Jason Stipp: I'm Jason Stipp for Morningstar. Succession has always been a big issue among those who follow Warren Buffett and Berkshire Hathaway, and these folks got some intriguing news on Monday when Berkshire announced that it hired Todd Combs, a little known hedge fund manager, to be the investments manager at Berkshire.
Here with me to offer his take on the news is Morningstar's Paul Larson. He is an equity strategist and also the editor of Morningstar StockInvestor.
Thanks for joining me, Paul.
Paul Larson: Glad to be here.
Stipp: So, this news, I think, was surprising to a lot of us. Who is this guy? What have you've been able to find about him over the last day or so?
Larson: Well, I didn't know who he was up until the announcement was made, and I would say that probably 999 out of 1,000 people that go to the Berkshire Hathaway Annual Meeting also had no idea who he was. You mentioned he is indeed a hedge fund manager at a private equity complex in Connecticut and has a focus on financial services, investing in those types of names over the last couple of years, and he's racked up a fairly decent track record, which is obviously something that I think gave him the inside line on this job.
Stipp: Sure, I want to dig into his holdings in just a moment, but, first, there were a few contenders short-listed that we had talked about even in a video here earlier. What happened to those folks? Why did this person suddenly emerge and where are the other people who were considered frontrunners?
Larson: Right, well, I'd say the frontrunner before was Li Lu, a Chinese-American hedge fund manager, someone who was at Tiananmen Square and introduced Berkshire Hathaway to BYD, and since news broke that he was indeed the frontrunner and Charlie Munger singling him out as someone that was most likely going to be in this role, he had since pulled his head out of the ring, and I think I would surmise that it may have been the very intense media attention on this role that maybe was something that he did not like.
And I would say that he maybe thought that he could make more money elsewhere because someone taking on this role of being Buffett's successor may make millions, may be even tens of millions of dollars, but as a high-profile money manger elsewhere they can make even more than that and that may have weighed on his mind.Read Full Transcript
Stipp: So, enters Combs. So, we don't necessarily know how Buffett and Combs' path crossed, but what would you say would be the general qualities that would have attracted Buffett to someone like Combs and what do we know based on Combs invests that might have been behind some of that affinity?
Larson: Well, one was a good investing track record, of course. Also, Buffett wanted someone who is fairly young; Combs is 39, and Buffett wanted someone young, so they could have a multi-decade run at Berkshire Hathaway, not a for-hire CIO that's going to be there for four or five years and then go off to greener pastures.
And I would also say that Combs' focus on high-quality companies is also very interesting. We got a look at his top five holdings, and those are MasterCard, U.S. Bank, State Street, Western Union, and RenaissanceRe. And I find it interesting that four of those five stocks, we have rated at wide economic mode, and the fifth one we up until very recently had wide mode and just downgraded it to narrow mode.
So he has a focus on high-quality stocks, which, I think makes him bird of a feather with Warren Buffett.
Stipp: And you mentioned a little bit before when you were talking about Li Lu and the compensation issue. There was a little bit in the Journal today about what the compensation might look like for Combs. It seemed like it was going to be based on the S&P 500 or outperformance from the S&P 500. Buffett himself has said that probably Berkshire won't be doing a whole lot better than the market going forward, so does the compensation scheme for Combs look a little bit dreary at this point?
Larson: Well, I don't think so, because he is only going to be managing a fairly small portion of Berkshire Hathaway, probably just a portion of the publicly traded equity portfolio, not the entirety of Berkshire Hathaway, which indeed does appear to mimic the American economy as a whole and therefore, the S&P 500 as a whole. But managing a small sleeve, I still think he has a decent shot of outperforming the S&P.
Stipp: And a follow-up on that, I mean certainly the amount of money that he has been managing in his current position and the amount of money that potentially could be managed at Berkshire, there is a pretty wide gap there. Do you think it's a concern that we haven't seen this candidate manage money on the level that he could potentially be managing at Berkshire?
Larson: Well, one of the nice things about money management is that it is a scalable business. You just add a zero to the number of shares that you're buying and as long as you're buying relatively large and liquid names, it's really not going to make much of a difference.
And hopefully, with the relatively small amount that he is buying, he won't be relegated to just the elephants, the mega caps, he'll be able to buy some mid-cap names and not move the stock price when he is accumulating the stock.
Stipp: It will certainly be interesting to see what he does. So I guess the question I think that's on the lot of investors' minds, and we don't know necessarily where Combs will end up at Berkshire at the end of the day, but what are the possibilities for the divisions of labor and a post-Buffett Berkshire Hathaway? What role might he play and what roles will we definitely or probably see in Berkshire?
Larson: He is a frontrunner now to be the chief investment officer, and he is going to handle all capital allocation decisions at Berkshire Hathaway, or so we think. And then there is going to be a separate person who is going to be a CEO, who is going to handle the operating businesses, the wholly-owned operating businesses that Berkshire has and is going to be in charge of managing the other CEOs at those businesses, and so we're going to see really two people or maybe even two teams of people run Berkshire Hathaway.
Stipp: Last question for you, Paul: You've been studying Buffett for a long time and you know a lot about his thought process. Is this a final decision or do you think that Combs is in there for a trial period and may end up playing a smaller role? Or when Buffett decides on somebody, does he make that decisions then that decision is done?
Larson: Well, I would say that Buffett, he does have some flexibility in his thought process, but for the most part when he makes decision, he usually tends to stick with it. And so I think that Todd Combs is going to be around for a some period of time.
Stipp: Likely a lot of thought went into that decision-making process?
Larson: I would argue it's probably the most important decision that Buffett's made in his investment career.
Stipp: So we're likely to see Combs play some important role in the company going forward and likely potentially the big investment role.
Larson: Yep, indeed.
Stipp: Thanks so much for joining me Paul.
Larson: Thanks for having me.
Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.