Portfolio Manager Perspectives

Jeff Benjamin

Son of Buffett: Five-star fund follows the Oracle's lead

Cook & Bynum mimic value style of Berkshire boss; few stocks make the cut

Aug 13, 2012 @ 4:02 pm

By Jeff Benjamin

Warren Buffett
+ Zoom
((Photo: Bloomberg News))

As a portfolio manager, Richard Cook refuses to pretend he has the time, energy or resources to track and analyze thousands of individual stocks.

Therefore, he limits his analysis to “hundreds of names” so he can invest in about a dozen stocks in the highly concentrated Cook & Bynum Fund Ticker:(COBYX).

The fund, which hit its three-year anniversary in July and has since been awarded a five-star rating by Morningstar Inc., is modeled after a strategy employed by Cook & Bynum Capital Management since 2001.

It might be difficult to find a more straightforward strategy in an active mutual fund. “We're as pure a value-investing philosophy as anyone in the value-investing world,” he said. “We'll go anywhere in the world, in any market cap size, but we only invest in our circle of competence.”

The competence, which Mr. Cook adheres to along with business partner and co-manager Dowe Bynum, follows strategies employed by such value-investing gurus as Warren E. Buffet, Benjamin Graham and Charlie Munger.

“The origin of our strategy is unabashedly trying to copy their teachings,” Mr. Cook said.

“At one point in 1974, Charlie Munger owned just three stocks,” he added. “And Warren Buffet has acknowledged several times that 20 of his investment decisions have made up 90% of his net worth.”

The fund, which is anchored by a 20% weighting in Wal-Mart Stores Inc. Ticker:(WMT), currently includes just eight positions, along with a 30% allocation to cash, according to the most recent public filing.

“We think its part of our job to not put capital at risk, so our cash position is totally a function of the number of opportunities we've found,” Mr. Cook said. “If we are fully invested, we will have between 12 and 15 positions in the fund, but there were a couple of strange periods since 2001 when we had just three stocks.”

As might be expected, the concentrated strategy includes holding periods that average more than four years.

The foundation of the research process involves a focus on companies with a “durable competitive advantage” that allows them to earn an “outsized return on capital over time,” Mr. Cook said.

He used Microsoft Corp. Ticker:(MSFT) as an example. “They have a number of lines of business that we feel are much stickier than a lot of people give them credit for,” he said. “Windows, for example, is a solid base that people will always use.”

Another example from the portfolio is Procter & Gamble Co. Ticker:(PG). “People perceive Tide laundry detergent, as well as a number of other Procter & Gamble products, to be the best,” Mr. Cook said. “And many of those products are the best, but they also spend a lot of research and development to continue to improve.”

Of course, as value investors, the co-managers also focus on price. “The key to everything we do is buying a business at a big discount to its intrinsic value,” Mr. Cook said.

It is also a philosophy at the $225 million asset management boutique to back its PMs' beliefs to the hilt. The co-managers at the firm have virtually all of their net worth invested in the fund.

“We try to design a strategy that is the best over a 30-year period of time, while a lot of strategies are only designed for this year or next,” Mr. Cook said. “We define risk by what the chances are of a permanent loss of capital, so this is more business risk than market risk, and that's why we're comfortable with that level of exposure.”

The fund has gained 14.6% so far this year, which compares to 13.3% gain by the S&P 500, and an 11.3% gain by the large-cap-blend category as tracked by Morningstar.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives .

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

3 tips when hiring millennials

Advisers want to add young talent, but ask if they want to add millennials and most will begin to squirm. Hunter Hart, and Marc Schliefer of Equity Planning Inc. disspell some myths and misconceptions of hiring millennials.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

Morgan Stanley sees slower fee-based asset flows on fiduciary rule delay

Flows to advisory accounts, while still higher than the start of 2016, dropped off more than 20% from Q2 and were the lowest in a year.

How adviser salaries stack up to other jobs

Median compensation hovers just under $100,000 on the low end and reaches nearly $300,000 for bosses.

Finra ranking brokers in effort to crack down on industry's bad apples

All 634.403 reps have been ranked based on factors such as prior regulatory disclosures, disciplinary actions and employment history.

How to save retirement planning from tax reform

Losing big deductions, even in lieu of a larger standard deduction, may cause taxes to rise in retirement.

Advice firms in a tricky financial position

As revenue growth dips and salaries rise, nearly 90% of firms are at or near capacity.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print