Warren Buffett’s shifting Asian portfolio

OMAHA, U.S. — For Antonius Budianto, an independent stock investor from Indonesia, it was a dream come true to be in Omaha, Nebraska for the first time.

Traveling from East Java with his wife and 14-year-old daughter, Antonius was standing in a queue in front of Omaha’s CHI Health Center at 3 a.m. to grab a seat at the annual general shareholders meeting of investment company Berkshire Hathaway on May 6. Antonius said they wanted to be “as close as possible” to the podium as his two business idols — Warren Buffett and Charlie Munger — sat and took questions from shareholders in the audience and around the world.

Antonius has been investing in listed stocks in Indonesia for over 20 years, faithfully following the Buffett method: focus on a few companies with strong earnings, handsome dividend payments and sound corporate governance, and hold on to them, sometimes for decades. At Berkshire, this strategy has been distilled into the oft-repeated maxim: “Just hold the goddamn stock,” as Munger put it that day.

For his part, Antonius has been making a living as a full-time professional investor since 2010.

“[I am] very tired, but satisfied,” he told Nikkei Asia after the meeting, adding that he had gained “so much knowledge” from the two nonagenarians, who fielded dozens of questions for over five hours.

Antonius is one of over 30,000 attendees who made the pilgrimage to this small Midwestern city to hear what the “Oracle of Omaha” had to say.

Berkshire’s 92-year-old chairman and CEO, who famously prefers to dine on steak, french fries and Cherry Coke, and rarely leaves Omaha, dispensed homespun investment advice and economic forecasts, not to mention life philosophy: “Write your obituary and then try and figure out how to live up to it,” he said.

Berkshire Hathaway’s equity portfolio is as homegrown as Buffett is. Among its equity investment portfolio of $328 billion at the end of March, 77% is made up of five U.S. shares — Apple, Bank of America, American Express, Coca-Cola, and Chevron.

Recently however, adding to this run of American companies Buffett has begun increasing his direct exposure to Asia — starting with an investment in PetroChina in 2002, then in South Korean steelmaker Posco for about a decade beginning in 2006. In 2008, he started investing in Shenzhen-based electric carmaker BYD. Asia now accounts for much of the growth in the Berkshire Hathaway portfolio, and a much higher proportion of the excitement surrounding Buffett’s next moves.

Indeed one recent Asia-based event stood out for the meeting attendees. In an uncharacteristic U-turn, the famously long-term Berkshire Hathaway in 2022 bought a $4.1 billion stake in Taiwan Semiconductor Manufacturing Co. (TSMC), one of Asia’s most valuable and innovative companies, only to sell it a few months later. In the latest quarterly filing in May, TSMC was gone from Berkshire’s holdings.

The decision appears to underline a lack of appetite for geopolitical risk at Berkshire Hathaway, which may sit uneasily with its new foreign stakes.

Buffett hinted earlier in an exclusive interview with Nikkei Asia in mid-April during his visit to Japan that the geopolitical issue was “certainly a consideration,” as the geography of TSMC mattered. “Is there a difference between that being located in Omaha, Nebraska, and in Taiwan? Yes,” he said.

When pressed by a shareholder at the AGM on the timing of the sales, as geopolitical issues surrounding Taiwan “were seemingly no different than when you acquired that stock,” Buffett did not directly answer the question. “I don’t like its location, and I’ve reevaluated that,” he said.

Buffett praised TSMC at the AGM as “one of the best managed and an important company in the world,” adding that he played bridge with TSMC’s founder Morris Chang in Albuquerque, New Mexico.

Meanwhile, in April, Buffett took a trip to Japan where he announced in an interview with Nikkei that he had increased previously held stakes in five of Japan’s oldest conglomerates to 7.4%. These are Itochu, Marubeni, Mitsubishi Corp., Mitsui & Co., and Sumitomo Corp. The aggregate market capitalization of Berkshire’s holdings in the Japanese trading houses as of May 19 was about 2.1 trillion yen ($15.2 billion), making this cluster its largest investment outside the U.S.

