Berkshire Investment Managers Having Mostly Positive Performance in 2015

The two investors Warren Buffett (Trades, Portfolio) hired several years ago to help manage and eventually take over Berkshire Hathaway’s portfolio had a fantastic start, with returns reminiscent of their boss’ virtuosity. But recent results have been more mixed, including so far in 2015.

Todd Combs, who started at Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) in 2011, and Ted Weschler, who joined in 2012, have gained more responsibility each year. Beginning with several billion dollars each in 2012, both oversaw more than $7 billion of Berkshire’s $127 billion investment portfolio as of early 2014. “They’ve earned it,” Buffett said in his 2013 letter.

Buffett made the comment when aglow from their first two years of performance. In 2012, they beat the 15.89% return of the S&P 500 by double-digit margins and left Buffett “in the dust a well,” he said. At that time, he increased the funds managed by each to almost $5 billion. 2013, when the S&P 500 advanced 32.15%, proved even more fruitful.

“In a year in which most equity managers found it impossible to outperform the S&P 500, both Todd Combs and Ted Weschler handily did so,” Buffett said. “I must again confess that their investments outperformed mine. (Charlie says I should add ‘by a lot.’) If such humiliating comparisons continue, I’ll have no choice but to cease talking about them. Todd and Ted have also created significant value for you in several matters unrelated to their portfolio activities. Their contributions are just beginning: Both men have Berkshire blood in their veins.”

More challenging times came in 2014, when Fortune estimated that Combs’ portfolio fell by 0.3%, weighed down by positions in Chicago Bridge & Tire (CBI) and Viacom (VIAB, Financial). Weschler’s gained only 6.7%, lagging the S&P’s 13.48% return, with a decline one of his largest positions, General Motors (GM, Financial).

Buffett maintained his confidence in the managers in spite of the weak year. He made each of them chairman of one of his new smaller acquisitions in 2014, to both save him some work and “more important, make the two of them even better investors than they already are (which is to say among the best),” he said.

Which of the stocks in Berkshire’s portfolio belong to Weschler, Combs and Buffett is not possible to say with certainty because they report them together in one quarterly filing. But Buffett gave a hint, saying the smaller new positions are likely to belong to Weschler and Combs, while the bigger purchases will likely be his doing. A further clue is that some of the smaller, recent purchases appeared in the holdings of the two investors’ previous funds, which they closed when they joined Berkshire.

Since the last quarter of 2014, Berkshire has added two new holdings that may fit the criteria of a Weschler or Combs buy: Restaurant Brands International Inc. (QSR, Financial) and Axalta Coating Systems Ltd. (AXTA, Financial). In total, 14 positions in the portfolio are likely purchases of the two investors. Of these, nine have posted year-to-date gains; five have declined this year.

Probable Weschler and Combs Stocks’ Year-to-Date Performance

Restaurant Brands International Inc. (QSR, Financial): -6.3%

Axalta Coating Systems Ltd. (AXTA, Financial): +10.4%

General Motors (GM, Financial): +3.7%

Chicago Bridge & Iron Company (CBI): +1.83%

Suncor Energy (SU): -13.15%

Viacom (VIAB): -42.66% (Through third quarter; sold in third quarter)

Liberty Media (LMCK): +12.6%

VeriSign (VRSN): +59%

Verizon (VZ) : -2.57%

Charter Communications (CHTR): +13.36%

MasterCard (MA, Financial): +13.66%

Visa (NYSE: V): +21.9%

WABCO (WBC): +1.87%

DaVita (DVA): -2.93%

S&P 500 Index (SPY): +2.5%

Biggest contributors

VeriSign (VRSN): +59.5%

Verisign became a Berkshire holding in fourth quarter 2014 when the price averaged $42 per share. The company bought shares quarterly through the second quarter of 2014, when the price averaged $50 per share. The holding gives Berkshire 11.6% ownership of the company and a 102% gain, the share price having surged to near a 10-year high at $90.90 on Tuesday.

The domain name and Internet security company’s stock jumped on Oct. 22 when it reported positive third quarter results. Verisign had a 4.2% year-over-year increase in revenue to $266 million, and net income of $92 million, or $0.70 per diluted earnings per share, down slightly from $95 million, or $0.69 per diluted share, in the same quarter of 2014. It also improved its operating margin from 54.7% to 58.1%. The results came on an additional of 1.68 million net new names for the quarter and 9.2 million new domain name registrations processed, both single-digit increases from the previous year.

Verisign also reported $466 million more cash from the end of 2014 at $1.9 billion and repurchased 2.3 million of its shares for $156 million, with an additional $605 million left under its repurchase authorization.

Visa (V): +21%

Berkshire disclosed a new stake in Visa in the third quarter of 2011, before Ted Weschler joined the company, making it a probable Todd Combs stock. Purchased at an average quarterly price of $22, Visa’s price has soared to $79.91 per share on Tuesday, and Berkshire has a total estimated gain of 106% on the holding of 9,885,160 shares covering 0.54% of the portfolio.

Visa’s shares also continued their advance when the company reported positive fiscal fourth quarter results Nov. 2. Visa operating revenue increased to $3.6 billion from $3.2 billion the same period a year ago, with a 41% increase in net income to $6.3 billion, or $0.62 per share. Results were buoyed by growth in payment volumes, new and renewed partnerships and increased capabilities in physical and digital transactions, the company said.

Visa also announced a new $5.0 billion shares repurchase program in addition to its previously announced 17% dividend-per-share increase.

Biggest detractors

Viacom (VIAB): -33.8%

Viacom shares slid 43% through the third quarter of the year. Berkshire sold the entire position in the third quarter, although it is unknown whether it was sold before or after the precipitous drop in August, when the price fell from $57 per share to under $40.

The stock decline in August was fueled by an 11% drop in revenue for the quarter ended June 30, at $3.06 billion. Net earnings similarly declined to $591 million, down 3%, while adjusted diluted earnings per share increased 4% to $1.47, a record for the quarter. The company’s lower revenue was impacted by a lack of wide theatrical releases during the quarter and falling advertising revenue.

Viacom also lost cash in the quarter, ending it with $421 million, down from $1.0 billion as of Sept. 30, 2014. Its debt also grew to $3.08 billion from $12.7 billion at the same time.

Suncor Energy (SU): -13.15%

Berkshire increased its position in Suncor by 34% in the third quarter to an even 30 million shares, 2.08% of the company’s shares outstanding, a lower average price of $27. Berkshire started the position with 17.8 million shares in the second quarter of 2013, when the price averaged $30. Suncor is one of three energy picks in the portfolio, second in size to Buffett’s Phillips 66 (PSX) holding.

Suncor is an oil sands developer based in Canada with plans to expand its oil sands production and continue to develop renewable energy sources. Its third quarter results, along with the announcement that it offered to buy Canadian Oil Sands Limited (TSE:COS), also boosted its share price in October.

Suncor reported $7.5 billion in revenue in the third quarter, a decrease from $10.2 billion the same quarter the previous year, with a net loss of $376 million, or $0.26 per common share, compared to net income of $919 million, or $0.63 per common share, a year earlier. The net loss included an unrealized after-tax foreign exchange loss of $786 million on the revaluation of its debt in U.S. dollars. To thwart sinking oil prices, the company decreased its cash operating cost per barrel at its oil sands operations to the lowest level in eight years, at $27.

At quarter-end, Suncor retained cash of $5.4 billion from roughly the same level a year earlier, while long-term debt grew to $14.1 billion from $10.6 billion over the same time.

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