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by Maz Jadallah

Last week we highlighted one of AlphaClone’s three new recently added fund groups called “Top Endowments”, which tends to invest in index funds and might therefore be a great fit for investors who prefer index investing. To refresh your memory, the group’s Top Three Holdings clone beat the market by 13 percentage points annualized since 2000 in back tests. Yes, that’s 13 percentage points each year on average since 2000.

This week, we’re highlighting another recently added fund group called “Value Masters”. As the name suggests, this group is comprised of 18 of the world’s foremost value investors. These investors like to find diamonds in the rough and indeed they are very good at it. Here are the funds that currently make up the group:

  1. Appaloosa Management
  2. Baupost Group
  3. Berkshire Hathaway (BRK.A)
  4. Blue Ridge Capital
  5. Dreman Value Management (DHG)
  6. Eminence Capital
  7. Glenview Capital Management
  8. Greenlight Capital (GLRE)
  9. Lone Pine Capital
  10. Maverick Capital
  11. Pershing Square Capital Management
  12. Private Capital Management
  13. RBS Partners
  14. Ruane, Cunniff & Goldfarb
  15. Steel Partners
  16. Third Point
  17. Tiger Global Management
  18. ValueAct Holdings

Before we dive into the group’s clones it is worth noting that our list is meant to be representative of value investors and not exhaustive. However, if you don’t see a fund that you think should be included, drop us a line and we’ll take a look.

This week, rather than focus on particular cloning strategy, we thought it would be instructive to compare all three clone strategies for the same group. To remind you, here is a quick summary of AlphaClone’s strategies for fund groups:

Top Holding

  • Holds the top 1, 2, 3, or 5 largest holdings from each fund in the group as determined by the market value of the holding at the end of the most recent quarter.

Best Ideas

  • Buys the top 1, 2, 3, or 5 largest new positions from each fund in the group.
  • Sells when a holding is no longer listed as being held by a fund manager or if the number of shares held is reduced by 50% or more.
  • This strategy limits the total number of holdings in any one quarter to no more than 50.

Popularity

  • Holds the 1, 3, 5, 10, or 20 most widely held stocks amongst the group.
  • At least two funds in the group must hold a stock in the same quarter for it to qualify as “popular”.

For this exercise, we selected the Top 3 Holdings strategy, the Top 3 Best Ideas strategy and the Top 10 Popularity strategy. The results are summarized below:

1/3/00 to 5/9/09

Top 3 Holdings

Top 3 Best Ideas

Top 10 Popularity

S&P500TR

YTD '09 Return

4.30%

29.20%

27.60%

3.90%

Annualized

9.60%

8.10%

13.80%

-3.00%

Volatility

17.90%

20.70%

19.20%

16.30%

Sharpe (4%)

0.30

0.20

0.50

-0.40

Max Drawdown

-51.30%

-48.70%

-40.80%

-50.90%

As you can see from the performance results, there is a reason we use the word “masters” in our fund group title! Across the board for each clone strategy we selected, our Value Masters group back tests to beat the S&P 500 by 11+ percentage points annualized since 2000. Even more amazing, the Top 10 Popularity strategy beat by 16.8 percentage points annualized and is up 27.6% year-to-date – all at a better risk/reward tradeoff (sharpe) than the overall market!

We know you want to know what the holdings are but we are about to rebalance all of our clone portfolios on May 22nd when holdings will substantially change for each clone portfolio.

Part I, Part III

Source: Investment Fund Clones Part II: Value Masters