By Erik Holm
Aug. 10 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. is buying corporate debt and securities issued by governments outside the U.S. as the billionaire investor’s spending on stocks falls to the lowest in more than five years.
Berkshire held about $11.1 billion in foreign government bonds in its insurance units as of June 30, compared with $9.6 billion three months earlier, the company said in a regulatory filing Aug. 7 announcing second-quarter results. Buffett, 78, spent $2.6 billion in fixed-maturity securities in the three months ended June 30 compared with $350 million on stocks.
Buffett is increasing fixed-income investments after results slumped at operating units including NetJets Inc., the money-losing plane-rental business, and companies in Berkshire’s equity portfolio including Wells Fargo & Co. slashed dividends. Omaha, Nebraska-based Berkshire posted its first profit gain since 2007 as payments from securities issued by Goldman Sachs Group Inc. and General Electric Co. boosted investment income.
“Some of the normal places he’s gotten the cash to invest are just getting killed in the recession,” said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington. “So he’s locking in these guaranteed returns, moving from the volatility of stocks to a steady stream of income that, in some cases, is almost at the return you normally get from the stock market.”
The $8 billion in investments in preferred shares of Goldman Sachs and GE are paying Berkshire 10 percent annual interest. Combined with the purchase of similar securities sold by Swiss Reinsurance Co., and Berkshire’s investment in debt in companies including candy manufacturer Mars Inc. and Vulcan Materials Co., the firm’s announced fixed-income deals since September pay interest of more than $1.8 billion annually.
Iceberg’s Tip
“That’s just the visible part of the iceberg, and it’s pretty massive,” said Mohnish Pabrai, founder of Irvine, California- based Pabrai Investment Funds, which owns Berkshire shares. “There’s lots of investments we don’t see and may never know about, especially on the debt side.”
The latest investments included the purchase of non- investment grade corporate debt. The amortized cost of the insurance operation’s high-yield corporate holdings rose 13 percent to $6.02 billion in the three-month period. Junk-rated debt returned 23 percent in the second quarter, as investors speculated the worst of the recession was over, according to Merrill Lynch & Co.’s High Yield Master II index.
Government Debt
The amortized cost of the insurance operation’s foreign government holdings rose 16 percent. The filing doesn’t list the nations that issued the debt or the companies in which Berkshire invested. Buffett is Berkshire’s chief executive officer, chairman and head of investing.
“It may be that Buffett thinks that inflation in the U.S. will be worse than elsewhere in the world,” said Martin, who has studied Berkshire’s investing history.
The shift toward fixed-income boosted investment income 9 percent from the year-earlier period to $1.87 billion at its insurance and finance operations, even as dividend revenue declined from some of Berkshire’s top stock holdings. Wells Fargo cut its quarterly payout to shareholders by 85 percent in March, and U.S. Bancorpslashed its payment 88 percent. Berkshire is the largest shareholder in Wells Fargo.
The Goldman Sachs and GE investments also give Buffett the option to buy stock at prices set when the deals were consummated. The Swiss Re securities are among those that may convert to stock later.
‘Major Mistake’
The $350 million that Berkshire spent on equities in the second quarter is the least since at least 2005, according to regulatory filings. It broke the mark set in the first quarter, when the firm spent $624 million on equities including Wells Fargo.
The firm sold more common stock that it bought this year, after Buffett confessed to a “major mistake” of purchasing shares of oil-producer ConocoPhillips with prices of the commodity near a peak. A writedown on the stake contributed to a first-quarter loss, Berkshire’s first unprofitable quarter since 2001. Buffett is expected to list U.S. stock holdings as of June 30 in a separate filing this month.
Berkshire’s own shares passed $100,000 in New York Stock Exchange composite trading last week for the first time since January, recovering from a six-year low in March. The stock, which closed at $108,100 before results were released on Aug. 7, is now up 12 percent this year.
Berkshire’s second-quarter net income rose 14 percent from a year earlier to $3.3 billion, as Buffett’s bet on derivatives tied to world equity markets gained in value.
Operating Profit Declines
Operating profit, which excludes some investment results, fell 22 percent to $1.78 billion as NetJets posted a $253 million pretax loss and revenue was pressured at Berkshire businesses that sell jewelry and furniture, and make products used in home building.
“He’s gotten himself into many small businesses that are not going well,” said Charles Ortel, managing director of New York-based Newport Value Partners, who advises clients to bet against Berkshire shares. “You are seeing revenue contracting and profits shrinking at alarming rates.”
Manufacturing subsidiaries have “taken actions to reduce costs, slow production and reduce or delay capital spending until the economy improves,” Berkshire said.
To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.
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