Big does not mean safe – ask Warren Buffett
WARREN Buffett is the doyen of investing for the long term, one of the most successful investors of all time and the chairperson and chief executive of the well-known Berkshire Hathaway conglomerate.
Buffett is having his own Steinhoff moment with the implosion of Kraft Heinz over the past year and the price of the stock falling by more than 55 percent.
Kraft Heinz is one of Berkshire Hathaway’s largest investments and according to recent reports the value of the holding was nearly 8 percent of Berkshire’s total equity holdings.
Apparently Kraft Heinz’s fortunes have turned for the worse due to changes in consumer trends away from processed foods to healthier alternatives.
Furthermore, according to Reuters the company disclosed it had been subpoenaed by the US Securities and Exchange Commission in October, related to an investigation into its accounting policies, procedures and internal controls related to procurement.
According to MarketWatch Berkshire Hathaway owns 26.7 percent of Kraft Heinz, while Berkshire Hathaway Inc and Brazil’s 3G Capital control Kraft Heinz.
It shows that no one is infallible, not even one of the most successful investors. There is one lesson to be learnt from Buffett’s misfortune in his Kraft Heinz investment – size matters.
It all gets down to manoeuvrability. The manager of a very large fund needs to commit the fund to specific equities over a much longer period than smaller funds and a buy-andhold strategy is normally followed as in the case of Buffett’s investment in Kraft Heinz.
Careful and in-depth research at great costs are prerequisites of solid investment performance over the longer term and analysts need to “live close” to the invested companies – as Buffett does in Kraft Heinz’s case.
Furthermore, because of the size of the fund and the investment house’s overall funds under management, the size of the companies or instruments in which they invest for the longer term, as well as market liquidity, are crucial as it limits their investment universe.
In addition, risk management is of utmost importance and careful and well-planned strategies such as risk-on and risk-off are non-negotiable and so are exit strategies.
When Buffett became aware of the fortunes of Kraft Heinz it would have been difficult to dispose of or cut Berkshire’s position due to the large holding.
In turn, smaller funds, or shall I say, managers of smaller funds, are in an enviable position as they can chop and change their assets, and equity holdings in particular, quite easily.
When things go terribly wrong with a specific share – whether it be because of wrongdoing or just a sudden change in the investment environment – they can get out and conserve or protect the value of the assets. They are also in the fortunate position to get significant exposure to small and medium capitalisation stocks and take profits or limit losses at relative ease and to some extent are in a better position to limit downside risk.
The impact of the implosion of the Steinhoff stock price by 91.7 percent in December 2017 on the returns of actively managed funds in the SA Equity General category in that month gives me a clue of manoeuvrability and long-term positioning of funds given the sizes of the funds at the end of September last year.
Approximately 94 out of 141 funds had less than R1 billion in assets and had an average negative return of 1.1 percent, while 35 funds had between R1bn and R5bn under management and produced an average negative return of 1.4 percent.
Six funds had between R5bn and R10bn in assets under management and had an average negative return of 3.5 percent, three funds had assets of between R10bn and R15bn and returned minus 1.4 percent on average.
Two funds had assets of between R15bn and R20bn, while one fund had assets of more than R20bn and achieved average negative returns of 0.5 percent and 1 percent, respectively. In comparison the JSE as measured by the All Share Index had a negative return of 0.3 percent with income distributions reinvested.
Although it is a generalisation it seems to me that the smaller funds could manage their exposure to Steinhoff more effectively than medium-sized funds (R5bn to R10bn). Large funds as defined with assets in excess of R10bn fared better than the medium-sized funds and this is probably as a result of harnessing their longer-term approach of buy-and-hold strategies and managing risk.
Must you lose faith in Buffett due to his misfortune in Kraft Heinz and question his ability to create wealth in the long run? No, certainly not. Similarly with large funds. They were at some stage also small funds but due to consistent solid performance they saw inflows that eventuated in a difficult position to adjust for bad apples in the short-term.
For investment excellence we need to look through the performance – straight or risk-adjusted – during a full cycle of five years at least.