Market review
Global equity markets were weaker in April as signs of persistent inflation and elevated geopolitical risk weighed on sentiment, with government bond yields hitting six-month highs. Despite this headwind, financials, as illustrated by our benchmark index, the MSCI All Country World Financials Index, outperformed, falling 2.1% while wider global equity markets fell 2.4%. Against this background, the Trust’s net asset value fell by 0.8%. This was entirely driven by stock selection, with the strongest contributors relative to the benchmark being holdings in OSB Group, Barclays and Bank of Cyprus Holdings; the largest detractors relative to the benchmark were holdings in Banco Santander, NU Holdings and Mastercard.
Berkshire Hathaway
Berkshire Hathaway held its annual meeting just after the month end, in Omaha as usual. It was marked by the passing of Warren Buffet’s partner Charlie Munger, at the age of 99 in November 2023, who joined the Board in 1978 and had been described as the architect of the company’s success. With a market cap of around US$875bn, the largest stock in our benchmark and eighth largest in the S&P 500, and shareholders’ equity of $572bn, by far the largest in the US, it has become a vast conglomerate employing nearly 400,000 people across insurance, railroads, utilities and energy, as well as a number of large manufacturing, service and retailing businesses. Furthermore, along with its well-known stakes in Apple, Coca-Cola, Kraft Heinz and American Express it also has large stakes in Occidental as well as a number of Japanese trading companies.
Despite its size its shares have kept pace with the S&P 500 Index over the past five years. During that period operating earnings have increased by just over 50% largely due to a 145% increase in profits at its insurance operations, from better underwriting as well as higher investment income. However, its investment portfolio has also performed well, having risen in excess of US$100bn in value. With the insurance business now representing around 42% of profits, up from 26.2% in 2018, BNSF, the railroad business, and Berkshire Hathaway Energy, the utilities and energy businesses, have gone backwards, the latter in part due to litigation around California wildfires that has cost the company dearly.
We added to our holding last year on the basis that it would be a beneficiary of the tailwinds in insurance but have since pulled back as we see a lack of catalysts for further outperformance outside a sharp correction in equity markets. With US$182bn in cash and US T-bills, the Sage of Omaha repeatedly highlighted during the event not only the difficulty in putting that amount of money to work but also a degree of caution about financial markets and why cash has continued to increase. Buffett stated: “There have been times in my life when I have been awash in so many opportunities that I could have invested every dollar by nightfall but now we have not seen anything that makes sense, that moves the needle.” and “It is not like I have got a hunger strike or something like that going on. It is just that things are not attractive and there are certain ways that can change, and we will see if they do”.
Banking consolidation
There was a sharp pickup in banking consolidation in April, with deals announced on both sides of the Channel. Following hot on the heels of its mutual peer, Coventry Building Society with total assets of £62bn at the end of 2023, and the UK’s second largest mutual, announced a £780m cash takeover of the Co-operative Bank, which had total assets of £28bn at end of 2023. This was subsequently followed at the end of the month by BBVA announcing it had approached Banco de Sabadell (Sabadell) about a possible merger, willing to offer a 30% premium in an all-share deal. This is BBVA’s second approach to Sabadell, having failed in 2020 and, while there is no certainty the deal will be completed this time, there is commercial logic to the transaction.
A merger of BBVA and Banco de Sabadell would create a powerful domestic franchise
For context, BBVA is the second largest bank in Spain, with total assets of €802bn at the end of March 2024, and a sizeable retail and commercial banking presence across Mexico, South America and Turkey. By contrast, Sabadell is Spain’s fourth largest banking group, with total assets of €236bn, and a much smaller international footprint, including a noticeable presence only in the UK through its subsidiary TSB. A merger of the two entities would create a powerful domestic franchise, with market shares of over 20% for loans and deposits against BBVA’s current 13-14%, while also helping to rebalance BBVA away from emerging markets, which accounted for greater than 70% of pre-tax profits in 2023.
Outside Spain and the UK there is an expectation there will be further consolidation in Italy with Monte de Paschi, now its balance sheet has been cleaned up and it has a reasonable level of profitability, among a number of smaller Italian banks seen as susceptible to being acquired. In Germany, Commerzbank has long been seen as a takeover target, while in Greece, Eurobank has acquired a large minority stake in Hellenic Bank, the second largest bank in Cyprus. Finally, BNP Paribas acquired a 9% stake in Ageas, a Belgian insurer that only recently attempted to acquire Direct Line Group before backing off during the month, which has also raised the potential for further bancassurance deals to benefit from the so-called “Danish Compromise” that allows banks to hold lower capital against their insurance subsidiaries.
