What makes a stock a 'Warren Buffett-style' stock? That's a good question.
Warren Buffett is without a doubt one of the greatest investors of all time — and a living legend. Over the past 60 or so years, he has turned Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B) from a failing textiles mill into the US$678 billion conglomerate it is today, achieving a compound annual return of around 20% per annum on average along the way.
What's in a MOAT?
So what kind of companies does Buffett typically invest in? Well, they usually have one thing in common: a moat. A moat is an investing concept coined by Buffett himself. Here's how he described the concept in his 2007 annual letter to shareholders of Berkshire Hathaway:
It's better to have a part interest in the Hope Diamond than to own all of a rhinestone. A truly great business must have an enduring 'moat' that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business 'castle' that is earning high returns.
Therefore a formidable barrier such as a company's being the low-cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with 'roman candles', companies whose moats proved illusory and were soon crossed.
Looking at Berkshire Hathaway's current holdings, we see plenty of moats. Companies like Coca-Cola and American Express, long-term Berkshire holdings, possess some of the most powerful brands in the world. Amazon.com is one of Berkshire's more recent holdings. But there's no doubt Amazon has one of the globe's best pricing moats.
And Apple, Berkshire's largest holding, is one of the most dominant companies on the planet with its brand, management team, and scale.
Berkshire doesn't own any ASX shares at present, so it's hard to know what kind of Australian companies Buffett might go for today. But there is one ASX investment that hones in on Buffett's concept of a moat. And it's an exchange-traded fund (ETF) that I personally own.
The VanEck Vectors Wide Moat ETF (ASX: MOAT) is a fund that focuses on only holding US shares that display characteristics of Buffett's moat concept. These are selected by Morningstar, which looks for companies with "sustainable competitive advantages".
This ETF's current portfolio includes names like Microsoft, Alphabet, Kellogg, and Disney. Berkshire's holding Amazon is also present, as are Berkshire Hathaway shares themselves.
Why I will never sell this Buffett-style ASX ETF
So we know that this ETF attempts to invest like Buffett does by looking for companies with moats. But does it have the numbers to back it up?
Well, this ETF has returned an average of 14.72% per annum over the past five years. That beats its S&P 500 benchmark, which has returned an average of 13.19% per annum over the same period.
Since the fund's inception in mid-2015, the VanEck Wide Moat ETF has averaged an annual return of 14.88%, again beating the S&P 500 which averaged 12.78%.
Here's a look at this ETF's unit price to illustrate:
So we have a Buffett-style investment that has consistently outperformed the market. That's enough to earn this ETF a place in my own portfolio. And enough for me to never want to sell this ASX investment.
