The funds and trusts that have beaten Warren Buffett

Warren Buffett needs no introduction as the world’s most famous investor. Over a long and illustrious career stretching back to 1965, he’s produced a mind-boggling 4,384,749% return for investors through his investment vehicle, Berkshire Hathaway. In other words, $100 invested in 1965 would today be worth over $4.3 million. For some context the same $100 invested in the S&P 500 would now ‘only’ be worth $31,323. (Data source: Berkshire Hathaway to December 2023).

Probably only Buffett, his immediate family and close associates have been invested for the entirety of those six decades and consequently enjoyed returns on that scale. But even more recent performance has been impressive. Over the past 20 years, Berkshire Hathaway has posted a dollar return of 555%, which translates into an 855% return for UK investors thanks to a weakening in the pound. That compares to a return of 738% from the S&P 500, in pounds and pence. That might not sound quite as jaw-dropping as compounded outperformance since 1965, but it still equates to beating the S&P 500 by 0.7% a year. That’s not to be sniffed at given the tremendous rise in the US stock market and the fact that Berkshire Hathaway has largely eschewed the technology stocks that have been responsible for the meteoric rise of the S&P 500. (Data sources: Refinitiv and FE to 19 April 2024)

Few other money managers available to UK investors have achieved this feat. Only 41 out of 973 funds and trusts with a 20 year track record have outperformed Berkshire Hathaway. Some of these have benefited from strongly rising markets in the area they happen to invest in, such as the US, India, and the technology sector. Others have prospered despite hunting in markets with less spectacular performance, such as Europe and China. No UK-focused funds make it into the list, which isn’t too surprising given the relatively weak performance of the domestic stock market.

Top 10 performing funds and trusts over 20 years

Source: Refinitiv, Morningstar NAV total return in GBP to 19 April 2024, NAV total return may be more or less than share price return for investment trusts

The list of funds that have performed better than Berkshire Hathaway includes eight that have been run by the same management team for the whole 20 years. To say these managers are better than Buffett is too much of a stretch, as even two decades is still a small part of Berkshire Hathaway’s performance record. Berkshire is also a bit of a strange beast, part holding company, part investment portfolio, so it’s set apart from a normal investment trust or fund, though it is still a capital allocation vehicle for Warren Buffet. The sheer size of Berkshire also makes investment choices more difficult, limiting Buffett to investing in larger companies only, often owning whole businesses outright. But the managers who have outperformed Berkshire Hathaway over twenty years are conspicuous by their rarity and deserve a tip of the hat. While no fund manager is an island and will rely on their team to a greater or lesser extent, these managers have all been at the head of successful investment operations for over two decades.

Eight longstanding managers who have beaten Buffett

Source: Refinitiv, Morningstar NAV total return in GBP to 19 April 2024, NAV total return may be more or less than share price return for investment trusts

How to invest like Buffett

Clearly the most direct way to gain exposure to Warren Buffett’s investment style is to invest in Berkshire Hathaway. One of the original shares in the company will set you back a cool $615,000 (currently around £496,000), but happily in 1996 Berkshire Hathaway introduced a new ‘B’ class of share which trades at $410, or £330, and is clearly more appealing for retail investors. The B class shares carry 1/1,500th of the ownership rights of the A class shares, so the two are equivalent per £1 invested, though B class shares have reduced voting rights equivalent to just 1/10,000th of the A class.

In reality many investors will already have some exposure to Berkshire Hathaway as it is one of the heavy hitters in the US stock market, despite not being a member of the Magnificent Seven. It’s actually the seventh biggest stock in the US market, having overtaken Tesla since the start of the year. An investor in a global tracker fund will have just shy of 1% invested in Berkshire Hathaway, and those invested in an S&P 500 tracker fund will have 1.8% invested. For those who want greater exposure to Warren Buffett’s management skills, Berkshire Hathaway shares are quoted on the New York Stock Exchange and can be held in a SIPP or ISA or standard trading account, so are a perfectly accessible stock for UK investors.

Beside buying Berkshire Hathaway stock directly, there are a host of fund managers who draw inspiration from Warren Buffett. Lindsell Train also hunt for high quality companies with competitive advantages, and quote Buffett in their investment philosophy. Fundsmith’s mantra of buy good companies, don’t overpay and do nothing could easily have been penned by Buffett, and the publication of an ‘owner’s manual’ was an idea pioneered by Buffett in the 1990s. Meanwhile, a lesser known fund, SDL UK Buffettology, explicitly seeks to replicate Buffett’s investment style within the confines of the UK stock market. Buffett’s pawprints can be found liberally spattered across the investment management industry in one form or another.

Investors can also take direct investment tips from many of the pearls of wisdom dropped by the Sage of Omaha over the years. Here are a few of them:

1. Be long term

Warren says: ‘Our favourite holding period is forever.’

