BIF: How To Buy Berkshire Hathaway At A Discount

Summary

• BIF is an equities closed end fund with over two decades of performance history.
• The fund has a very concentrated position in Berkshire Hathaway which accounts for almost 37% of the fund.
• BIF is currently trading at -15% discount to Net Asset Value.
• The fund has very robust trailing total returns, with the 5- and 10-year returns sitting at 12.5% and 12.7%, respectively.

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Thesis

Boulder Growth & Income Fund, Inc. (BIF) is an equity closed end fund. The vehicle seeks long term capital appreciation and current income through investment in equity and fixed income instruments. Currently the fund is 100% invested in equities with a very concentrated position in Berkshire Hathaway (BRK.B) which accounts for almost 37% of the fund. BIF takes a very concentrated approach with only 26 positions overall.

The fund has very robust trailing total returns, with the 5- and 10-year trailing total returns sitting at 12.5% and 12.7%, respectively. BIF is an unusual closed end fund in the sense that it does not transform equity returns into high monthly dividends, but has capital appreciation and an accretive NAV as its goals.

The fund dividend yield is only 3.44% and throughout the last decade the fund performance has been assured through an increase in NAV. From that perspective BIF is more akin to an equity index and we are going to compare its metrics to the SPDR Dow Jones Industrial Average ETF (DIA) to gauge risk/reward profiles.

BIF has a good Sharpe ratio of 0.78 versus a 0.86 for DIA and a standard deviation of 14.3 versus 15.99 for DIA. The fund achieves a lower volatility of its returns versus the index, but on a 5- and 10-year lookback it has underperformed the Dow Jones. BIF has an appropriate risk/reward profile, although its management fees of 1.16% are a drag as exposed in a lower Sharpe ratio than the index. The fund also employs leverage, although small at 12%.

BIF is currently trading at a -15% discount to NAV and theoretically an investor would realize a windfall if the fund manager were to liquidate all holdings imminently. We do not believe this will happen and the best way to trade the fund NAV is by buying BIF when we observe a substantial discount as compared to historical levels (high negative z-stat). For an existing investor, BIF is a very good buy-and-hold vehicle to track the equity markets and we have a Hold rating here, while new money looking to enter the space would do well to wait for a discount to NAV exceeding -16%.

Holdings

There are only 26 holdings in the BIF portfolio, and the top 10 account for over 88% of the exposure:

Top 10 Holdings (Fact Sheet)

This fund is extremely concentrated, with Berkshire Hathaway being by far the largest exposure. The fund is heavily focused on financial services:

Industry Allocation (Fact Sheet)

The fund also has a very low turnover, meaning that the initial fundamental thesis is pursued for long periods of time:

Turnover (Morningstar)

With a low turnover of 6% for 2021, the fund sits in the buy-and-hold category. We like this approach since it is consistent with a concentrated portfolio - i.e. the portfolio managers look to identify undervalued names and then stick with their thesis development for long periods of time. This is not a vehicle that engages in overtrading to justify management fees.

Through its current holdings, the fund sits in the Large Cap Value Morningstar box:

Morningstar Box (Morningstar)

As the Fed raises rates and investors switch from Growth to Value, BIF and its holdings are set to benefit. An investor is looking at a value play here, with the manager having identified undervalued names in their respective industries and having a low turnover portfolio set-up.

Performance

The fund has had a very similar performance in the past 5 years as its main holdings, namely Berkshire Hathaway (BRK.B), but has underperformed the Dow Jones Industrial Average ETF (DIA):

5-Year Performance (Seeking Alpha)

This performance chart is a bit of a mixed bag - on one hand the risk metrics and returns are fairly in line with DIA, but on the other hand the fund runs leverage and is supposed to outperform its largest holding and the index in the long term from a management fee perspective - i.e. as an investor if I am paying a management fee I would expect the managed fund to perform better than a passive index or another conglomerate's stock that I can buy outright.

A 10-year chart paints a very similar picture:

10-Year Total Return (Seeking Alpha)

BIF is a robust fund, a fund that closely tracks both the Dow Jones Industrial Average and its current main holding Berkshire Hathaway, but does not offer an outperformance for the management fee and undertaken leverage.

Discount / Premium to NAV

The fund has always traded at significant discounts to NAV:

Premium / Discount to NAV (Morningstar)

The green area above indicates that BIF has always had a market price lower than its NAV, with annual historical maximums reached in 2013 when the discount was over 21%. An ideal way for a manager to monetize this discount is to buy back shares. The discount to NAV has tended to stay in a very well defined band:

Historic Discount to NAV (CefConnect)

Distributions

Unlike many other CEFs in the equity space, BIF does not position itself as a vehicle that transforms equity returns into dividends, but a NAV accreting fund:

NAV Performance (CefConnect)

The NAV is up more than +121% in the past decade. We see many managers in the CEF space that entice investors with very high yields that are paid from the capital gains realized through the fund trading / holdings and sometimes even through return of capital. Return of capital dividends are basically just a return of the investor "principal" and generally constitute a marketing tool since that yield is not supported and the NAV keeps decreasing throughout time. We like the fact that BIF is NAV accreting but ultimately BIF is to be benchmarked against pure passive equities indices because it offers that type of long-term capital appreciation profile.

Conclusion

BIF is a closed end fund which is more akin to an equity index rather than the bread and butter CEF. The vehicle does not offer outsized monthly dividend yields and has gained value through NAV accretion in the past decade. BIF has a good Sharpe ratio as a measure of risk/reward and a lower volatility than the Dow Jones index, but has trailed the index on a 5- and 10-year total return lookback period. The fund takes very concentrated equity positions with only 26 holdings currently. Currently Berkshire Hathaway accounts for almost 37% of the fund and the top 10 holdings account for over 88% of the exposure.

BIF is currently trading at an approximate -15% discount to NAV, which has been fairly stable historically. BIF is more appropriate for investors seeking equity capital appreciation rather than the transformation of equity capital gains into dividends. The fund falls into the Large Cap Value bucket and is currently benefiting from the Growth to Value switch. For an existing investor BIF is a very good buy-and-hold vehicle to track the equity markets and we have a Hold rating here, while new money looking to enter the space would do well to wait for a discount to NAV exceeding -16%.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.