Berkshire after Buffett

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This week I bring you a special edition of the newsletter: Berkshire after Buffett. In a series of pieces, led by my colleague and longtime Berkshire Hathaway watcher Eric Platt, the FT examines the conglomerate’s rich success under Warren Buffett and the challenges that will eventually face the company’s next generation of leaders.

Eric was in Nebraska for Berkshire’s annual shareholder meeting on Saturday, dubbed the Woodstock of capitalism. The Omaha gathering had a particular poignancy, being the first time Buffett took to the stage since the death of his longtime investment partner Charlie Munger, who passed away in November at the age of 99. His death has intensified questions over the future of the business when Buffett, 93, is no longer at the helm.

At the start, the legendary investor mistakenly referred to his successor Greg Abel as “Charlie” when passing a question to him. The packed arena — so full that hundreds of people sat behind the stage, unable to see Buffett in the flesh — broke into a thunderous applause. “I’m so used to . . .,” he said, before laughing. “I checked myself a couple times already. I’ll slip again.”

Can any stockpicker follow the Oracle?

At the AGM on Saturday, Buffett gave his most direct answer yet on how responsibilities will be doled out among the small executive team that will one day lead the company, handing Abel responsibility for how hundreds of billions of dollars are allocated. “I think the responsibility ought to be entirely with Greg,” Buffett said from the stage at the CHI Health Center in downtown Omaha. “I used to think differently about how that would be handled, but I think that the responsibility should be that of the CEO.”

While Buffett made clear that Abel will have authority over not just takeovers but the sprawling conglomerate’s mammoth stock portfolio as well, two other lieutenants — Ted Weschler and Todd Combs — are expected to play a prominent role within Berkshire’s $354bn equity portfolio.

Berkshire is the last great American conglomerate, with hundreds of subsidiaries fused with the backbone of the US

BP shareholders expect it to scale back climate target

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Shareholders in BP are preparing for the company to scale back its climate targets further after a shift in tone from the oil major’s new chief executive.

BP is alone among its peers in committing to cut oil and gas production, setting a target in 2023 of producing 2mn barrels of oil equivalent by the end of the decade, a 25 per cent reduction from 2019 levels.

The target has already been pared back once, from a 40 per cent cut announced in 2020, but the company’s shareholders believe that Murray Auchincloss, who took over from Bernard Looney as chief executive in January, is prepared to be more flexible as demand for oil and gas continues to grow.

“Do we think BP is going to change their guidance on oil production? Yes, we do,” said one top-10 shareholder. But, they added, “we’re not sure this is the right thing to focus attention on . . . precisely how many barrels of oil BP is going to produce.”

The shareholder said that the shift is “partly a response to market pricing” — the war in Ukraine inflated oil prices, while a higher interest rate environment has hurt the profitability of renewables projects. 

“Murray is saying outwardly that there’s no change but behind the scenes he’s being a lot more pragmatic, returns focused and hard-nosed about it,” another investor said. “We’d all love them to build more in renewables but from a shareholder point of view, returns are not there.”

Another investor said they would “not be surprised if they decided they had been too ambitious and moved more in line with their peers and not cut oil and gas production as much as they initially said they would.”

This investor added: “Since Russia’s invasion of Ukraine, [oil companies] are seen as providing countries with energy security rather than being terrible companies polluting the world — and they have used that to their advantage.” 

Any decision by Auchincloss to weaken BP’s climate pledges would mark a significant pivot away from the green strategy of Looney, who quit the FTSE 100 group in September after failing to disclose past relationships with company colleagues.

Auchincloss, who served as Looney’s chief financial officer, has previously said that BP will “pragmatically adapt” to future changes in energy demand.

Analysts also pointed to comments he made in February that

Why don’t auditors find fraud?

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For decades, investors have lamented how rarely external auditors uncover corporate fraud. From Enron to Wirecard, the cry after each scandal is, where were the auditors? The Association of Certified Fraud Examiners’ biennial report on how workplace fraud gets detected has typically shown auditors are the ones uncovering the wrongdoing only 4 per cent of the time.

Bad news. The latest report out a few weeks ago said the number is down to 3 per cent. Whistleblower hotlines and other internal controls may have helped some companies themselves discover some malfeasance earlier, but what about when management is the perpetrator or a corporate culture is rotten? A survey of investors by the Center for Audit Quality, a trade group for large accounting firms, found that 57 per cent thought the current system “frequently” failed to detect illegal acts.

Regulators fear auditors are failing in their role as a last line of defence for investors against corporate shenanigans. Audit firms argue that company executives are responsible for the accuracy of financial statements and that the role of an auditor role is only to provide reasonable assurance — not a guarantee — that a financial statement is free from material misstatement.

It is an argument that has prompted the US Securities and Exchange Commission’s chief accountant, Paul Munter, to exclaim to me on more than one occasion that he is fed up hearing from auditors what they do not do.

But a series of proposals to clarify and extend auditors’ responsibilities has now been made. In the US, the Public Company Accounting Oversight Board is revamping rules on how auditors must look for and deal with evidence of a client’s non-compliance with laws and regulations (Noclar, in the jargon). The intent is to force auditors to cast a wider net for matters that could have a material effect on a company’s financials, even indirectly by leading to big fines or regulatory action that threatens the business.

Audit firms have responded that they cannot be expected to make legal judgments, and that the huge amount of extra work implied by the Noclar proposal as currently drafted probably will not uncover anything significant that current procedures do not already.

A narrower proposal in the UK — which says auditors do not have to probe every minor law or regulation, and can

Risk of a renminbi devaluation is real

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The writer is research associate at Oxford university’s China Centre and at Soas. He is also a former chief economist at UBS

Recent speculation about a significant devaluation of the still closely managed renminbi looks rather fanciful given that China runs a large manufacturing trade surplus and a balance of payments surplus of about 2 per cent of GDP. And that is probably understated.

