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Berkshire Hathaway CEO Warren Buffett.
Alex Wong/Getty Images
Bonds don’t excite Warren Buffett even after the sharp rise in yields this year.
The
Berkshire Hathaway
(ticker: BRK/A, BRK/B) CEO hasn’t liked bonds for a decade due to low rates, and that view hasn’t changed based on the small percentage of bonds in the company’s huge investment portfolio.
Berkshire held $18.6 billion of bonds on Sept. 30, or roughly 4% of its investment portfolio of about $460 billion, according to the company’s recent 10-Q report. The bond total is up about $2 billion so far this year, while Berkshire has been a net buyer of almost $49 billion of stocks.
Berkshire owned about $335 billion of stocks on Sept. 30—including holdings in
Kraft Heinz
(KHC) and
Occidental Petroleum
(OXY), which are subject to special accounting treatment—and held $105 billion of cash (excluding the amount at its railroad and utility businesses).
Much of the Berkshire portfolio backs its huge property and casualty insurance business, including auto specialist Geico and sizable reinsurance businesses.
Most P&C insurers hold the vast bulk of their investments in bonds because they don’t want stock market volatility to impair their ability to pay claims. Regulators and credit-rating firms also like the security of big bondholdings. Industry leader
Chubb
(CB), for instance, had less than 1% of its $111 billion investment portfolio in stocks on Sept. 30, and the stock exposure at Geico’s rival,
PGR
), was under 10%.
Buffett, 92, takes a different tack than virtually all other major insurers by investing heavily in stocks and holding a lot of cash in the form of Treasury bills—rather than investing insurance premiums mostly in bonds. Buffett would rather hold cash and not take the interest-rate risk of bonds. After accepting near-zero rates on cash, Berkshire finally is getting paid now with 4% yields on its short-term Treasury bills.
“Berkshire’s outsize level of equity investments, relative to its peers, reflects a longstanding practice, supported by high levels of cash on its balance sheet and by a mix of business at GEICO with relative short -term obligations,” says Cathy Seifert, an analyst with CFRA.
Berkshire didn’t immediately respond to a request for comment.
Buffett also favors this so-called barbell strategy of stocks and cash in personal investing. He has instructed that a fund be established for his wife after his death that would be 90% invested in
S&P 500
index funds and 10% in Treasury bills. His own investments are equity-heavy. He holds about $100 billion of Berkshire stock, which accounts for about 98% of his assets.
It’s notable that P&C insurer Alleghany, which Berkshire bought for about $11.6 billion in October, had nearly as large a bond portfolio at almost $17 billion as Berkshire, despite being a fraction of its size. Alleghany held nearly $3 billion of stock.
Berkshire’s fixed-income portfolio is very conservatively constructed. It’s concentrated in U.S. government and agency debt as well foreign sovereign debt with maturities of less than five years. The foreign debt is believed to be largely the result of mandates from overseas insurance regulators for some of Berkshire’s international business.
What Berkshire said in its latest 10-K report about its investments is a rarity among insurers: “Generally, there are no targeted allocations by investment type or attempts to match investment asset and insurance liability durations. However, investment portfolios have historically included a much greater proportion of equity securities than is customary in the insurance industry.”
At Berkshire’s annual shareholder meeting in April, Buffett talked about how insurers reflexively own bonds despite low yields, and he was critical of Progressive, Geico’s main rival in auto insurance, for largely ignoring investment opportunities by overwhelmingly favoring bonds.
“Probably everyone in insurance business would say that, well, we own bonds because that’s what people do,” Buffett said, contrasting that approach with the intense focus among insurers about setting proper rates for policyholders. He noted the hit that insurers had taken on their supposedly safe bond portfolios this year due to higher rates.
He then discussed Peter Lewis, the longtime CEO of Progressive who died in 2013 after building the company into one of the best-run insurers in the world through a top-notch underwriting culture.
“Peter Lewis sat my office 40 years ago and smart as hell,” he recalled. “This guy was clearly going to be a major competitor of Berkshire’s insurance…and very bright and everything, but they just ignored the investment side. And that was as important as the underwriting side.” Progressive, however, has been outmaneuvering Geico in insurance underwriting, and Geico is playing catch-up with Progressive in technology.
Write to Andrew Bary at [email protected]
Source: https://www.barrons.com/articles/warren-buffett-berkshire-hathaway-bonds-stocks-51668028485?siteid=yhoof2&yptr=yahoo