Morningstar's Samuel Lee covered a new BlackRock [profile] iShares fund, MSCI USA Quality Factor that hopes to capture some of Warren Buffett's magic. However, Lee argues that the product proves to be a "pale imitation" of the real thing.

The fund bases its rules on Buffet's acquisition criteria, such as demonstrated earnings power, business earning good returns on equity while employing little or no debt, to select stocks, Lee writes. The rules are simpler however, such as high return on equity, low debt/equity ratios, and low variability in their year-over-year per-share earnings growth over the trailing five years.

However, it can't manage to meet Buffet's standards, because as Lee writes, "The best that can be said is that if Buffet buys the needle, the index buys the haystack."

Lee looked at MSCI data for quality stocks, finding that they underperformed the broad market by over 20 percent from 1975 to 1980. However, he wrote that if one looks at cumulative returns of MSCI Quality from 1981 to April 2013, quality stocks can gain a consistent performance edge over the business cycle as long as it doesn't trade at extreme valuations, Lee writes.

Compared to Vanguard's [profile] Dividend Appreciation fund, or as Lee has named it "Buffet in a Box," it's more expensive and Vanguard offers a well-managed and liquid fund. The iShares fund is competitive however, as it offers purer exposure and greater transparency, Lee writes.

To read more, click here.  

Edited by: Casey Quinlan


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