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It struck Questor as rather like telling the Pope that his grasp of the Bible was suspect: a London-listed investment trust worth £1.8bn has told Warren Buffett that he has lost his touch as an investor and has sold its shares in the Sage of Omaha’s $630bn investment vehicle, Berkshire Hathaway, as a result.
The trust, Personal Assets, had held the shares since the financial crisis and acknowledged that they had “contributed strongly to performance”. But in its interim report published last week Sebastian Lyon, the manager, said he had three concerns about Berkshire that were not adequately reflected by the share price, which had outpaced the company’s earnings to the point that the shares’ valuation was “towards the upper end of [its] long-term range”.
His first concern was straightforward enough: Buffett’s advanced age. Lyon said this “key man risk” was well known but “rises as each year passes – Warren Buffett just celebrated his 91st birthday”.
It’s true that Buffett is not, despite his enormous fame, a one-man band: he has enjoyed a 56-year partnership with Charlie Munger, who is perhaps even more revered by Berkshire devotees. Munger, however, is in his 98th year. While successors have been chosen, they have big boots to fill.
Personal Assets’ second gripe concerned some of Buffett’s recent investment decisions, especially his purchase and later sale of stakes in various airlines. Lyon wrote of “disappointing recent capital allocation by Berkshire, evident particularly in the decision to purchase airlines, something Buffett has long warned against, followed by their untimely sale”.
Berkshire Hathaway once owned large stakes in American, Delta, United and Southwest Airlines. But in spring last year it sold these holdings at a big loss. Buffett called his decision to invest in air travel a “mistake” and said it could take years for airlines to fully recover from coronavirus.
Several times earlier in his career he had warned against investing in airlines. “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money,” Buffett said. “Think airlines.”
“Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers.”
Personal Assets said its final complaint was over Berkshire Hathaway’s “refusal to hold its subsidiary businesses to a higher level of account when it comes to climate disclosures”. It said this reflected “a management team that is yet to fully grasp the ESG [environmental, social and governance] nettle”. This was likely to affect returns in the years to come, Lyon added.
We were fortunate enough to tip Berkshire, whose diverse range of assets, we said, made it resemble an investment trust, when its shares looked cheap. Since that advice in May 2019 the share price has risen by 35.5pc and, as Personal Assets warned, they are looking expensive on some measures.
And nothing bothers this column quite like an investor who doesn’t invest the way he said he would – even when that investor is the Sage of Omaha. Although it may feel like more heresy, we will bank our gains on Buffett and sell Berkshire Hathaway.
Questor says: sell
Ticker: NYSE: BRK.B
Share price at close: $275
Update: Gresham House Strategic
This is a trust in disarray. It has lost the man who ran it, changed fund management firm to be reunited with him, changed chairman, conducted a strategic review and found itself the subject of a campaign by shareholders led by its former management group to wind itself up. Oh, and there was a bungled tax calculation too.
As if that were not enough, the wind-up proposals, due to be put to investors later this month, involve various complexities such as the issue of a new class of share, “tender offers” for the existing class, which may have tax implications for those who hold them outside Isas and pensions, and an extended two-year process.
While the wind-up, assuming that it is approved, could well result in a return of capital at closer to net asset value, we are inclined to avoid all the mess and simply sell now at a 67pc gain relative to our tip just over a year ago. Sell.
Questor says: sell
Share price at close: £16.45
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