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Buffett Plans Retirement, Considers Successors MoneyNews
(Headlines - scroll down for full stories)
Warren Buffett has retirement on his mind, and he wants his successor - whoever that may be - to think big in order to move Berkshire Hathaway's stock deeper into profitable territory. In his annual letter to shareholders released on Saturday, the Oracle of Omaha let them know that a succession plan is in place and a pool of potential heir apparents has been selected to run Berkshire when Buffett retires. But once that successor takes over the Nebraska-based investment company, finding those major acquisitions to fuel Berkshire's growth is likely to become more difficult - especially during the first few years.
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In the letter, the 75-year-old Buffett said the board had designated a successor from among three "reasonably young and fully capable" internal candidates. Buffett, the world's second-richest person, has run Berkshire since 1965. "Berkshire's board has fully discussed each of the three CEO candidates and has unanimously agreed on the person who should succeed me if a replacement were needed today," Buffett wrote. "I feel terrific," he added. Buffett is definitely paving the way for his exit. In February, he also announced that he would be leaving Coca-Cola's board of directors - although at the time, he said he was doing so to devote more time to running Berkshire Hathaway. Dismissing reports that the company was struggling with its stock portfolio, Buffett called 2005 a "decent year" for Berkshire as the company's net earnings grew nearly 17% to $8.528 billion.
"Over the years, our current businesses, in aggregate, should deliver modest growth in operating earnings," Buffett wrote. "But they will not in themselves produce truly satisfactory gains. We will need major acquisitions to get that job done." Financial industry observers say that whoever succeeds Buffett at the Berkshire helm will face tough sledding. Steve Kaplan, a University of Chicago professor of finance and expert in corporate governance, told the Associated Press that businesspeople bring deals to Berkshire Hathaway because of Buffett. And when he goes, the luster may disappear with his legacy. "The reason people are willing to sell to Berkshire Hathaway is because of Buffett, not because it's Berkshire," Kaplan said. He adds that five big recent deals were completed after executives contacted Buffett personally. "He sees deals that other people don't," Kaplan said. "That will not be true of his replacement." "I really don't worry about Berkshire's operations," said Keith Trauner, who helps invest $3.3 billion at Fairholme Capital Management in New Jersey, including 15% in Berkshire. "I worry more about the investment side, where Berkshire will almost certainly not be as strong without Buffett. That does not mean it will be bad." Buffett also told investors that Berkshire's net worth grew by $5.6 billion in 2005. That increased the book value - assets minus liabilities - of both classes of Berkshire stock by 6.4%, beating the S&P gain of 4.9% for the year. Editor's Note:
2. Investors Jump at Emerging-Market 'BRICs' It's no secret that Wall Street likes to hop on to the next emerging market trend. Investors have been doing so for years - from Japan to China to Ireland and so on down the line. But now The Wall Street Journal is commenting on a new form of emerging-market investing that bundles stocks from some of the hottest market sectors across the globe, such as those of Brazil, Russia, India and China. They're called "BRICs" - named after the first letter of each of the four countries - and they're starting to catch fire, The Journal says. "Goldman Sachs popularized the term in a 2003 report that suggested these four economies might one day surpass Japan and the West as the most important in the world," The Journal reports today. "By 2050, Goldman ventured, only the U.S. and Japan could have larger economies than any of the BRICs." Other investment firms have climbed onto the bandwagon, with Deutsche Asset Management, Schroders Investment Management, Franklin Templeton Investments and HSBC Asset Management now offering BRIC funds to clients here in the U.S. and overseas. Such companies are already seeing an influx of interest from individuals with high net worth, the paper reports. While technically not mutual funds - at least until the Securities and Exchange Commission decides they are - returns from BRICs have been "eye-popping," according to The Journal. The Morgan Stanley emerging market index is up a pedestrian 17.1% since 2002. Comparatively, Morgan's BRIC index is up 262%. "The interest in BRICs underscores the recent mania for emerging markets, and how the countries with the biggest populations are attracting a disproportionate amount of attention," The Journal says. "The new BRIC funds also reveal how fund companies act to capitalize on new trends - even