I like to follow the closed-end funds managed by Boulder Investment Advisors, largely controlled by Stewart Horejsi.
After graduating from college with a business major, Horejsi inherited a family welding supply with shrinking margins. He was impressed with Benjamin Graham's book "The Intelligent Investor" and began investing profits from the family business in Berkshire Hathaway stock (BRK.A) in 1980 when it was only $265 a share. Berkshire closed today at $128,605 a share.
His net worth from the Berkshire Hathaway investments grew tremendously, so Horejsi sold the family business in 1999, started a charitable foundation and runs several family trusts. He also entered the investment management business and has assumed control of several closed-end funds where his family trusts are large shareholders.
One of these funds is Boulder Growth & Income Fund (BIF) which is trading at a large discount now. BIF only reports its NAV weekly. As of August 17, 2012, the discount to NAV was -22.9%. This is well above the 52-week average discount of -20.5%.
Here are the ten BIF top portfolio holdings as of May 31, 2012 taken directly from the company website (Note: for some odd reason, the portfolio holdings listed on CEFConnect and Morningstar incorrectly list Williams Partner LP as the largest holding instead of Berkshire Hathaway):
Top 10 BIF Holdings (as of 5/31/2012)
Johnson & Johnson
Cohen & Steers Infrastructure Fund
Ithan Creek Partners LP
Wells Fargo & Co
Heineken Holding NV
Advent Claymore Convertible Securities & Income II
Kiwi Income Property Trust
BIF owns a large position in Berkshire Hathaway along with other solid holdings and looks like a pretty good deal given the large discount. A Horejsi family trust owns 8.64 million shares, so management eats its own cooking.
So what is the catch?
A big issue with BIF is the high expense ratio. In the last semi-annual report, the annualized expense ratio was 2.84% even after management waived some of its fees. The legal and audit expenses were especially high.
A shareholder lawsuit was filed in 2010 against BIF related to a 2008 rights offering along with the fund's decision to suspend its level rate distribution policy in November 2008. The lawsuit alleged breach of fiduciary responsibilities and unjust enrichment related to the fund's 2008 rights offering.
On August 14, 2012, a judge approved a $4 million settlement of this lawsuit. As part of the settlement, the fund was awarded $4 million along with a waiver of a portion of the management fee, but $1.5 million will go to pay the plaintiff shareholder's lawyer and $50,000 will go to the plaintiff. The net amount of $2.45 million will go to the fund.
Take a look at the spiraling BIF audit/legal expenses over the last few years:
BIF Audit Legal Expenses
$87,948 (one year)
$110,613 (one year)
$578,171 (one year)
$997,903 (one year)
$1,031,340 (six months!)
Now that the lawsuit has been settled, I am waiting for the annual report in November to see if legal expenses will start going down. If the legal expenses go back to earlier levels, the expense ratio will be dramatically reduced. But the liability insurance for the fund will likely remain somewhat high.
BIF seems like a decent investment now for a patient investor willing to wait for legal expenses to start decreasing. There is also a possibility in the future that management will institute policies to reduce the discount to NAV.