These essentials were surely part of the attraction to Warren Buffett in swallowing up last month the biggest deal of his career – a $28bn takeover of HJ Heinz. His investment company, Berkshire Hathaway, partnered with 3G, the Brazilian private equity firm, to notch up the largest takeover in the food industry to date.
Poor performance from Buffett?
With a strong record of growth and cash generation, HJ Heinz looks a typical Buffett purchase. He likes brands and has long admired consumer goods companies, being famed for his large stake in Coca-Cola. However, as a well-known value investor paying a premium for soup, beans and ketchup falls short of his customary investment approach.
When we review fund managers for inclusion in our client portfolios we look for a robust investment process which makes sense and is consistently applied by an experienced team or individual. If Berkshire Hathaway was a holding in our portfolios, this acquisition would trigger a review – no matter that Warren Buffett is the world’s most lauded investor with a long, successful public track record.
In his recent annual letter to Berkshire Hathaway shareholders, (a must-read for all investors), Buffett criticised his sub-par performance relative to the firm’s S&P 500 Index benchmark in 2012. He firmly believes his company’s intrinsic value approach will outperform the benchmark for shareholders in future. After all, they could always turn to a low-cost tracker.
Yet, I find it hard to believe that his shareholders will be selling. This is only the ninth time in 48 years that Berkshire Hathaway (+14.4%) has failed to outperform the S&P 500 (+16%) in the calendar year. However, he did express concern for the potential loss of its five-year rolling track record of market outperformance.
Value of a long-term outlook
The letter explained that Berkshire Hathaway’s relative performance did better when "the wind is in our face."
He also told shareholders of his disappointment in failing to make a major acquisition in the year – "I pursued a couple of elephants, but came up empty-handed." That is not to say there was no reinvestment in Berkshire Hathawayexisting investments; they spent a record $9.8bn on plant and equipment. Buffett berates CEOs for blaming uncertainty for their lack of capital expenditure.
The recent acquisition of HJ Heinz is his latest ‘elephant’, but despite his 82 years he has promised that he still has the appetite to bag some more. We meet many fund managers who adopt the Warren Buffett approach – scarcely surprising bearing in mind his 48-year track record which has compounded annually at 19.7%. His outlook is suited to investors with similar patience and short-term speculators need to look elsewhere.
I have no doubt that many more fund managers would like to assume Buffet’s investment approach, but the short-term quest for performance rules this out. To be the best-performing fund in a falling market is a bittersweet marketing accolade.
John Husselbee is CIO of North Investment Partners