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FA Center: This mutual fund may have cracked the ‘Buffett Code’ — Berkshire Hathaway’s secret sauce

For the 55 timetable years from 1965 through 2019, Berkshire Hathaway’s stock rose at an 18.6% annualized pace, versus 11.8% for the S&P 500
SPX,
-0.82%

 . (Both returns reflect reinvested dividends.) Warren Buffett can take credit for this, and he appears to be very much in tuition of Berkshire. But, given that he just prestigious his 90th birthday, it’s well-spoken that Buffett won’t be at the helm forever.

But if you invest in Berkshire
B,
0.50%

 
BRK.B,
-0.36%

 or by pursuit Buffett’s well-known investing principles, your portfolio returns likely won’t suffer without Buffett stops analyzing the markets and offering his insights.

How can I be so certain? Because some years ago a group of researchers tapped the Buffett Code. They devised a mechanical investing strategy that would have washed-up every bit as well as Buffett over the long term. It is testament to Buffett’s upbringing that it took many researchers many attempts over many years surpassing they figured out the Oracle of Omaha’s secrets.

The researchers who succeeded were three principals at AQR Capital Management, each of whom has strong wonk credentials: Andrea Frazzini; David Kabiller, and Lasse Pedersen. The study, entitled “Buffett’s Alpha”, began circulating in wonk circles in early 2012. (Berkshire Hathaway did not respond to an email seeking scuttlebutt well-nigh this study.)

The word-for-word specifics of the formula the researchers derived are vastitude the telescopic of this column. In unstipulated it focuses on what might be tabbed “cheap, unscratched stocks.” The formula favors issues that have low price-to-book-value ratios, have exhibited below-average volatility, and are from companies whose profits have been growing at an above-average pace and pay out a significant portion of their earnings as dividends.

One bilateral fund that perhaps comes closest to employing the formula the researchers derived is offered, not surprisingly, by AQR: The AQR Large Cap Defensive Style Fund
AUEIX,
-0.63%

 . The fund’s inception was in July 2012, soon without the research was completed.

The researchers don’t expect their formula to replicate a portfolio that is identical to Berkshire Hathaway’s stock holdings, by the way. But, based on the researchers’ results, it should produce a list of stocks that are similar to those Berkshire has owned over the years — similar both in terms of characteristics as well as long-term performance.

An example is Kraft Heinz
KHC,
0.37%

 , which was one of the stocks the fund invested in when it was formed. At the time Berkshire Hathaway had no position in the stock. Not long after, Buffett spoken that his visitor had uninventive a 50% stake in Heinz.

That’s just one data point, of course. But since inception, the AQR fund has produced a 14.4% annualized return versus 12.5% for Berkshire Hathaway stock, equal to FactSet. Both of these returns reflect the reinvestment of dividends.

It would be going too far to expect the AQR fund to protract outperforming Berkshire shares over the long term. There are major differences between the fund and Berkshire, and there inevitably will be some periods in which the fund won’t come out ahead.

But, thesping the future is like the past, the fund (as well as anyone else pursuit the research) should at least match Berkshire’s stock performance over the long term — with Buffett or without.

Mark Hulbert is a regular freelancer to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a unappetizing fee to be audited. He can be reached at mark@hulbertratings.com

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