By SAM MAMUDI
Many investors can only look on with envy when Warren Buffett says his investors have seen 20% annualized gains over the past 45 years—even the best mutual funds pale by comparison.
Only two funds are even on the horizon: Fidelity Magellan Fund, which has returned 16.3% a year during Mr. Buffett's chairmanship of Berkshire Hathaway Inc., and Templeton Growth Fund, up 13.4% a year on average, according to investment researcher Morningstar Inc.
Berkshire's Class A shares have delivered returns of 22% a year since 1965, based on market price, though Mr. Buffett prefers to judge gains according to book value, which stand at 20.3%.
Using Berkshire's market-price gains for fairer comparison with mutual funds, $10,000 invested with Mr. Buffett on Oct. 1 1964—equivalent to about $60,000 in today's dollars—would now be worth about $80 million. The same amount in Fidelity's fund would have grown to about $9.1 million, while Templeton Growth investors would now have roughly $2.9 million.
The returns covered the 45 years through the end of 2009. During that period the Standard & Poor's 500 was up 9.3% on an annualized basis—$10,000 would have grown to nearly $560,000. There were 145 mutual funds at the start of 1965.
Mr. Buffett has more structural freedom than mutual-fund mangers, so comparing their performance isn't apples to apples. But the differences highlight the limits of mutual funds, particularly the short-term pressures many managers face.
"Throughout his tenure he's been a huge proponent of investors thinking of themselves as owners of companies rather than investors, [which fits his] extremely long-term approach," said Jonathan Rahbar, mutual-fund analyst at Morningstar, about Mr. Buffett. "Mutual-fund managers have incentive to do well on a year-in-year- out basis; if things don't go well for a year or two, they'll see outflows."
Fund-ratings firms such as Morningstar might be part of this problem, Mr. Rahbar conceded, though he said his firm focuses more on long-term performance. But according to one Berkshire investor, the structure of the fund industry makes it harder to invest as he does.
"Mutual funds have to sell to institutions who lump them into style boxes and expect them to be fully invested," said Timothy Vick senior portfolio manager at Sanibel Captiva Trust Co. "And those institutions review a manager quarterly and they change some managers every year."
The short-term pressures lead many fund managers to busily buy and sell as they seek to gain a short-term edge—the average fund turns over its entire portfolio every year, according to Morningstar—the antithesis of Mr. Buffett's approach.
Mr. Vick, author of the book "How to Pick Stocks Like Warren Buffett," said his firm typically wants turnover of no more than 10% to 15%—holding a stock for between eight to 10 years. Of the fund industry's 100% turnover average, he says, "it's like a gambling den."
Templeton Growth uses a value deep value strategy, buying stocks when they are cheap, and keeps its turnover low, at just over 10%, Morningstar says. In fact the fund shares many similarities with Mr. Buffett, owing its good performance mostly to consistent, if not overwhelming, gains in good markets and holding up well in down markets, said Kevin McDevitt, senior mutual fund analyst at Morningstar, who covers the fund.
Unlike the Templeton fund, Magellan is a growth-tilted fund. But unlike the other fund, its performance has been unsteady; most of its success came during the record-breaking run of manager Peter Lynch from 1977 to 1990, during which the fund saw annualized returns of 29%.
"Its very long-term returns are still living off Lynch's success," said Christopher Davis, fund analyst at Morningstar.
Mr. Lynch also had a low-turnover approach, and during his tenure Magellan, which today has about $25 billion in assets, was much smaller—it's hard to get outsize results when managing huge sums, as Mr. Buffett himself has acknowledged.
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