By Nicole Friedman
Warren Buffett's Berkshire Hathaway Inc. holds nearly $100 billion in financial-services stocks, underscoring the size of the billionaire investor's ongoing bet on the future of the U.S. economy.
Berkshire's position has built up over years and includes banks, payment companies, insurers and a ratings firm. Taken together, these holdings represent about one-fifth of Berkshire's $488 billion market capitalization. By comparison, at the end of 2010, investments in these kinds of companies accounted for 12% of Berkshire's market capitalization.
Banks are often viewed as a proxy for the wider economy. Berkshire also benefits from banks' rising dividends, adding to the cash that Mr. Buffett can spend on new deals and investments. However, declining interest rates and fears of an economic slowdown have weighed on bank stocks this month.
As of March 31, seven of Berkshire's top 10 stockholdings were financial companies: Bank of America Corp., Wells Fargo & Co., American Express Co., U.S. Bancorp, JPMorgan Chase & Co., Moody's Corp. and Bank of New York Mellon Corp. Berkshire is the biggest shareholder in all but JPMorgan.
Six of those companies have had positive performance so far this year on a total return basis. Moody's has been the best-performing, with a 53% total return so far this year, and American Express is up 34%, according to FactSet. BNY Mellon has fallen 5.6%, according to FactSet. The S&P 500's total return this year has been 18%.
Mr. Buffett, who is known for taking long-term positions, is sometimes reluctant to explain his investment theses on specific companies or sectors. In February, Mr. Buffett told CNBC that financial companies are "very good investments at sensible prices, based on my thinking. And they're cheaper than other businesses that are also good businesses, by some margin."
He added that banks benefited from the 2018 changes to U.S. tax law and that even in a low-interest-rate environment, some large banks continue to generate outsize returns.
"I think [Mr. Buffett] just thinks that the large banks in particular really have some sustainable competitive advantages," said Paul Lountzis, president of Lountzis Asset Management LLC, which owns Berkshire shares.
Berkshire increased its Bank of America stake in July to 950 million shares, just over 10% of the company.
Berkshire's detailed holdings as of June 30 are due to be released in a securities filing Wednesday.
The Omaha, Neb., conglomerate owns dozens of companies, including household names like Dairy Queen and Duracell, and has equity stakes in dozens more.
Berkshire's stockholdings have grown in the past decade as its companies have generated more cash, and an extended bull market and competition from private capital have made it difficult for Mr. Buffett to buy entire companies at attractive prices.
Berkshire's stock investments climbed from $61.5 billion in 2010 to $200.5 billion as of June 30, not including Berkshire's 27% stake in Kraft Heinz Co. During the same period, Berkshire's stock investment in banks, insurance and finance companies rose from $24.6 billion to $96.5 billion, according to the company.
Besides financial companies, the most notable change in Berkshire's stock portfolio is its Apple Inc. position, which has grown from an initial stake of almost $1 billion in 2016 to $50.5 billion as of June 30, according to Berkshire's latest quarterly filing.
True to his long-term focus, Mr. Buffett has held stakes in Wells Fargo, American Express, M&T Bank Corp., Moody's and U.S. Bancorp for more than a decade.
Mr. Buffett scooped up more financial holdings during and following the 2008 crisis. Berkshire bought preferred shares in Goldman Sachs Group Inc. in September 2008, shortly after Lehman Brothers Holdings Inc. filed for bankruptcy. The investment was treated as a major show of faith that the economy would recover and that the U.S. government would step in to prevent further bank failures.
Goldman redeemed the preferred shares in 2011, and Berkshire bought a large stake in the bank two years later.
In 2011, when Bank of America's health was in question, Berkshire bought preferred shares in the company and warrants to buy common stock. It exercised the warrants in 2017 to become the bank's biggest shareholder and netted a gain of about $13 billion.
Last year, Berkshire purchased new stakes in PNC Financial Services Group Inc., Travelers Cos. and JPMorgan.
Not every financial bet has panned out.
Mr. Buffett bought shares of Salomon Inc. shortly before the 1987 market crash, and later stepped in as Salomon's interim chairman after a Treasury-auction bidding scandal. In addition, Mr. Buffett has come under criticism for standing behind Wells Fargo following the bank's sales-practices scandal in 2016. He has said that Wells should have addressed the scandal sooner but he doesn't plan to sell his stake.
While Berkshire is a major shareholder in many of the country's largest banks, it is typically a passive investor.
Mr. Buffett has said he tries not to own more than 10% of a company's stock to avoid additional regulatory requirements, but Berkshire's stakes occasionally grow above that level as companies buy back shares. Berkshire received permission from the Federal Reserve to own up to 25% of American Express stock and has committed to remain a passive investor in the company.
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