Buried in Berkshire Hathaway’s third quarter fine print was a break down of the company’s investment portfolio that confirms that 2016-17 has seen perhaps the most significant change in its composition for decades.
Buffett announced earlier this year that Berkshire no longer regarded IBM as one of its investment ‘pillars’ and had sold around a third of its holding, and the company’s quarterly updates on its investment holdings first revealed a big move into Apple – a decision that Buffett has explained and expanded on several times in the past few months. That was a rise of 14.6% in the quarter (the S&P 500 is up nearly 15% for the year to date!).
The next quarterly update on that portfolio is expected around November 15.
For the year to date the portfolio’s value has leapt $US55 billion or more than 45%. Driving that has been the surge in Apple shares, as a breakdown of the portfolio shows at the end of September and the end of 2016.
The accounts (http://www.berkshirehathaway.com/qtrly/3rdqtr17.pdf) reveal that the value of that portfolio had jumped to more than $US157 billion from $US137 billion at June 30and $US122 billion at December 31, 2016.
The latest report reveals the significant shifts – at the end of September Berkshire said that:
"Approximately 62% of the aggregate fair value was concentrated in the equity securities of five companies: American Express Company – $13.7 billion, Apple Inc. – $21.3 billion, Bank of America Corporation – $17.7 billion, The Coca-Cola Company – $18.0 billion and Wells Fargo & Company – $26.9 billion. At the end of 2016 it was
“Approximately 62% of the aggregate fair value was concentrated in the equity securities of five companies: American Express Company – $11.2 billion, Apple Inc. – $7.1 billion, The Coca-Cola Company – $16.6 billion, International Business Machines Corporation – $13.5 billion and Wells Fargo & Company – $27.6 billion."
And signalling the benefits of the stockmarket surge and the change in the mix the unrealised losses on equity securities in a continuous unrealised loss position for more than twelve consecutive months were $US94 million at September 30, down sharply from $US551 million which reflects the dropping of IBM, the rise in the value of Coca Cola shares (a dip in the value of the Well Fargo holding, which was partly reduced earlier in the year) and the addition of Apple and its huge capital gains for Berkshire.
The comparison shows that the value of the Apple holding has risen by $US14 billion because of the mix of the rise in the share price and the purchasing of more shares. That more than outweighed the value of the IBM holding at the end of December of $US13.5 billion.
The conversion of the preferreds in the Bank of America into 700 million shares at a cost of around $US7 billion shows the patience and skill of Buffett’s reputation. Berkshire pointed to a significant change to the reporting of these unrealised gains next year that will distort the company’s reports.
"In the first nine months of 2017, net unrealized gains related to our investments in equity securities (after-tax and net of noncontrolling interests) included in other comprehensive income were approximately $10.9 billion. Beginning in 2018, unrealized gains and losses on equity securities will be included in earnings after the adoption of a new accounting standard required under U.S. GAAP.
"We believe that investment and derivative gains/losses, whether realized from sales or unrealized from changes in market prices, are often meaningless in terms of understanding our reported results or evaluating our economic performance. Investment and derivative gains and losses have caused and will continue to cause significant volatility in our periodic earnings,” directors explained.