Recent investor focus has been on passive, index tracking ETFs. However, the concept of combining low cost ETFs with active management has proven, in some cases, to be an excellent value proposition. RIT, the managed REIT ETF which has returned 13.5% per year over the past five years, comes to mind.
Potentially, companies that act like actively managed ETFs can also be great long term investments. While I usually suggest that retail investors stay away from owning individual companies, there are three that I know well that may be the exception to this rule.
The Grandfather of ETF like Companies, Berkshire Hathaway (BRK.B)
Here is a question that I ask my Investing For Retirees seminar participants. “What is the annual Management Expense Ratio (MER) of having Warren Buffett manage your investment in BRK.B ?” Answer – zero.
Think about this – you can essentially hire Warren Buffett, one of the most successful investors in history who is worth US$75 billion, to be your investment advisor at no cost, simply by buying some BRK.B shares. (Compare that to the person at your local bank branch trying to sell you overpriced mutual funds at a MER of 2.25%). By doing so, you get a piece of one of the largest companies in the world which owns outright 20 major companies including the third largest railway in the US, and has over 340,000 employees. It is the second largest share holder of Apple and Berkshire has over $180 billion in 40+ other share investments.
While BRK.B has slightly lagged the S&P 500 over the past few years, likely because they are sitting on $110 billion in cash, Buffett’s brilliance shines when the markets tank and he is the only game in town for those who need a few billion to survive.
Total annual 5 year return in US$ = 8.2%, or about 10.5% per year in C$. There are no dividends. BRK.B is listed on the NYSE. You can buy the A shares, BRK.A, which are worth 2500 times a B share, but the price is a bit steep at US$ 313,700 per share, compared to US$ 208 for a B share as of September 21, 2019. Note that there is no difference between holding an A share or a B share, except that a B share only buys you 1/2500 as much of the company and its earnings. (This is a good lesson in why the price of a share is not an indication of the value of a company).
One major caveat – Buffett is 89 and is turning over management of the company to others. But those he has selected to run Berkshire in the future are long term BRK senior managers with excellent track records.
The Global Infrastructure ETF like company, Brookfield Infrastructure (BIP.UN)
Brookfield Infrastructure Partners is a member of the Brookfield Asset Management company, arguably one of the best managed and most worldly of Canadian enterprises. BIP is one of the largest owners of infrastructure in the world and operates in Canada, Australia, Chile, Brazil, the UK and France. It owns critical infrastructure such as toll roads, railways, gas pipelines, container ports, home energy service companies, and cell phone towers.
In a low interest rate environment, long life income producing assets such as infrastructure are like gold, as pension funds have to find ways to invest their assets to produce the returns necessary to support their subscribers. Government bonds at 1.5% or less are not going to do it. As a result, the price of infrastructure has been bid up. BIP specializes in finding undervalued assets, improving their performance and therefore value, and selling them to provide the cash flow to invest in new projects.
Over the past five years, the total annual return including distributions (currently 4.2%) was 20% per year in C$. Note that BIP’s distribution is NOT a qualified Canadian dividend and does NOT qualify for the Canadian dividend tax credit, and therefore is best held in a TFSA, RSP or RIF. BIP is listed on both the TSX and the NYSE.
The Global Gold ETF like company, Franco Nevada (FNV)
Speaking of gold, Franco Nevada is a unique way to invest in gold. FNV is currently run by two people, Pierre Lassonde and David Harquail, who have been in this business for 34 years. What they do is to find high quality potential mines and invest money in their development, long before the general investment community is prepared to do so. Using their extensive expertise, they have been able to identify some of the best new gold and other mines, and get in on the ground floor.
What they get for their investment is a royalty, that is a small share of every ounce of gold that is produced by the eventual mine. They operate nothing, so they eliminate operating cost risk.
They have investments in 51 producing mines and more recently 55 oil and gas producers. With a capitalization of US$14 billion and 34 staff, they have the highest capitalization to staff ratio of any company listed on the NY Stock Exchange.
If you believe that gold is going higher if the economy slows and markets decline, as it did in 2008 – 2012, FNV is an option. Every dollar increase in the price of gold is pure profit to this company.
Total return over the last five years was 19% per year in C$. FNV pays a small dividend of 1.05 %. FNV is listed on both the TSX and the NYSE.
CAUTION: Both BIP and FNV have experienced strong price appreciation over the Year to Date (YTD). BIP is up 38% YTD and FNV is up 32% YTD.
Investors are cautioned to seek the advice of a registered investment adviser or conduct their own thorough due diligence before making any investment decisions.
Disclosure: the author has positions in all three of the companies mentioned and RIT.
Thanks to Yves for giving me the idea for this post.