Berkshire's days of “amazing” gains are over.

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Challenges facing Buffett's successors

The acrimonious death of Berkshire Hathaway vice chairman Charlie Munger in November turned investors' attention toward the company's prospects without Warren Buffett at the helm. Greg Appel, Buffett's designated successor, and Todd Combs and Ted Wechsler, his investment deputies, are lined up to guide the giant.

Buffett's annual letter on Saturday laid out in no uncertain terms the challenges they will face, my colleague Eric Platt reported in New York.

The so-called Oracle of Omaha has warned Berkshire shareholders that his sprawling $905 billion conglomerate has “practically no potential for eye-catching performance” in the coming years. He said there have been few deals that have offered the kind of transformative impact that previous acquisitions have had, such as its purchases of insurers Geico and National Indemnity or the railroad BNSF.

“There are still only a handful of companies in this country capable of making a real difference at Berkshire, and they have been chosen by us and endlessly by others,” he said. “Outside the US, there are essentially no candidates who represent meaningful options for deploying capital at Berkshire.”

It's a problem Buffett has been staring at for nearly a decade as the growth of Berkshire's operations and cash levels worsened.

The company has spent billions of dollars acquiring truck stop operator Pilot Flying J and insurance conglomerate Alleghany in recent years, adding it to a portfolio that includes ice cream provider Dairy Queen and utility giant Berkshire Hathaway Energy.

But these expenses have only put a dent in Berkshire's cash pile, which continues to rise. It reached a record level of $167.6 billion at the end of 2023, an increase of $39 billion over the course of the year.

“Size has helped, although increased competition for purchases has also been a factor,” Buffett said. “For a while, we had an abundance of candidates to evaluate. If I missed one — and I missed many — another always came along. Those days are long behind us.”

Buffett also used his letter to memorialize Munger as the architect of modern Berkshire Hathaway, describing the 99-year-old's relationship with him as “part big brother, part loving father.”

“In the physical world, great buildings are associated with their architect, while those who poured the concrete or installed the windows are quickly forgotten,” Buffett said. “Berkshire has become a great company. Although I have been in charge of the construction crew for a long time, Charlie should forever be credited with being the architect.

Crisis at Hargreaves Lansdowne

In November 2020, there was a flurry of trading among retail investors to capitalize on the sharp market rally caused by positive news about the COVID-19 vaccine.

Hargreaves Lansdown was one of at least 10 of the world's largest brokerages that found its systems cumbersome. The UK's largest DIY investing platform and so-called fund supermarket has seen an outage as well as thousands of duplicate trades, leaving some accounts in debt and causing severe pressure on investors.

In this big read, Arjun Neil Aleem and I explore how criticism of legacy IT infrastructure is just one of the many challenges facing Hargreaves Lansdown and its new chief executive Dan Ollie.

Its dominant position is now under threat due to sweeping changes in the investment landscape, most notably stricter regulation and intense competition from a new generation of digital platforms – among them the likes of Robinhood, eToro and Trading 212 – that aim to make better use of technology. And charge much lower fees.

These industry shifts exacerbate the firm's difficulties, including reputational fallout from its involvement with disgraced star fund manager Neil Woodford that continues to haunt it.

In December, Hargreaves Lansdown was dropped from the FTSE 100 index for the first time since 2011. Its share price has fallen by two-thirds from its peak in May 2019. In a sign that investors believe its shares may decline further, The company is the third largest shorted stock in the UK.

One hedge fund manager, who has a short position in Hargreaves Lansdowne, said its business model faces “structural challenges… It has a very high market share, but it offers a lower-quality product and charges excessive fees for it.” He estimated that the combination of fee reductions to make itself More in line with competitors and ending the temporary spike in profits you make from retaining customer money could herald a 70 percent drop in profits.

Crucially, high interest rates came to Hargreaves Lansdown's rescue. “Earnings would have collapsed if prices had not risen and they had not overcharged customers for their money,” the short seller added. This is something the UK regulator, the Financial Conduct Authority, is now looking at.

Read the full story here

Chart for the week

European investors have been piling into the region's risky corporate bonds for the big returns on offer, as they grow more confident in companies' ability to refinance their debt, writes Mary McDougall in London.

A record $1.2 billion has flowed into European-listed exchange-traded funds that invest in high-yield bonds in the region this year as of Thursday, according to BlackRock data. This compares to flows into European-listed ETFs that invest in US high-yield bonds of just under $200 million.

This is the first time European ETF investors have favored “junk” bonds in their home market over the US since 2019. Many believe that a slightly better performance than feared by regional economies means a more painful recession can be avoided, while… Low inflation will exacerbate the problem. Allowing central banks to lower interest rates, creating a supportive backdrop for junk bond issuers.

In contrast, the strength of the US economy and high levels of government spending relative to taxes could convince the Fed to keep interest rates high for some time, investors say, which could hurt lower-quality companies.

“The European economy has been weak and divergent from the US over the past two quarters, but, with the exception of German manufacturing, we believe this economy is starting to decline and then improve,” said William Vaughan, associate portfolio manager at Brandywine Global. Bond yields have fallen enough from their peak that we are seeing demand [from companies and households] In order to move forward with credit.”

Five stories not to miss this week

Chris Rukos's hedge fund made more than $1 billion in profits this year after a bet on US interest rates paid off. Ruckus Capital Management, which manages about $16 billion in assets, was up 8.8 percent in 2024 through February 16. She told investors that the gains were largely driven by the recent sell-off in bond markets.

Billionaire Michael Dell's investment vehicle has agreed to back two former top Goldman Sachs executives, Tom Connolly and Mike Koester, who will launch a private credit investment firm. Dell's family office, DFO Management, has agreed to provide the first outside capital to 5C Investment Partners. The company's first fund plans to provide high-quality loans to medium and large companies.

Private equity firms are increasingly raising money to buy individual companies on a deal-by-deal basis, as they struggle with a market downturn and investors look for ways to cut management fees. A record $31 billion was distributed by “deal-by-deal” investors last year, according to private equity advisory firm Triago, in defiance of a broader decline in dealmaking and fundraising in the industry.

Our US Finance Editor Brock Masters wonders if there's a pension revolution in the US. She believes IBM's decision to bring back its defined benefits system makes business sense, and other companies should follow suit. The results of switching to defined contribution plans, or 401k plans in the 1980s, don't look pretty. The typical Gen

Meanwhile, the UK's £1.4 trillion DB pensions industry has turned to corporate debt for its higher returns and to prepare potential sales plans for insurers. Pension funds are piling into UK corporate bonds, encouraging some French and German companies to issue sterling debt for the first time. This has led to the start of the busiest year in a decade for European investment grade issues from non-financial companies.

And finally

Five buzzing urban headlines for next weekend, courtesy of HTSI.