When Wall Street professionals and everyday investors want to know what one of the world's most successful investors has been buying or selling, all they have to do is pull up Berkshire Hathaway's (BRK.A -1.34%)(BRK.B -1.27%) latest 13F filing with the Securities and Exchange Commission (SEC).
A 13F is a quarterly filing required of money managers and wealthy individuals with over $100 million in assets under management (AUM). It effectively provides investors with an end-of-quarter snapshot that can be used to determine what top-tier money managers are buying and selling. That can come in particularly handy for investors wanting to ride Warren Buffett's coattails to big gains. Buffett has, after all, outpaced the S&P 500 by a factor of 120 since becoming Berkshire Hathaway CEO in 1965.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Berkshire Hathaway's 13F doesn't tell the complete story
However, Berkshire Hathaway's 13F only tells part of the story about how the Oracle of Omaha has put his company's cash to work. For example, if you dig into Berkshire's quarterly operating results since the midpoint of 2018, you'd see that Buffett and Executive Vice Chairman Charlie Munger have OK'd the repurchase of more than $63 billion worth of their company's Class A (BRK.A) and Class B (BRK.B) shares. That's more money than has been deployed into any single stock over the same time frame.
Additionally, Warren Buffett has a "secret" portfolio worth nearly $5.9 billion that doesn't show up in Berkshire Hathaway's 13F filing.
In 1998, Buffett's company acquired General Re for a whopping $22 billion. Though the crown jewel of this deal was General Re's reinsurance operations -- Buffett is a big fan of the insurance industry -- General Re also owned a specialty investment company, New England Asset Management (NEAM). When Berkshire bought General Re, it also acquired NEAM.
Although the Oracle of Omaha doesn't oversee NEAM's investment strategy or portfolio, what NEAM holds is, ultimately, owned by Berkshire Hathaway.
Based on the latest round of 13F filings with the SEC, Warren Buffett's secret portfolio significantly slashed its stake in two longtime holdings.
NYSE: USB
Key Data Points
U.S Bancorp
The first sizable reduction was seen in the nation's largest regional bank by market cap, U.S. Bancorp (USB +0.99%). This is the parent company of the more familiar U.S. Bank.
U.S. Bancorp has been a continuous holding by New England Asset Management for more than two decades. During the third quarter, NEAM reduced its stake by more than 1.13 million shares. Interestingly, the position Warren Buffett reduced the most during Q3 in Berkshire Hathaway's investment portfolio was U.S. Bancorp.
If you're wondering why both Warren Buffett and the investment team running his secret portfolio reduced their stakes in this bank stock, it's a bit of a head-scratcher. While no clear red flags stand out, one possibility does come to mind.
U.S. Bancorp has seen its exposure to commercial lending, commercial real estate, and residential mortgages grow over the past year. Under normal circumstances, this would be a bullish talking point for a bank stock. However, with interest rates climbing at a historically fast pace, the threat of a recession -- coupled with the likelihood of rising loan delinquencies and charge-offs that typically accompany recessions -- could have investors leery about putting their money to work in U.S. Bancorp. For what it's worth, revolving credit line utilization, commercial real estate charge-offs, and residential mortgage delinquencies are all well within historic/recent norms.
On the flipside, U.S. Bancorp brings two clearly defined competitive advantages to the table that have long made it an attractive investment. First, the company's management team has taken a conservative approach to investments and product offerings. Because it largely avoided the riskier derivative investments that sacked money-center banks during the financial crisis, U.S. Bancorp has consistently outpaced its large peers in return on assets.
The other big advantage for U.S. Bancorp is its digital engagement. As of Aug. 31, 2022, 82% of its active customers were banking digitally. Even more important, 62% of total loan sales were completed online or via mobile app in the latest quarter. That's up 17 percentage points in less than three years. Digital transactions are considerably cheaper for banks and have allowed the company to reduce expenses by consolidating some of its physical branches.
Given these advantages, U.S. Bancorp looks downright cheap at roughly 9 times Wall Street's forecast earnings for 2023.
Image source: Getty Images.
Bank of New York Mellon
The second longtime holding that Warren Buffett's secret portfolio aggressively pressed the sell button for is Bank of New York Mellon (BK +1.58%) -- better known as BNY Mellon.
Custodial bank BNY Mellon has been a continuous holding for New England Asset Management since the first quarter of 2015 and was one of just seven securities (I say securities because NEAM also buys exchange-traded funds) that accounted for at least 1% of NEAM's invested assets at the end of June 2022. But during Q3, NEAM dumped 84% of its stake (about 1.69 million shares) in BNY Mellon.
Not to sound like a broken record, but it's not crystal clear what the motivation would be for New England Asset Management's investment team to head for the exit. Perhaps the most glaring near-term concern is that stock market volatility and economic uncertainty threaten to adversely impact its Investment and Wealth Management operations. To boot, a stronger dollar is weighing down the company's sales and profits, albeit most investors are going to look past this one-time adjustment.
NYSE: BK
Key Data Points
The other potential negative is that BNY Mellon hasn't really done much for its shareholders over the past 23 years. Although they've walked away with a superior dividend yield, Bank of New York Mellon's nominal share price is effectively unchanged since 1999. That's disappointing given how well the broad-market indexes have performed over the past 23 years.
Nevertheless, being one of the largest custodial banks in the world ($42.2 trillion in assets under custody) comes with a huge benefit: safety. All but $117 million of its $3.35 billion in Q3 revenue came from fees. Fee revenue tends to be very predictable and would help BNY Mellon weather a recession far better than traditional bank stocks that rely on lending to generate a sizable portion of their revenue and profits.
Investors looking for a bear-market hedge that'll pay out a market-topping yield can do far worse than Bank of New York Mellon.
