Warren Buffett’s hiring of a relatively unknown hedge fund manager, Todd Combs, to help oversee Berkshire Hathaway’s overall portfolio came as a surprise to many. In the past month, speculation ran high as to who would take the top job as next investment chief at Berkshire, and Combs' name was not prominently on the list of likely candidates. Still, upon closer look, one can see how this announcement might be understandable.
While Berkshire is a broadly diversified company with investments in many sectors of the economy, the financial sector continues to be a significant part of the overall investment portfolio. General Re,Geico, and Berkshire Hatahway Assurance spin off huge cash flow that provides for opportunities for other investment ideas. XTRA Lease and investments in Goldman Sachs again underscore the focus on financial services. Enter Todd Combs.
With a background analyzing financial services companies, Mr. Combs likely understands the nuances of the financial industry. While the fund he ran may only have about $400 million in assets, it’s primarily invested in the shares of financial-services companies. That expertise will be well suited to assessing Berkshire's financial assets.
But in my view, Mr. Combs financial expertise is only one piece of the equation. Berkshire’s core holdings need to be managed on an operational level. Perhaps this role is less of a replacement for Warren Buffet and more of a macro manager of the disparate business in Berkshire Hathaway's portfolio. Others will likely be involved in other areas of the business.
Lou Li, a Chinese-American hedge fund manager, who was a candidate in the running but decided to bow out, said he is comfortable in his current life and not interested in assuming the role Mr. Combs assumes. But imagine if Mr. Li was designated a senior confidant for emerging market investments.
Take the example of Berkshire’s investment in Chinese electric car maker, BYD; an investment that happened as a result of Lou Li’s connection to mainland China. This team approach might very well be the master plan.
Imagine a Berkshire Hathaway with a core investment leader who understands the overall assets in the company’s portfolio and utilizes other parties around the world to integrate new companies into the investment portfolio. It is a strategy focused on building a team.
I’ve been following Berkshire for years and I'm amazed at how little credit Warren Buffett is given for being tactical and flexible. The focus has always been on his long-time core holdings, and he has often been labeled as conservative and old-fashioned. Perhaps. But there is another Buffett.
Buffett is strategic and visionary; that is what you need to be to outperform in the long-run. Monday's announcement might just be an indication that he intends to continue that tradition long after he relinquishes control of Berkshire Hathaway.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at email@example.com.