One of Warren Buffett’s most often quoted quips is that his favourite holding period is forever. The idea that when you buy stocks you should do so with the intention of holding onto them for as long as possible is a good one. Short termism can lead to investment losses and excessive trading fees, not to mention an awful lot of faff and potentially capital gains tax along the way. Buffett thinks you should be happy to sit on your portfolio even if the market closed down for ten years. No-one will likely disagree with Buffett on this point, even though both professional and hobbyist investors may find it tempting to tamper with their portfolio in practice. Investors should also be wary of letting a long-term view slip into complacency or apathy, which can be harmful if poorly performing stocks or funds in your portfolio aren’t occasionally weeded out. Perhaps the words of the economist John Maynard Keynes may also be useful here; ‘when the facts change, I change my mind’.

2. Use trackers

Warren says: ‘Both large and small investors should stick with low cost index funds.’

Buffett’s advocacy of tracker funds is a curiosity, and doesn’t on the face of it make a lot of sense for a man who’s made a fortune for himself and others through active money management. In the 2016 Berkshire Hathaway report Buffett wrote ‘when trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsize profits, not the clients. Both large and small investors should stick with low cost index funds.’ Here in the UK, less than a third (32%) of actively managed equity funds outperformed a passive alternative over 10 years according to AJ Bell’s latest Manager versus Machine report.

UK investors today have a wealth of low cost passive funds which can serve as the basic building blocks of a portfolio, and in recent years the majority of retail investors’ monies have flowed into index trackers. However, there are some areas where active management can generally add value, for instance in smaller companies and income investing. There are also some exceptional fund managers who have demonstrated an ability to beat the market over the long term. As Buffett concedes in the same report ‘there are, of course, some skilled individuals who are highly likely to outperform the S&P over long stretches.’ Arguably this applies even more to other, less scrutinised markets where active management has historically yielded greater rewards. Of course, UK investors don’t have to choose exclusively between active and passive approaches, and would generally be sensible to have a mix of both in their portfolios.

3. Choose high conviction active funds

Warren says: ‘Diversification is protection against ignorance.’

This is a somewhat extreme position expressed by Buffett, and one he doesn’t actually follow himself seeing as Berkshire Hathaway runs a diverse, if compact, selection of business and stocks. Diversification should be a high priority for private investors, but there does come a point when it stops being diversification and crosses into being ‘diworsification’. Probably the most egregious example of this is closet tracker funds, which largely hug the index but charge active fees for doing so, leading to underperformance in the long term. Investors holding such closet trackers should consider switching to low cost tracker funds or high conviction active funds. The point is, if you are going to invest in active funds, you should do it properly by choosing a manager who acts with conviction, and puts meaningful sums into each of the companies they back, rather than placing a chip in most of the companies on the stock market.

4. Roll up dividends

Warren says: ‘We relish the dividends we receive from most of the stocks that Berkshire owns, but pay out nothing ourselves.’

Buffett likes to receive dividends, even though Berkshire Hathaway doesn’t pay one. As he wrote in 2013: ‘A number of Berkshire shareholders… would like Berkshire to pay a cash dividend. It puzzles them that we relish the dividends we receive from most of the stocks that Berkshire owns, but pay out nothing ourselves.’ Part of the rationale is Buffett has plenty of opportunities to reinvest the dividends he receives within his portfolio, unlike the companies paying the dividend, which are generally limited to the industries they operate in. Private investors are in the same boat as Buffett on this one. The dividends they receive from their holdings can be reinvested in the same funds and companies that generate them, or reallocated elsewhere in the portfolio, to top up existing holdings, or establish new ones. The long-term benefits of rolling up dividends are clear, particularly when investing in a high yield market like the UK, and especially if maintained within the tax sheltering walls of an ISA.

5. Don’t invest in what you don’t understand

Warren says: ‘Risk comes from not knowing what you’re doing.’

This piece of advice can prevent you losing money and feeling a nasty sense of buyer’s remorse to boot. If you don’t understand something, then you shouldn’t invest in it. At the same time it’s important to recognise that no-one has every single bit of information available about prospective investments, so a balance has to be struck here in which investors gather as much information to make them comfortable they know the conditions under which their investment is likely to perform well and poorly. And everyone makes mistakes, even professional money managers, so simply learn from these for next time and you will become a better investor.

6. Avoid crypto

Warren says: Cryptocurrencies are ‘probably rat poison squared’ … ‘I can say almost with certainty they will come to a bad ending.’

Don’t expect to see Bitcoin in Berkshire Hathaway any time soon, and if you rate the advice of Warren Buffett, you best steer clear yourself. Crypto is going through another boom, but it has few genuine economic uses, and its long-term adoption by consumers, businesses and investors as a medium of exchange or a store of value is highly speculative. Those who do want to take a punt on its future should do so only with a small amount of money they can afford to lose.