“I feel better about the capital that we [have] deployed in Japan than in Taiwan,” the 92-year-old investment guru told shareholders. He did not directly spell out the word geopolitics at the AGM, but said, “[I] wish it weren’t so, but I think that’s a reality and [we] recalculated in light of certain things going on.”

One of those “certain things” is very likely to be the geopolitical risk caused by the mounting U.S.-China tensions in the Taiwan Strait, though it remains unclear to shareholders and analysts what had changed between the first purchase between July and September when Buffett amassed the position and the following March, by which time he had sold all shares.

Aside from his apparent concern for security, shifting his Asia exposure away from greater China and Taiwan and over to Japan was a “simple” decision, according to Buffett. The Japanese companies have a track record of solid earnings, decent dividends, and steady share buybacks — which Buffett repeatedly speaks in favor of, as buybacks increase the ownership of a company without actually purchasing more of it.

Moreover, all five Japanese conglomerates were trading below book value with dividend yields of about 5% when Buffett entered in 2019. He told CNBC during his visit to Japan in April: “They were selling at what I felt was a ridiculous price, particularly the price compared to the interest rates prevailing at that time.”

The latest annual results by the five trading houses released by May 9 show large increases in profits and dividends. For the financial year ended in March, the aggregate net profit for the five companies was 4.2 trillion yen, up 19% from a year earlier. The total cash dividend payout was 957 billion yen, marking an increase of 20%.

Presuming Berkshire has acquired 7.4% shares in the companies before ex-dividend rights of March 31, the estimated dividend income will be about $510 million. According to the dividend payment plans for the five companies, that figure is expected to jump to $565 million for the current financial year to close in March 2024.

These figures are close to what Berkshire received in dividends last year from its core holdings in Coca-Cola, which was $704 million.

Why Japan?

Part of the appeal of the Japanese trading companies is that they are “understandable,” as Buffett put it, as they hold many similarities with Berkshire Hathaway itself. Like the Japanese conglomerates, Berkshire Hathaway is a holding company comprised of many assets.

The English translation of “trading houses” is a bit deceptive. The original Japanese term sogo shosha literally means “comprehensive commercial company,” and that seems to be closer to the reality.

Japan’s trading houses originally emerged around the time of the Meiji Restoration in 1868, when the country turned away from rule by the pre-modern Tokugawa Shogunate and toward modernization modeled on the West.

The roots of Mitsui and Sumitomo go back even further, to the 17th century. The former originated as a kimono retailer in Edo, modern-day Tokyo, which is now Isetan Mitsukoshi Holdings, one of the largest department store concerns in the country. The latter started as a bookstore and pharmacy in Kyoto, and later branched into the copper mining and refining business, a precursor to present-day Sumitomo Metal Mining.

Itochu and Marubeni used to be the same entity. It started out at the end of the Tokugawa era as a hemp cloth peddler based in Japan’s Kansai region. It split into two companies after World War II. Mitsubishi is the newest among the five, founded in the early days of the Meiji era as a shipping merchant.

Berkshire is also a conglomerate with six operating segments, namely insurance, railroads, utilities and energy, manufacturing, wholesale groceries distribution, and service and retailing. Berkshire owns and runs real businesses, such as auto insurer GEICO, See’s Candies, and the operator of Burlington Northern Santa Fe (BNSF), one of the largest North American railways.

Investing in Japan came with an added incentive in the form of extremely cheap finance. Berkshire Hathaway raised Japanese cash through a series of local bonds over the past five years, obtaining significantly lower interest rates compared to those in the U.S., which removed any currency risk from the deal.

“Everything works so well,” Buffett told shareholders at the AGM. “We’re not done in terms of what may come along [in Japan].” Other than his declared intention to further enhance shareholdings in the five trading houses to 9.9% each and to consider potential collaborations, “we’ll just keep looking for more opportunities,” he added, without elaborating.

Greg Abel, Berkshire’s comparatively young 60-year-old vice chairman who was reaffirmed as successor to Buffett during the AGM, accompanied his boss on his trip to Japan in April to “build trust with these Japanese companies.”

“We hope there’s long-term opportunities” in the country, Abel said. Taking his heir-apparent to Japan for a meeting with the top management of the five trading houses was widely viewed by Japanese partners as an indication of Buffett’s dedication to staying as a long-term investor, even after he steps down in the future.

