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Fund Spy
4 growth funds that invest like Buffett
Who says value funds have a monopoly on good fundamental investing?
By Morningstar
When people talk about mutual funds that invest in a style influenced by Warren Buffett, value funds are most often mentioned. But Buffett's philosophy applies just as well to growth as it does to value.
As Morningstar senior stock analyst Dreyfus Neenan pointed out in his review of the Berkshire Hathaway portfolio (registration required), the companies Buffett owns are pretty evenly spread across value and growth.
For those of you who recoiled at my description of how momentum funds work, don't despair of all growth funds. You may find the following Buffett-influenced mutual funds to be more your speed.
Heritage Capital Appreciation and Goldman Sachs Capital Growth
Led by Herb Ehlers, Goldman Sachs' growth team has produced strong results at the Heritage Capital Appreciation (HRCPX) and Goldman Sachs Capital Growth (GSCGX) with an approach that's quite grounded in the Buffett philosophy. The Heritage fund, which Ehlers and his team subadvise for Raymond James, is more concentrated and has lower costs.
Related news and commentary on MSN Money
The folks at Goldman Sachs say their investing process consists of three basic elements. First, they buy the business -- that is, they come at a stock not as traders but with the mindset that they are investing in a firm's business for the long term. Second, they look for high-quality growth businesses that dominate their markets, have strong brand names and throw off a lot of cash. They also want good management running a business with long product life cycles. Third, they want to pay a modest price for the business in order to give them a good chance of earning an attractive return.
The results of that process are two concentrated, low-turnover funds that have performed well over time. You get a pretty eclectic mix of stocks in these portfolios, too: The top five holdings are Microsoft (MSFT, news, msgs), Freddie Mac (FRE, news, msgs), Qualcomm (QCOM, news, msgs), McGraw-Hill (MHP, news, msgs) and PepsiCo (PEP, news, msgs). Thus, the fund's returns tend to fall between those of the S&P 500 ($INX) and the typical large-growth fund.
Delaware Select Growth
Early this year, Delaware Select Growth (DVEAX) hired a growth team led by Jeff Van Harte and installed it at this fund. The team definitely leans more toward growth than does the Oracle of Omaha, but the strategy is still sound.
"This team looks for strong cash flow and consistent growth in the intrinsic value of the business and prefers companies it can imagine owning for 10 years or more," writes Morningstar fund analyst David Kathman in his recent report on the fund. Kathman's report continues, "Yet these managers are more willing than Buffett to take a chance on companies with uncertain but promising growth potential. They use a 10-year discounted cash-flow model to come up with a range of values for each stock, with riskier stocks having a wider range. Several of this portfolio's top holdings, such as online DVD renter Netflix (NFLX, news, msgs) and online jewelry seller Blue Nile (NILE, news, msgs), look pricey by traditional measures, but Van Harte thinks their smart management and efficient business models will serve them well over time."
The fund's turnover rate is usually in the 30s or 40s, which is higher than Buffett's, but that's not really surprising considering that Van Harte and company focus on younger companies than does Buffett. As you'd expect, they maintain a concentrated portfolio.
Before joining Delaware, this team put up a fine record at Transamerica Premier Equity (TEQUX).
Jensen Fund
I haven't seen any direct references to Buffett in their writings, but the managers of the Jensen Fund (JENSX) certainly do some things they way he does. They begin with a screen that pares the stock universe to just 100 or so names: They require that a company deliver returns on equity of at least 15% for the past 10 years. Then they look for those firms with attractive prospects that are trading at discounts of at least 40% to their estimates of intrinsic value.
Talk about picky. It can't be easy to find stocks that have posted those ROEs and are cheap at the same time. In fact, Jensen owns just 25 stocks, including Emerson Electric (EMR, news, msgs) and Procter & Gamble (PG, news, msgs).
Jensen also has one clear edge on Delaware and Goldman: costs. This fund charges a modest 0.85%, compared with 1.52% at Delaware, 1.39% at Goldman and 1.19% at Heritage.
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