Investors Buffett-Shy

A flurry of excitement surrounded the launch of a new fund that would give Australians the chance to touch greatness, by capitalising on the investment success of Warren Buffett and his company, Berkshire Hathaway. The Global Masters Fund, in Eureka Report on October 26, was reported to be considering an ASX listing. Five weeks on, GMF is finding its Berkshire Hathaway units a difficult sell.

GMF is trying to raise $60 million, of which it plans to invest 20% in cash and 80% Berkshire Hathaway Class A stock. Berkshire Hathaway shares '” at least the Class A shares GMF wants to buy '” are among the most expensive in the world, trading at about $US80,000 each. GMF's proposal is for investors to buy units for as little as $5,000.

At face value, it appears a good offer. Small investors from Australia can benefit from Buffett's impressive record '” he is acknowledged as one of the greatest investors of all time '” without stumping up the massive amounts of capital required to purchase even a single Class A share.

The fund charges an annual 0.85% administration fee and a once-off 3% fee to cover offer costs. This includes a 2.5% commission to brokers and financial planners and 0.5% for offer costs (printing and legal fees).

However, many investors might not realise there are two types of Berkshire Hathaway stock: Class A and Class B. Class A regularly trades for more than $US80,000; Class B is currently changing hands for about $US2,900. Class B is always valued at 1/30th the cost of Class A but only retains 1/200th the voting rights. Growth of these stocks measured as a percentage over the past two, three and five years has been virtually identical.

Being able to buy units in Berkshire Hathaway makes the stock affordable for small investors, who might otherwise rule the company out as too expensive. Similarly, investors might also assume that direct purchases of US-based shares, such as Berkshire Hathaway’s Class B stock, is an expensive exercise. But this is not the case.

Several brokers allow Australian investors direct access to international equities and securities. CommSec International Equities offer investors access to international markets with fees that can work out cheaper than going through GMF.

In common with several brokers, CommSec does not require a minimum investment sum. CommSec charges $US65 or 1% of the trade, whichever is greater. So for the Australian investor who is looking to get on board Berkshire Hathaway, a clever investor could purchase one Class B Stock for $US2,900 or about $3,900. The $US65 brokerage represents a fee of about 2.3%, about two-thirds the size of the fee being charged by GMF. Buying two Class B shares would cost about $7,800 and the brokerage would be about 1%, about a quarter of GMF's charge.

When asked why investors would choose the GMF over investing directly, Birch says: “Some investors may not be comfortable purchasing shares overseas. In addition, some investors may feel assured by the provision of three-day liquidity”.

If you don't feel comfortable investing irregular amounts of money, then buying Class B stocks may not be for you, buying directly does have the advantage of carrying lower fees.

It is worth noting that Berkshire Hathaway's Class B stock was created in 1995 in response to moves by unit trusts attempting to buy Berkshire Hathaway stock, and on-sell units in these shares. As Buffett, Oracle of Omaha, himself suggested in a 1995 letter to his shareholders about such schemes:

"The unit trusts '¦ would be sold by brokers working for big commissions, would impose other burdensome costs on their shareholders, and would be marketed en masse to unsophisticated buyers '¦ The sure outcome: a multitude of investors destined to be disappointed."