Warren Buffett cuts bond allocation to lowest in more than a decade

NEW YORK: Warren Buffett cut the allocation to bonds at Berkshire Hathaway’s insurance units to the lowest in more than a decade as the company warns that low yields will hurt results. Fixed-income assets made up 14 percent of investments at the insurers as of December 31, according to the company’s annual report. The year-end figure has typically been 20 percent to 25 percent since 2002, according to Berkshire documents.

The $186.8 billion portfolio included $114.8 billion of stocks. Buffett "is trying to maximize the total return," said Cliff Gallant, an analyst at Nomura Holdings Inc. He "sees more opportunity in his stock purchases than he does in his cash and bond holdings." Buffett has said low yields mean that insurers and other bond investors are holding "wasting assets." To counter that, he struck private deals for higher-paying securities and added equities.

Omaha, Nebraska-based Berkshire also made acquisitions and invested in its railroad and energy utilities. "Our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for our endless gusher of cash," Buffett, 83, wrote in his annual letter to shareholders, which was published March 1.

Still the cash pile was $48.2 billion as of December 31, compared with $47 billion a year earlier and $30.6 billion at the end of 2009. Any amount higher than $20 billion is too much, Buffett told Bloomberg Television’s Betty Liu last year. Buffett also has been favoring shorter-duration bonds. As of December 31, Berkshire had about $8.5 billion of bonds that were due in a year or less.

That compares with $6 billion at the end of 2012. The holdings typically offer lower yields than longer-duration securities while providing more flexibility. Corporate bonds sold by the riskiest to most creditworthy borrowers in the US returned 0.34% last year, the least since 2008. That compares with an annualized 13.5% from 2009 to 2012, according to Bank of America Merrill Lynch index data.

"The valuations of corporate bonds are close to their historic extremes courtesy of the rally," Edward Marrinan, a credit strategist at RBS Securities, said in a telephone interview from Stamford, Connecticut.