The Warren Buffett Portfolio

A comparison of the risks, returns and costs of Warren Buffett's S&P 500 index fund and short-term US Treasury portfolio with active asset allocation funds and hedge funds.

1. The Buffett Portfolio Compared to Broadly Diversified Funds and Hedge Funds
Warren Buffett indicated that he has directed the trustee of his personal family trust to invest the
remaining assets of his fortune in two index funds after his death. Specifically, the trustee should invest
90% of the proceeds in an S&P 500 index fund and 10% in a 1-3 year maturity US treasury securities
index fund. He has famously commented that hedge funds (and active management in general) have
failed to deliver on their promises to investors but have been a great success for their managers in
transferring wealth from investors to the managers. Given the esteem that the Oracle of Omaha is held
among many investors I decided to see if his investment strategy should be imitated by those of us less
gifted in the art of investing.
I looked at the returns, risk and costs of investing in a 90/10 allocation to the S&P 500 index and
Barclays 1-3 year maturity US Treasuries over the past 25-years as well as returns to world asset
allocation funds and hedge funds. The past 25-years cover the emerging markets currency crisis of 1997,
Russian debt default of 1998, the dot-com bust in 2000 and the global financial crisis of 2008 as well as
the tech bubble of the late 1990s and the US housing bubble of 2005-2008. It also includes the
commodities and emerging markets bull markets of 2005-2012. By my estimate, this period represents
roughly 3 market cycles and a fair period of the modern era in investing which includes mutual funds,
hedge funds and exchange traded funds but, as they say, past returns are not indicative of future
performance. Here is a summary of findings:
Buffett 90/10
Portfolio
Morningstar World
Allocation Funds Average
Credit Suisse/Tremont Broad Hedge
Fund Index (since 1-1994)
Annualized
Return
8.9% 7.1% 7.8%
Risk (annual
volatility)
13.0% 9.6% 7.0%
Beta to the S&P
500 index
.90 .75 .83
Worst 12-mo
Return
-44.3% -35.2% -19.1%
Return/Risk Ratio .68 .74 1.1
Annual Cost .05% 1.37%
2% annually +20% of returns above a
risk free return like a US T-bill
Performance statistics May, 1991 through April, 2016. Returns are annualized, net-of-fee.
Observations
If down-side risk is not a concern of the investor, the Buffett portfolio had the highest net-of-fee
nominal return when compared with asset allocation funds and hedge funds. It is interesting to note
that if fees are added back, the world allocation funds and hedge fund returns would have been similar
to the Buffett portfolio returns with less risk. Lesson: fees & expenses matter.
If down-side risk is of concern, the Buffett portfolio had one twelve month period where it returned
-44%, the worst of the three by far. Hedge funds provided some down-side protection relative to the

2. Buffett portfolio but not enough to categorically describe them as “absolute return strategies” as they
had advertised themselves prior to 2008. Lessons: investor down-side risk tolerances need to be
considered in any strategy and not just returns and fees. Could an investor tolerate a -44% year without
panic? Do we know if hedge funds will “hedge” down-side risk adequately?
For a buy and hold investor with a long-term investment horizon who does not look at their account
statements frequently, the Buffett portfolio may be an appropriate investment solution. For many of the
rest of us, a more globally diversified approach might be a better choice than an allocation of 90% large-
cap US stocks and 10% short-term US treasuries.
Actively managed portfolios (including hedge funds) require the investor to have skill at manager
selection, manager allocation and manager due diligence. These are things which most private wealth
investors do not have the time, desire or resources to under-take. The simplicity of the Buffett portfolio
is therefore appealing to many.
Advances in investment management technology allow investors to obtain global markets returns in one
place at low cost using exchange traded fund (ETF ) fund-of-funds like Blackrock’s iShares asset
allocation ETF’s. These investments can be levered or de-levered to achieve down-side risk or desired
return objectives without sacrificing their global diversification nature and with lower down-side risk
than the more concentrated Buffett portfolio. Perhaps a 90/10 allocation to a diversified global asset
allocation ETF and a short-term US treasury bond ETF would be a more appropriate alternative to the
Buffett portfolio for many buy and hold investors.
Contact me at [email protected] with comments/questions.
Greg Johnsen, CFA manages a private family investment office in the Atlanta, GA metropolitan area. He
has 30 years of investment experience with private wealth, sovereign wealth and institutional investors.
Connect with Greg on Linked In. His Linked In profile is gregjohnsencfa.
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