(Bloomberg Businessweek) -- For Warren Buffett, taking the road less traveled has often led to better investment returns. One often overlooked example: how he’s approached the $15 billion in pension plan assets at his conglomerate, Berkshire Hathaway Inc. Over the next several weeks, subsidiaries such as the Buffalo News and Geico will likely file detailed reports to the U.S. Department of Labor about their plans. The documents make for dry reading. But they reveal a strategy that’s unlike just about any other company’s.
Most pension plans invest in a broad array of stocks and bonds, plus private equity and real estate. They do so, in part, because plans are legally obligated to be managed in the best interests of participants, and one way to avoid uncomfortable questions about their investment choices is to follow the conventional wisdom to diversify. At Berkshire, many of the funds are far more concentrated, often with fewer than 20 stocks backing each plan. With interest rates so low, they stay away from fixed income. Buffett summed up the strategy in 2014 in a CNBC interview: “We’re all equities. … We don’t have any bonds in our pension funds.”
Rather than hire an outside company to oversee the money, Berkshire has two of its investment managers, Todd Combs and Ted Weschler, picking stocks. Like Buffett, they tend to place big bets on companies they think will do well over the long haul. In addition to the pension assets, Combs and Weschler invest on behalf of Berkshire’s insurance subsidiaries, and the portfolios often overlap, according to filings. Stocks such as DaVita Inc., a provider of kidney dialysis, and cable operator Charter Communications Inc. show up in both places. (Peter Grauer, chairman of Bloomberg LP, is a director of DaVita.)
The strategy has paid off so far. Berkshire saves on investment management fees, and it’s seen the value of its picks climb. Take Burlington Northern Santa Fe. Before Berkshire took control, in 2010, the railroad’s pension fund held hundreds of securities and was 73 percent funded, meaning it had only 73¢ for every dollar owed to plan participants. By the end of last year the situation had changed: The plan was 9 percent overfunded. Four stocks—DaVita, VeriSign, General Motors, and Verizon Communications—accounted for more than half its assets as of Sept. 30, 2016, a Labor Department filing shows.
Overall, Berkshire has work to do. Its pension funds were collectively underfunded by about $2.4 billion at the end of last year. That’s partly because Buffett keeps adding to his conglomerate, and the acquired companies sometimes come with pension shortfalls. Berkshire also doesn’t manage the money that backs pensions for its electric utility businesses, where funding is typically reflected in the rates they charge.
Looming in all this happy news for Berkshire and its retirees are some big risks. Stocks have been rising for more than eight years. A correction could hit Berkshire’s plans harder than other pensions at S&P 500 companies, which on average have 44 percent in bonds, according to a study by Goldman Sachs Asset Management. Further, holding most of the assets in a handful of stocks might not be considered well-diversified, says Olivia Mitchell, executive director of the Pension Research Council at the Wharton School. That could raise the issue of liability if the investments go south.
Before Weschler and Combs took over the job, several Berkshire pensions held bonds from a subsidiary of TXU Corp. that lost value when falling natural gas prices made it harder for the power company to service its debt. (TXU, now called Energy Future Holdings Corp., declared bankruptcy in 2014.) Buffett has called the investment a “major unforced error.”
Buffett can play the pension game differently in part because Berkshire has tens of billions of dollars in cash. Were Weschler or Combs to lose a lot of money earmarked for retirees, the company should be able to plug the hole. Buffett’s reputation as an investor also helps—few pensioners are likely to question whether he and his team know what they’re doing. “Many people have tried and failed” to copy him, Mitchell says. “If a different corporation asked me, ‘Should I try to replicate Warren Buffett’s approach,’ my answer would be, ‘That’s pretty risky.’ ” —With Katherine Chiglinsky
To contact the author of this story: Noah Buhayar in Seattle at nbuhayar@bloomberg.net.
To contact the editor responsible for this story: Pat Regnier at pregnier3@bloomberg.net.
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