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Berkshire Hathaway Inc. (BRK.B): Bill & Melinda Gates’ Trust Sells Some Shares As Its Equity Portfolio Underperforms Mr. Market

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As a new filing with the Securities and Exchange Commission showed, the Bill & Melinda Gates Foundation Trust has started to successfully implement its sales plan of Berkshire Hathaway Inc. (NYSE:BRK.B) class B shares announced in January, 2014. The foundation, run by Michael Larson, has sold some 3.44 million shares between February 2 and April 1 of this year, in multiple transactions at an average price of $146.49 per unit. Following the sale, the foundation holds 73.55 million shares of Berkshire Hathaway Inc. (NYSE:BRK.B)’s Class B stock. In addition, Bill Gates owns around 6.53 million class B shares through class A shares owned directly by him through his investment arm, Cascade Investment.

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The Bill and Melinda Gates Foundation Trust sold shares under its Rule 10b5-1 sales plan in order to facilitate compliance with federal excise tax rules that limit excess business holdings by private foundations, the filing added. According to a previous filing, the foundation planned to sell 65 million shares of Berkshire Hathaway Inc. (NYSE:BRK.B)’s class B stock by the end of June, 2017.

Even though the Trust is a charitable organization, we follow its activity along with over 700 other investment firms, because it holds a vast equity portfolio that is valued at almost $20 billion (as of the end of 2014). Moreover, the foundation is run by Michael Larson, who also manages Cascade Investment. Mr. Larson is the man who helps Mr. Gates stay at the top of the list of the richest people on the planet (Mr. Gates’ net worth is currently estimated at $79.6 billion). Since 1994 when Mr. Larson took over managing Mr. Gates’ investment firm, his net worth has surged from around $5.0 billion to its present value. A former bond-fund manager, Mr. Larson uses a pretty conservative approach when it comes to picking stocks and this has allowed him to generate steady returns over the years.

We are interested in Mr. Larson’s skills in picking stocks alongside other great investors that we follow mainly because of their positions in small-cap stocks. These companies, with a market cap below $5 billion, are part of our small-cap strategy, which during the last 2.5 years generated returns of 132% and beat the market by 79 percentage points. The strategy involves picking the most popular small-cap picks among the funds that we track, because we have seen that these companies can help a retail investor exploit pricing inefficiencies that are less likely to happen in the mid and large-cap space, with companies being more popular and more-widely followed as a result. So far this strategy has worked extremely well, which was also confirmed by backtests that were conducted for the period between 1999 and 2012 (read more details about our backtests here).

Nevertheless, let’s take a closer look at Bill & Melinda Gates Foundation Trust’s equity portfolio from the latest 13F filing. It showed a total of 19 long positions held as of the end of 2014. Even though the Trust has generated steady returns over the years, its first-quarter performance looks a little bleak, judging from the returns of the companies in its equity portfolio. As we analyzed the data of its 18 stocks with a market capitalization of over $1.0 billion from the Trust’s 13F, we found that they had a negative average return that amounted to 3% during the first three months of 2015, versus the gain of the S&P 500 ETF (SPY) of 0.9%. The main impact on this loss was the 3.88% decline of Berkshire Hathaway Inc. (NYSE:BRK.B), in which the fund’s stake amasses almost 60% of its value. However, the fund’s other two top positions, represented by Canadian National Railway (USA) (NYSE:CNI) and Caterpillar Inc. (NYSE:CAT), don’t have much to show, as both stocks lost 2.61% and 11.85% respectively.

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