Yet Japan’s surplus is larger, and this has not stopped the yen suffering a deep slump. China could follow suit. The strong dollar is partly the reason but in China, the main story is the persistent decline in interest rates towards zero, domestic economic and financial circumstances, and a policy conundrum.

It should be noted that there is little point in or benefit from a policy-induced or accidental depreciation of the renminbi, which — were it to happen — would have far-reaching economic and political consequences.

From a domestic angle, there is no case for helping exports, given China’s strong external trade position. It would also be precisely wrong to further discourage imports and consumption when significant changes are needed in distributional and income policies to strengthen domestic consumer demand. The government should announce targeted income and consumption fiscal support for households, financed by withdrawing support from companies and state entities, thereby neutralising incentives for capital to leave the country, at least temporarily. But this would involve an unlikely political volte face. 

If such fiscal support is limited and monetary easing prevails, a weaker renminbi will aggravate China’s deeply embedded financial imbalances and its endemic proclivity to overproduction and exports.

This would, in turn, exacerbate existing trade frictions in new sectors such as electric vehicles and climate change equipment, and older sectors such as steel, metals and shipbuilding. A perceived policy of currency depreciation would doubtless incur hostile reactions from the US — particularly under another Donald Trump administration — and the EU.

China’s government would also not welcome the disruptive repercussions of a currency depreciation shock. Memories of the 2015 financial chaos in which a mishandled adjustment of the renminbi precipitated significant currency pressure and capital flight are still fresh. And yet, it could still happen.

China’s leaders plan to ease monetary policy, lowering bank reserve requirements and interest rates — as they made clear following the Politburo meeting at the end of last month.

Divestment is not as easy as it may seem

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Students all over the US have been pitching tents, barricading buildings and demanding that their universities stop profiting from Israel’s treatment of Gaza. “Disclose, divest, we will not stop, we will not rest,” they chant. If only it were that simple.

Leaving the thorny question of the wisdom and effectiveness of severing financial ties to one side, the practical challenges of doing so have multiplied since student protests prompted more than 150 universities to divest from apartheid-era South Africa. Investing has changed dramatically since then.

Most endowments and foundations now supplement their holdings of individual stocks and bonds with pre-packaged funds and alternatives such as private equity and private credit. Some investors do not even know where their exposures are. Even those that use new technologies to add transparency are finding their positions can be very difficult to unwind.

Consider the New York State Common Retirement Fund, which started reviewing its fossil fuel investments in 2019 amid climate change concerns. The fund divested from 22 thermal coal companies that it decided “were not prepared to thrive” in a low-carbon economy. But it still drew criticism for an indirect stake in a massive Ohio coal plant through its investment in a Blackstone private equity fund. Such funds require multiyear commitments and most clients buy the whole package.

Many universities also entrust big chunks of money to active managers who pick and choose stocks or bonds for an entire fund, rather than personalising selections for individual clients. Similar issues occur with low-cost index tracking funds: clients historically took the whole offering or stayed away. That passivity has left endowments in a bind.

Brown University recently acknowledged that its publicly trumpeted divestments from tobacco and Sudan only applied in full to the 4 per cent of its endowment in directly held public securities. Its fund managers for the rest are given more freedom. Brown also said it was contractually barred from even disclosing what those holdings are.

Such secrecy impedes accountability. One university executive told me last week that when they asked for a full accounting of their institution’s exposure to defence stocks and companies that do business in Israel, they were told it was too hard to calculate quickly.

That is absurd. Asset managers who serve religious charities or those with scruples around military hardware have been keeping their

Bank Indonesia ‘ready for the worst’ in face of hawkish Fed and currency volatility

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Indonesia’s central bank is “ready for the worst” and will provide more support for the rupiah if needed, the head of its monetary management department has said.

Bank Indonesia was prepared to intervene in the currency market — as it did last month when the rupiah hit multiyear lows — but would not rely solely on intervention, Edi Susianto, the monetary department’s executive director, told the Financial Times.

Susianto’s comments come as Asian economies brace for more currency volatility following the US Federal Reserve’s signal this month that it will hold interest rates higher for longer.

Bank Indonesia raised rates unexpectedly late last month and warned of worsening global risks, saying the rate increase was a pre-emptive move to ensure inflation remained within its target.

Indonesia was facing an “unusually” challenging environment from global and domestic factors, Susianto said in an interview.

“We believe that we are ready for the worst situation” of a more hawkish Fed and heightened geopolitical tensions in the Middle East, he said.

Countries around the world are trying to protect their currencies from a strengthening dollar amid growing expectations the Fed will delay cutting interest rates while inflation stays stubbornly above its 2 per cent target.

Bank Indonesia in April stepped into the spot, non-deliverable forwards and bond markets in a “triple intervention” to support the rupiah, Susianto said. The government also asked state-owned enterprises to limit their US dollar purchases.

Japan and Vietnam have also intervened to support their currencies, while the central banks of Malaysia and South Korea have said they are prepared to do so.

Adding to the wider pressure from a stronger dollar, Indonesia was also experiencing a cycle of dividend repatriation, Susianto said.

He said the repatriation by foreign companies, which has further boosted demand for the dollar, was expected to last until the end of May, after which the rupiah would become “more manageable”.

Since last month’s rate rise, Indonesia had noted net foreign inflows into government bonds and central bank bills, Susianto said.

Separately, central bank governor Perry Warjiyo told a news conference on Friday that it would auction rupiah securities twice a week — instead of once — from this week to attract more inflows.

Susianto said the bank was encouraging companies to use hedging instruments and pursuing efforts to deepen the market so there would be less need for central bank