Upstart Managers School Sage of Omaha; Gains for Two Younger Money Managers at Berkshire Hathaway Outpace Buffett, S&P 500

Upstart Managers School Sage of Omaha

Gains for Two Younger Money Managers at Berkshire Hathaway Outpace Buffett, S&P 500

ANUPREETA DAS 

Jan. 17, 2014 4:38 p.m. ET

The pupils are beating the master at Warren Buffett -led Berkshire Hathaway Inc.BRKB -0.15%

Two investment managers, hired by the 83-year-old billionaire in recent years as part of his succession plan, each posted returns last year that outdid both Mr. Buffett’s performance as Berkshire’s top stock picker and the Standard & Poor’s 500-stock index, according to people familiar with the matter.The 2013 returns mark the second year in a row that the two men beat the broader market gauge, which gained 32% including dividends last year, as well as their boss. The people wouldn’t say by how much the two outperformed the market in 2013, but the year before, they each beat the S&P by a double-digit margin, Mr. Buffett said in his 2012 annual letter to shareholders.

The younger managers’ strong performance is further proof that Mr. Buffett “hit the jackpot” with their hires, as he said in his last letter. The 83-year-old billionaire investor hired Todd Combs and Ted Weschler to eventually manage all of Berkshire’s investments once he is no longer at the helm, although he has no plans to step down.

Meanwhile, Mr. Buffett fell short of his own performance target for the conglomerate for the first time since the Omaha, Neb., native took control of Berkshire in 1965.

Mr. Buffett has long said he aims to increase Berkshire’s net worth faster than the S&P 500’s gains over the previous five-year period. Thanks to the index’s robust gains in 2013, Mr. Buffett will fall short of that goal, according to analysts as well as calculations by The Wall Street Journal.

Mr. Buffett warned shareholders that he expected to fall short of the measure, though they are unlikely to hold it against him: Berkshire shares gained about 30% last year and are trading at a premium to book value, a measure of the company’s net worth.

The investor plucked his investment managers from relative obscurity. Mr. Combs, 42 years old, ran a $400 million Connecticut hedge fund before he started work at Berkshire in 2011. He has beaten the S&P 500 three years in a row.

Mr. Weschler oversaw a $2 billion Charlottesville, Va., firm and joined Berkshire in 2012. Mr. Weschler, 52, also had previously bid more than $5 million in charitable auctions to have private lunches with Mr. Buffett.

In a phone interview, Mr. Buffett said the two managers—who, along with his financial assistant, Tracy Britt Cool, he calls the “three T’s”—now do much more than just pick stocks. “They have helped Berkshire in significant ways that are not directly connected with investment management,” he said. “They’ll both be huge assets for decades to come.”

Mr. Buffett, Berkshire’s chief executive and chairman, also gave them more money to play with. Messrs. Combs and Weschler are each beginning 2014 with more than $7 billion to manage, up from about $3 billion each at the beginning of 2012, according to the people familiar with the matter.

Both men are expected to take a larger role in overseeing the company’s affairs, including acquisitions, in coming years.

At $14 billion or so, the investments picked individually by Messrs. Combs and Weschler make up a small slice of Berkshire’s massive U.S. portfolio of more than $100 billion. But the rapid increases in assets under management indicate Mr. Buffett’s growing faith in their ability to spot winners.

Their involvement in Berkshire’s business dealings outside of investments is important because Berkshire’s stock portfolio is only part of the conglomerate’s overall value. Berkshire is a gigantic entity that also owns insurance operations, manufacturing and retailing businesses and one of the largest U.S. railroads.

The two managers have mostly bought positions of less than $1 billion, which are small compared with the multibillion-dollar positions in Berkshire’s “Big Four” stocks— Coca-Cola Inc., KO -1.08% American Express Co. AXP +3.63% , Wells Fargo WFC 0.00% & Co. and International Business Machines Corp. IBM +0.70% Picked by Mr. Buffett years ago, these four stocks collectively represented about $58 billion, or more than half of Berkshire’s portfolio, at the end of the third quarter. Berkshire doesn’t report its fourth-quarter stock holdings to regulators until next month.

Many of the stocks picked by Messrs. Combs and Weschler significantly outpaced the S&P 500 in what was the strongest year for U.S. stocks in 16 years.

Mr. Buffett has said that most of the small positions in Berkshire’s portfolio of 43 stocks are likely investments made by either manager, while the large ones are his.

For example, shares of satellite-TV operator DirecTV DTV -0.28% LLC, a favorite of both managers, rose 34% in 2013. As of the end of the third quarter, Berkshire owned about 36.5 million shares, or nearly 7% of the company, valued at $2.2 billion.

Shares of credit-card companies MasterCard Inc. MA -0.86% and Visa Inc., V +4.69%also likely among the stocks picked by the managers, rose 64% and 43% respectively last year.

“Those gentlemen are being allowed to practice stock picking the way Warren did…and run a concentrated equity portfolio,” said Bill Smead, whose Smead Capital Management owns 197,005 Berkshire Class B shares.

Mr. Smead said that DirecTV and DaVita Healthcare Partners Inc., DVA +0.28% a dialysis-treatment company that is an investment of the two managers, resemble the kind of “toll-bridge” companies Mr. Buffett has talked about —businesses that collect “tolls” customers must pay to access an essential product or service.

That Berkshire fell short of Mr. Buffett’s self-imposed target likely reflects the conglomerate’s large size rather than a flagging performance.

With Berkshire’s market value approaching $300 billion and more of its net worth tied to operating businesses rather than its stock portfolio, it has gotten harder for the company to get a big percentage gain in net worth expressed in book value per Class A share, Mr. Buffett’s preferred yardstick.

Since 2009, the S&P 500 has registered double-digit percentage gains every year except 2011 for a total five-year return of more than 128%. By comparison, Berkshire’s book value per share, a measure of assets minus liabilities, rose roughly 80% from the end of 2008 until the third quarter of 2013. Mr. Buffett said in his last annual letter that he would fall short of his five-year target if the index continued to do well.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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