Evaluating CEFs: A Look At BIF

Summary

• BIF let's you buy BRK.B at a 15% or more discount.
• I continue a series where I examine CEFs beyond the yield with a look at BIF that started in 2015 from a merger of several similar funds.
• With a NAV that's 28.5% higher than 5 years ago, the distribution appears well supported.
• Since a Do-it-yourself version of the fund does better, and the yield is moderate, there are better places for investors to put their money.
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Photo by damedeeso/iStock via Getty Images

Introduction

I previously evaluated two CEFs from Cornerstone that I concluded were not supporting the distribution in the articles "How To Evaluate A CEF: A Look At CLM" and "Evaluating CEFs: A Look at CRF." I'm an income investor who looks to grow the income my portfolio pays me in dividends and distributions each year, and as such, I want to buy shares that provide a reliable income stream. I detailed a method of determining whether a specific CEF could provide that.

I found that both CLM and CRF failed to do so most years. That is the cause of the regular declines in both NAV and distributions. I also looked at one fund from Eaton Vance, Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG), that I felt did a better job of supporting its distribution. I covered that one here. With its last distribution cut, EXG looks to be paying a distribution it can now support.

I seek to identify CEFs that can support their distribution and are not consuming their asset base to pay a distribution. NAV destruction from overpaying the distribution just isn't a good way to get long-term stable income. The declining distributions from CRF and CLM while still generous are not stable (much less increasing).

Many people have pointed out that the Cornerstone funds have made them lots of money in the past. But it says nothing about whether or not this will continue. They are paying an unsustainable distribution and management clearly intends to keep the policy that produces those unsustainable distributions in place. As long as this policy is in place, no distribution cut will make the distributions sustainable.

I will now turn to another fund that was mentioned in comments on prior articles, Boulder Growth & Income Fund, Inc. (BIF). This fund holds a lot of Berkshire Hathaway stock (BRK.B) and some see it as a way to hold Berkshire and get dividends too.

Boulder Growth & Income Fund

My process looks to compare the total return on NAV (this is similar to total return, but rather than using the share price it uses the NAV per share) to the yield on NAV (again similar to yield but uses NAV instead of price). If the yield is less than the total return, the distribution is well supported. It gets more complicated if the total return doesn't exceed the NAV (but it is still possible the distribution is well supported).

So the first thing we do is go to the fund's website and get the total distributions over the last year. The fund has paid out $0.4080 in distributions ($0.1020 a quarter).

Data by YCharts

Using YCharts we have a very nice graph of the NAV performance over the last year. We can see the crash from COVID and the upward trend after that. The peak NAV was $14.49 while the average was $12.32. Using those numbers with the $0.4080 in distributions, we can see that the average yield on NAV for the year was 3.31% while the minimum was 2.90%. Based on the increase in NAV for the year, it is quite likely that the return on NAV will exceed the yield on NAV, but let's plot it anyway to eliminate any chance for a surprise.

As expected, the total return on NAV of approximately 19% easily exceeds the yield on NAV at 3.31%. During the COVID crash, shareholders might have been a bit nervous, but plenty of investments plunged by more than 30%, so the dip here seems quite reasonable.

Long-Term Trends

Like a football team that has a chance to win on any given Sunday no matter how bad a record they actually have, a fund could get lucky and have a good year. Last year, which was far from typical, would not be a good one to base forward projections on without looking at longer-term trends. It is easy to have a good year, far harder, and an indication of good management, to string together a bunch of good years.

Looking at the total return on NAV for the 3 years prior to COVID, we see a total return on NAV of 37.78%. It looks like the fund switched from paying distributions on a monthly basis to a quarterly basis at the end of 2018. In the process, it skipped a couple of monthly distributions, although the new amount was 3 times the old. So over the 3 year period, the fund paid out $1.156 in distributions. NAV during that time averaged $12.62. That produces a yield on NAV of 9.16% which is well below the total return on NAV of over 37%. This fund clearly as the distribution well covered.

