Three Dirt Cheap Managed Funds

One of the most common questions I get asked is where to invest.

I’m not one for hot stock tips (most turn out to be cold), trading CFDs (the only people getting rich are the CFD providers). Instead, I invest where the smart money goes – and that’s far, far away from the grubby world of sales-pushing planners.

While I have an individual portfolio of shares that I add to when the market’s dip, here are the following investments that make up the core of my portfolio:

Berkshire Hathaway (BRK.B NYSE)

Firstly, for my friends at ASIC I will disclose that I personally own shares in Berkshire Hathaway.

My reason for this is quite simple: I want to get the highest possible returns for my money, so I have chosen to employ the most successful investor the world has ever seen to do the investing.

Berkshire Hathaway shares trade at $US106,000 a share (as at 16/09/2011). However, there are also class B shares that trade at around $US70 a share (it’s the same, albeit smaller investment, they’ve just been split to be more affordable). These can be bought quite simply through CommSec for about $US65 a trade.

Ten grand invested in Berkshire in the 1950s would be worth $80 million today. That roughly translates to a 434,057 per cent return from 1965 to 2009. I also don’t like too much risk, so Buffett’s guiding golden rule of investing, “don’t lose money”, sits well with me.

While it’s well known in the industry that most professional fund managers don’t invest their big (shareholder-given) bonuses in the funds they run, Buffett has practically 99 per cent of his wealth invested in Berkshire, so where his personal money goes so does mine. Despite being one of the richest men in the world, Buffett pays himself $100,000 a year in salary to manage a $200 billion portfolio of investments.

Australian Foundation Investment Company (AFI.ASX) and Argo Investments (ARG.ASX)

Most managed funds are terrible investments. They’re loaded with fees, and as studies repeatedly show, their returns rarely beat the long-term market average.

Most financial planners have never heard of the two managed funds below, despite them being around for seventy years and having solid, steady results for that time. Why? They don’t spend money on marketing, or greasing the palms of salesmen.

Some of the cheapest, and best long-term managed funds actually trade on the stock market. They’re called Listed Investment Companies (LICs). There are all sorts of LICs that trade on the stock market, yet the ones we’ll focus on are those that have a solid track record and rock-bottom fees, two of which are Argo investments (ASX code ARG) and the Australian Foundation Investment Company (AFIC; ASX code AFI).

Both companies are large with billion-dollar portfolios, primarily invested into 100 of Australia’s major companies. The returns of these companies have been in line with the major indices (market measures), and their stock track records stretch back decades.

As I’ve said many times before, there are only two variables you really have control over when investing – the asset class you invest in, and the fees you pay. With this in mind, this is one of the key reasons I personally invest in LICs. AFIC has a total Management Expense Ratio of just 0.12 per cent (at the time of writing), which leaves most other funds for dust.

Tread Your Own Path!