Sunday, August 21, 2005

Focus Funds

I define “Focus Funds” as the mutual funds that invest a large portion of the portfolio in relatively few stocks. The managers of these funds focus on a few stocks that they believe will outperform the overall indexes and invest heavily in them. The methodology of these funds is not to ‘buy a few of a lot’ but instead ‘buy a lot of few’. Meaning, these funds do not invest tiny amount of money in hundreds and hundreds of stocks but instead focus on a few stocks and hold relatively large positions in them.

If you ever wanted to buy a fund that follows the Benjamin Graham/Warren Buffett investment principals then these funds will fit the mold. The fund managers of these funds may or may not agree with this assertion, but if ever you wanted to find a fund which holds relatively large positions in few stocks, which is what Warren Buffett did and is doing in his investment career, then look no further. The table below lists some “Focus Funds”. A couple of these “focus funds” hold Berkshire Hathaway as their largest holding. What does it say about the funds and the philosophy of their managers?

As the table illustrates, these “focus funds” hold at least 5% or greater amount of the fund holdings in the single stock. In each case, the top 10 holdings take up as much as or close to 50% of the total fund portfolio.

Fund NameLargest Holding% in top 10 holdingsPerformanceManager Name
CGM Focus (CGMFX)Murphy Oil
(5.64%)
52.82%19.5%* G. Kenneth Heebner
Clipper (CFIMX)Freddie Mac
(9.3%)
49.50%14.04%James H. Gipson
Fairholme (FAIRX)Berkshire
Hathaway
(18.94%)
66.68%18.75%*Bruce Berkowitz
Janus Twenty (JAVLX)UnitedHealth
Group
(11.76%)
57.59%11.22%Scott Schoelzel
Legg Mason
Growth Trust
(LMGTX)
Amazon.com
(6.83%)
51.79%11.65%Robert Hagstrom
Legg Mason
Value Trust
(LMVTX)
Nextel Communication
(8.16%)
48.53%15.99%Bill Miller
Longleaf Partners (LLPFX)Vivendi
(6.7%)
55.30%13.10%Mason Hawkins,
Staley Cates,
John Buford
Matthew 25 (MXXVX)Polaris Industries
(21.52%)
84.16%15.89%*Mark Mulholland
Oakmark Select (OAKLX)Washington Mutual
(15.15%)
62.01%19.31%* Bill Nygren,
Henry Berghoef
Sequoia (SEQUX)Berkshire
Hathaway
(35.30%)
82.92%14.69%Robert Goldfarb

What common characteristics do you see in these funds?

Here is what I see in them:

  • A focused portfolio
  • Below average expense ratio (exceptions: Two Legg Mason funds)
  • Market beating performance
  • Very low turnover; which translates into very good after tax returns

Here are some of the noteworthy things about these funds:

  • The Warren Buffett connection. Firholme and Sequoia hold significant amount of money in Berkshire Hathaway. The manager of Legg Mason Growth Trust, Robert Hagstrom, has written a book about Warren Buffett style of investing.
  • The Legg Mason Value Trust has beaten the S&P 500 index for 14 consecutive years.
  • The Sequoia fund was closed in 1982 and it remains closed for new investors today.
  • Some of these funds hold large cash positions today. We have heard from Warren Buffett many times that he is not afraid of holding large cash positions until appropriate opportunity presents itself.

I read market commentaries and shareholder reports of these managers each quarter. The market commentaries and shareholder reports are available on the respective mutual fund website.

I intend to find some other funds with similar “focus” philosophy and add them to this table. If you are aware of some other focus funds then leave a comment at the bottom of this post or send me an email and I will update the table. Please only send the funds with at least 5 years of performance record and at least 100 million of assets under management.

Discloser: I do not own any of the mutual funds mentioned in this post. All disclaimers apply.

* All Performance is data is based on 10-year performance, except these funds with less than 10 year performance record: CGM Focus (inception: 9/3/97), Fairholme (inception: 12/29/99), Matthew 25 (inception:10/16/1995), Oakmark Select (inception: 11/1/96).

7 comments:

Adam said...

So I currently have a roth IRA account, I was wondering if I can take my money out of the roth, which is a putnam voyager b account and put it into one of the funds you list here. Also do you have money invested in any of these stocks, and if so, how do you like the company that handles it?

Phil Town said...

Hey, great post. I posted about it on my site. Here's the URL if you want to check it out:

http://philtown.typepad.com/phil_towns_blog/2005/09/can_focus_funds.html

Thanks for the good reading.

Phil Town

thc said...

Adam: There is no reason to take a distribution from your Roth. If you want to invest in a different fund, sell the Putnam and buy your new choice with the proceeds--within the Roth account.

Micro said...

Great article on focus funds! I have been in CGMFX for a few years and smiling because of it!

Of course diversification is a key to managing risks, therefore I have a wide array of investments.

Themicrokid
http://themicrokid.blogspot.com/
http://themicrokidstocks.blogspot.com/
themicrokid at yahoo.com

Anonymous said...

morningstar says CGMFX has over 200% turnover.

Anonymous said...

Janus Orion (JORNX) is also a focus fund. Is doing quite well for this year (as of late Nov. 2006).

micro said...

CGMFX despite a high turnover is the winner since Aug 2005 IMO among these funds.

Most of the low turnover guys turned out to be dogs.