When I think of Berkshire Hathaway , I think of a company with honest management, led by a top-notch capital allocator -- someone who makes smart and calculated decisions with investors' money.
Finding great capital allocators is hard, but for good reason: The very best make their shareholders obscenely rich over time. Buffett took Berkshire from an $11.50 stock in 1962 to a $215,000 stock as of early 2015.
With these points in mind, let's look at two companies exhibiting the same traits that made Berkshire great.
A true contrarianHoward Marks is one of the best investors to ever live. Not surprising, then, that the company he runs, Oaktree Capital , has been one of the best-ever distressed debt managers in the world. Its distressed debt funds have racked up average annual returns of more than 20% over time.
Unlike Berkshire, Oaktree makes most of its money by managing other people's money. The asset management firm specializes in distressed debt, but has its hand in a variety of alternative funds, including convertible bond and real estate funds. All in all, it earns lucrative management and incentive fees on more than $91 billion of investor capital.
Sure, Oaktree isn't exactly Berkshire Hathaway. But that's a feature, not a bug. Managing other people's money scales much faster than managing your own. In the last 10 years alone, its assets under management have more than tripled. Most importantly, its reputation as a world-class asset manager has enabled it to raise billions of dollars of new capital even in the deepest downturns. As investors fled the financial markets during the Great Recession, Oaktree tapped into its brand name to raise $25 billion in new funds with the snap of its fingers in 2008 and 2009.
Given the firm's impressive record under an excellent capital allocator, and a favorable reputation crafted over its 20-year history, it's my opinion that Oaktree can continue producing results for shareholders for years to come. There is a lot to like about the asset-light and easily scalable model of investing other people's money, particularly when you get a legendary investor on top.
The baby BerkshireWhere others have mimicked Berkshire Hathaway, Markel Insurance may be a carbon copy. Markel has all the elements that made Berkshire great: A roster of profitable insurance lines, a smart capital allocator, and an investment framework built on buying and holding high-quality companies forever. If you believe in the Buffett model, this is probably your best bet.
Markel's story starts in insurance, where the company has proven its mettle as a risk manager. Its specialty insurance lines (which insure things like wedding cancellations and bicycle accidents) have helped it generate consistent underwriting profits over its history. Its combined ratio has averaged 95% over the last 10 years. That is, for every dollar earned in premiums, Markel paid out roughly $0.95 in insurance losses and operating costs. The net effect is that, like Berkshire, Markel basically gets paid to borrow money -- money it then invests for a profit.
This consistent profitability in insurance allows it to think for the long-term in its investment portfolio, which has a bias toward stocks over bonds. Chief Investment Officer Tom Gaynor has reigned over a stock portfolio that has beaten the S&P 500 by an average of two percentage points per year over the last quarter century, an impressive achievement.
Markel is now taking its investing savvy into a new frontier: The private markets. Markel is on the hunt for companies it can buy outright and hold forever, similar to Berkshire's controlled companies. These investments will only further diversify its income sources and give it new avenues to seek the best returns. If insurance becomes unattractive, it can divert capital to its recently acquired residential homes businesses, its hardwood flooring company, or its retail data firm, just to name a few. This is almost directly out of the Warren Buffett playbook for running a great insurer.
Oaktree and Markel may lack a household name like Buffett or Berkshire, but they have one thing that Buffett doesn't: Plenty of room to grow. Relatively small in terms of market capitalization and market share, these two companies would definitely make my short list of the best Berkshire-like companies.
The article The Best Berkshire Hathaway-Like Companies originally appeared on Fool.com.
Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway, Markel, and Oaktree Capital. The Motley Fool owns shares of Berkshire Hathaway and Markel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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