Few investors have a more impressive track record than Berkshire Hathaway (BRK.A 0.55%) (BRK.B 0.50%) CEO Warren Buffett. In the 57 years he's held the reins at Berkshire, he's led his company's Class A shares (BRK.A) to an average annual return of 20.1%, which equates to an aggregate return of more than 3,600,000%.
Buffett's success as an investor is due to myriad factors, including a willingness to hold investments for long periods of time, as well as his love of cyclical companies and dividend stocks.
But something you may not know about the Oracle of Omaha is that he has a secret portfolio containing $6.3 billion in assets under management, as of March 31, 2022. While it's relatively easy to follow Buffett's trading activity via 13F filings with the Securities and Exchange Commission, you won't find these holdings in Berkshire's 13F filing.
In 1998, Buffett's company acquired insurer General Re for $22 billion. While the prized asset of the General Re buyout was the company's reinsurance operations, General Re also controlled specialty investment firm New England Asset Management (NEAM).
To be perfectly clear, Warren Buffett and the investing team making the decisions for Berkshire Hathaway's more than $350 billion investment portfolio don't oversee NEAM's $6.3 billion investment portfolio. Nevertheless, New England Asset Management is an owned entity of Buffett's company. This means the assets held in NEAM's investment portfolio are, ultimately, "owned" by the Oracle of Omaha.
With $6.3 billion in assets under management, New England Asset Management is required to file a 13F just like its parent company. But unlike Berkshire Hathaway, NEAM has its fingers in more than three times as many securities as Berkshire (52 for Berkshire, compared to more than 160 for NEAM).
What's similar is that Buffett's secret portfolio has invested the vast majority of its assets into a small concentration of sectors. In New England Asset Management's case, 95% of its assets are invested in just the following two sectors.
Technology: 57.49% of invested assets
The sector Warren Buffett's secret portfolio unquestionably favors the most is information technology. In total, NEAM has positions in 17 different tech stocks, including software behemoth Microsoft, semiconductor solutions-specialist Broadcom, payroll solutions-provider Paychex, and legacy stalwarts like HP and IBM.
But here's the jaw-dropping stat that really defines New England Asset Management's "love of tech." Out of the 57.49% of assets invested in information technology at the end of March, virtually all of it (56.62%) was tied up in Apple (AAPL -1.00%). This means the other 16 tech stocks held by NEAM make up just 0.87% of invested assets, on a combined basis!
There's certainly something to be said about Berkshire Hathaway and New England Asset Management sharing their largest positions. Then again, Apple has given investors an abundance of reasons to trust in the company over the long run.
To begin with, Apple is arguably the most valuable and recognized brand in the world. Earlier this year, Brand Finance labeled Apple as the world's most valuable brand for a second consecutive year. Brand Finance cited the company's range of services, its bolstered privacy and environmental push, and its diversified product line as reasons for hanging onto the top spot among global brands.
Innovation is another reason Apple has been such a superstar for the investing community. Since Apple introduced a 5G-capable version of its iPhone in the fourth quarter of 2020, its U.S. smartphone market share has held at 50% or above in 5 out of 6 quarters, according to Counterpoint Research.
But it's not just product innovation that's driving results. Apple CEO Tim Cook is overseeing an ongoing transition of his company to a service-oriented business. A subscription-driven model should help boost long-term operating margins and lessen the bumpiness often associated with product-replacement cycles. Keep in mind that Apple isn't abandoning the product line that brought it fame. The company is simply evolving in order to grow.
Apple is also in a league of its own when it comes to capital-return programs. In addition to returning more than $14 billion a year to investors in the form of a dividend, the company has repurchased close to $520 billion worth of its common stock since initiating a buyback program in 2013. That's not pocket change, and it's an easy way to get the attention of Warren Buffet and New England Asset Management's investment-portfolio managers.
Financials: 37.45% of invested assets
The second sector that New England Asset Management has absolutely piled into is (drum roll) financials! Did you expect anything else from a company with an insurance-based background?
As a whole, NEAM holds stakes in 51 financial securities. I say "securities," because NEAM invests in stocks, exchange-traded funds, and preferred stock. But once again, only a small handful of these investments account for the lion's share of the 37.45% of invested assets tied up in financial stocks. This includes U.S. Bancorp (USB 0.02%), Bank of America (BAC 0.92%), the SPDR S&P 500 ETF, and the Bank of New York Mellon.
Together, these four securities account for 32.98% of the 37.45% in financial sector-invested assets. You might note that Berkshire Hathaway has stakes in all four of these financial securities, too, in its portfolio.
Regional bank U.S. Bancorp and money-center giant Bank of America each make up about 14.9% of invested assets (29.8% on a combined basis). When held for long periods of time, bank stocks benefit from the disproportionately longer period of time the U.S. economy spends expanding, relative to contracting.
Although downturns are inevitable, the U.S. economy naturally expands over time. That allows U.S. Bancorp and Bank of America to grow their loans and deposits.
Bank of America and U.S. Bancorp are also benefiting from a combination of rising interest rates and digitization investments. The former noted in its June-ended quarterly investor presentation that a 100 basis-point parallel shift in the interest-rate yield curve would generate an estimated $5 billion in added net-interest income over 12 months.
Meanwhile, U.S. Bancorp has set the standard for digital engagement. It ended June with 82% of its active customers banking digitally and had 64% of total sales completed online or via its app. Since digital transactions cost a fraction of what in-person or phone-based transactions do, this digital push is helping boost U.S. Bancorp's efficiency.
Financials may not be the sexiest place to put your money to work, but they have all the tools to take advantage of a steadily growing economy over the long term.