Indirect China exposure

For Buffett to travel outside the U.S. is extremely rare. This was only his second visit to Japan since November 2011, after the devastating earthquake and tsunami that hit Fukushima and the northeast. He has invested in a Fukushima-based cutting tool maker called Tungaloy since 2008 through IMC Group, a directly controlled company in Berkshire’s manufacturing segment. Tungaloy produces carbide metalworking tools.

Buffett visited Tungaloy again during his most recent trip with Abel, but the Fukushima-based company declined to comment on the details of the trip.

Meanwhile, the trading companies were eager to disclose their encounters with Buffett to the Japanese media. Kenichi Hori, president and CEO of Mitsui, described the meeting with Buffett and Abel in Tokyo as “fruitful,” as he felt Berkshire management understood their business model.

“Due to the current geopolitical situation where volatility has risen significantly,” Hori told reporters on May 2, “we need more intricate offerings in order to add new value to any business propositions, unlike the time when straightforward globalization was happening.”

Though Hori stopped short of being explicit, he suggested the ground rules for globalization has shifted to a more complex one, given the ongoing Sino-American rivalry that has triggered decoupling and a gradual formation of a dual-track supply chains.

The five Japanese trading companies have varying levels of exposure to China. Their various natural resource-related businesses are highly reliant on Chinese demand, and they have direct investments in the country.

Itochu’s former chairman was the Japanese ambassador to China. The company has also held tripartite capital and strategic tie-ups with Chinese state-owned conglomerate Citic and Charoen Pokphand Group, a Thai conglomerate with heavy exposure to China, for almost a decade.

Richard Kaye, portfolio adviser and analyst at Comgest Asset Management Japan, believes another reason why Berkshire chose to invest in top trading houses is so they could act as “proxies” to gain exposure to China’s growth, as the business connections and interactions between the two countries are very close.

“Japan is the best platform in the world to invest in the growth of China,” said Kaye, who manages about 10 billion yen worth of Japanese equity in the French asset management company.

Berkshire’s commitment to Japan has stimulated renewed interest in the country’s equity market. The Nikkei Stock Average, the key benchmark, rose almost 40% since Buffett issued a statement exposing his investments in the five trading companies through official disclosures at the end of August 2020. The index exceeded the 30,000 yen mark and is approaching its all-time high, reached in December 1989.

“It’s taken us 30 years to get back here. But the reasons to be bullish are obvious,” Toby Rodes, co-founder of the Boston-based Japan-focused investment fund Kaname Capital, told Nikkei. “The Japanese market is demonstrably cheaper than the last time when it hit this level. That’s the reason why Warren Buffett and a lot of people are attracted to this market, because they see true value.”

‘Just the beginning’

As part of his shift to Japan, Buffett has been walking away from his investments in greater China, which he started in 2002-2003, with a $488 million stake in state-owned PetroChina. At the time, the revelation of his purchase of PetroChina shares was a surprise given Buffett’s longtime investment posture of being American-only.

Before PetroChina, the only significant foreign equity holding Berkshire had was the Irish brewery Guinness, in the early 1990s. As Alice Schroeder, the author of Buffett’s biography “The Snowball” pointed out in her book, he would only buy into non-U.S. stocks “under the right circumstances,” but she argued that Buffett “did not spend time seriously studying foreign stocks until opportunities in the U.S. began to thin.”

Berkshire came under severe fire for the PetroChina investment, along with other Western investors holding stakes in the company, as violence in Sudan’s Darfur intensified in 2007. PetroChina’s parent, China National Petroleum Corp. (CNPC), owned a substantial stake in the local oil company, and pressure was mounting on Berkshire to divest from companies that supported serious human rights crises. In February 2008, Berkshire declared it had sold its entire PetroChina holdings the year before. The two reasons Buffett cited were the significant rise in oil price and the subsequent rise in stock price, with no mention of the Darfur crisis.

PetroChina’s H-share price peaked in November that year at HK$20.25, probably after Berkshire’s sell-off, and has not reached that level since. The Hong Kong closing price on May 19 was HK$5.4. Though it turned into a public-relations nightmare, Buffett’s first endeavor in China was a great success.

