As Berkshire exits Wells Fargo, other fund managers pile in

Wells Fargo & Co. may have lost the confidence of the Sage of Omaha, but a range of asset managers and hedge funds are betting the bank is on the mend.

Berkshire Hathaway Inc. slashed its holdings in Wells Fargo by another 58.8% in the fourth quarter of 2020, leaving it with just a tenth of the position it held at the end of 2015. That was just before Wells Fargo's fake accounts scandal broke into the open, triggering a yearslong rehabilitation effort that often proceeded in fits and starts, with investors looking to Warren Buffett's moves for cues on the bank's outlook.

The selling accelerated after Wells Fargo hired Charles Scharf from Bank of New York Mellon Corp. as its new CEO, though Buffett has been guarded about the specific reasons behind changes in Berkshire's portfolio. In 2020, Berkshire also exited positions in banks including JPMorgan Chase & Co., PNC Financial Services Group Inc. and M&T Bank Corp., while upping its stake in Bank of America Corp.

Buffett, Berkshire's chairman, president and CEO, and the company's executive vice chairman, Charles Munger, expressed displeasure at the apparent ouster of former Wells Fargo CEO Timothy Sloan in 2019 and urged the bank to look outside of Wall Street for a successor. By then, Berkshire had cut its peak holdings in the bank by about a fifth.

At Berkshire's annual meeting in May 2020, near the peak of pandemic-related job losses, Buffett said that banks were generally well-capitalized and reserved for credit losses. "I think they're in very good shape," he said.

Investors like Dodge & Cox have been positioning themselves to catch the upswing. The mutual fund company increased the number of Wells Fargo shares it owns by 75% in 2020, making it the fourth-largest owner of the bank, and Wells Fargo its second-largest holding.

Recent quarterly filings by institutional investment managers also showed several hedge funds piling into the Wells Fargo recovery trade. Basswood Capital Management LLC lifted its stake in the bank by more than 33x in the 2020 fourth quarter to $47.4 million. Stieven Capital Advisors LP exited JPMorgan Chase and initiated a $23.1 million position in Wells Fargo. M3F Inc. raised its stake in the bank by more than 77% to $17.9 million.

Wells Fargo's stock has at least kept up with the recovery in bank stocks that started last fall, as the view that Wells Fargo might finally be putting its scandals behind it gains more traction. Recently, Wells Fargo's shares jumped 5.2% on Feb. 17 after a news report that it was making tangible progress toward being released from a regulatory cap on its asset size. Still, Wells Fargo's shares have underperformed banks broadly since the end of 2015 and remain some 30% below trading levels when Berkshire's stake in the company was at its highest.

But while Wells Fargo has been gaining ground, it is still subject to an asset cap and is playing catch-up with higher-performing big banks. The bank recently announced an ambitious effort to bring its expenses down closer to peer levels. The company remains well behind where it was in the early 2010s when it routinely posted best-in-class profitability and was rewarded with sector-leading stock multiples.

As for the possibility that Berkshire might change its mind on the shares, Buffett may have given a clue in May. "When we sell something, very often, it's going to be our entire stake. I mean we don't trim positions," he said. "If we like a business, we're going to buy as much of it as we can and keep it as long as we can."