Portfolio) in the last 20 years, I was very curious to see who they were.
AJ Bell’s analysis showed that 160 funds and investment trusts have returned more than Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) since in the period from April 20, 2001 to April 20, 2021. This may sound like a big number, but it is not. First, there are thousands of funds and investment trusts in the investing universe. Second, from the 160 higher returning funds, 61 are emerging markets focused, 57 are small and midcaps focused and 18 have specialist mandates such as sector specific funds (like technology, mining, or financials).
Note, for the purposes of this article, the "investing universe" consists of funds in the UK’s Investment Association universe (open ended funds) and the UK’s Association of Investment Companies (closed end funds including listed investment trusts).
Top 10 funds which have beaten Buffett
Source: AJ Bell, FE, Thomson Reuters Eikon, total return in British pounds, April 20, 2001 to April 20, 2021
Obviously, this is nowhere near a like for like comparison as all but 24 of these funds have riskier, sometimes niche mandates, that generally should be expected to beat a developed market large-cap mandate. Even the 24 developed market large cap equity funds, which are more comparable to Berkshire Hathaway, have advantages over Buffett, who is running over $600 billion. Even Scottish Mortgage, one of the larger UK funds, is only an $18 billion fund after recent very strong performance.
Here is where AJ Bell’s analysis became very interesting. From the top 10 performing developed market large-cap mandates, only four investors had been managing their funds for the entire 20-year period, and they represented six funds.
Top ten comparable large cap funds which have beaten Buffett
Source: AJ Bell, FE, Thomson Reuters Eikon, total return in British pounds, April 20, 2001 to April 20, 2021
First on the list is James Anderson, manager of Scottish Mortgage Investment Trust (LSE:SMT, Financial), who I have written about a lot recently in my "Inside the Mind of James Anderson" series. Anderson has clearly had a technology bias (using the broad definition of that word rather than in the strict industry classification sense). However, he has still managed to outperform the Nasdaq significantly in the past decade. Anderson, like Buffett, invests in both public and private markets and says Jeff Bezos has had the most influence on his thinking. A key philosophy of Anderson’s is that history shows that stock market returns are driven by a small group of big winners and it is the job of the investment manager to identify such companies and then invest in them with conviction.
Next up is the team of Nick Train and Michael Lindsell, managing the Lindsell Train Investment Trust (LSE:LTI, Financial) and Finsbury Growth & Income Trust (LSE:FGT, Financial).
Lindsell Train are similar to Buffett in that they embrace long-term investing and dislike selling stocks, and they sometimes own private companies. They’ve publicly stated they are highly influenced by Buffett and Munger. That’s why their funds tend to be highly concentrated, and Nick Train likes to say it’s better to have a few eggs in your basket and watch those eggs very closely. Those big holdings are typically lower risk and predictable businesses. An example of that is Unilever (LSE:ULVR, Financial), one of the UK’s largest companies. Many of the companies they invest in have long histories such as Burberry (LSE:BRBY), Schroders (LSE:SDR) or the London Stock Exchange (LSE:LSEG). These companies have strong brands and hold strong market positions, yet they are still innovative and forward thinking. The London Stock Exchange, for example, is transforming itself into a data company, but at the same time is has a leading market share in its businesses globally.
Another key investment belief of Lindsell Train is the importance of dividends. This goes against financial theory which states total return is what is important, which can include capital allocation policies of zero dividends and 100% reinvestment rates. According to Lindsell Train, many great investments over the long term (meaning 30 years or more) come from the companies that tend to show consistent dividend growth.
European Opportunities Trust (LSE:JEO), which only invests in listed companies, is run by Alexander Darwall. This fund is also highly concentrated: the top 20 positions account for 93.7% of the portfolio. Darwall is also a long-term investor and looks for companies with a sustainable competitive advantage, but he is also more open to investing in younger, perhaps riskier companies. In a recent presentation, Darwall stated that corporate governance was a vital element to his investment strategy and that he believes being a responsible investor helps investment performance and ESG analysis is naturally integrated into the investment process. But this isn’t to be confused with impact investing, i.e. investing for political purposes. Darwall’s sole aim is maximizing returns. Darwall doesn’t try to forecast macro trends or engage in market timing and instead invests with an “all seasons” mentality.
Jupiter European is the only open-ended fund to make the top 10. Open ended funds are at a disadvantage to closed-ended funds because they have to manage liquidity flows which are to some extent outside of the manager’s control. Until 2019, Darwall also managed the Jupiter European fund, before leaving to set up Devon Equity Management.
Finally, we have veteran fund manager Max Ward who manages the Independent Investment Trust (LSE:IIT). Ward has stated he plans to keep managing Independent for as long as he is able. Ward also tends to run relatively concentrated and long-term orientated funds. Independent Investment Trust, like Scottish Mortgage (which Ward managed before James Anderson), has an opportunistic, go-anywhere mandate without any index constraints. This can be demonstrated by a taking a look at the list of the fund’s list of investments; for example, it holds large cap international equipment rental company Ashtead (LSE:AHT) and a handful of other FTSE 100 companies as well as a near 7% fund position in small-cap Team17 (LSE:TM17), a computer games developer, and a handful of other small-cap and mid-cap stocks. His fund also holds some stocks which have had significant negative press over the last few years, so this hints at somewhat of a contrarian bent. Independent Investment Trust has very low management fees for an investment trust at about 0.25%. Unfortunately, while we can see Ward’s portfolio, he doesn’t appear to write any fund commentaries.
