Share split gives little guy piece of Buffett
If you like your investing no-frills and low-cost, prepare for your introduction to Warren Buffett. Investors in mutual funds that track the Standard & Poor’s 500 stock index will soon have a stake in the investing legend’s company for the first time.
A split that’s made Berkshire Hathaway’s expensive stock suddenly affordable means S&P will add the company to the index, possibly within a couple weeks. S&P 500 funds that own all the index’s components will snap up Berkshire shares and remove Burlington Northern Santa Fe.
That’s the railroad that Buffett’s conglomerate is acquiring, a move that will expand a stable of Berkshire properties ranging from insurance to jewelry to corporate jets.
After the Jan. 21 share split, you can now get a piece of Berkshire for about $74, rather than the previous $3,500.
Berkshire’s membership in the world’s most closely tracked market index will give millions of small investors exposure to a company led by the best-known advocate of price-conscious “value’’ investing. Nearly 40 percent of all assets in US index funds track the S&P 500. That’s some $324 billion, and the anchor of many retirement portfolios.
Until now, short of buying Berkshire’s expensive stock directly, investors’ chief option for buying Buffett was getting into an actively managed fund that held Berkshire. Those funds now have some competition.
With Berkshire’s debut in the index, S&P 500 funds will have to quickly buy Berkshire shares. Anticipation of that binge triggered a 4 percent price jump for Berkshire’s newly affordable Class B shares on Wednesday. That was a day after S&P announced its decision to add a stock that had hovered within a split-adjusted $64 to $68 from August through mid-January. The shares climbed another 3 percent Thursday.
“The stock has gone nowhere for a long time now,’’ said David Winters, manager of the Wintergreen Fund, which is actively managed and has invested 6 percent of its $1 billion portfolio in Berkshire stock. “So we’ve been looking forward to an upward bump.’’
Berkshire’s long-term investors have fared well. While the S&P 500 fell 24 percent last decade, Berkshire’s Class B shares jumped 80 percent.
But if you’re about to get your first Berkshire exposure through an S&P 500 index fund, expect only a small piece of Buffett. Berkshire will make up a little more than 1 percent of the portfolio.
To get more, you’ll have to buy the stock, or get into one of the nearly three-dozen mutual funds whose Berkshire shares make up at least 5 percent of their portfolios.
Three funds are extremely bullish on Buffett, keeping 20 percent to as much as 26 percent of their portfolios in Berkshire stock. The best-known is Sequoia, a $2.9 billion fund whose 10-year return is within the top 3 percent among its large-blend peers. Two others with even heavier Berkshire tilts are tiny: Blue Chip Investor is a $16 million fund, and Midas Special is $12 million.
Managers of Berkshire-heavy funds wouldn’t have bought the stock unless they believed it would head up. But now some of them say they’re increasingly optimistic, and not just because of the financial health of Berkshire’s far-flung businesses.
They’re expecting the stock split and S&P 500 membership will further support the stock long-term.
Cheaper Class B shares will draw more small investors who couldn’t previously afford the stock. Institutional buyers also will latch on to a stock that’s now easier to trade. (Class A shares remain a stratospheric $109,000 each, the priciest US stock.)
For Larry Coats, co-manager of the Oak Value fund, it adds up to well-deserved attention for a stock that he said many investors have long ignored.
Since its 1993 launch, Coats’ $78 million fund has continuously owned Berkshire, with 7 percent now in the stock. He says Berkshire’s switch to two share classes in 1996 went a long way to make the stock more accessible. But the Class B split takes it to another level.
Many institutional investors and mutual funds have avoided Berkshire because it’s not in the universe of S&P 500 companies they explore for buying opportunities, Coats says.
And Wall Street firms have produced relatively little research on Berkshire, focusing instead on S&P 500 companies because of the greater interest they generate.