The Cook & Bynum Fund's 10-Stock Portfolio

The Cook & Bynum Fund (symbol COBYX) gives new meaning to the idea of concentration. Richard Cook and Dowe Bynum, managers of the two-and-a-half-year-old fund, typically hold no more than 15 stocks. As of September 30, they held only ten, accounting for 68% of the $61 million fund's assets (the rest was in cash).

Less is often better, says Cook. "If you own 50 stocks, I don’t think you can have adequate information and know what you own," he says. "It’s usually a better idea to put more money in your best idea than in your 20th-best idea."

The fund’s biggest holding, accounting for 17% of assets, was Wal-Mart Stores (WMT). Other holdings included Coca-Cola (KO; 12% of assets), Berkshire Hathaway (BRK.B; 11%) and Mexico’s Arca Continental, the second-biggest Coke bottler in Latin America (10%). Rounding out the portfolio were Procter & Gamble (PG), Microsoft (MSFT), Kraft (KFT), Sears Holdings (SHLD), Sears Canada (SCC; 94% owned by Sears Holdings) and Wal-Mart de Mexico (WMMVY; 68.5% owned by Wal-Mart Stores).

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The managers invest worldwide in companies of all sizes, buying only those businesses they understand and for which they believe they can predict earnings over the next ten years. They want businesses with strong management teams and advantages over competitors and that will likely generate big profits over the long haul.

But even if a company meets those criteria, Cook and Bynum won’t buy the stock unless it’s cheap -- ideally at a price 50% less than what they believe the company is worth. “So when we’re right, we’ll get an outsize return, and when we’re wrong, we minimize the odds for big losses,” says Cook. If he and his partner can’t find a compelling investment, they’re happy to hold on to cash until one comes along -- hence the 32% stake in the green stuff recently.

The fund is having, at least on a relative basis, a bang-up 2011. Year-to-date through November 28, it returned 6.1%, beating Standard & Poor’s 500-stock index by 9.5 percentage points and putting Cook & Bynum in the top 1% of large-company blend funds (those that invest in large companies with a blend of growth and value attributes). In 2010, the fund’s first full year, it gained 11.8%, lagging the S&P 500 by 3.3 points.

Although the fund doesn’t have a long-term record, managers Cook and Bynum do. Over the past ten years through October 31, 2011, a private account the duo have managed in the same way they manage the fund returned 8.7% annualized, according to an investor in the private account. That trounced the S&P 500 by an average of 6.4 points per year.

The managers’ long-term record is impressive, and their fund is off to a good start. But because the fund is so concentrated, it comes with big risks, as shareholders in other focused funds, such as CGM Focus (CGMFX) and Fairholme (FAIRX), have painfully discovered. One wrong bet can wreck the fund’s performance.

For more details on the Cook & Bynum fund, visit CookandBynum.com.

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