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Envisioning the Berkshire Hathaway Portfolio in a Post-Buffett World

On May 16, Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) revealed that it had taken a $1 billion-plus stake in Apple (NASDAQ: AAPL). Berkshire now owns 9.81 million shares of the technology darling.Berkshire Hathaway portfolio

Some of the breathless reporting from media outlets said how great the Berkshire investment is for Apple. After all, Buffett’s long-term track record of buying quality companies on the cheap is unmatched.

At first glance, the move was surprising. That’s because back in 2012, Buffett had said he would not invest into Apple or Google, which is now part of Alphabet (NASDAQ: GOOGL). At the time, he said, “I just don’t know how to value them.”

And it turns out Buffett did not buy Apple.

Berkshire’s New Generation

The Apple purchase came from one of Buffett’s deputies – either Todd Combs or Ted Weschler.

Combs joined Berkshire in 2011. Weschler was added a year later. These two former hedge fund managers were brought on board as potential successors to run the company’s $129 billion stock portfolio.

Both gentlemen are believed to have about $9 billion to “play” with. They are also believed to be in charge of subsidiary pension funds, such as the fund of the recently acquired Precision Castparts. Previously, Berkshire had hired outside managers to run these funds.

Both Combs and Weschler seem very willing to wade into sectors Buffett would not touch. Among other major Berkshire Hathaway portfolio positions thought to have been initiated by these two are Internet infrastructure company Verisign (NASDAQ: VRSN) and credit card giants MasterCard (NYSE: MA) and Visa (NYSE: V).

Obviously, the 85-year-old Buffett will not be around forever. The question for shareholders of Berkshire Hathaway is whether the investment portfolio will be in steady hands with Combs and/or Weschler in charge.

In my mind, even though this may be controversial, the answer is an emphatic no.

Just take a look at the pension fund portfolios of Berkshire’s subsidiaries, including BNSF Railway and Lubrizol. Long gone are the days of a diversified portfolio of stocks and bonds.

Now, these pension funds’ portfolios look more like that of a hedge fund. The allocation to stocks eclipses 90% in some cases, which is scary enough for a pension plan. Even worse, the stock allocation is concentrated into roughly anywhere from just a handful to a dozen or so stocks.

The most recent annual report was a real eye opener for someone like me who has been in the investment business since the 1980s. The Financial Times reported that in BNSF’s pension fund portfolio, a mere three stocks made up 47% of the fund’s assets. When you run a hedge fund, it’s OK to do that. Clients know they are investing into a high-risk investment. But employees’ hard-earned retirement savings are a totally different matter.

Berkshire a Hedge Fund?

I can’t even imagine what Combs or Weschler would do if they gained full access to Berkshire Hathaway’s $58 billion cash hoard. What comes to mind is a classic Buffett quote on that cash pile: “A full wallet is like a full bladder, the urge is to very quickly pee it away.”

Even if that doesn’t happen, Berkshire’s investment portfolio will look vastly different.

The portfolio Buffett built is full of value plays. My guess is that the future Berkshire Hathaway portfolio will be filled with more volatile technology and financial stocks. That is the typical stock portfolio for money managers of this generation. In other words, Berkshire’s portfolio will likely look similar to the run-of-the-mill fund.

The only plus for shareholders is that about two-thirds of Berkshire’s market capitalization lies in the operating companies. Buffett has amassed some of the country’s largest insurance, utility, and rail infrastructure companies.

I suspect performance at these companies will have to be stellar to offset what may happen to Berkshire’s once-incredible investment portfolio. Berkshire Hathaway will no longer be a “widow-and-orphan stock” when Buffett is gone.

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