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Warren Buffett's announcement Monday that a little-known hedge fund manager, Todd Combs, will help oversee his $100 billion investment portfolio at Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) surprised investors and highlighted Buffett's emphasis on risk management for investment success.
Adding 39-year-old Combs to the Berkshire team makes him a top contender to take over Buffett's investment management duties whenever the Oracle of Omaha leaves his company.
"He is a 100% fit for our culture," said Buffett. "I can define the culture while I am here, but we want a culture that is so embedded that it doesn't get tested when the founder of it isn't around. Todd is perfect in that respect."
In a Berkshire statement, the company said Combs will handle a "significant portion" of Berkshire's portfolio, without providing specifics.
Combs hit Buffett's radar when he sent a letter requesting a meeting with Berkshire Vice Chairman Charles Munger, who then introduced Combs to Buffett.
Combs is a managing partner of Castle Point Capital Management LLC, a Connecticut-based $400 million hedge fund he started in 2005. His ability to manage risk and prevent investments from falling as low as the Standard & Poor's 500 Index during the financial crisis was a major factor in his hiring.
"Buffett wasn't looking for an exciting star," Vidak Radonjic, managing partner at Beryl Consulting Group LLC, told Bloomberg. "He's chosen someone with a low profile who has the skills to help preserve capital by managing downside risk. Combs was able to navigate a difficult 2008 when other hedge fund managers didn't."
Buffett has been emphasizing the need for risk management since he announced a search for an additional investment manager in 2007. In a letter to shareholders Buffett wrote that any replacement candidate would have to be "genetically programmed to recognize and avoid risk, including those never before encountered."
Combs' hedge fund lost 5.7% in 2008 while the industry fell a record 19.0%. Buffett has recognized Berkshire's performance during market downturns as outperforming the S&P 500, even if the company's stock does not always outperform during market upswings.
"Our defense is better than our offense," Buffett wrote to shareholders last year.
Combs took a similar strategy with Castle Point, taking a "value-oriented" approach in stock bets that would "play out over several years," according to a monthly investor letter.
"One of the central objectives with respect to each of our investments is to identify all relevant risks," Combs wrote in an Oct. 19 letter to investors. "If we can find quality businesses at attractive risk-adjusted valuations, then we should be able to meet our investment objectives over time."
Castle Point has lost about 4.0% this year through September, but has seen about 34.0% gains since the fund launched in November 2005, compared with a 5.1% drop in the S&P 500 during the same time period.
Combs' market knowledge and thorough research helped him spot growing problems before the financial meltdown in the real estate and mortgage industries. He took short positions on financial firms that helped save his fund from huge losses on its long positions.
Although Buffett and industry followers praise Combs, Berkshire shareholders were more hesitant with their enthusiasm. Berkshire's Class A shares fell on Tuesday $1,575, or 1.3%, to $123,455.
Combs' Steady Upward Climb
Colleagues described Todd Combs' career, which began at a state-banking regulator and led to hedge fund management, as one focused on hard work and research instead of spotlight-earning gains.
"He's not one of those hedge fund managers who's shot the lights out with stellar returns," Tom Russo, a partner at investment firm Gardner Russo & Gardner, told Bloomberg. "But he has done a great job at preserving capital over the long term. He's not trapped by his own success."
Former co-workers describe Combs as spending a significant amount of time researching, reading newspapers and financial documents and increasing his deep understanding of the financial world.
"He's extremely well-trained, reads 500 pages a week and does his own deep-dive research," Chuck Davis, chief executive of Stone Point Capital who helped Combs start his fund, told The Wall Street Journal.
Combs received an undergraduate degree from Florida State University and a master's of business administration from Columbia University – Buffett's alma mater. He worked for three years with a Florida banking regulator and then worked from 1996 to 2000 as a pricing analyst with The Progressive Corp. (NYSE: PGR).
Combs moved into the hedge fund world by managing investments at Copper Arch Capital LLC before starting Castle Point.
"He was a huge spread-sheet guy," said Scott Sipprelle, who hired Combs at Copper Arch. "He had a very detailed, analytical approach. He was a hard worker but easygoing at the same time, not one of those intense, over-the-top maniac types."
Copper Arch held $1 billion in assets at its peak and modeled its investment strategy after Buffett's by developing a deep understanding of its portfolio's long-term holdings.
Combs has not always adopted the same buy-and-hold strategy, but has managed to avoid some financial pitfalls that hurt other funds. His trading acumen will be tested with Berkshire's much larger portfolio that makes finding big gains more difficult than Combs is used to.
Castle Point's biggest holdings now include U.S. Bancorp (NYSE: USB), MasterCard Inc. (NYSE: MA), The Western Union Co. (NYSE: WU) and The Chubb Corp. (NYSE: CB). Berkshire is also a heavy investor in U.S. Bancorp.
Buffett Leaves Big Shoes to Fill
Buffett serves as chief executive officer of Berkshire as well as chief investment officer, but is splitting those roles among successors. Buffett made a commitment to shareholders in his 2007 annual letter when he announced that he and Munger would look to hire investment managers to ensure the company would be in good hands should anything happen to Buffett. He said he already had candidates in line for the CEO position.
The responsibility involved with a job performed so successfully by Buffett turned some contenders off of consideration. Two candidates took themselves out of the running prior to Buffett choosing Combs, according to Berkshire's leader.
One of the prospects was hedge fund manager Li Lu, who according to Buffett, "decided he would prefer to be where he was. In effect he didn't want the job. I think he made a lot of money doing what he is doing and he has a very good position in life."
Buffett has said the next Berkshire investment manager should not expect a large paycheck, where as some people in similar positions at other firms earn billions over their career.
But industry experts say Buffett has been looking for someone whose main goal was something other than the money.
"Warren has said that he hires people who he likes, those that share his same work ethic and value system," David Kass, finance professor at the University of Maryland, told Bloomberg. "They love their work more than the money."
While Buffett does not plan on stepping down right now and will not hand over all investment responsibilities to Combs, he seems to have found what he has been looking for. Besides his risk management style, Combs brings something else to the table Buffett likes to see: Combs is much more focused on the work and the investors than his own piece of fame.
"For three years Charlie Munger and I have been looking for someone of Todd's caliber to handle a significant portion of Berkshire's investment portfolio. We are delighted that Todd is joining us," said Buffett.
News and Related Story Links:
- Money Morning News Archive:
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- The Wall Street Journal:
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- The Wall Street Journal:
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- Money Morning:
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