How Did Bill Gates’ Portfolio Handle the Recent Market Turmoil?

The Bill & Melinda Gates Foundation Trust, which is managed by Michael Larson, is one of the best funds to follow if you are seeking steady long-term growth stocks, which have small chances of tanking, but which will also provide relatively modest returns. In its latest 13F filing, the Trust disclosed 17 positions, most of which represent large- and mega-cap companies, with Berkshire Hathaway Inc. (NYSE:BRK.B), as usual, amassing over half of the portfolio. Based on our calculations, these 17 holdings had a weighted average loss of almost 7% during the third quarter, so it looks like the market turmoil in August did not overlook even the most conservative of investors. One of the biggest contributors to the weak performance during the third quarter was Caterpillar Inc. (NYSE:CAT), whose stock slumped by over 22% during this period. Year-to-date, the return of the Trust’s 13F portfolio also stands at a loss of 14%, but in this article we will focus on the third quarter performance of its top five positions.

It is important to follow investors like Michael Larson, mainly due to their conservative approach, which often outperforms most index funds in periods of market turmoil and uncertainty. However, we are more interested in beating the market over the long-term and by a wider margin, which is why we have developed a strategy that is based on the sentiment of around 730 of the best-performing investors. We have determined that their top small-cap ideas are the best at providing the highest returns and since August 2012 we have been tracking a portfolio of the 15 most popular small-cap picks among the funds from our database in real-time. Our strategy returned 102% in this period, outperforming the S&P 500 ETF (SPY) by some 53 percentage points (see details here).

Without further ado, let’s take a closer look at how Mr. Larson’s top holdings performed between July and September, starting with Berkshire Hathaway Inc. (NYSE:BRK.B), which amasses over half of the Trust’s $17 billion public equity portfolio through a stake that contains 68.63 million shares. The class B stock of the company managed by Warren Buffett inched down by over 4% during the third quarter, and year-to-date has lost over 11% as a slowdown in global growth has been looming large over the company, which has vast international exposure. Overall, 71 funds held around 5.60% of Berkshire Hathaway Inc. (NYSE:BRK.B)’s outstanding stock at the end of June, with the Trust holding the largest position of those by a wide margin, followed by Boykin Curry’s Eagle Capital Management, which disclosed ownership of 10.34 million shares in its latest 13F.

Michael Larson’s second pick, Canadian National Railway (USA) (NYSE:CNI), in which the Trust owns 17.13 million shares, performed slightly better, with the stock losing just 1.3% in the third quarter. Being tightly-related to commodity markets, the company was also affected by economic headwinds leading to its stock falling by 13% since the beginning of 2015. Other funds that we track were more cautious towards Canadian National Railway (USA) (NYSE:CNI), as 21 funds amassed stakes equal to just 3% of the company. Moreover, it seems like smart money likes Canadian Pacific Railway Limited (USA) (NYSE:CP) more, because 51 funds among those that we follow held 21% of that company at the end of June. Canadian Pacific’s market cap is around half of Canadian National Railway (USA) (NYSE:CNI)’s, but its stock lost over 10% during the third quarter. Again, Bill & Melinda Gates Foundation Trust emerged as the top shareholder of Canadian National Railway, trailed by D. E. Shaw’s holding of 1.87 million shares.

See our discussion of the other three top picks of Mr. Larson on the next page.

Caterpillar Inc. (NYSE:CAT)‘s stock dropped between July and September as the company faces issues in the mining and energy segments. Caterpillar has recently embarked on a cost-cutting plan, which involves laying off around 10,000 employees in the next two years. This confirms the words of famous short-seller Jim Chanos, who explained back in January why he was shorting the stock (see the details).  However, the decline of Caterpillar Inc. (NYSE:CAT) and the weak confidence of his peers seems to not affect Mr. Larson’s position regarding Caterpillar Inc. (NYSE:CAT) as the Trust disclosed an unchanged position of 11.26 million shares in its latest 13F filing.

Then there is Waste Management, Inc. (NYSE:WM), in which the Trust owns 18.63 million shares. This was the only stock that gained ground during the third quarter among Mr. Larson’s top five picks and it ended the quarter around 8.3% in the green. Waste Management, Inc. (NYSE:WM)’s stock has also edged up by 3% since the beginning of the year, but it is still under the radars of most funds from our database. Only 31 of them reported long positions as of the end of June, which represented around 6% of Waste Management, Inc. (NYSE:WM)’s shares in aggregate.

Wal-Mart Stores, Inc. (NYSE:WMT) is a completely different story, because even though the stock fell by only 8% during the third quarter, its slump of over 9% registered yesterday and the most probable consequent declines will be severely affecting the Trust’s returns at least in the short-term, assuming that Mr. Larson sticks to the position, which he most likely will do. The stock fell yesterday after the company said that its revenue will remain flat for the fiscal year 2016. The news has disappointed many investors that have been bullish on Wal-Mart Stores, Inc. (NYSE:WMT), such as funds managed by billionaire quants like AQR Capital and Renaissance Technologies, which are among the top ten hedge fund holders of the stock. Warren Buffett has also been betting on the company for many years and is one of the largest shareholders of Wal-Mart Stores, Inc. (NYSE:WMT) to this day.

Disclosure: None