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How Will Berkshire Look After Buffett?

Jeremy Glaser
Greggory Warren, CFA

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. What does Berkshire look like after Buffett? I'm here today with Gregg Warren, our analyst who covers the company, to see what he thinks is in store.

Gregg, thanks for joining me today.

Gregg Warren: Thanks for having me.

Glaser: It's no secret that Warren Buffett is getting on in years and has had some health problems recently. What's the update on what's happening with the succession planning? Anything new on that front?

Warren: Not a whole lot. We expect the questions to come up again this year, but I think, Berkshire sort of put the questions to bed the last couple of years by highlighting the fact that they have one named candidate. The name's in an envelope. The board has it, and it'll be opened once Warren's no longer running the show. I think the thing is when we look at Warren now, he's 83; Charlie Munger just turned 90 at the beginning of the year. Warren did have some health issues the past couple of years with prostate cancer, but that's not really been talked about. Again, it's probably a question that'll come up at the meeting: How's he faring and how's his health doing?

But overall, when you look at where Warren is and you look where Charlie is, you've got to think there's at least another good decade potentially with Warren at the helm or at least another good five or six years. In that time, things can change. Our best guess of whose name is in the envelope is Ajit Jain. He runs Berkshire Hathaway Reinsurance. He's probably been a bigger contributor to profits at Berkshire over the last 20 years. Buffett's come out on several occasions and said that Ajit's made more money for Berkshire than [Buffett] has over the years. We think that he's a good capital allocator if that's what Buffett's looking for in a new CEO.

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Glaser: That's the CEO position. How about the investment portfolio? Buffett brought in Ted Weschler and Todd Combs to take over sleeves of that. How has their performance looked?

Warren: Their performance has been really good. In the annual letter this year, he noted the fact that once again they beat his investment performance in 2013. From what we understand, Todd's a lot like Charlie, and Ted's a lot like Warren in their investment styles, which I think works well because if you had everybody in the same mold it would be a little bit more difficult. At this point, they're actually managing more money than we would've anticipated this soon in the process. Our thought all along was that Warren would kind of hold back and hold the reins a little bit and sort of watch over them, but he's really given them a lot more autonomy than I was anticipating.

Ted's actually been involved in some of the specialty financing they've been doing with Media General. I think both guys were involved in the Heinz deal last year. Buffett's looking at them for more than just buying stocks and running a stock portfolio, which is a positive because whoever takes over that sort of capital allocator-in-chief role is going to have to work closely with those two guys and really understand what the overall picture is for Berkshire's investments and where capital's being allocated. From our perspective, it's been very positive.

Glaser: Do you still think that division of powers will work, having those functions separated?

Warren: Yes, I think so. Again, the sole notion that Combs and Weschler are somewhat different in their investment styles, much like Buffett and Munger are, I think works to the benefit of the firm longer term. We have Ajit at the top. He's really more of a risk assessor. His primary role over the last 20-30 years within the reinsurance business has been to assess risk and to underwrite policies based on his knowledge of risk. And it's a critical thing to have in sort of that capital-allocation role. And when you've got two guys working with you in tandem who are looking at the investment opportunities and looking at what Berkshire can really put its money to work in, that's a big positive longer term. If these guys can generate the kind of returns they've been generating with the portfolio with a bigger piece of portfolio longer term, then it's a good, positive thing for Berkshire.

Glaser: The Economist had a story this week about how it might make sense for Buffett just to sell of pieces of the firm piecemeal before he departs, that that might be a better way to unlock value than keep running it as a conglomerate. What's your take on that? Do you think it makes sense to keep Berkshire together in this way?

Warren: I can go either way. I understand the rationale behind breaking it up and potentially unlocking value within the organization. But that said, our notion is that Berkshire is probably a purer conglomerate than we've seen historically. Buffett does run everything on a decentralized basis. So your assessment of the value is kind of muted by the fact that we don't really have a whole lot of information on things below, and we're really working on total company operating profitability and sort of make an assessment of that.

But when we look at the businesses themselves, it sort of makes sense. They're allowed to run autonomously. They're allowed to run within a structure where at the most they're giving annual reports to Buffett, and they're funneling excess cash up to the parent company, which ultimately gets used in investments and other opportunities.

So overall, I think the structure works, and I think that whoever takes over as long as they maintain that kind of structure, we think that it can still work. The problem becomes when things start going out of control. One of the bigger issues, too, is if you try to impose a more centralized structure on that kind of an organization is where you tend to probably have problems cropping up.

Glaser: For an investor considering Berkshire shares today, is this transition something that should be a key worry or something just to keep in mind? How do you think of it from an investment standpoint?

Warren: I think it's always going to be a key worry. You have to hope that whoever is the next candidate has a deeper understanding of what's going on with the businesses because Warren really has that knowledge in a lot of cases locked up in his own head. It's kind of hard to get past that. We are encouraged to see that he's had Tracy Britt Cool out there the last few years really going and acting as his liaison with a lot of these smaller subsidiaries. That's a positive in that regard because, again, having that transition go smoothly, having her eventually report to the next CEO is a big move in the right direction.

Five years ago, I think there was a lot more concern because nobody really knew. There was sort of a big outline of what might happen. But now we know, Howard Buffett's going to be most likely the chairman. Ajit in our case is definitely going to be the best CEO candidate that we can think of within Berkshire, and Buffett's already said he's not willing to go outside of the firm to bring somebody into that role. You've got Todd and Ted working on the investment side of the portfolio. You've got Tracy acting as a liaison internally. And then you've got just the good work that guys like [MidAmerican Energy chairman] Greg Abel and [BNSF executive chairman] Matt Rose have been doing. They're helping through overall firm continue to be profitable.

Glaser: Gregg, thanks for your thoughts on Berkshire after Buffett.

Warren: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser.