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Allan Gray vs Warren Buffett: Who is the best investor?

Local fund managers outperform Sage of Omaha.

The debate about attending the Berkshire Hathaway AGM, which was held in Omaha, Nebraska, last month, refuses to die a quiet death.

It would seem that everywhere I turn, I bump into someone who has either participated in this annual pilgrimage or has very strong views on this issue.

Kokkie Kooyman, probably the biggest Buffett-fan in South Africa, recently released a report after he visited Omaha earlier this year. He has attended this AGM an astonishing 15 times and, together with this wife Nora, seems to have been the unofficial tour guide for the more than 50 South Africans who attended this year’s investment Woodstock.

His report was compiled on behalf of Nedgroup Investment managers and contains the usual adoration for Warren Buffett and Charlie Munger, the two geriatric managers of Berkshire Hathaway.

Under the title ‘Unrivalled track record’ Kooyman sets out to describe to readers the amount of wealth created by Buffett and Munger to their shareholders, with the book value of Berkshire Hathaway growing at an annual rate of 19.7% versus the S&P 500 index, which only grew at an annual 9.8% per annum since 1965.

An amount of $1 million invested in 1965 would be worth $5.6 billion today, compared with only $89 million for someone who invested in the S&P500 index.

As I said in my previous article on this issue, these returns are astonishing and cannot be faulted in any respect. This was never my intention.

Comparisons

I made some comparisons of these returns with other investments that were available to local investors, including an investment in the Rembrandt Group of companies, PSG (although it is only 20 years old) and also Allan Gray through Orbis Investment Management.

I am still waiting for the results from Rembrandt and PSG, but so far Allan Gray has responded with the performance figures of the Orbis Global Equity

Fund, a fund founded in 1990 and managed by, first, Allan Gray himself and now his son William, following the same investment philosophy.

Orbis describes itself as contrarian fund managers, rather than value fund managers.

A comparison of returns on a $10 000 investment in the Berkshire Hathaway and the Orbis Global Equity Fund in January 1990 to the end April this year (see graph below), reveals a very close correlation in returns over this period, with Berkshire marginally ahead with an investment amount of $221 619 versus $182 057.

This paints a totally different picture to the often-used graph used to illustrate the superior performance of Berkshire versus the S&P500 index, as Kooyman does in the graph below, which he used in his ‘Unrivalled track record’ report referred to above.

But it is when the returns of the past 14 years are compared that the under-performance of Berkshire becomes very apparent (see graph below).

In fact, when compared with the Orbis Global Equity Fund you would have to ask searing questions as to why anyone would recommend Berkshire Hathaway over an investment in the Orbis fund.

Contrasting individuals

The contrast between the two individuals – Warren Buffett and Allan Gray – could not be starker. Buffett (83) is the affable showman of the investment world, while Allan Gray (76) is secretive, mysterious and almost invisible to the public eye. He rarely grants interviews and it is difficult to even find a photograph of the person reported to be South Africa’s richest man.

Yet his investment returns in the Orbis fund not only match that of the legendary Buffett since inception, but also beat him hands-down over the last 14 years.

Is Buffet really the best investor in the world?

It seems as if I’m not the only columnist questioning the universal adulation for Buffett. Writing on the influential financial website Marketwatch.com Paul Merriman, one of the most respected writers and authors on financial matters in the US asks the following: “Buffett is smart, generous, industrious, famous and known for integrity. But is he really the world’s best investor?”

In the article, Merriman asks two pertinent questions on Buffett and his investing philosophy:

1. How have his investments fared over the past 15 years?

2. If he is so smart, why does he set the bar so low for measuring his success?

Tackling the first question, Merriman says Buffett’s investment results are usually seen as identical to the performance of Berkshire Hathaway, of which he is chairman, CEO and the largest shareholder. Buying Berkshire Hathaway essentially means buying this pool of investments which are all ultimately chosen by Buffett.

He says Buffett uses the five-year trailing total return of the S&P500 index to evaluate his company’s performance. “Last year for the first time in 44 years Berkshire’s gain in book value underperformed that measure. That hasn’t diminished the ardor of Buffett’s fan club, but I think they should hold him to a higher standard,” says Merriman.

As to the second question, he refers to Buffett’s performance comparison to the S&P500 index – which comprises one asset class: large-cap US stocks such as Apple, Exxon and Google (and Berkshire Hathaway). “The index represents the result of buying the best-run large US businesses and holding on to them. But that is strictly not what Buffett does. He is a value investor, trying to buy companies when they are cheap and ‘on sale’ because of what he regards as temporary or unimportant problems.

“Such stocks have higher expected returns than those of the S&P500 index and for that reason I believe his results should be held up to a different set of indexes: one that tracks value indices.”

In a more “reasonable comparison” Merriman sets Buffett against other annualised performance figures from Morningstar for the 15 years ended May 2014. They tell an interesting story:

 

Annualised performance

Berkshire Hathaway

6.4%

Standards & Poor’s 500 index

4.2%

US large cap value index*

7.4%

US small cap value index

12.2%

International large cap value index

7.1%

International small-cap value index

11.5%

Emerging markets value index

11.5%

*A close cousin to Buffett’s investment style, according to Merriman

Investors can easily invest in these indexes in the form of low cost index funds compiled by Dimensional Fund Advisors.

“Owning such funds is easier and much less expensive than running a huge holding company like Berkshire Hathaway. If his company, over 15 years, grows only two thirds as much as two low cost funds that take a similar investment approach, then why has Mr Buffett been elevated to that status?” asks Merriman.

Merriman highlights the same issue that I have with the Buffett-devotees: they compare his investment returns with an index that makes him look very good, thereby justifying their gushing adoration for the man. And for good reason comparisons with other, perhaps better fund managers, are never used.

I have now shown that other fund managers are equal, if not better, in their investment returns over many years. And it is not a case of cherry-picking a fund to prove a point. The Orbis Global Equity Fund has been available to local investors since inception and can be found on the Allan Gray Offshore Platform or via the Allan Gray Local Platform in the form of the Allan Gray Orbis Global Equity Feeder Fund (currently temporarily closed, as it has reached its international investment limit), or directly offshore on the Momentum Wealth International platform.

I am absolutely sure that an investment made into the Rembrandt Group in 1965, the year that Buffett launched his fund, would have matched or beaten that of Berkshire Hathaway over the past 49 years. And over the past 20 years an investment into Jannie Mouton’s PSG Group (an annualised 50% return over this period, I am told) would have built significantly more wealth for his mainly South African backers.

But somehow, attending the PSG or Rembrandt AGM does not have the same bragging rights as saying “I was in Omaha, I saw The Man”.

Magnus Heystek is investment strategist of the advisory firm Brenthurst Wealth Management. He can be reached on magnus@heystek.co.za for ideas and comments.

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