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Following in Warren Buffett's Able Footsteps

June 18, 1995|RUSS WILES | RUSS WILES, a financial writer for the Arizona Republic, specializes in mutual funds

You've heard the name. You've read the book. Now maybe it's time to buy the mutual fund.

Robert G. Hagstrom Jr., a Philadelphia money manager, has sold 300,000 copies of "The Warren Buffett Way," his 1994 profile of America's wealthiest investor.

Now he's trying to practice what Buffett preaches as manager of a new mutual fund.

Hagstrom's Focus Trust ($1,000 minimum; [800] 665-2550) seeks to replicate Buffett's success by concentrating on 12 to 15 stocks that Buffett owns or would probably own through Berkshire Hathaway, his Omaha, Neb., holding company.

These businesses "possess favorable long-term prospects with superb underlying economics run by trustworthy and able management," says the prospectus, adding that any stocks selected must be available at "sensible prices."

Many other mutual funds pursue roughly similar objectives. But few really mimic Buffett because they don't concentrate investor dollars in a small number of companies or hold those positions for the long haul, Hagstrom says.

"Many people equate widespread diversification with safety," he says. But owning too many companies also tends to dilute performance, making it harder to post exceptional gains.

The bulk of Berkshire Hathaway's $16-billion portfolio is concentrated in a dozen or so blue-chip stocks. Larger holdings include Coca-Cola, Geico, Gillette, Capital Cities/ABC and American Express. Hagstrom pegs Buffett's personal wealth at about $10 billion.

In addition to owning a small number of stocks, a true Buffett fund should exhibit low portfolio turnover. Hagstrom is shooting to keep Focus Trust's turnover rate below 25%, a level that would indicate each stock is held four years on average. The typical growth-stock fund hangs onto a position less than one year.

Hagstrom is a chartered financial analyst and a principal of Lloyd, Leith & Sawin, a Philadelphia money-management firm that counts about $100 million in assets. Focus Trust represents the first mutual fund foray for Hagstrom and his firm.

This lack of experience might explain the fund's slow start. Two months after its mid-April launch, Focus Trust counts just $1.6 million in assets and about 190 shareholders.

It's worth noting that the fund expects rather high initial expenses of 1.75% annually, although Hagstrom says costs will fall as the portfolio grows.

To date, Focus Trust owns six stocks--American Express, Capital Cities/ABC, Federal Home Loan Mortgage, Federal National Mortgage, Gannett and Wrigley. All are current or past Buffett holdings.

Combined, the six stocks represent about 30% of the fund's assets, with the rest in cash. In light of the market's rally this year, Hagstrom says he's "uninspired to spend any more money at these prices."

Over its short life, Focus Trust is up about 1%.

In Hagstrom's view, the mutual fund that comes closest to practicing what Buffett preaches is the Sequoia Fund, run by William Ruane and Richard Cunniff. Its $1.7 billion in assets are spread among about 20 stocks, anchored by a 22% position in Berkshire Hathaway.

Sequoia enjoys favorable ratings from both Morningstar Mutual Funds and the Value Line Mutual Fund Survey. It has been closed to new shareholders for years.

Hagstrom says Buffett's style mainly reflects the value-investing principles of Benjamin Graham, one of his professors at Columbia University, but also shows the influence of Philip Fisher, an early proponent of growth-stock investing.

This mix might be one reason no other funds seem to have a pure Buffett bent, even though many managers follow Graham's teachings. Another explanation could involve the obsession with short-term results that permeates the fund business.

"Buffett doesn't have to stand up before a board of directors and justify his performance each quarter against a peer group of other mutual funds," says John Rekenthaler, associate publisher of Morningstar Mutual Funds, a Chicago research publication.

"That may be why there are so few Buffett look-alike funds, although you would still expect more."

Rekenthaler says he believes Longleaf Partners (no load; [800] 445-9469) and Weitz Value (no-load; [800] 232-4161) also might fall into the look-alike category.

Hagstrom concedes it may be hard for him to pursue a long-term strategy in an open-end fund format, which allows investors to sell at any time.

But to discourage shareholders from jumping ship, the fund charges a 2% fee to those who redeem in the first year, falling to 1% in year two and nothing after that.


Buffett Basics

Here are four key principles followed by famed investor Warren Buffett, as identified by Robert G. Hagstrom Jr., author and mutual fund manager:

* Ignore daily stock market fluctuations. Invest in top companies and hold for the long haul.

* Don't worry about the economy. Instead, invest in companies likely to prosper regardless of the economic climate.

* Buy a business, not a stock. You can estimate the value of a company by analyzing its business, management, finances and more. Stick with understandable businesses and give yourself a margin of safety between the price you pay and your estimate of the company's worth.

* Manage a portfolio of businesses. If you carefully analyze your picks, you don't need broad diversification. You can do well owning five to 10 sensibly priced stocks.

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