Unless the board announces an intention to address the discount by January 31, 2006, then in order to offset Mr. Horejsi's influence, the filing persons and their affiliates may, among other things, seek to increase their influence by (a) forming an alliance with other like-minded shareholders; (b) acquiring more shares in the market, in private transactions or through a tender offer; or (c) soliciting proxies in order to obtain representation on the board of directors.
In the letters that Phillip Goldstein sent to the board, he suggested that some possible actions the board could take would be to conduct a large tender offer, or distribute Berkshire Hathaway stock to the fund’s shareholders. Both of these are good ideas. BIF has consistently traded at a double-digit discount since Stewart Horejsi became the fund’s manager in 2002, and he has done a poor job of structuring the portfolio. So giving shareholders an opportunity to get some of their money out of the fund at or near NAV would be a good thing.
Regarding the problems with BIF’s portfolio, first off, let me say that I think Warren Buffett is the greatest investor in modern times, and I would not argue against anyone who wanted to invest in his company. That being said, it is irresponsible for a closed-end fund to have 30% of its assets in a very easily purchased stock like Berkshire Hathaway. This virtually guarantees the fund will trade at a significant discount. Since Berkshire Hathaway is such a large holding in BIF, any prospective shareholder will know that the returns of the fund will be significantly affected by the returns of this stock. If this is what the prospective shareholder is going for, they will have to question why they will be better off in BIF and pay a management fee and other expenses incurred by closed-end funds, rather than just buying Berkshire Hathaway stock directly. I believe that many prospective shareholders are choosing the latter option, which decreases demand for BIF shares, and thus leads to the double-digit discount.
So how likely are shareholders to get the opportunity to exit the fund at NAV? I think it depends on how determined Stewart Horejsi is to maintain control of the fund. A recent filing details that the Ernest Horejsi Trust has begun buying shares again and has brought its ownership in BIF up to 22.17%. In the past Horejsi has purchased 40%+ of the outstanding shares in closed-end funds in order to control the board. If Horejsi’s ownership in the fund dramatically increases going forward the status quo will probably be maintained. But if Horejsi’s ownership does not significantly increase and nothing is done about the discount, I believe Phillip Goldstein will get the support of the other shareholders and some action will be taken in to narrow the discount.
The future for BIF will become a lot clearer over the next few weeks or months as we see if there is a board response on January 31, and updated ownership reports are filed by Horejsi. But an aggressive investor could start taking a position in this fund with the expectation that something will be done to narrow the discount, or purchases by Horejsi will drive up the fund’s market price. Of course either of these things happening are far from a sure thing.
BIF 1-yr chart:
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