As I have written several times before, Mohnish Pabrai (Trades, Portfolio) is one of my favorite value investors. There are many reasons why I like Pabrai’s approach. His returns speak for themselves, but Pabrai also approaches the market with a steady hand, long-term outlook and calm demeanor, something many other investors struggle to achieve.
Pabrai’s gentle approach has helped him become one of the world’s most successful value investors. By concentrating on his returns, blocking out the rest of the market and taking a long-term focus, Pabrai has turned $100,000 invested in his leading fund at inception into $937,000 for year-end 2016 net of fees.
Emulating Pabrai
I have tried to emulate Pabrai’s approach in my investing, but there is no substitute for the real thing. Unfortunately, the Pabrai funds are closed to additional investment. Investors, however, can still gain exposure to the market via the Dhandho Funds' Dhandho Junoon exchange-traded fund. But is it worth it?
The Dhandho Junoon ETF seeks investment results that generally correspond to the performance of its underlying index, the Dhandho Junoon Index. This index uses a rules-based methodology to select stocks that fall into three buckets- cannibals, spinoffs and select value manager holdings.
The cannibals bucket is devoted to companies that are aggressively buying back their own stock, giving more weight to companies consistently reducing their shares. These are businesses that are buying back their stock year in and year out, and issuers must have repurchased between 1% to 26% of their shares outstanding during the trailing 12-month period. The securities from this universe are then ranked from highest to lowest based on the percentage of shares repurchased, and the largest purchasers are selected.
The spinoff bucket is composed of companies that were spun off from a parent company. Companies must have split from their parent companies in the past 12 to 84 months.
The smallest bucket is select value manager holdings. To qualify for this category, issuers must have been held by one of 20 selected value hedge funds during the previous quarter, as reported on their Form 13F filings. Value managers such as the TCI Fund, Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) and Sequoia are included.
Not a substitute
As you can see from the above, the Junoon ETF is very different from the Pabrai funds. Rather than replicating the Pabrai Investment holdings, the ETF uses a rules-based approach for several different buckets, which will almost certainly generate different returns to Pabrai’s value preference.
Two other distinct differences between the ETF and Pabrai funds are fees and diversification. Pabrai’s funds famously have a 0% management charge, in line with the initial fee structure used by Warren Buffett (Trades, Portfolio)’s investment partnerships. The gross expense ratio of the ETF is 0.75% per annum. In addition, the ETF has around 100 holdings while Pabrai is quite happy being relatively concentrated with as few as 10 holdings. So there are some fundamental differences between the Pabrai value funds and Junoon ETF, but should you buy the ETF?
Even though the ETF may have a winning strategy, it is still a rules-based ETF: there are thousands of others out there. What’s more, the ETF rebalances quarterly, which does not actually conform to the value mantra of long-term investing -- this quarterly rebalance means the fund looks more like a short-term trading instrument.
The bottom line
All in all, it is clear the Junoon ETF is no substitute for Pabrai’s investment genius and is not an easy way to buy into his strategy. The ETF may have a winning strategy, but it does not use a value strategy, have a value approach to investing or even offer value with its relatively high annual fee.
It seems that if you want to replicate Pabrai, the best way is to study his style, read his reports and make your own investment decisions based on the findings of these activities.
Disclosure: The author owns no stock mentioned.
