Last year, Berkshire Hathaway (BRK.B) was finally added to the S&P 500 index. Because of this, it is now widely owned by many open-end mutual funds, ETFs and closed-end funds. I believe that Berkshire Hathaway is a good core holding for retail investors, especially in taxable accounts, since it does not pay dividends or other distributions and is very “tax friendly”.
Berkshire Hathaway management is also shareholder friendly. Warren Buffett only takes a salary of $100,000 a year and does not take any executive options. Buffett compares quite favorably to other CEOs who take multi-millions a year in compensation, even when their stocks go down in value.
There are three closed-end funds that hold especially large positions in Berkshire Hathaway stock that are currently trading at large discounts to net asset value. These funds are managed by Boulder Investment Advisors and Stewart Investment Advisors which are controlled by Stewart Horejsi.
Horejsi inherited a family welding supply business. After graduating from college, he was highly impressed with Benjamin Graham’s book “The Intelligent Investor”. The welding supply business had shrinking margins, so he began investing a large portion of the family’s business profits in Berkshire Hathaway stock in 1980 when it was selling for $265 a share (these were the A shares (BRK.A) that now trade above $100,000) and has continued buying since then.
Horejsi sold his family welding business in 1999, started a charitable foundation and entered the investment management business. Horejsi currently manages several closed-end funds where his family trusts own large holdings, and three of these funds hold large positions in Berkshire Hathaway stock: BTF, BIF, DNY.
Here is a brief overview of each fund. They all sell at large discounts to net asset value, but they also have high management fees and fund expense ratios.
Denali Fund (DNY)
Percentage of fund invested in Berkshire Hathaway: 20.6%
Other large holdings: Ventas 12.6%; Money Market 12.2%
Expense Ratio: 2.80%
Total Net Assets: $133 million
Total Common Assets: $72 million
Leverage: 35.89% (Auction rate preferreds)
Current Discount to NAV= -19.75%
Average 52 week Discount= -15.74%
1 Year Z-Statistic= -1.50 (one and one-half standard deviations below the mean)
Annual Portfolio Turnover: 7%
Average Daily Trading Volume= 3,000
Average Daily Dollar Volume= $44,000
Percentage owned by Horejsi family trusts: 77%
Boulder Total Return (BTF)
Percentage of fund invested in Berkshire Hathaway: 38.4%
Other large holdings: Yum Brands 20.7%; Walmart 6.9%
Expense Ratio: 2.19%
Total Net Assets: $307 million
Total Common Assets: $232 million
Leverage: 24.41% (auction rate preferreds)
Current Discount to NAV= -18.89%
6 Month Average discount= -17.91%
1 Year Z-Statistic= -1.32
Annual Portfolio Turnover: 6%
Average Daily Trading Volume= 23,000 shares
Average Daily Trading $ Volume= $356,000
Percentage owned by Horejsi family trusts: 37%
Boulder Growth and Income (BIF)
Percentage of fund invested in Berkshire Hathaway: 26.7%
Expense Ratio: 2.19%
Total Net Assets: $187 million
Current Discount to NAV= -20.1%
6 Month Average discount= -18.7%
1 Year Z-Statistic= -1.59
Annual Portfolio Turnover: 5%
Average Daily Trading Volume= 46,000 shares
Average Daily Trading $ Volume= $285,000
Percentage owned by Horejsi family trusts: 34%
All three of these funds are tax efficient with low trading turnover and are good holdings for taxable accounts who want exposure to Berkshire Hathaway. The main downside are the high expense ratios.
They are trading at attractive discounts now, but there is no immediate catalyst to narrow the discount. The funds are pretty illiquid and not suitable for in-and-out active trading. But a patient buy-and-hold investor may be rewarded at some point in the future, if the Horejsi family trusts ever wanted to liquidate some of their holdings. They could easily adopt more aggressive techniques to narrow the discount to net asset value (e.g. voluntary tender offers, managed distributions etc.).
Disclosure: I am long BRK.A.