National Post (National Edition)
Berkshire finds it more difficult to beat market
Growth, diversity, make it harder to ‘move the needle’
Warren Buffett may be on safari for major acquisitions, which he likes to call elephants, but shareholders may wonder if his Berkshire Hathaway
Inc. has become the biggest elephant in the room.
Berkshire has grown to look more and more like corporate America, as Mr. Buffett expands outside its core insurance business into such areas as energy, industrial products, newspapers, and in February ketchup, when he teamed up with Brazil’s 3G Capital investment firm to buy H.J. Heinz Co. for US$23.2-billion.
Few of the 35,000 or more people who will this weekend make a pilgrimage to Berkshire’s hometown of Omaha, Neb., for the company’s annual shareholder weekend, which Mr. Buffett calls “Woodstock for Capitalists,” are likely to criticize that strategy.
While Mr. Buffett has managed to handily beat the Standard & Poor’s 500 so far this year, outperforming the overall market is getting tougher for Berkshire as it grows and diversifies, investors and analysts said.
Mr. Buffett, 82, and vicechairman Charlie Munger, 89, will at Saturday’s annual meeting to field five hours of questions about the company, governance, the economy and — with a US$15-billion cash cushion even after the Heinz purchase is completed — their next elephant.
“Larger deals are needed to move the needle,” said Doug Kass, founder of hedge fund Seabreeze Partners Management Inc., who has shorted Berkshire stock partly because its size, including a US$262billion market value, makes it more difficult to record market-beating returns.
Mr. Kass has been tapped by Mr. Buffett as a “credentialed bear” to ask questions and “spice up” the meeting.
Mr. Buffett recognized the performance question when he noted in his March shareholder letter that Berkshire has lagged the broader market since the latter bottomed out four years ago.
“To date, we’ve never had a five-year period of underper- formance, having managed 43 times to surpass the S&P over such a stretch,” he wrote. “If the market continues to advance in 2013, our streak of five-year wins will end.”
Some investors will also ask how long a man of Mr. Buffett’s age, even one who recently beat prostate cancer, can remain at the helm of the company he has led since 1965.
“There is nothing the board can do to halt the aging of the CEO, but it has no higher pri- ority than to prepare for succession,” said Thomas Russo, a partner at Gardner, Russo & Gardner in Lancaster, Penn., which invests 11% of its more than US$6-billion of assets in Berkshire. Mr. Kass also said the company will have to face up to the difficulty of replacing “the single greatest stock investor of all time” probably sooner rather than later.
Mr. Buffett is the world’s fourth-richest person and owns 21.4% of Berkshire, whose board includes Bill Gates, the Microsoft Corp. co-founder and the world’s second-richest person.
Berkshire has more than 80 subsidiaries selling such things as Russell athletic apparel, Geico car insurance, chemicals and furniture. It owns the Burlington Northern Santa Fe railroad and dozens of newspapers. It will report first-quarter results for those businesses on Friday.