Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

The annual shareholder meeting of Berkshire Hathaway last week gave fans of Warren Buffett another chance to hear the legendary investor’s thoughts.

Watching Buffet speak at age 90 (and flanked by long-time business partner Charlie Munger, aged 97!) it was hard not to wonder how many more times we’ll witness the spectacle. Indeed, the headline news coming out of the event was the confirmation - unintended, it slipped out during the Q&A session - that Buffett will be succeeded by current vice-chairman Greg Abel as and when the great man leaves the post.

But it wasn’t just the talk of succession that gave last week’s event the sense of an era ending. Berkshire Hathaway is changing, and there a number of questions about its future.

One concerns who owns the company. Buffett himself still owns a significant minority stake but he is in the process of donating chunks to charity. In the process, an increasing proportion is finding its way into the hands of large institutional investors who are beginning to voice their concerns about the unique governance structure of the company. Buffett continues to occupy all three of the Chairman, CEO and Chief Investment Officer roles.

Those institutional investors are still dwarfed by Berkshire Hathaway’s army of individual shareholders, many of whom have taken to heart Buffett’s philosophy of never, ever selling their stake if it can be avoided, but the institutions are vocal and increasingly willing to demand change.

In particular, they have been seeking stronger commitments from the company to manage climate risks, such as producing an annual report addressing Environmental, Social and Governance (ESG) concerns amongst the companies it owns and invests in.

Berkshire Hathaway management has resisted the change and a proposal was defeated in a shareholder vote last week by a proportion of two to one, once Buffett’s own shares were adjusted for. That’s a safe margin for now but the issue is unlikely to go away, particularly as Berkshire Hathaway counts among the biggest corporate emitters of carbon anywhere in the world.

Perhaps a more pressing question concerns Berkshire Hathaway’s financial performance. Buffett’s long-term record as an investor barely needs restating, but let’s do it anyway. Since 1965, Berkshire Hathaway’s shares have grown at an annualised rate of 20%, versus just over 10% for the S&P 500. Yet for the past three and five-year periods growth has been 12% and 15%, versus 19% and 18% for the S&P.

The company is often referred to as a conglomerate - a term Buffett himself eschews. It consists of several businesses owned outright, as well as an equity portfolio of shares in other companies where Berkshire Hathaway has no management role. This model has allowed Buffett to deploy his legendary allocation skills to great effect over the decades, but is now coming up against the law of big numbers.

Buffett has increasingly huge amounts of money to invest and, as the amounts build, there is a shrinking group of companies he can buy shares in - much less buy outright - that will move the dial. Take a look at Berkshire Hathaway’s top holdings and it looks a lot like a list of America’s largest companies (minus some notable tech names), so it’s no surprise that it has struggled to beat the index.

Anyone buying shares in Berkshire Hathaway now can expect a broad exposure to America’s leading companies, as well as a slice of the company’s massive $130 billion cash pile which is waiting to be used for acquisitions. While that cash remains unspent, however, it will act as a drag on the company’s share performance relative to the index. That’s likely to test even the most patient investor.

Berkshire Hathaway can still play a valuable role in a portfolio, of course. That same cash pile which is a drag on performance in a rising market can become valuable when prices fall because it can be used to stock up on existing positions, or used for buy-backs, on the way down. That builds extra value for investors for the future.

It seems unlikely, however, that Berkshire Hathaway will return to making the high-octane gains of the past. The first job for the new leadership at the company, whenever it arrives, will be to reassure investors - both large and small - that Berkshire Hathaway has a bright future in a post-Buffett world.

Five-year performance

(%) As at 30 April 2016-2017

2017-2018

2018-2019 2019-2020 2020-2021

S&P 500

15.4 12 10.3 -3.9 47.7

Berkshire Hathaway

13.1 19.5 10.7 -16.4 50.6

Past performance is not a reliable indicator of future returns

Source: Refinitiv total returns as at 31.3.21, with net income reinvested in local currency.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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