PSG Flexible comment - Mar 15 - Fund Manager Comment10 Sep 2015
"I believe the chance of any event causing Berkshire to experience financial problems is essentially zero. We will always be prepared for the thousand-year flood; in fact, if it occurs we will be selling life jackets to the unprepared. Berkshire played an important role as a "first responder" during the 2008-2009 meltdown, and we have since more than doubled the strength of our balance sheet and our earnings potential. Your company is the Gibraltar of American business and will remain so." -
As at 31 March 2015 the second largest investment in the PSG Flexible Fund was Berkshire Hathaway Inc. which represented 6.4% of the Fund. Berkshire Hathaway has been managed by Warren Buffett for the past 50 years and it has been of the largest investments in the PSG Flexible Fund for more than 8 years. The fund owns 160 class A shares that are worth R428.7million or R2 679 203 each. Over the past 8 years we paid on average R886 291 for each of these shares. The investors in the Fund have made good gains on their Berkshire investment. We believe Warren Buffett and his team (340 499 people work for Berkshire) will continue to produce above average returns for investors.
A recent example of how Buffett adds value has been through the Kraft/Heinz merger. On 25 March 2015 it was announced that Heinz, a leading global food company, would merge with Kraft, the 4th largest food and beverage company in the United States. The combined entity will be the 3rd largest food and beverage company in the United States. It will have an attractive portfolio of branded products and the potential for significant cost and revenue synergies. Berkshire acquired 50% of Heinz on 3 Jun 2013 for an amount of USD4.25bn. The other 50% was acquired by 3G Capital, a global investment firm focused on long-term value, with a particular emphasis on maximizing the potential of brands and businesses. Executives from 3G Capital have managed Heinz since acquisition and have transformed Heinz into a food company with industry leading margins. Operating improvements of around USD1 billion have been achieved through implementing zero-based budgeting, simplifying the corporate structure and rationalising the manufacturing footprint of Heinz.
After the merger, Berkshire will own 25.5% of the combined Kraft Heinz and together with 3G Capital they will control 51% of Kraft Heinz. Based on the market price of a Kraft share of USD87.12 as at 31 March 2015 we estimate that Berkshire's 25.5% interest in Kraft Heinz is worth around USD21.5bn. This means that in the 22 months since acquisition Berkshire has made a gain of around USD12.2bn on its Heinz investment.
Berkshire currently trades at a price-earnings ratio (based on our adjusted earnings) of 15.9 times and a price to book ratio of 1.5 times. Berkshire has indicated that they would do share buybacks at a price to book ratio of 1.2 times, therefore shareholders have some form of downside protection. The price-earnings ratio of Berkshire at 15.9 times is also less than that of the S&P 500 Index. In our opinion the average business held by Berkshire is of better quality than the average business included in the S&P 500 Index.
"Today Berkshire possesses:
1. an unmatched collection of businesses, most of them now enjoying favourable economic prospects;
2. a cadre of outstanding managers who, with few exceptions, are unusually devoted to both the subsidiary they operate and to Berkshire;
3. an extraordinary diversity of earnings, premier financial strength and oceans of liquidity that we will maintain under all circumstances;
4. a first-choice ranking among many owners and managers who are contemplating the sale of their businesses and
5. in a point related to the preceding item, a culture, distinctive in many ways from that of most large companies, that we have worked 50 years to develop and that is now rock-solid." -
Warren Buffett is 84 years old. No one lives forever, but you can build a culture that can endure after you leave. We believe Buffett has achieved this. Berkshire's many operating subsidiaries each have its own good CEO - this will continue once Buffett leaves.
"I'm not embarrassed to admit that Heinz is run far better under Alex Behring, Chairman, and Bernardo Hees, CEO, than would be the case if I were in charge. They hold themselves to extraordinarily high performance standards and are never satisfied, even when their results far exceed those of competitors." -
There are 340 499 people that work for Berkshire. They will continue to produce growth for shareholders. Furthermore, a successor to Buffett has been chosen by the board so there is a plan for the inevitable consequence of age. Despite Berkshire being such a large company it has a culture that "fights the ABC's of business decay, which are arrogance, bureaucracy and complacency:" -
"We do, of course, have an active audit function; no sense being a dammed fool. To an unusual degree, however, we trust our managers to run their operations with a keen sense of stewardship. After all, they were doing exactly that before we acquired their businesses. With only occasional exceptions, furthermore, our trust produces better results than would be achieved by streams of directives, endless reviews and layers of bureaucracy. Charlie and I try to interact with our managers in a manner consistent with what we would wish for, if the positions were reversed." -