In search of the next Buffett
David Prosser searches for managers who invest in the Buffet style.
Let us wish Warren Buffett a very happy retirement now that he has announced he will step down from running Berkshire Hathaway after almost seven decades. The “Sage of Omaha” has earned his rest years. It’s not just his remarkable investment record that is so admirable, but also the wisdom, entertainment and honesty he has provided along the way.
Will we see his like again? Terry Smith, one of the UK’s best-known investment managers, thinks not. Buffett and his business partner Charlie Munger were phenomenal, but they also capitalised on a number of advantages that their counterparts today do not enjoy, Smith argued in a Financial Times piece following Buffett’s announcement.
We may well never see his like again, but it may still be worth looking out for managers who demonstrate the attributes and style that served Buffett so well. Indeed, investment experts have been doing that for years – there may be no single heir to Buffett, but a number of managers are widely seen as investing in similar ways.
If you’re looking for individual managers who share some of the characteristics that served Buffett so well, they are worth considering.
David Prosser
Buffett’s approach to investment has changed over the years as markets have evolved but is sometimes described as focusing on “growth at a reasonable price” – or GARP for short. He started out by following the philosophies of Benjamin Graham, the influential author of investment bibles such as The Intelligent Investor, which focused on finding mispriced securities – businesses that the market was undervaluing for one reason or another.
As markets became more efficient, those companies became harder to find; Buffett therefore shifted to searching for companies with enduring growth prospects – often those with significant competitive advantages – but which traded on attractive valuations.
One manager regarded as taking a comparable approach today is Nick Train, who runs Finsbury Growth & Income Trust. Train is known as a stock picker with a patient approach to investment in high-quality growth companies. He’s also prepared to take high-conviction positions, with large stakes in individual stocks, which is something Buffett has also often done.
Another manager often talked about in the same breath as Buffett is Terry Smith himself. He runs the Fundsmith Equity Fund, an open-ended investment vehicle, but also launched the Smithson Investment Trust – a high-conviction fund built on Smith’s focus on identifying companies with superior operating characteristics and attractive valuations to hold over the very long term.
Smith first came to public attention more than 30 years ago when he authored Accounting for Growth, an exposé of the often dubious accounting techniques employed by many companies to paint themselves in the best possible light. It’s an entertaining read that is reminiscent of the way in which Buffett has so often spoken plainly about the failings of markets.
Elsewhere, Buffett fans might also like to consider Nick Purves and Ian Lance, who run the boutique investment firm Redwheel. They manage Temple Bar Investment Trust, known for its value investment style, geared around finding undervalued companies of high quality.
This is not to suggest any of these managers will ever be talked about in the same way as Buffett – or that they will deliver the same outsized investment returns over the longer term. But if you’re looking for individual managers who share some of the characteristics that served Buffett so well, they are worth considering.
One final point. All these managers run both open-ended vehicles and investment trusts. But as Smith pointed out in his FT article, one advantage enjoyed by Buffett is that Berkshire Hathaway is a closed-ended fund. He’s never had to contend with inflows and outflows of investors’ cash, which can make portfolio management awkward. Investment trusts, of course, also operate with a closed-ended structure.
