Veteran fund manager Wally Weitz seeks big cash-producing companies selling at discount prices. By Jennifer Schonberger, Staff Writer June 22, 2012 Wally Weitz, the manager of Weitz Value Fund (symbol WVALX), has been attending Berkshire Hathaway annual meetings since the 1970s, when Warren Buffett hosted investors in the lunchroom of his company’s National Indemnity insurance unit and long before the confabs became known as the Woodstock of capitalism. Weitz, who has run his Omaha-based fund since its inception in 1986, and two recently added co-managers, David Perkins and Brad Hinton, adhere to Buffett’s philosophy, searching for large companies that generate copious amounts of cash and sell at cheap prices. SEE ALSO: Our Guide to Mutual Funds They seek companies with significant advantages over their rivals and shrewd executives who excel at allocating capital. Once they come up with candidates, they estimate how much excess cash -- cash beyond what is needed to maintain the business -- a company will generate over the next 15 to 20 years. They use all of this information to estimate a company’s current value. But it’s not enough to merely identify a cash machine. The trio buy only if a stock sells for at least 40% less than their estimate of value. “The trick is finding a great company that stumbles and then figuring out if it’s still a good company or if it’s likely to be a disappointment,” says Weitz. “That’s where the art comes in.” Advertisement If the managers can’t find good companies to invest in at the right price, they’re perfectly content to sit on cash. At last report, the fund had 21% of its $918 million in assets in cash. And if the managers like a company but it isn’t selling for the right price, they’ll add it to their watch list. The trio typically keep a list of 35 to 40 companies that they’ve vetted and like, but that are too pricey for their taste. Weitz Value has an excellent long-term record. Over the past 15 years through June 20, the fund returned 7.6% annualized. That outpaced Standard & Poor’s 500-stock index and the average large-company blend fund (funds that invest in stocks with a blend of growth and value attributes) by an average of 2.9 percentage points per year. Over the past year, the fund gained 10.5%, beating the index by 2.1 points and the average large-blend fund by 6.4 points. The fund’s turnover has generally been in the 20% to 25% range, implying an average holding period of four to five years. But the fund may hold a stock for much less time. That typically occurs when a company is acquired or a stock appreciates to the point where it’s no longer cheap. Incidentally, the fund has held Berkshire Hathaway from the outset. Lately, the managers have been finding some opportunities in the energy and health care sectors. But mostly they’ve been adding to their favorite existing holdings. At last report, the fund’s top three holdings were Berkshire Hathaway; Wells Fargo, a Buffett holding; and insurer Aon. Follow Jennifer on Twitter or become her fan on Facebook. Kiplinger's Investing for Income will help you maximize your cash yield under any economic conditions. Download the premier issue for free.