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Cloning Warren Buffett’s picks pays off for portfolio manager

Norman Rothery is the value investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.

Adventuresome souls who like to eat at new restaurants will eventually run into a dud. I still have bad memories of a trip to a pricey place in Toronto, which served such tiny morsels of French cuisine that I was not satiated after a multicourse meal. Thankfully, a nearby Italian pizzeria provided real food at a fraction of the cost.

Being adventuresome in investing can yield similar results: The returns you get often don't match your costs. Paying big bucks for risky funds can be dangerous. But there are several ways to cut costs and boost returns while lowering risk.

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Today I'll focus on cloning smart investors like Warren Buffett. I'm not talking about brewing up mini-Buffetts in some sort of nefarious genetic experiment, but simply copying the portfolios of the best investors in the world. The idea is to ride the coattails of their expertise – without having to pay for it.

Cloning is made possible by friendly regulators who force funds to regularly reveal their holdings to the public. The high level of transparency is a real boon to both fund investors and those keen on trolling for interesting ideas.

However, it's impossible to be a perfect cloner due to the delay between when a fund makes a trade and when it is disclosed. As a result, you can't copy a fund's portfolio precisely. It also makes it difficult – if not impossible – to clone a manager who trades frequently.

Ideally, cloners should focus their efforts on funds with concentrated portfolios that remain relatively static for long periods of time.

Buy-and-hold portfolio managers with good long-term track records represent ideal candidates.

Thomas Russo of Gardner Russo & Gardner is one such manager. He's a devotee of Mr. Buffett and likes to pack his portfolio with high-quality value stocks that are usually held for years.

Despite favouring big, conservative stocks, Mr. Russo has developed a stellar track record over the years. His fund gained 12 per cent annually over the 20 years through to the end of 2013. That's 2.8 percentage points higher than the S&P 500, which gained 9.2 per cent annually over the same period.

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Given his affinity for Mr. Buffett's methods, it should come as no surprise that about 12 per cent of Mr. Russo's fund is invested in Berkshire Hathaway Inc. stock. (I own some BRK.B myself.) About 7 per cent of the fund is in Wells Fargo & Co., which is a Buffett favourite. MasterCard Inc. represents another 7 per cent and it is a small Berkshire Hathaway holding.

Mr. Russo loves good brand-name consumer staples stocks whose products attract loyal followings. While the companies in the sector might appear to be stodgy giants, Patrick O'Shaughnessy, the author of Millennial Money, figures consumer staples stocks have on average outperformed all others from 1963 to 2014, with annual returns of 13.3 per cent. Even better, they tend to be less volatile than most other stocks.

In the sector, Mr. Russo owns two big international food and consumer products companies. Nestlé SA represents 11 per cent of his fund and Unilever PLC accounts for 5 per cent.

In addition, roughly 13 per cent of his portfolio is divided up between the tobacco giants Phillip Morris International Inc., Altria Group Inc., and British American Tobacco PLC. (I have a large amount invested in the first two myself.)

Continuing the theme, a total of 18 per cent of the fund can be found in the big brewers Anheuser-Busch InBev SA, SABMiller PLC, and Heineken NV. Some 10 per cent is invested in liquor companies Diageo PLC, Pernod-Ricard, and Brown-Forman Corp.

Swiss luxury goods maker Compagnie Financière Richemont, Martin Marietta Materials, and Comcast Corp. round out his larger holdings.

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Cloners looking for a conservative portfolio built around quality businesses should give Mr. Russo's a second look.

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