Berkshire’s latest big China bet is BYD, an electric vehicle maker in which Buffett first invested 15 years ago, and which now is set to become China’s largest-selling car brand, on track to displace Volkswagen this year.

According to the latest disclosures made to the Hong Kong exchange in early May, Berkshire now owns 108.34 million shares in BYD, about 3.7% of the total, including Shenzhen listed shares, which is less than half of 225 million shares it originally acquired in September 2008.

As the original purchasing price was 8 Hong Kong dollars apiece and with the selling prices at around HK$200 or above, Berkshire is estimated to have gained over HK$6 billion ($765 million) in cash and over HK$5 billion in profit so far.

However, there has been no clear indication from Berkshire management on why they are selling BYD. Skepticism over the future of the auto industry may have coincided with geopolitical considerations over China.

“[The] auto industry is too tough,” said Buffett at the AGM, making reference to the fate of Henry Ford to make his case on the difficulty of maintaining a leading position in the sector. Ford invented the Model T by introducing a revolutionary mass production method and “owned the world” at one point, but only 20 years later, “he was losing money.”

“It’s a business where you have a lot of worldwide competitors,” Buffett said. “They’re not going to go away, and they look like a winner at any given time, but it doesn’t get you a permanent place.” Even though he “finds it fascinating to be in” the industry, Buffett confessed that “I don’t think I could tell what the auto industry will look like in five to 10 years from now.”

Most likely referring to the recent global shift to EVs, he added, “You will see a change in vehicles, but you won’t see anybody that owns the market.”

To the concerns about the auto industry have been added concerns about China: The last-minute cancellation of Ant Financial Group’s initial public offering in November 2020 and the subsequent disappearance of its founder Jack Ma, Buffett’s clients’ view toward China has shifted significantly. Though Ma reappeared, the incident was a forceful reminder of the risk of investing directly in Chinese companies.

Shuta Samei, chief analyst at Nissay Asset Management, told Nikkei that one of the motivations for Berkshire to invest in the Japanese conglomerates may be that their business portfolios are relatively resistant to inflation. All five trading companies also have logistics functions under their wings, such as Mitsubishi Corporation LT and Sumisho Global Logistics.

As the world witnessed the extreme confusion in global logistics under COVID-19, Berkshire “may have noticed the functions that those trading houses have in logistics to be valuable.” Samei also views geopolitics as a possible factor but stressed that “we need to see whether there will be real actions being taken on business collaborations” in order to fathom the real intentions and the stickiness of Berkshire’s investment in Japan.

A Hong Kong-based hedge fund manager in charge of Japanese equity who spoke under anonymity held a similar view. He understands the risks involved with directly dealing with China, especially as a U.S. company, but is skeptical as to whether Berkshire is actually going to move on with the trading companies to forge any business collaborations. “If that is to really happen, it would be an indication of Berkshire stepping away from U.S.-centric behavior in the years to come,” he said.

Buffett and Munger do not seem to want a further escalation of tensions between the U.S. and China that would exacerbate a decoupling between the superpowers. At the Omaha AGM, Munger was more outspoken on Sino-American relations, stressing that both sides are making the situation precarious. Munger believes the U.S. and China are “equally guilty” for the consequences that are unfolding now.

Raising the case of Apple, where Berkshire is heavily invested, he pointed out that engagement with China has been producing results, and that has been “good for Apple and good for China.” Munger went on to say, “Anything that increases tension is stupid, stupid, stupid.” The audience in Omaha responded with a round of applause.

Buffett compared the current U.S.-China race to the Cold War nuclear arms buildup, which in 1962 brought the world to the brink of nuclear war over the Cuban missile crisis. The investor believes that what the U.S. faces now against China is a “different game,” where there are “more tools of destruction” in the hands of both leaders, including cyberwarfare.

“It’s imperative that China and the U.S. both understand that you can’t push too hard,” Buffett said. “We are going to be competitive but should judge how far to push without the other side reacting.”

Buffett seems to be prepared for a long game under this new situation, saying, “We’re just at the beginning of this.”

Additional reporting by Pak Yiu, Echo Wong and CK Tan.