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Portfolio > Mutual Funds

Buffett Cancer Diagnosis Has Analysts, Investors Scrambling

By John Sullivan

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The fallout from Tuesday night’s announcement that Warren Buffett has been diagnosed with stage 1 prostate cancer continued Wednesday, with investors and analysts racing to explain its possible implications for the average investor.

The topic most raised was that of Buffett’s successor. Buffett named his son Howard as his possible successor as chairman of Berkshire Hathaway, but a possible CEO has remained a mystery since scandal embroiled David Sokol, Buffet’s No. 2 at the company.

“Last night’s disclosure by Warren Buffett that he has prostate cancer renewed concerns over Berkshire’s succession plans,” Cathy Seifert of the research firm S&P Capital IQ said in a statement. “We think its succession strategy is probably better established than [Berkshire Hathaway] articulates in its shareholder messages.”

However, she sees a two-fold risk in that Buffett could remain at the helm as he ages (although the company may have plans in place to prevent this).

“The shares also currently (and historically) trade at a premium to peers,” she added. “That premium may evaporate when Mr. Buffett’s tenure ends. We keep our $87 target price.”

A number of issues also arise for mutual funds that hold Berkshire Hathaway in their portfolios.

“There are a number of funds that own this stock where it’s not only a top 10 holding, but also 8,9 or 10% of the portfolio,” S&P Capital IQ mutual fund analyst Todd Rosenbluth told AdvisorOne. “The company is well-liked because it is so well-run. It’s also a financial services company, but it’s a diversified holding because of the other companies it owns, more so than, say, Coca-Cola. Lastly, fund managers have bought into Buffett’s management style, and believe it will deliver solid returns for the foreseeable future.”

It is this last point, Rosenbluth said, that is most affected by the diagnosis and announcement.

“You have a class of funds that have over $1 billion in assets and only have 40 or so stocks,” he said. “These include funds like Clipper, Fairholme and Sequoia. Berkshire Hathaway is a top 10 holding in a concentrated portfolio, so any negative news about the stock will disproportionately affect the portfolio.”

As a result, Rosenbluth concludes, investors should evaluate whether or not that mutual fund should continue to be a core holding in light of the fact that the portfolio now has additional risk.     

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