Expert Analysis and Commentary
Why Not Just Buy Berkshire Hathaway? An Update
Larry Swedroe Sep 29, 2016
Dimensional Fund Advisors (DFA), with more than $300 billion in mutual fund assets under management, is the leading provider of passively managed structured asset class funds. (Full disclosure: My firm, Buckingham, recommends DFA funds in the construction of client portfolios.) Vanguard is the leading index fund provider. So, let’s go to the videotape.
Berkshire Hathaway vs. Passive Value Mutual Funds
We can also compare BRK.A’s performance to the performance of Vanguard’s index funds. BRK.A outperformed Vanguard’s Large Cap Value Index Fund (VIVAX), which returned 7.18%, but it underperformed Vanguard’s Small Cap Value Index Fund (VISVX), which returned 10.5%. It also underperformed the average return of the two funds by 0.39 percentage points a year.
- If I have been waiting 15 years for superior performance as compensation for taking concentration risk, how much longer is it prudent to keep waiting?
- Why would I expect to be rewarded now, when for 15 years taking that risk has actually resulted in lower, not higher, returns?
My guess is that most investors in BRK.A are unaware of the evidence. You no longer have that excuse.
With the benefit of hindsight, the article challenged the idea that equity markets are efficient through a study of nine successful investment funds that had outperformed the market over the long term. Each of the nine funds was managed by Benjamin Graham’s alumni, who pursued different investment tactics but followed the same “Graham-and-Doddsville” value investing strategy.
Buffett argued that if these long-term winners belonged to a group of value investing adherents, and they operated independently of each other, their success was more than a lucky outcome. It would be the triumph of the investment right strategy. Buffett presented evidence showing how each of the investors had trumped the market by wide margins.
Now, to be fair to TWEBX, it is no longer a U.S.-only fund. Its mandate was changed to make it a worldwide fund. That should, in theory, give it more opportunity to add value. So, we will also analyze the returns of the three DFA international value funds over that same 15-year period. Their International Large Value Fund (DFIVX) returned 7.66%, their International Small Value Fund (DISVX) returned 11.97% and their Emerging Markets Value Fund (DFEVX) returned 13.89%. Each of them far outperformed TWEBX.
We can also take a look at the returns of Tweedy Browne’s flagship fund, TBGVX. Over that same 15-year period, it returned 7.72%. Of the five DFA funds we looked at, TBGVX outperformed only DFIVX, and did so by just 0.06 percentage points. TBGVX underperformed the other four by margins ranging from 1.51 percentage points to as much as 6.17 percentage points.
Before concluding, let’s take a look at the Morningstar rankings for the passively managed funds we have reviewed. As you review the figures, keep in mind that Morningstar’s rankings fail to account for survivorship bias in the data, as its rankings only include funds that have survived the full period. As a result, the ratings understate the relative performance of the surviving funds. For the same 15-year period we have been examining, the following are Morningstar’s rankings:
The Bottom Line
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