A Model Portfolio for Pension Trusts
Modern Portfolio Theory is all about Asset Allocation and Diversification, but the lesson to be learned by studying how Warren Buffet has achieved success at Berkshire Hathaway tells a different tale.
It is a tale of
float + derived price + direct collaboration
While Texas Teachers boasts about excelling at the conventional wisdom of MPT to generate
an annualised return of approximately 7.2% with 2.6% annualised standard deviation
Warren Buffet has consistently delivered 20% compound growth in book value for over 50 years:
Over the last 50 years... book value has grown [at]... a rate of 19.4% compounded annually
A Pension Trust might do well to see in Berkshire a model for its own portfolio, and in the formula float + derived price + direct collaboration a more fit-for-purpose theory than Modern Portfolio Theory.
As we have seen in earlier posts, the core of the Berkshire Hathaway portfolio is a collection of property & casualty insurance companies. These generate the "float" that powers the portfolio.
A Pension Trust generates its own "float" that can and should be powering its portfolio.
So, we have some equivalency there, that we can build on.
I think it is fair to say that Berkshire is a casualty insurance company at its core, as a Pension Trust is a retirement insurance enterprise at its core.
Both generate large "floats" that create the need and the opportunity for investment, so that each fits the standard industry model of being an insurance + investments enterprise.
Warren Buffet presents the Berkshire investment portfolio in four groupings,
- Regulated
- Manufacturing, Service and Retail
- Finance and Financial Products
- Investments (actually, Public Equities)
The first three groupings are all what I recommend we think of as investments in future cash flows, through direct collaboration with enterprise leaders.
The last are investments in the future selling prices of shares in publicly traded corporations. These prices are derived, more or less directly, from expectations for future cash flow generation within those corporations.
Most of the growth in Berkshire book value over the 50 years of Warren Buffet's leadership has come from the direct collaboration side of the portfolio.
As we saw in yesterday's post, however, the derived price portfolio is absolutely essential to Warren's success at Berkshire:
a broad range of options always sharpens decision-making. The businesses we are offered by the stock market every day – in small pieces, to be sure – are often far more attractive than the businesses we are concurrently being offered in their entirety
Berkshire's derived price portfolio exemplifies Warren Buffet's roots as a bargain-hunter and his penchant for mainstream companies. Top holdings include:
- American Express Company
- The Coca-Cola Company
- DaVita HealthCare Partners Inc.
- Deere & Company
- DIRECTV
- The Goldman Sachs Group, Inc.
- International Business Machines Corp.
- Moody’s Corporation
- Munich Re
- The Procter & Gamble Company
- Sanofi
- U.S. Bancorp
- USG Corporation
- Wal-Mart Stores, Inc.
- Wells Fargo & Company
Even in this derived price portfolio, Warren eschews trading in favor of his legendary buy-and-hold strategy.
The direct collaboration portfolio is, however, Warren's first love, and where he works most of his magic. Here's the list.
Regulated Transportation and Utilities
- BNSF - railroad system
-
U.K. utilities
-
Iowa utility
-
Nevada utilities
-
PacifiCorp (primarily Oregon and Utah)
-
Gas Pipelines (Northern Natural and Kern River)
-
HomeServices
-
Other
Finance and Financial Products
- Berkadia
- Clayton (homes)
- CORT (furniture)
- Marmon – Containers and Cranes
- Marmon – Railcars
- XTRA (tractor-trailer)
Manufacturing, Services and Retail
- Acme
- Adalet
- Affordable Housing Partners, Inc.
- AltaLink
- Altaquip
- Ben Bridge Jeweler
- BenjaminMoore
- BHMediaGroup
- Borsheims
- Brooks Sports
- The Buffalo News
- BusinessWire
- Campbell Hausfeld
- Carefree of Colorado
- Charter Brokerage
- Cleveland Wood Products
- CTB
- DairyQueen
- Douglas/Quikut
- Fechheimer
- Flight Safety
- Forest River
- France
- Fruit of the Loom
- Garan
- H.H. Brown Shoe Group
- Halex
- Heinz
- Helzberg Diamonds
- Iscar
- Johns Manville
- Jordan’s Furniture
- Justin Brands
- Kirby
- Larson-Juhl
- Lubrizol
- McLaneCompany
- Metalogic Inspection Services
- MiTek Inc
- Nebraska Furniture Mart
- Net Jets
- Oriental Trading
- The Pampered Chef
- Precision Steel Warehouse
- Richline Group
- Russel
- See’s Candies
- Shaw Industries
- Stahl
- Star Furniture
- TTI, Inc.
- United Consumer Financial Services
- Vanity Fair Brands
- Wayne Water Systems
- Western Enterprises
- R.C. Willey Home Furnishings
- WorldBook
- WPLG,Inc.
It would be interesting to draw a map of the economy, starting with the activities sponsored by Warren Buffet through Berkshire Hathaway, to chart its impact on the economy and society as a good place for any Pension Trust to start thinking about its own portfolio, and its impact on the economy and society.
two separate skills, the evaluation of investments and the management of businesses
Too often, these two skills get co-mingled and confusion ensues.
Many people in the investment business like to think they know better than Management how to manage the business.
As Warren teaches, this is not true. The skills of an investor and the skills of a manager are different skills, and the wise investor knows the difference.
I have a problem with "management" because too often it denigrates the genius that it takes to drive an enterprise to win popular choice through commercial competition. Good housekeeping is important to the success of any business, but the success of every business requires more than just good housekeeping.
The success of Berkshire Hathaway lies in large part in the fact that Warren Buffet understands that rule, instinctively, and respects, systematically, the difference between the skills of an investor and the skills of a business leader.
A Pension Trustee will do well to follow Warren in this regard.
As a business leader, a Pension Trustee is in the Retirement Insurance business, much as I believe Warren Buffet is in many ways, a business leader in the Casualty Insurance business.
Both businesses create a Float, which for the one (the Pension Trustee) gives rise to an obligation to invest and for the other (Warren Buffet) creates the opportunity to invest. In either case, both require the skills of an investor, to evaluate the ability of others to run their businesses, which is not the same skill as the skill required to actually run that business.
They say, the best way to learn, is to teach.
I think Warren has discovered that the best way to learn how to evaluate a business leader, is to actually try to lead a business.
Doing has a way of showing us the difference between what we think we know, and what it is we actually do know.
A prudent fiduciary will always know that difference.
A faithful fiduciary will always respect it.
This is the difference between Ownership and Stewardship, between Opportunity and Purpose, between "making payroll" and not.