ones that have timetables stretching out to mid-century." "It's a fad, not an investment thesis, that reminds me of the old Internet funds," Robert C. Pozen, chairman of MFS Investment Management in Boston, tells the paper. He recommends owning a diversified emerging-market funds that offers exposure to a broader array of companies. While the Morgan Stanley numbers are indeed amazing, BRICs really haven't been around all that long - plus, BRIC markets like China and Russia are extremely volatile, with a lousy record on shareholder rights. "Others note that rapid economic growth isn't the same as strong stock-market returns," says The Journal. "China's economy, for instance, has expanded at an annual rate of 7% to 10% for the past 10 years, while its stock-market returns have moved up and down but essentially are flat over that period." But try telling investors that - especially when firms like HSBC Asset Management are whetting their appetites by successfully launching BRIC funds - HSBC has seen its numbers rise 65% and its assets grow to $2.8 billion since inception in the spring of 2005. Then there's Schroders' BRIC funds, registered in Asia and Europe, which launched with $10 million last November and already has $900 million in assets. Australian investment Web site MoneyManagement.com.au cites ING director and head of emerging markets Jan-Wim Derks, who says, "For 2006, we think the BRIC economies will continue to grow their economies much faster than the main developed markets: Brazil plus 3.5%, Russia plus 6%, India plus 7%, China plus 8.5%, versus U.S. plus 3.5%, Japan plus 2.6% and Europe plus 2.1%. "The macroeconomic fundamentals of the BRIC economies will continue to improve." So how can more U.S. investors get some BRIC exposure? The Journal recommends using diversified emerging-market funds. "Fund tracker Morningstar says there are 20 funds, including ones from OppenheimerFunds and Pioneer Investment Management, with a third or more of their assets invested in the stocks of the four BRIC countries," says The Journal. "Alternatively, there are exchange-traded funds or closed-end funds for each of the four countries, though total fees would be considerably higher to invest in four separate funds."
But advisers do caution investors to weight the higher risk of such funds. Editor's Note:
3. Wireless Internet Calling Competition Heats up
It seems AT&T is making a major move to catch up with its competitors. "Internet calling has already taken off in the landline world, allowing millions of customers to save money by having their phone calls travel through the Internet instead of telephone landlines," says the newspaper. "Now, phone companies, wireless carriers, cable companies and start-ups are all developing services that will enable cellphone calls to travel over the Internet as well." The idea is to create a hybrid handset that not only serves as a cellphone but also is capable of routing calls over the Internet when it detects a wireless high-speed Internet network, such as those increasingly found in cafes, airports and other public places. While AT&T's competitors are already selling such devices, none are yet available in the U.S. Cingular Wireless, America's largest wireless provider, is now a joint venture of AT&T and BellSouth. The cell phone giant "says it is exploring technologies to offer a hybrid phone that would use the Internet networks of AT&T and BellSouth," according to WSJ. A Cingular spokesman says that, long-term, the merger will make it easier to eventually integrate landline and wireless services, as "having one owner makes governance simpler, and makes decision-making simpler." Meanwhile, other wireless firms like T-Mobile and Sprint Nextel have plans to sell Internet-cellular phones and services within the next two years. But others are trying to get in on the act as well. Many cable companies are touting Internet telephony over their broadband networks - allowing them to breach the wireless sector without having to spend money on network infrastructure. Across the telecom sector, companies are clamoring to create the most cost-effective bundles (TV, phone, Internet services), hoping to eventually provide all services in one efficient package. "They all want to be the company to deliver movies and content to your house, be your wireless provider and deliver your Internet and phone service," Jupiter Research wireless analyst Julie Ask tells WSJ. "They want to do it all." Meanwhile, AT&T and others are taking a large risk by venturing into these new waters. By offering lower-cost mobile calling over the Internet, many subscribers may choose to purchase less minutes for their cell phones. Plus, the handsets will initially be quite expensive - much more costly than most mobile phones currently on the market. With these problems and other technical challenges, time will tell whether the venture into wireless Internet calling proves profitable.
Editor's Notes:
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