BIF Funds: How to buy Berkshire Hathaway at a discount (NYSE: BIF)

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Thesis

Boulder Growth & Income Fund, Inc. (BIF) is a closed-end equity fund. The vehicle seeks long-term capital appreciation and current income by investing in equities 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 nearly 37% of the fund. BIF takes a very concentrated approach with only 26 positions in total.

The fund has very robust rolling total returns, with the 5- and 10-year rolling total returns standing at 12.5% ​​and 12.7%, respectively. BIF is an unusual closed-end fund in that it does not turn equity returns into high monthly dividends, but has capital appreciation and an accretive net asset value as its objectives.

The fund’s dividend yield is just 3.44% and throughout the past decade the fund’s performance has been driven by an increase in net asset value. From this perspective, the BIF is more like a stock index and we will compare its metrics to the SPDR Dow Jones Industrial Average ETF (DIA) to assess risk/reward profiles.

BIF has a good Sharpe ratio of 0.78 against 0.86 for DIA and a standard deviation of 14.3 against 15.99 for DIA. The fund achieves lower volatility in its returns compared to the index, but over a 5 and 10 year period it has underperformed the Dow Jones. BIF has an appropriate risk/return profile, even if its management fees of 1.16% are a drag because it is exposed to a Sharpe ratio lower than that of the index. The fund also uses leverage, although low at 12%.

BIF is currently trading at a -15% discount to NAV and, in theory, an investor would realize a windfall if the fund manager were to liquidate all of their holdings imminently. We don’t believe this will happen and the best way to trade the fund’s NAV is to buy BIF when we see a substantial discount 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 note here, while new investors looking to enter the space would do well to wait for a NAV discount above -16%.

Assets

There are only 26 stocks in the BIF portfolio, and the top 10 represent over 88% of the exposure:

BIF Fund Top 10 Holdings

top 10 holdings (Fact sheet)

This fund is extremely concentrated, with Berkshire Hathaway having by far the largest exposure. The fund has a strong focus on financial services:

Sector breakdown of the BIF fund

Industry Breakdown (Fact sheet)

The fund also has a very low turnover, which means that the initial fundamental thesis is continued for long periods:

BIF Fund turnover

Turnover (The morning star)

With a low turnover rate of 6% for 2021, the fund is in the buy-and-hold category. We like this approach because it’s consistent with a concentrated portfolio – that is, portfolio managers seek to identify undervalued names and then stick to their thesis development for long periods of time. It is not a vehicle that engages in excessive trading to justify management fees.

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

The BIF fund is large cap

morning star box (The morning star)

As the Fed hikes rates and investors shift from growth to value, BIF and its holdings stand to benefit. An investor here is looking at a value play, with the manager having identified undervalued names in their respective sectors and having a low turnover portfolio setup.

Performance

The fund has had a very similar performance over the last 5 years to its main holdings, namely Berkshire Hathaway (BRK.B), but hunderperformed the Dow Jones Industrial Average ETF (DIA):

Return of the BIF fund

Performance over 5 years (Looking for Alpha)

This performance chart is a bit mixed – on the one hand the risk metrics and returns are fairly in line with DIA, but on the other hand the fund uses leverage and is expected to outperform its largest position and the long-term index from a management fee perspective – i.e. as an investor if I pay a management fee I I would expect the managed fund to perform better than a passive index or a stock from another conglomerate that I can buy directly.

A 10-year chart paints a very similar picture:

BIF Fund 10-Year Return

Total return over 10 years (Looking for Alpha)

BIF is a robust fund, one that closely tracks both the Dow Jones Industrial Average and its current leading position Berkshire Hathaway, but does not offer outperformance for management fees and leverage undertaken.

Discount / Bonus to NAV

The fund has historically traded at significant discounts to net asset value:

BIF Fund Discount/Premium to Net Asset Value

Premium/Rebate to NAV (The morning star)

The green area above indicates that BIF has always had a market price below its net asset value, with annual historical highs reached in 2013 when the discount was above 21%. An ideal way for an executive to monetize this discount is to buy back shares. The discount to NAV tended to stay within a very well-defined band:

Net asset value/BIF fund price

Historical discount to NAV (Cef Connect)

Distributions

Unlike many other equity CEFs, BIF is not positioned as a vehicle that turns equity returns into dividends, but as a net asset value enhancement fund:

Net asset value of the BIF fund

NAV performance (Cef Connect)

Net asset value has grown over +121% over the past decade. We see many managers in the CEF space attracting investors with very high returns that are paid from capital gains made through fund/holding trading and sometimes even through return of capital. Returning capital dividends is basically just a return of the investor’s “principal” and is usually a marketing tool since that return is unsupported and the net asset value keeps decreasing over time. time. We like that BIF increases net asset value, but ultimately BIF should be compared to pure passive equity indices because it offers that kind of long-term capital appreciation profile.

Conclusion

The BIF is a closed-end fund that is more like a stock index than bread and butter CEF. The vehicle does not offer outsized monthly dividend yields and has gained in value as net asset value has grown over the past decade. The BIF has a good Sharpe ratio as a measure of risk/reward and lower volatility than the Dow Jones index, but it lags the index over a 5- and 10-year retrospective total return period. The fund takes very concentrated equity positions with only 26 holdings currently. Currently, Berkshire Hathaway makes up nearly 37% of the fund and the top 10 stocks make up over 88% of the exposure.

BIF is currently trading at a discount of around -15% to NAV, which has been fairly flat historically. BIF is more appropriate for investors seeking equity appreciation rather than the transformation of capital gains into dividends. The fund belongs to the Large Cap Value tranche and is currently benefiting from the shift from growth to value. For an existing investor, the BIF is a very good buy and hold vehicle to follow the equity markets and we have a Hold note here, while new investors looking to enter the space would do well to wait for a NAV discount above -16%.

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