* Well respected among hedge fund managers
* May be a successor at Berkshire Hathaway
* Recent top holdings include CME, US Bancorp, MasterCard
By Joseph A. Giannone
NEW YORK, Oct 25 (Reuters) - Billionaire investor Warren Buffett may have just made one of his boldest market bets: hiring 39-year-old Todd Combs to manage a major part of Berkshire Hathaway’s (BRKa.N) investments. [ID:nN25285572]
On Monday Berkshire announced Combs, chief executive and portfolio manager at Castle Point Capital Management LLC, had been hired after a three-year search to “handle a significant portion of Berkshire’s investment portfolio.”
Castle Point is a value-oriented long-short equity fund that focuses on financial services companies. He managed $395 million on July 1, according to a July investor letter obtained by Reuters.
Through June this year, his fund has risen 28 percent from its November 2005 inception, against a 49 percent drop in his benchmark, the SPDR Financial Services sector fund (XLF.P).
The Greenwich, Connecticut-based Castle Point manager, though hardly a household name, is considered by some peers to be one of the best financial services sector investors around. And, like his new boss, he is a gifted writer of thoughtful shareholder letters.
“At Castle Point we like to think of ourselves as owners of businesses,” Combs said in a seven-page July letter to shareholders -- sounding a bit like the Oracle of Omaha.
In the same conversation where he invokes value investing pioneers Benjamin Graham and David Dodd, he also channels Charles Darwin in discussing the chances of investment loss.
“(W)e may begin with the acknowledgment of the pervasive reality of failure -- that, for instance, 99.9 percent of biological species that have ever existed are now extinct,” he wrote. “Or, a little close to home, that only one original member of the Dow Jones industrial index continues to be a member today.”
As manager of a long-short hedge fund, Combs tries to generate high returns with less volatility than the broader market. The fund’s best years came in 2007, when it rose 19 percent, and 2006, when it was up 14 percent.
In 2008 when the bottom dropped out during the financial crisis, Castle Point had a 5.7 percent loss. Last year the fund rebounded, climbing 6.2 percent.
Castle Point notes its returns have not been tied to the underlying performance of financial stocks. Combs realized average returns of 1.7 percent during 36 positive-return months, against gains of 4.8 percent in the XLF.
At the same time, his losses were more muted: down 1.8 percent on average during 20 negative-return months, compared with a drop of 7.7 percent for the index. Castle Point returns were about half as volatile as those of the broader Standard & Poor’s 500 Index.
His top 10 long holdings in June included CIT Group (CIT.N) senior secured credit, CME Group Inc (CME.O), MasterCard (MA.N), US Bancorp (USB.N), Western Union (WU.N), State Street Corp (STT.N), Amadeus IT (AMA.MC) and RenaissanceRe (RNR.N).
Until today, Combs was one of many successful but obscure hedge fund managers. Investors who follow Buffett and Berkshire Hathaway say it should come as no surprise the 80-year-old iconoclast took a less traveled road to find a potential successor.
“The most talented people and the people with the best independent judgment are not to be found at large institutions,” said James Armstrong, president of Henry H. Armstrong Associates in Pittsburgh, who oversees $400 million. (Reporting by Joseph A. Giannone; Editing by Steve Orlofsky)