What's Happening at Berkshire?

By MoneyShow.com  OCT 22, 2012 11:20 AM

Warren Buffett's lieutenants are getting into the action a little bit more every quarter..

 


Having had a chance to take a much closer look at the changes that were made to Berkshire Hathaways (BRK-A) (NYSE:BRK.A) stock holdings during the second quarter, we continue to view the equity investment portfolio at the firm as a work in progress.

While Warren Buffett has had (and continues to have) an outsized influence on the makeup of the portfolio, as time goes on we are getting more and more glimpses of just how his two lieutenants—Todd Combs and Ted Weschler—will approach their own portfolios.

Buffett noted recently that these two managers will be working with a “bank” of around $4 billion each (exclusive of any gains/losses on capital that already has been put to work), which is up from $1.75 billion each at the end of last year and $2.75 billion each at the end of the first quarter. We are seeing a far greater willingness on the part of the Oracle of Omaha to hand over more and more of the investment portfolio than we would have expected this early in the transition.

The fact that Buffett also has been willing to sell some of his own legacy holdings in order to fund their stock portfolios speaks volumes, in our view, about how much faith he has in these two managers. He even noted in a recent interview that Combs and Weschler have “terrific talent” and that Berkshire feels “very, very, very good about where we are now versus a few years ago in terms of successor investment management.”

That said, Buffett continues to hold sway over a meaningful amount of the equity portfolio—something we don’t anticipate changing too significantly in the near to medium term. This should not be surprising, given that Buffett (and his sidekick Charlie Munger) has been the driving force behind most of the larger holdings in Berkshire’s investment portfolio for the last four decades.

That’s not to say that Lou Simpson, the now-retired manager of the investment portfolio at GEICO (Berkshire’s auto insurance subsidiary), did not have an influence over the years. It’s just that his position sizes tended to be in the hundreds of millions, whereas Buffett’s traditionally have gone well into the billions.

At the time that Simpson announced his retirement in 2010, he was managing a total of around $4 billion in equities, accounting for 8% of Berkshire’s total stock holdings. This compares to the $8 billion that Combs and Weschler are currently managing, accounting for 11% of the insurer’s equity holdings at the end of the second quarter of 2012.

While this means that Buffett continues to manage around 90% of the equities in Berkshire’s portfolio, the big positive from a succession perspective is that each of Buffett’s two lieutenants is managing about 5.5% of the total equities held by Berkshire. That's much closer to the level that Simpson had managed over the 30 years that he was running the investment portfolio at GEICO, and higher than we would have expected given the length of time that each of these managers has been with the firm.

Here are our key takeaways after spying the latest data:

Editor's Note: This article was written by Greggory Warren of Morningstar StockInvestor.

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