Billionaire Bill Gates has 20% of his foundation’s portfolio in this stock — and it’s not Microsoft

Bill Gates is one of the richest people in the world with an estimated net worth of over $125 billion. Today, the former head of Microsoft runs one of the largest charitable foundations in the world.

Not surprisingly, Microsoft is the foundation’s largest holding, with more than 30% of its portfolio. However, after increasing its share in Berkshire Hathaway (BRK.B 0.97%) (BRK.A 0.94%) up more than 40% in the second quarter, the conglomerate is now the Gates Foundation’s second-largest position with more than 20% of the portfolio, surpassing Waste management.

The Gates Foundation was not buying Berkshire stock on the open market. Instead, the shares were gifted to the foundation by Warren Buffett. However, this could very well be Berkshire’s last stock donation to the foundation, as the friendship between Buffett and Gates has cooled recently. Meanwhile, Buffett said the foundation will no longer accept donations after his death. This is a change of heart as the gifts to the charity were originally in his will.

Despite the drama between Gates and Buffett, let’s see why the Gates Foundation will likely keep Berkshire as a core position and why investors should hold the stock as a core position.

Instant diversification

One of the first things that stands out about Berkshire stock is that investors get instant diversification, both through the conglomerate’s variety of wholly owned businesses and Berkshire’s large investment portfolio.

The company’s foundation is built on its diverse property and casualty (P&C) insurance holdings, led by Geico and General Re. Insurance accounted for about 40 percent of Berkshire’s operating profits last year, but those can fluctuate widely from year to year. What Buffett has long liked about the insurance industry is float, meaning the money that insurance companies hold that hasn’t yet been paid out in claims.

In fact, many property and casualty insurers are unprofitable in their underwriting, having higher expenses and claim payments than they receive in premium money. This measure is called the combined ratio, and any number above 100% indicates that a company was not profitable from underwriting insurance. Last year, the P&C industry net combined rate was 101.7%, which was actually an improvement from 102.5% the previous year.

However, insurance companies make most of their money investing in the fleet. Most invest in high-quality bonds, but thanks to having one of the best investors of all time, Berkshire uses its fleet to support its huge portfolio of equity investments. That said, in most years Berkshire also makes an underwriting profit. Last year, it was an impressive $5.4 billion.

In addition to its insurance and stocks, Berkshire owns and operates a number of businesses in various sectors. One of the biggest businesses it owns is BNSF railroad, which accounted for more than 13% of operating income last year and 19% in 2022. Berkshire has also built a good portfolio of energy transportation and utilities . In addition, it owns companies in manufacturing, retail, apparel, media and construction spaces.

Overall, Berkshire offers investors a top-notch insurance business with a unique investment strategy that sets it apart from any other company in the world.

Image source: Getty Images.

Solid succession plan in place

What Buffett has created over the last few decades with Berkshire is unique. But the Oracle of Omaha won’t be around forever (he’ll celebrate his 94th birthday at the end of August).

Buffett cannot be replaced by a single individual, which is why when he is gone, Berkshire will hand over his duties to several people. Vice Chairman Ajit Jain will take over Berkshire’s insurance operations, while Greg Abel will be responsible for Berkshire’s non-insurance business. Todd Combs and Ted Weschler, meanwhile, have been under Buffett’s tutelage for the past decade, both managing part of Berkshire’s investment portfolio. Abel, however, will be responsible for all capital allocation and investment decisions.

Buffett has given these individuals direct responsibilities over the years as he has backed off a bit, so there should be a relatively smooth transition when he finally does. While he will not be replaceable, he has created a unique insurance-backed investment model that will endure long after his death.

A great base operation

P&C insurance companies are typically valued on a price-to-book (P/B) ratio, and by that measure, Berkshire’s stock is a bit expensive, trading at 1.6x. In the past, Buffett reportedly sought to buy back Berkshire shares when they were below 1.1 times and later 1.2 times P/B, though he later reversed course believing the metric did not reflect the underlying value of Berkshire’s assets .

BRK.B Price-to-book value data by YCharts.

While Berkshire’s valuation might be a little expensive by this measure compared to where it’s historically traded, the one thing the stock has shown is that it’s a long-term winner with a business model that continues to create value. Even with Buffett gone, I don’t see that changing.

Berkshire stock should continue to be a core holding for both billionaires like Bill Gates and individual investors.