BIF came into existence in its current form with the merger of 4 similar funds at the beginning of 2015. Like many CEFs, it had some struggles in the first year. But since then, only COVID has cut into its upward trend in NAV. This is what I want to see in a CEF. While I might like a higher distribution, management is giving a solid and very safe distribution. So far this doesn't look too bad.

Future Distribution Coverage

Until someone manages to invent a time machine, investors will find it impossible to buy shares in a fund or company in the past. The best you can do is buy some today. This means that the performance of the fund or company in the future is far more important than past performance. The proper use of past performance is to help is figure out how an investment in the fund will do in the future. And this determination about the future should determine if an investment remains a good place for our money even if it did make us a lot of money in the past.

So what exactly are the holdings of BIF? We need to dig into what it has held so we can judge if past performance will continue. And since the performance was good, we want it to continue or even improve.

A little over a year ago, this article came out on BIF. The point the author made that I found particularly striking was that an investor could assemble a portfolio of their own that would do better than BIF. And this was with the investor getting a 15% discount to NAV when buying BIF but the DIY fund didn't. The author also noted that BIF used no leverage. That has changed, and the fund now has 15% leverage. Last November the fund issued $225 million in unsecured notes.

Source: BIF website

Source: Fund Factsheet

The fund lists its full holdings updated monthly, here. Looking at the difference from the fund's factsheet (as of today, 1 month's difference), shows that the fund has reduced its exposure to Berkshire and JPMorgan. This list has just 38 securities of which 12 are different treasury bonds. No wonder the fund warns about concentration risk (particularly with the large exposure to Berkshire). YUM! Brands (YUM) owns a lot of fast food places, has had a good run that might not continue, but it is a small position.

Enterprise Products Partners (EPD) is an energy MLP that has had a total return of about 32% (total) over the last 5 years and with oil prices increasing it should be able to continue. But the tall pole in the tent is Berkshire. As long as Buffett continues in control that should continue to perform well.

Data by YCharts

The chart above shows one of the two big selling points for BIF. You get a fund whose performance mirrors Warren Buffett's investment for a discount of between 15% and 20%. The other selling point is that you get this investment in Warren Buffett and dividends too.

BIF is good, but if I roll my own can I do better?

In his article, Kingdom Capital assembled a list of funds and stocks that he thought was a very close match to what BIF owned. The fund managers have continued to adjust the holdings of BIF, and even added leverage, but his list is a good example of what an investor might put together on their own. So let's look at how this DIY version of BIF would have done compared to the fund's actual returns. The performance of management is crucial to a CEF, and is why we pay a fee. While I don't mind paying fees, I want to get better performance for my money.

I am going to use Portfolio Visualizer to do this analysis. I will also compare the performance of BIF to Liberty All-Star Equity Fund (USA) a fund I have written about and now own. Distributions will be reinvested.

Source: Portfolio Visualizer

Based on this data, we can see that the picks assembled by Kingdom Capital did slightly better than the actual fund BIF. It's not a huge difference, just 8.67% CAGR versus 8.12%. This is the impact of the fees. The DIY portfolio was assembled looking at the published holdings of BIF and the only work done after then was to rebalance it once a year. Note too, that BIFF added $225 million in leverage at the end of last year, and so far (it is early) that didn't make much difference between BIF and the homegrown version.

Source: DIY BIF from Portfolio Visualizer model

In fact, if you just bought BRK.B in 2015, your $50K would be $80,090 compared to $80,907 with BIF.

Conclusion

BIF is a good fund that does an excellent job at covering its distribution. Maybe even too good. While the 3.42% yield isn't chump change, the fund could cover a larger one. I also wonder why I should pay to own a fund that I can assemble myself and manage with minimal work and do better. Now maybe the leverage that was added at the end of 2020 will improve the fund's performance (perhaps an increase in the distribution) but as it stands now there are better places for investors to put their money.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

I do own shares in CVX which is in the DIY BIF portfolio I talk about in the aricle.