Boulder Growth & Income: Large Discount With Potential

Feb.22.13 | About: Boulder Growth (BIF)

As I had previously written about its sister fund, Boulder Total Return (BTF), I thought I should also write about Boulder Growth & Income Fund (NYSE:BIF). It is part of a group of closed end funds that are managed and controlled by the Horejsi family, which owns 33.88% of the outstanding shares. I am fine investing side by side with management who also invest their own funds.

As of February 20, 2013, BIF was selling at a 22.09% discount from net asset value. This is the normal discount range for BIF. BIF and its sister closed end funds, usually sell at substantial discounts from net asset value, for the following reasons:

1. This is not a balanced portfolio but rather opportunistic, with the bulk of its investments in just a few companies. Like BTF it has a chunk of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B);

2. It is a relatively small fund and as one group of shareholders own one third of the outstanding shares, there would be liquidity issues for any other substantial shareholder;

3. There is substantial unrealized appreciation, which if realized can result in substantial capital gains liability, but this potential liability is not of the same magnitude as BTF.

As of November 30, 2012, the five largest holdings of BIF, were as follows:

Berkshire Hathaway 26.2%
Wal-Mart (NYSE:WMT) 07.1
Johnson & Johnson (NYSE:JNJ) 05.8
Cisco (NASDAQ:CSCO) 04.0
Freeport-McMoRan (NYSE:FCX) 04.0
Click to enlarge

This is not a radical portfolio and it simply appears that they are buying large cap domestic stocks which they have faith in and will hold for a long time.

As of November 20, 2012, BIF had gross assets of $242,668,917 of which $25,038,348 was leveraged with taxable auction rate preferred stock. Short- term investments were 3.9% of the portfolio.

The potential tax liability, which is substantial, consists of the following:

Undistributed ordinary income $ 4,704,546
Accumulated capital gains 3,994,370
Unrealized appreciation 59,674,911
Timing differences ( 222,273)
Total 68,151,554
Click to enlarge

Although BIF has started waiving part of its fees, expenses are on the high side. Income is modest and turnover is exceptionally low. I will show the five year figures, excluding the waiver, as follows:

Expenses Income Portfolio Turnover
2012 3.28% 1.11% 2.83%
2011 2.40 0.54 2.12
2009 2.19 0.44 1.93
2008 2.08 (0.39) 1.79
2007 2.12 0.18 1.80
Click to enlarge

In reviewing expenses, I did notice that almost 40% represented litigation expenses, regarding a prior rights offering, and that this litigation has now been fully settled. I suspect that 2013 will show a substantial drop in operating expenses.

I have previously written about BIF and only recently wrote about its sister fund BTF. They all sell at large discounts but have a portfolio of companies that you can live with. These are not even close to being balanced diversified funds but they do have nice assets. I would buy them and include them in a basket of other securities.

Disclosure: I am long BIF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.