This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- The Gates Foundation Trust is selling off many major positions.
- Its Berkshire Hathaway stake was trimmed heavily.
Billionaires Warren Buffett and Bill Gates have been close friends for decades. Unsurprisingly, the Gates Foundation Trust owns more than 21 million shares of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) -- a stake worth around $11 billion. The Gates Foundation Trust sold many stocks last quarter, including part of its Berkshire Hathaway stake.
Why did Gates sell 2.4 million more shares of Berkshire last quarter? There are two obvious reasons
1. Berkshire Hathaway is holding a lot of cash
It's no secret that the stock market in general is getting pretty expensive. The S&P 500 currently trades at roughly 30 times earnings, nearly twice its long-term historical valuation. With that in mind, it would make sense that skilled investors are having a tough time finding market values. Just take a look at Buffett's holding company, Berkshire Hathaway. Buffett has long warned against market timing, yet Berkshire now has more than $380 billion in cash -- more than one-third of its entire market cap!
This oddly makes Berkshire a wonderful investment for those who are worried about the market. It's like buying a mutual fund that has 30% of its investments in cash. If the stock market declines by 10%, you could expect this fund to fall by only 7% if all else were equal. But Berkshire holds a bigger advantage than simply buffering the effect of a market decline. If markets were to experience a correction, Berkshire now has a ton of cash it can deploy at lower valuations. Few investors have this advantage: the ability to put a ton of cash to work while markets are crashing.
In essence, Berkshire is a fantastic choice for nervous investors. By buying shares, you keep your money invested, but have the ability to both shoulder marketwide declines and take advantage of potentially lower valuations if a correction does occur. The portfolio managers at the Gates Foundation Trust are likely aware of these advantages, which may explain why Berkshire is the trust's biggest position. But like Buffett, these portfolio managers may be getting nervous about the market's high valuation. Of the trust's 25 holdings, 12 experienced net selling last quarter. A total of zero positions were increased. So while Berkshire may be a relatively safe stock during market downturns, it appears as if the Gates Foundation Trust is so nervous that even Berkshire isn't a candidate for buying at current levels.
2. Selling Berkshire stock balances the Gates Foundation Trust's other bets
Selling Berkshire stock has one other benefit for the Gates Foundation Trust's portfolio: more balanced diversification.
Even after the selling, Berkshire remains the trust's largest position, with a 25% portfolio weight. That's right: Roughly one-quarter of the trust's entire portfolio is invested in one stock. Granted, Berkshire itself is fairly diversified, with interests across dozens of industries and geographies. But it's still a single business, leaving the trust's portfolio relatively undiversified versus broader market indexes.
The latest sales brought down Berkshire's portfolio weighting from 30% to 25%. The selling also occurred near Berkshire's all-time highs -- both in terms of trading price and relative valuation. Last quarter, for instance, Berkshire stock had a price-to-book ratio of around 1.6. Over the past decade, however, shares have usually traded between 1.2 and 1.5 times books value. So while the net selling of Berkshire stock by the Gates Foundation Trust may relate to market valuations and diversification needs, it may also be an indication that it simply thinks that Berkshire stock is overvalued. The fact that Buffett himself declined to execute any share repurchases last quarter backs up this belief.
Both Gates and Buffett have preached long holding periods. Buffett is clearly nervous about today's market valuations, leaving him so unable to find deals that he needs to sell down top positions simply to hold cash. The selling by the Gates Foundation Trust seems to mirror this nervousness. But remember that this isn't Gates' personal portfolio -- it is the portfolio of a charitable trust whose primary mission is to distribute profits to other causes. Selling, therefore, could simply be the trust delivering on its mission statement, and not a signal of its skittishness over current market valuations.
Still, the foundation has been a net buyer of stock is previous quarters. So while the selling isn't a smoking gun, it's another potentially bearish sign for investors.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
