Berkshire adds stocks in pension fund handoff to Buffett lieutenants

Billionaire Warren Buffett is betting that his deputy investment managers can find value hiding in a corner of Berkshire Hathaway Inc.: its $10.4 billion in pension assets.

Todd Combs and Ted Weschler have been building stock portfolios with funds they oversee for defined benefit plans at Berkshire subsidiaries, including railroad Burlington Northern Santa Fe. The strategy saves Mr. Buffett's company fees it would pay to outside asset managers and could reduce the need for contributions to the pensions.

“For his whole career, Buffett has been extremely choosy about who he will allow to manage Berkshire's money,” said James Armstrong, president at Henry H. Armstrong Associates, which oversees about $400 million, including shares in the Omaha, Neb.-based company. “Now he's got two young guys who have a lot of energy and some capacity, and I think it makes perfect sense” that he selected them for pension investments rather than “some big bank.”

Burlington Northern liquidated hundreds of holdings backing obligations to retirees as Berkshire took control of investments for a $1.9 billion defined-benefit plan in 2012, two years after Mr. Buffett bought the railroad, U.S. Department of Labor filings show. Since then, the fund made concentrated stock bets in companies favored by Mssrs. Combs and Weschler.

Holdings of DirecTV and DaVita HealthCare Partners Inc., for instance, were each valued at more than $300 million at Wednesday's share prices, based on assets listed in regulatory filings in May. Stock picks in the plan used to be a fraction of that size, separate filings show.

Changes occurred at plans of other Berkshire units, including FlightSafety International Inc., which trains pilots. A $281 million fund tied to the unit sold holdings last year in Johnson & Johnson and Procter & Gamble Co. — both Mr. Buffett's picks — and added stock in Viacom Inc. and oil refiner Phillips 66. Berkshire's Acme Brick Co. and cowboy-boot maker Justin Brands Inc. also eliminated holdings in P&G and J&J.

Reallocating pension assets is one way Mr. Buffett can assign more funds to Mssrs. Weschler and Combs without liquidating some of his own long-held investments. Berkshire's stock portfolio, valued at $103.3 billion as of June 30, includes stakes of more than $10 billion in Wells Fargo & Co., Coca-Cola Co., International Business Machines Corp. and American Express Co.

The amount of funds the deputies oversee more than doubled to about $5 billion each, the billionaire wrote in March. Mssrs. Combs and Weschler were each hired in the past three years.

A review of pensions at subsidiaries with combined assets of about $5 billion shows that Berkshire tends to target fewer than a dozen stocks for each plan and has smaller-than-average investments in bonds. Mr. Buffett didn't respond to a message seeking comment.

The trust for Acme's pension held 83% of its $116 million portfolio in nine equities at the end of 2012, and less than 4% in corporate and government bonds, filings show. That compares with 50% in stocks and 37% in debt for similar-sized U.S. private pension plans, according to a forthcoming study from Towers Watson & Co.

While some of Berkshire's pension funds are overseen by outside managers, the investments have been shifting toward equities. More than half the assets were in stocks at the end of last year compared with 36% at the end of 2009, according to regulatory filings. Assets climbed about 76% in that period, as Mr. Buffett bought more businesses and markets rose.

Many pension funds avoid concentrations in single stocks to limit risk. Mr. Buffett became the world's fourth-richest person in part through targeted bets made with funds from insurance subsidiaries. He has called bonds among the “most dangerous” of assets, saying near-record-low interest rates aren't enough to compensate investors for inflation risk.

After joining the board of Washington Post Co. in 1974, Mr. Buffett advised his friend and the company's then-chief executive officer, Katharine Graham, to abandon Morgan Guaranty as the company's pension asset manager. By switching to investors that shared his approach, returns would probably be better without taking on too much risk, Mr. Buffett wrote in a memo published by Fortune magazine.

Ms. Graham took the advice, and the results stand out. At a time when the average corporate pension plan in the U.S. is underfunded, the Washington Post's ended 2012 about $600 million overfunded. Berkshire's total obligation to pension holders was $14.1 billion, meaning that the plans had an average funding level of about 75%.

Some picks by Mssrs. Combs and Weschler have turned out well. The Phillips 66 shares that FlightSafety's plan bought last year almost doubled in value, according to filings. Justin Brands' investment in General Motors Co. in 2012 had climbed more than 70% through Wednesday based on the cost of shares reported in its annual filing to the Labor Department.

“These are the kinds of bets he's believed in all along,” Jeremy Gold, an independent pension actuary and economist, said of Mr. Buffett. “He believes that these insights provide returns and cost savings above and beyond the returns for risk taken in more highly diversified, externally managed portfolios.”

Mr. Buffett's picks have led to some losses. Before Mssrs. Weschler and Combs took over, at least five Berkshire pension plans bought bonds tied to Energy Future Holdings Corp. Mr. Buffett apologized for the wager in a 2012 letter to investors after the securities plunged in value.

The risk for pension holders from Mr. Buffett's strategy should be minimal, said Richard Shea, a partner at Covington & Burling LLP and chairman of the law firm's employee-benefits and executive-compensation practice.

Most corporate defined benefit plans are required to insure obligations through the Pension Benefit Guaranty Corp., he said. Companies also are responsible for addressing shortfalls. Buffett's firm had $35.7 billion in cash at the end of June.

“If you had to pick an employer to be behind the trust, Berkshire is not such a bad one to have,” said Mr. Shea.

That's a view shared by Patrick Hiatte, who retired in 2009 to a farm in Missouri after working more than three decades in communications at Burlington Northern. Payments from the plan account for about 40% of annual income for him and his wife.

“As long as that direct deposit keeps coming once a month, I have every confidence in the plan's managers,” he said. Berkshire is “a good solid group of companies. The more I read, and the more I learn about it, the better I feel.”