BERKSHIRE Hathaway is again giving stock pickers Todd Combs and Ted Weschler more money to invest after they beat the Standard & Poor’s (S&P) 500 index and left Warren Buffett "in the dust", the billionaire chairman said.
The deputies, who made profitable bets on Visa and DaVita HealthCare Partners, each oversee about $5bn, Buffett, 82, wrote in an annual letter to investors on March 1. That is up from the $4bn he outlined in July and reflects his confidence that Berkshire found managers capable of running more than $80bn of stocks once he and vice-chairman Charles Munger, 89, are no longer leading the company.
"We hit the jackpot with these two," wrote Mr Buffett, who is also CEO. "Todd and Ted are young and will be around to manage Berkshire’s massive portfolio long after Charlie and I have left the scene."
Mr Buffett is preparing Berkshire for new leadership after building the Omaha, Nebraska-based company over more than four decades. Stock picks and takeovers transformed the company from a failing textile manufacturer into a $250bn firm with more than 80 operating units and the largest equity stakes in companies including IBM, Coca-Cola and Wells Fargo.
Continuing that track record will fall to Mr Weschler and Mr Combs, who were hired in the past three years to help pick stocks. Mr Buffett has said he still oversees the largest investments in Berkshire’s portfolio, while his deputies will make bets from "a couple hundred million" dollars to $1bn.
The company does not specify each person’s portfolio in its filings. Mr Combs and Mr Weschler beat the S&P 500 by "double digits" last year, Mr Buffett said, without providing specifics. The index returned 16% including dividends last year.
Some of the smaller holdings in Berkshire’s portfolio including Visa and MasterCard, the world’s biggest payment processors, rose more than 30% last year.
Two of Mr Buffett’s three biggest equity holdings, Coca-Cola and IBM, advanced less than 5% last year.
"He’s trying to build these guys up," said Luke Sims, co-portfolio manager of the Eagle Capital Growth Fund, which lists Berkshire among its largest holdings.
Promoting their records to shareholders helped Mr Buffett show that he hired the right money managers to succeed him.
At least one of their picks climbed past $1bn in value, Mr Buffett wrote. DirecTV, the satellite television provider, was the first stock not picked by the billionaire to be included in a list of the company’s largest holdings in the annual report. Both Mr Weschler and Mr Combs invested in it.
Berkshire has built the largest stake in DaVita since Mr Weschler’s hiring was announced in September 2011. The operator of kidney dialysis centres climbed 46% last year and was among Mr Weschler’s biggest holdings when he ran a hedge fund before joining Berkshire.
The performance by Mr Combs and Mr Weschler was "extraordinary" last year, said Jeff Matthews, author of Warren Buffett’s Successor: Who It Is And Why It Matters, and a Berkshire shareholder. The billionaire takes a longer view than one year. "Let’s see what happens in a down market," Mr Matthews said. "Let’s see what happens over the course of a cycle."
Mr Weschler and Mr Combs each earned a salary of $1m as well as 10% of the amount by which their portfolios outperformed the S&P 500 on a three-year rolling basis, the billionaire said at Berkshire’s annual shareholder meeting in May, when he announced the first increase in their portfolios to $2.75bn each from $1.75bn.
A total of 20% of each manager’s performance pay is based on the other’s results so that they have an incentive to collaborate, Mr Buffett has said. Neither consulted with Mr Buffett on what to buy, he said.
Mr Buffett also wrote in the letter that Mr Weschler and Mr Combs were "models of integrity" and "a perfect cultural fit" at Berkshire.
Mr Weschler was involved in Berkshire’s bid for a loan portfolio from bankrupt lender Residential Capital last year. He also helped Mr Buffett on a deal to purchase most of Media General’s newspapers for about $140m in June.
Mr Buffett uses the letter every year to laud the performance of Berkshire managers. His praise for Mr Weschler and Mr Combs extended beyond their job performance. Both were talented runners, he said. That skill would help them as Berkshire’s Brooks Sports subsidiary inaugurated a 5km fun run on May 5, the day after the company’s annual meeting.
"Regretfully, I will forgo running," Mr Buffett wrote. "Someone has to man the starting gun."