October 26, 2010
Yesterday, Warren Buffett laid down a new piece in the puzzle of his succession plan at Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) . The Oracle of Omaha announced the hiring of Todd Combs, a 39-year-old hedge fund manager, "to handle a significant portion of Berkshire's investment portfolio." Berkshire watchers everywhere are scratching their heads and scrambling to answer the question: Who is Todd Combs?
A quantum leap in size and visibility
It's hardly surprising that Buffett plucked his new hire from the hedge-fund industry: Where else would one expect to find a talented money manager these days? Still, Combs, the general partner of Castle Point Capital Management, manages roughly $400 million, or less than 1% of the Berkshire portfolio's value. Among hedge funds, that's small potatoes, and Combs isn't a huge name in the business. What does Buffett see in him? Here are a few clues:
- Value orientation: Combs is a dyed-in-the-wool value investor. This is an absolute prerequisite for the job: Buffett would never consider handing Berkshire's portfolio to someone who does not share his value discipline.
- Financial sector expertise: Combs's hedge fund is focused on the financial sector. That expertise will come in handy for managing Berkshire's portfolio, which has a heavy weighting toward financials. Castle Point's current holdings include US Bancorp (NYSE: USB ) , Goldman Sachs (NYSE: GS ) and Wells Fargo (NYSE: WFC ) -- all companies in which Berkshire also has an interest.
What Combs's portfolio tells us
Castle Point's holdings yield further clues concerning Combs's investing style:
- Concentrated: Value investors shun benchmark weightings and are willing to make sizeable bets on stocks they like. SEC filings show 27 positions for Castle Point at the end of the second quarter, with the top five positions representing more than a third of the total value of his holdings, and the top 10 representing 57%.
- Dynamic: A comparison of Castle Point's latest list of holdings with the same list two years prior shows relatively high turnover. Is this contrary to Buffett's "buy and hold" approach? This does not result from a fundamental difference in investing philosophy, but from the fundamental difference between managing a $400 million hedge fund versus a $5o billion-plus stock portfolio. When Buffett was managing his investment partnerships and was less constrained by size, he himself employed a much more dynamic style.
Combs may not be a celebrity hedge fund manager, but Buffett's an expert at identifying outstanding investments for Berkshire -- whether it be people or businesses. Buffett labeled Ajit Jain a "superstar" for his contributions to Berkshire's reinsurance activity; in a few years, he may well say the same of Combs for his work managing part of Berkshire's investment portfolio.
Buffett may be the world's greatest investor, but he owns 3 stocks that you shouldn't.