Manager puts Buffett's theories to work for fund

INVESTING

Investing

May 23, 1999|By Bill Atkinson

ROBERT G. Hagstrom isn't your average Warren Buffett groupie.

For seven consecutive years, he's made the trek from his home in Wayne, Pa., to Berkshire Hathaway Inc.'s annual meeting in Omaha, Neb. He's written two books on the man called the "Oracle of Omaha" and the world's greatest investor. And he follows Buffett's teachings as a true disciple, by managing his own mutual fund -- the Legg Mason Focus Trust -- the way Buffett would.

"I clearly couldn't have picked a better role model to study," said Hagstrom, 42.

The approach is paying off, not only in the fund's performance but recognition.

Last year, the Focus Trust returned 41.47 percent, and this year it is up 13.32 percent, beating the Standard & Poor's 500 stock index by more than 4 percent.

"You can't argue with the returns so far," said Russel Kinnel, editor of Mutual Funds, a newsletter published by Chicago-based Morningstar Inc.

Assets in the Focus Trust are swelling, too. Legg Mason bought the fund about a year ago, and assets under management have shot up from $20 million to $180 million.

"He is the champ in terms of assets growth," said William H. Miller III, the portfolio manager who runs the Legg Mason Value Trust Fund. "It is hard to have any other conclusion, but his fund is beating the market this year nicely."

Even Hagstrom's book, "The Warren Buffett Portfolio," which was released this year, was plugged by Buffett's partner, Charlie Munger, at the company's annual meeting, which brings in about 20,000 people and has been dubbed "Woodstock for capitalists."

The remarks by Munger about the book were "huge," said Hagstrom, who noted that it is selling well.

Like Buffett, Hagstrom invests in a small number of companies. He bets heavily on what he calls "high probability events," or companies that are easy to understand, managed well, make money and promise to rise in value over time.

Like Buffett, he holds onto these stocks, and ignores the ups and downs in the stock market. He doesn't try to predict interest rates or the market's movement, but relies on his analysis of the company.

He and Buffett own stocks that include American Express Co. and Freddie Mac, which packages mortgages into securities. Hagstrom's Focus Trust also owns McDonald's Corp., which Buffett sold last year and later acknowledged was a "very big mistake."

Some argue that there is a danger in investing heavily in a few stocks. "Focus" funds can be volatile because they have fewer stocks to spread the risk.

"The more concentrated a portfolio, the greater confidence you need to have in the manager," Kinnel said. "In most funds, a fund manager doesn't have to be that good to get by. In this case, a concentrated fund in the wrong hands can mean big risk."

While the fund has 14 companies in its portfolio, it is diverse among industry groups. Focus Trust owns shares of America Online Inc., Avon Products Inc. and International Speedway, which operates auto-racing tracks.

Focus Trust directors wondered why the fund invested in racetracks, despite Hagstrom's arguments that it fit perfectly with the Buffett philosophy. Hagstrom settled the dispute in 1997 by embarking on a yearlong tour of the Winston Cup, where he studied the drivers, team owners, sponsors and racetrack operators. He wrote a 250-page research report and turned it into a book called "The NASCAR Way," which was published last year.

"It was my mid-life crisis book," he said. "Some guys buy convertibles, some guys buy motorcycles. I went out on the racing circuit."

Yet, Hagstrom acknowledges that the fund is not for every investor, especially those with weak stomachs.

"It bounces," he said. "You can't believe the bounciness of the portfolio."

Hagstrom was introduced to Buffett's teachings in 1984 as a broker at Legg Mason when he was given a Berkshire annual report to analyze. The more he learned about Buffett's style, the more he liked it. "I had been struggling with how to invest in markets," he said. "Some things just click with you, the information rings true in your ears, it feels right."

Hagstrom tracked Buffett as a kid would a star athlete.

"Anything he had written I had copies of. When he bought a company, I would get that company's annual report," he said.

Hagstrom left Legg Mason in 1988 to manage money for a bank, and in 1991 he joined the investment department of Lloyd Leith & Sawin, a financial advisory firm in Wayne. In 1994, he published his first book, "The Warren Buffett Way," which became a best seller. In April 1995, he and the Lloyd partners launched the Focus Trust, and put Buffett's principles to work.

Despite strong returns, the money came in slowly.

"I had a 1-800 number, no sales force and kind of a Kevin Costner image, `If you build it, they will come,' " Hagstrom said.

Now, with a sales force of more than 1,000 brokers and a book plugged by Buffett's partner, Hagstrom and Focus Trust are flying, and there is no telling how high they will go.

Hagstrom has great expectations for the fund.

"I wasn't brought into Legg Mason to shut the fund down at $200 million," he said.

As for himself, he simply wants to demonstrate to investors that Warren Buffett's style works.

"We are the laboratory example of his teaching," Hagstrom said. "The confidence grows with time."

Pub Date: 5/23/99

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