An Anniversary Thought for Berkshire Hathaway Investors: Diversify Into Managed Futures!
Amidst this year’s well-deserved celebration of Berkshire Hathaway’s 50 years of investment returns, we wondered if a portfolio holding Berkshire (BRKA), already hugely successful, could nonetheless be improved by combining holdings of BRKA with those of other assets. An ideal candidate for investment alongside BRKA would be an asset with both positive returns on a stand-alone basis as well as low correlation to BRKA.
Dr. John Linter in 1983 published the classic paper, “The Potential Role of Managed Commodity-Financial Futures
Accounts (and/or Funds) in Portfolios of Stocks and Bonds”. In this study he pointed to gains in risk-adjusted rates of return that could potentially be obtained by combining equity investment with managed futures.
To examine the portfolio combination of stocks and managed futures, we have focused on Berkshire because of its historical moment and legendary performance. On the managed futures side, our own fund would satisfy the requirements of having both strong performance on a stand-alone basis along with almost-zero correlation to Berkshire.
While our investment program, the Drury Diversified Trend-Following Program (Drury), cannot cite the same longevity as Berkshire, nonetheless it has been in continuous operation for almost 19 years, a substantial period encompassing many economic cycles and market conditions. At least for these years, we can examine this investment in relation to
BRKA for possible improvement of portfolio returns.
The two performance records, taken individually during this period, are broadly similar.
May 1997 to Feb 2015
Drury BRKA*
50% Drury
50% BRKA
Rate of Return (ROR)   11.3%
Standard Deviation (Vol)   20.0%
Drawdown (DD)
ROR/DD
ROR/Vol
32.5%
0.35
0.57
10.4%
20.6%
44.5%
0.23
0.50
10.9%
14.4%
23.9%
0.50
0.83
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
The correlation between the two return streams is a low 0.01.
Despite the overall similarity of returns, the paths of producing these returns share almost nothing in common.
Consequently, as modern portfolio theory would predict, the performance of a portfolio holding BRKA is potentially improved by being coupled with a non-correlated asset such as Drury. (It is of course equally true that a portfolio holding only Drury is potentially improved by being coupled with a non-correlated asset such as BRKA).
A look at the efficient frontier for this two-asset portfolio suggests that a blend of approximately 50-50 would have produced the highest ratio of ROR versus standard deviation of returns:

Consistent with the theory, the portfolio with 50% each in BRKA and Drury raised the risk-adjusted ROR to a level higher than either asset could achieve individually. For the holder of BRKA, the diversification reduced the portfolio volatility by almost one-third and reduced the depth of the peak-to-trough drawdown by almost half. Finally, perhaps even remarkably, the combination of Berkshire holdings with this non-correlated asset cut the length of the drawdown associated with holding Berkshire alone by a whopping 43 months. This means that instead of experiencing a 61-month period (Dec 2007 – Jan 2013) of being underwater, relative to the latest high price, while holding BRKA shares alone, the combined portfolio reduced that underwater period to only 18 months. (By the same token, of course, the underwater period of holding Drury alone is reduced from 55 months to the same 18 months).
May 1997 to Feb 2015
Drury BRKA*
50% Drury
50% BRKA
Drawdown 32.5%
Peak to trough(months) 32
Trough to peak (months)
Total (months)
23
55
44.5%
14
47
61
23.9%
10
8
18
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Columbia University professor Benjamin Graham led academia and Wall Street with his pioneering work in the area of value investing. Famously, Warren Buffett was one of his students in the 1940’s. Years later, the Nobel prize-winning work of Harry Markowitz explored the effects of combining non-correlated assets into diversified portfolios with the aim of improving risk-adjusted returns. Markowitz is credited with the often-repeated quip that “diversification is the only free lunch in finance.”
As we congratulate Berkshire on its 50 th
anniversary, it can be observed that equity investment, of which Berkshire is an eminent practitioner, can be profitable. It is also possible that the combination of equity investment with other strategies may be return-enhancing as well as volatility-reducing.
*Source: BRKA stock price. Percentage change in stock price month-over-month as of each month-end across the period covered. BRKA stock prices were taken from Yahoo Finance.
THIS COMPOSITE PERFORMANCE RECORD IS HYPOTHETICAL AND THESE TRADING ADVISORS HAVE
NOT TRADED TOGETHER IN THE MANNER SHOWN IN THE COMPOSITE. HYPOTHETICAL
PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED
BELOW. NO REPRESENTATION IS BEING MADE THAT ANY MULTI-ADVISOR MANAGED ACCOUNT OR
POOL WILL OR IS LIKELY TO ACHIEVE A COMPOSITE PERFORMANCE RECORD SIMILAR TO THAT
SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN A HYPOTHETICAL
COMPOSITE PERFORMANCE RECORD AND THE ACTUAL RECORD SUBSEQUENTLY ACHIEVED.
ONE OF THE LIMITATIONS OF A HYPOTHETICAL COMPOSITE PERFORMANCE RECORD IS THAT
DECISIONS RELATING TO THE SELECTION OF TRADING ADVISORS AND THE ALLOCATION OF ASSETS
AMONG THOSE TRADING ADVISORS WERE MADE WITH THE BENEFIT OF HINDSIGHT BASED UPON
THE HISTORICAL RATES OF RETURN OF THE SELECTED TRADING ADVISORS. THEREFORE,
COMPOSITE PERFORMANCE RECORDS INVARIABLY SHOW POSITIVE RATES OF RETURN. ANOTHER
INHERENT LIMITATION ON THESE RESULTS IS THAT THE ALLOCATION DECISIONS REFLECTED IN
THE PERFORMANCE RECORD WERE NOT MADE UNDER ACTUAL MARKET CONDITIONS AND,
THEREFORE, CANNOT COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL
TRADING. FURTHERMORE, THE COMPOSITE PERFORMANCE RECORD MAY BE DISTORTED BECAUSE
THE ALLOCATION OF ASSETS CHANGES FROM TIME TO TIME AND THESE ADJUSTMENTS ARE NOT
REFLECTED IN THE COMPOSITE.

PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN
CONNECTION WITH ACCOUNTS OF QUALIFIED ELIGIBLE PERSONS, THIS BROCHURE OR ACCOUNT
DOCUMENT IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE
COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING
IN A TRADING PROGRAM OR UPON THE ADEQUACY OR ACCURACY OF COMMODITY TRADING
ADVISOR DISCLOSURE. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS
NOT REVIEWED OR APPROVED THIS TRADING PROGRAM OR THIS BROCHURE OR ACCOUNT
DOCUMENT .
THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. YOU SHOULD
THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF
YOUR FINANCIAL CONDITION.
THIS INFORMATION CONTAINED HEREIN IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY. IT IS
NOT AN AND SHOLD NOT BE CONSIDERED AS AN OFFER TO SELL OR A SOLICITATION TO BUY AN
INTEREST IN ANY PRODUCT OF DRURY CAPITAL INC. AN INVESTMENT IN THE DRURY TRADING
PROGRAM INVOLVES A HIGH DEGREE OF RISK AND THE POTENTIAL FOR SUBSTANTIAL LOSS.
INVESTMENTS CAN ONLY BE MADE BY “QUALFIED ELIGIBLE PERSONS” AS DEFINED UNDER CFTC
REGULATIONS ON THE BASIS OF A CONFIDENTIAL OFFERING MEMORANDUM OR BY WAY OF A
TRADING ADVISORY AGREEMENT.