Buying Buffett on the Cheap

06/06/2011 1:55 pm EST

Focus: ETFS

Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

A closed-end fund heavily invested in Warren Buffett’s Berkshire Hathaway is selling at a sizable discount to net asset value, writes Richard Lehmann of the Forbes/ISA Closed End Fund & ETF Report.

The market appears to be sequencing through a “risk on”/ “risk off” cycle. So far, the cycle alternates between low-risk Treasuries and higher-risk stocks.

The flip-flopping between the two is likely caused by the uncertainty engendered by the Federal Reserve. Not knowing their future policy has made investors guess in different directions, sometimes in the middle of a trading day. The alternating nature of the cycle is impossible to predict.

An alternative to the sharp swings between safety and risk might be to invest in companies that can cope with major swings in government policy. These would be large-cap, Warren Buffett-type securities with good and consistent growth prospects.

There is a fund which invests in such securities—and trades at a significant discount to its net asset value.

The Boulder Total Return Fund (BTF) takes large positions in a limited number of securities. We recommended this closed-end fund back in November 2010 at a price of $15.45, and it is part of our Deep Discount Portfolio.

It’s currently trading at $16.68, versus its net asset value of $19.34, giving it a discount of 13.75%.

Boulder’s largest holding is Berkshire Hathaway A shares (BRK.A), at more than 27% of assets. Berkshire’s class B stock (BRK.B) accounts for another 12% of the portfolio. Since the fund trades at a hefty discount, it is an excellent way to participate in the gains of Warren Buffett’s investments.

After Berkshire Hathaway, the next largest holdings are Yum Brands (YUM) at 18% and Wal-Mart (WMT) at nearly 7%.

The fund previously attempted to deal with the high discount by using a managed distribution policy, but when this didn’t work, it abandoned the idea. It now relies on capital gains only, with no payouts.

Boulder Total Return uses leverage, which is currently at 24% of the portfolio.

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