Seeking the investment wisdom – and returns – of Warren Buffett? Try Buffettology

There is no shortage of equity managers, on both sides of the Atlantic, who cite Warren Buffett as an influence over their investment strategy.

Whether their claims make a real difference to their returns is another matter. Of late, even Buffett has struggled to beat the index, after changing Berkshire Hathaway into an industrial and reinsurance company, through a series of acquisitions.

In the periods to 10 May Ashworth-Lord’s fund was top quartile over every conceivable short and long-term period

As Buffett enters the twilight of his career, at 88, where can you possibly travel to take advantage of his investment wisdom?

You might choose to make an early stop at Manchester, England, to weigh up the £870 million Keith Ashworth-Lord’s CFP SDL UK Buffettology Fund whose name is far more complicated than its strategy.

Ashford-Lord licenses the brand from David Clark and Mary Buffett, the Sage of Omaha’s former sister-in-law, who use Buffettology to brand their investment writings.  Ashworth-Lord also shares Warren Buffett’s straightforward approach at his boutique, Sanford DeLand Asset Management.

He makes a point of visiting Hathaway’s annual meetings to digest the views of Warren Buffett and his lieutenant Charlie Munger.  But the proof of Ashworth-Lord’s pudding is in his performance. In the periods to 10 May his fund was top quartile over every conceivable short and long-term period.

He has beaten every UK equity manager in the UK All Companies sector over three and five years, and since inception in March 2011. Over five years, he has generated a cumulative return of nearly 108%, against the 30.5% return from his peers.

Before starting Buffettology, Ashworth-Lord ran his personal pension fund on similar lines, generating 114% against a fall of 1.5% in the UK index over the ten years from 1999.  He is a former head of research at Daiwa Securities and co-author of Analyst, the investment research publication, where he met Warren and Mary Buffett.

Ashworth-Lord’s track record is increasingly attracting the attention of family offices, mainly via intermediaries, but sometimes through a direct approach. Alex Brotherston, former head of UK retail sales at Franklin Templeton, has just signed up as his chief executive.

Like Buffett, Ashworth-Lord looks into the guts of a business to get a deep understanding of its current and future cashflow. A lifetime spent doing this that made it natural for Berkshire Hathaway to make acquisitions of the right kind of companies. And Ashworth-Lord finds it the perfect way to tune out stock market noise and concentrate on what matters.

He wasn’t remotely bothered by a poor first quarter this year, where his least favourite sectors, like life insurance and mining, managed a rally: “Great businesses will always bounce back.  That’s why we led the funds league table in April.”

He adds: “A free cash-flow yield of 6% to 7% is always interesting. I have never, ever, gone wrong buying a business on a 10% or greater FCF yield in my entire business life. The only factor that matters is how much cash the business is going to generate for its shareholders between now and Judgement Day. Discount that back to present value at an appropriate discount factor (we always use 10%) and you have all you need to know.”

The success, or otherwise, of businesses in digging a moat to protect their franchise is important: “They allow you to consistently generate excess returns on capital over and above the cost of that capital, without it being competed away.” Ashworth-Lord looks closely at factors like the bargaining position of customers and suppliers, plus competitive threats.

He likes managements that act with an owner’s eye. Family businesses would be first to appreciate the importance of this approach.

Ashworth-Lord invests in a focused list of 32 stocks.  Far from reducing risk, he thinks ill-researched diversification can increase it. In his view, too many investors have circles of competence which are a mile wide, and an inch deep.

He regularly bounces ideas off his chief analyst, Andrew Vaughan and his colleague Rosie Banyard, although she is leaving later this year for personal reasons. He is happy to seek opportunities in her small-cap sector, which mainstream managers tend to leave to specialists, although he concedes that his fund has grown to a size where building positions at the small end of the market is becoming harder.

Ashworth-Lord likes companies which use proprietary technology to succeed, as long as their cash flow prospects stack up. Games Workshop, a war game manufacturer, is his largest position, followed by AB Dynamics, which makes car testing equipment and Bionventix, a biotechnology stock. His newest investment is PayPoint which facilitates digital payments to retailers.

He also likes companies closer to a value style whose competitive advantage stems from their financial strength: “A business growing at a steady, single-digit rate of, say, 5% to 8% over the long term makes a wonderful investment because of the power of compounding.”

He likes companies where 80% of profits come from free cash flow. For the record, his favourite large-cap stock is Diageo, the drinks group.

In an ideal world, Ashworth-Lord would run his profits forever: “I only sell if the economic power of a business has been compromised, or where I have made a mistake. And I certainly make them. At least half a dozen since the fund started. Its twelve-month portfolio stock turn of 3.3% in the year to April would imply a holding period of thirty years.”