Buffett's Combs Pick Means Defense Beats Offense at Berkshire

Warren Buffett’s selection of little-known hedge-fund manager Todd Combs to help oversee investments at Berkshire Hathaway Inc. shows how the billionaire values limiting losses when markets decline.

“Buffett wasn’t looking for an exciting star,” said Vidak Radonjic, managing partner at Beryl Consulting Group LLC, which advises clients on investing in hedge funds. “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.”

Combs, 39, who ran his own $400 million hedge fund Castle Point Capital Management LLC, lost 5.7 percent in 2008, according to an investor letter, while the industry slumped a record 19 percent, Hedge Fund Research Inc. data show. Buffett, 80, who built a stock portfolio valued at more than $50 billion through four decades, has said Berkshire’s advantage over the Standard & Poor’s 500 Index is biggest when the benchmark falls.

“Though we have lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the eleven years during which it delivered negative results,” he said in a letter to shareholders this year. “Our defense has been better than our offense.”

Combs’s Castle Point had a “value-oriented” investment strategy, betting on and against financial services stocks in wagers that “play out over several years,” according to the monthly letter.

‘Spread-Sheet Guy’

“He was a huge spread-sheet guy,” said Scott Sipprelle, who hired Combs about eight years ago at Copper Arch Capital LLC and now runs Westland Ventures, a Princeton, New Jersey-based investment firm. “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.” Sipprelle is running for the U.S. House of Representatives as a Republican.

Combs started Castle Point in 2005 with backing from Stone Point Capital, the private-equity firm whose chairman is Stephen Friedman, a former Goldman Sachs Group Inc. executive. Friedman was chairman of the board at the Federal Reserve Bank of New York before resigning last year.

“One of the central objectives with respect to each of our investments is to identify all relevant risks,” Combs said in an Oct. 19 letter to investors touting Western Union Co., the world’s biggest money-transfer business. “If we can find quality businesses at attractive risk-adjusted valuations, then we should be able to meet our investment objectives over time.”

‘Genetically Programmed’

Buffett has said his preferred time to hold a stock is “forever” and built stakes in companies such as Wells Fargo & Co., American Express Co., Coca-Cola Co. and Kraft Foods Inc. that he believes have durable advantages over competitors. Omaha, Nebraska-based Berkshire was looking for managers “genetically programmed” to avoid large risks, Buffett wrote in 2007 when he discussed the search for an investment manager to assume some of his duties.

Castle Point has lost about 4 percent this year through September, after gaining 6.2 percent last year, according to the letter. The Greenwich Connecticut-based fund returned 19 percent in 2007 and 14 percent the previous year.

Hedge funds have returned 4.8 percent this year through Sept. 30 and 20 percent in 2009, according to Chicago-based Hedge Fund Research. The industry climbed about 10 percent in 2007 and 13 percent in 2006, according to the research firm.

“He’s not one of those hedge fund managers who’s shot the lights out with stellar returns,” said Tom Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, who owns Berkshire shares. “But he has done a great job at preserving capital over the long term. He’s not trapped by his own success.”

Castle Point returned 33 percent from November 2005 through Sept. 30, according to a company document, compared with a 5 percent gain for the S&P 500, including reinvested dividends.

MasterCard, Western Union

Castle Point’s largest holdings as of Sept. 30 included U.S. Bancorp, MasterCard Inc., Western Union and Chubb Corp., the firm said. Berkshire has the third-largest holding of U.S. Bancorp, according to data compiled by Bloomberg.

Combs will handle a “significant portion” of Berkshire’s portfolio, the company said in an Oct. 25 statement without providing specifics. Berkshire also has a fixed income portfolio valued at more than $30 billion. Buffett and Combs didn’t respond to messages seeking comment.

Before starting his own firm, Combs oversaw financial- services investments at Copper Arch, the New York-based hedge fund started by Sipprelle, a former Morgan Stanley managing director. The fund was shuttered in 2007.

Combs worked at auto-insurer Progressive Corp. from 1996 to 2000 as a pricing analyst and before that he spent three years working for the Florida banking regulator, according to information sent to investors.

Work Ethic

Combs received an undergraduate degree from Florida State University and a master’s of business administration from Columbia University, where Buffett studied.

Buffett, chairman and chief executive officer of Berkshire, is seeking candidates to take over his duties when he steps away. He said in 2006 that hedge funds, which he described as “hyper-helpers,” overcharge investors.

“Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky,” he said in an annual letter.

“He’s not tarring every hedge fund manager with the same brush,” said David Kass, finance professor at the University of Maryland. “Warren has said that he hires people who he likes, those that share his same work ethic and value system. They love their work more than the money.”

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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