Buffett-esque Mutual Funds

I've set the stage on value investing with some previous entries focusing on Benjamin Graham and Warren Buffett, so why not take the discussion to the next level and highlight a few mutual funds (that produce immediate diversification) that employ the tenets of value investing?

This weekend, the Wall Street Journal ran a piece titled, What kind of mutual fund would Warren Buffett buy?

Finding bargains in any market environment is a challenge. For Mr. Buffett, value is rooted in some basic principles: Think of stocks as businesses; invest in companies that generate more cash than they use; buy shares cheap enough to provide what value guru Benjamin Graham called a "margin of safety" and ignore the thundering market "noise" that could trigger a hasty exit.

"Buffett's principles are still sound and universal," says Robert Hagstrom, manager of the Legg Mason Growth Trust fund and the author of a best-selling book on Mr. Buffett's investing style. "Cash flow and return on capital is about all you need."

Some value-stock darlings include Wal-Mart Stores Inc. and Anheuser-Busch Cos., which appear in the Weitz Value fund, run by Wallace Weitz, and in manager Bill Nygren's Oakmark Fund. Meanwhile, Coca-Cola Co. shows up in Oakmark and Auxier Focus, which is run by another Buffett disciple, Jeff Auxier. Not coincidentally, these stocks are also major holdings for Berkshire Hathaway.

A number of former growth-stock darlings are currently making it through stock screens modeled on Mr. Buffett's investing principles. That's because these companies are trading at attractive discounts to estimates of their "intrinsic market value" -- that is, their takeover price.

Fairholme Fund (FAIRX)
The Fairholme Fund (FAIRX), highlighted in the table above, has been praised in various sources that I've seen recently. This fund is as solid as a fund can be -- a Mid-Cap value fund with a 1.00% expense ratio and a 5-Star rating from Morningstar. How can you argue with results like these?

Just this week the the Motley Fool said

This fund is co-managed by Bruce Berkowitz and Larry Pitowsky, whose dedication to the teachings of legendary investor Warren Buffett have led them to invest nearly 19% of Fairholme's assets in Berkshire Hathaway (NYSE: BRKa)(NYSE: BRKb) stock. Of course, that shouldn't come as a surprise: Berkowitz and Pitowsky tend to eschew wide diversification and concentrate resources on their best ideas, which, as of November, included Canadian Natural Resources (NYSE: CNQ), Leucadia National (NYSE: LUK), EchoStar Communications (Nasdaq: DISH), and Sears Holdings (Nasdaq: SHLD).

So far, the strategy has paid off. Fairholme has beat the S&P 500 by more than 10 percentage points since its inclusion in the Champion Funds portfolio last April. It boasts the same market-crushing record over the past five years.

Legg Mason Value Trust (LMVTX)
The legendary Bill Miller (article database) runs the grandaddy of value funds, Legg Mason Value Trust - the only fund to outperform the S&P 500 for each of the last 15 calendar years. But, LMVTX is not off to the hottest start in 2006.