Buffett's all-equities pension strategy

The investment allocation provided a shield from Bill Gross's sudden departure and points up how dangerous Buffett thinks bonds are

By Bloomberg News

Oct 6, 2014 @ 7:23 pm EST

Warren Buffett, Chairman and Chief Executive Officer of Berkshire Hathaway Inc. Photographer: Jeff Kowalsky/Bloomberg

Bill Gross's departure from Pacific Investment Management Co. sent ripples through the bond market. Berkshire Hathaway Inc. (BRK/A) pensioners didn't feel it.

Warren Buffett, Berkshire's chairman and chief executive officer, said today that he didn't know of a single investment that his company or its dozens of subsidiaries had with Pimco, manager of the world's largest bond fund. Why?

“We manage all of our pensions internally, except for those connected with the utility business,” Mr. Buffett said today in an interview with CNBC. “We are all-equities, anyways. We don't have any bonds in our pension funds.”

That Mr. Buffett favors stocks over bonds is well-known. He built Berkshire into the fifth-biggest company in the world by market value using funds from insurance subsidiaries to invest in equities and make acquisitions. Two years ago, he called bonds “among the most dangerous of assets” and said yields were too low to compensate investors for the risk of inflation.

What's less talked about is how he's taken a similar approach with Berkshire's billions of dollars in pension assets.

Over the past few years, Mr. Buffett's deputy investment managers, Todd Combs and Ted Weschler, have reshaped the portfolios backing obligations to retirees at units including railroad BNSF and auto insurer Geico. The strategy saves Berkshire fees it would pay to outside asset managers and could reduce the need for future contributions to the pensions.

Like their boss, Mssrs. Weschler and Combs concentrate their stock picks. BNSF's portfolio, which was valued at $2.5 billion as of Dec. 31, liquidated hundreds of holdings as the deputies took over. By the end of last year, more than 60% of the plan assets were in just four U.S. equities and almost all the rest was in other stocks. Fixed-income securities accounted for about 1%.

That kind of investment allocation insulated Berkshire's pension holders from what happened after Mr. Gross's surprise departure from Pimco on Sept. 26. His move to Janus Capital Group Inc. (JNS) sparked selloffs in some of his largest wagers, such as inflation-protected U.S. bonds, and highlighted vulnerabilities in the $42 trillion credit market.

Stocks have also declined, with the Standard & Poor's 500 Index falling about 1% since the day before Mr. Gross's announcement. That compares with a gain of less than 1% through yesterday for U.S. corporate debt.

Mr. Buffett has quipped that his favorite holding time is “forever” and has said that paying fair prices for good businesses will help an investor do well over time. That inclination to stay the course would have also applied to Pimco, if he had money there.

“I would assume Pimco would have all kinds of professionals there managing money,” Mr. Buffett told CNBC. “I would not change myself, just because Bill Gross left, if I was happy with the personnel at Pimco.”

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