The Bill & Melinda Gates Foundation Trust recently disclosed its portfolio updates for the first quarter of 2020, which ended on March 31.
Established in 2000 by Microsoft (MSFT, Financial) founder Bill Gates (Trades, Portfolio) and his wife Melinda, The Bill and Melinda Gates Foundation is the largest private foundation in the world with over $40 billion in total assets. Six years after it was established, the group’s trustees created a two-entity structure: the Foundation, which distributes money to grantees, and the Foundation Trust, which manages the group’s endowment. The investments of the Foundation Trust are managed by an outside team of portfolio managers. Out of the three trustees, the Gates provide guidelines for the portfolio managers, such as defining areas in which the foundation will not invest due to philanthropic reasons (such as tobacco stocks), while Warren Buffett (Trades, Portfolio) does not play a role in the group’s investment decisions. The goal of the foundation is to distribute donations and income from investments in the form of grants to encourage and fund philanthropic business activity.
During the quarter, the trust reduced its stake in Berkshire Hathaway (BRK.B, Financial) and established new holdings in Schrodinger Inc. (SDGR, Financial), Apple Inc. (AAPL, Financial), Amazon.com Inc. (AMZN, Financial), Alibaba Group Holding Ltd. (BABA, Financial), Alphabet Inc. (GOOGL, Financial)(GOOG, Financial) and Twitter Inc. (TWTR, Financial).
The trust cut its holding in Berkshire Hathaway by 5,000,000 Class B shares, or 10.02%, impacting the equity portfolio by -5.30%. During the quarter, shares traded for an average price of $213.25.
Buffett’s Omaha-based conglomerate consists of a wide variety of companies, including Geico, BNSF Railway, Berkshire Hathaway Energy, See’s Candies and many more. Buffett is perhaps more famous for his investing skills, which enabled him to convert an obsolete textile company into a successful multi-faceted business via acquisitions. In 2006, Buffett pledged most of his fortune to the Gates Foundation and four of his family’s own charitable trusts.
On May 22, Berkshire’s Class B stock traded around $174.14 for a market cap of $423.21 billion. The share price is down 23% since U.S. markets peaked at the end of February.
GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rating of 7 out of 10 and a business predictability rating of three out of five stars. However, due to specific changes in U.S. accounting rules that became effective in 2018, in which companies must report unrealized investment gains or losses as part of their income, it can be hard to get a visual on a valuation for the conglomerate. Buffett wrote about this topic in his 2019 annual letter to shareholders:
“The adoption of the rule by the accounting profession, in fact, was a monumental shift in its own thinking. Before 2018, GAAP insisted – with an exception for companies whose business was to trade securities – that unrealized gains within a portfolio of stocks were never to be included in earnings and unrealized losses were to be included only if they were deemed “other than temporary.” Now, Berkshire must enshrine in each quarter’s bottom line – a key item of news for many investors, analysts and commentators – every up and down movement of the stocks it owns, however capricious those fluctuations may be.
Berkshire’s 2018 and 2019 years glaringly illustrate the argument we have with the new rule. In 2018, a down year for the stock market, our net unrealized gains decreased by $20.6 billion, and we therefore reported GAAP earnings of only $4 billion. In 2019, rising stock prices increased net unrealized gains by the aforementioned $53.7 billion, pushing GAAP earnings to the $81.4 billion reported at the beginning of this letter. Those market gyrations led to a crazy 1,900% increase in GAAP earnings!”
The effects of this change are clearly shown in the below chart of Berkshire’s annual revenue and net income. In addition to Buffett’s cautious stance toward the current market environment, in which stock prices are increasingly disconnected from economic reality, this may be another reason why some investors have sold their shares.
The trust’s biggest new buy was 6,981,665 shares of Schrodinger, which had a 1.73% impact on the equity portfolio. Shares traded for an average price of $37.48 during the quarter.
Schrodinger is a life and materials sciences software company that develops chemical simulation software used in pharmaceutical, biotech and materials research. Its physics-based computational drug discovery platform can predict binding affinity with a high degree of accuracy, enabling faster and more cost-effective drug discovery. Founded in 1990 and headquartered in New York City, the company went public in February.
On May 22, shares of Schrodinger traded around $69.17 for a market cap of $4.41 billion. The company’s initial public offering was on Feb. 5, with shares offered at $17 apiece. Since the IPO, shares have gained 306.88%.
GuruFocus gives the company a financial strength rating of 7 out of 10 and a profitability rating of 1 out of 10, though as a company that recently IPO’d, there is a substantial lack of information about the stock. The cash-debt ratio of 19.24 is higher than 84.90% of competitors, but the operating margin of -39.43% indicates that the company is not yet profitable.
The trust also bought 501,044 shares of Apple (0.73% portfolio impact), 60,460 shares of Amazon (0.68% portfolio impact), 552,383 shares of Alibaba (0.62% portfolio impact), 43,107 voting and 42,981 non-voting shares of Google (each with a 0.29% portfolio impact) and 272,420 shares of Twitter (0.04% portfolio impact).
Shares of Apple traded at an average price of $295.01 during the quarter. On May 22, shares of the multinational technology company traded around $318.89 for a market cap of $1.38 trillion, a price-earnings ratio of 24.92 and a forward price-earnings ratio of 26.84. GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 10 out of 10.
Amazon shares traded at an average price of $1936.38 during the quarter. On May 22, shares of the U.S.-based e-commerce giant traded around $2,436.88 for a market cap of $1.21 trillion, a price-earnings ratio of 116.34 and a forward price-earnings ratio of 97.56. GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 8 out of 10.
Shares of Alibaba traded at an average price of $209.23 during the quarter. On May 22, shares of the Chinese e-commerce giant traded around $199.70 for a market cap of $535.74 billion, a price-earnings ratio of 21.49 and a forward price-earnings ratio of 24.24. GuruFocus gives the company a financial strength rating of 7 out of 10 and a profitability rating of 10 out of 10.
Voting shares of Alphabet (GOOGL, Financial) traded at an average price of $1359.46 during the quarter, while non-voting shares (GOOG, Financial) traded at an average price of $1,361.82. On May 22, shares of the U.S. multinational search engine giant traded around $1,414.81 and $1,410.42, respectively, for a market cap of $960 billion, a price-earnings ratio of 28 and a forward price-earnings ratio of 33. GuruFocus gives the company a financial strength rating of 9 out of 10 and a profitability rating of 10 out of 10.
Shares of Twitter traded at an average price of $32.44 during the quarter. On May 22, shares of the U.S.-based social media company traded around $32.60 for a market cap of $25.67 billion, a price-earnings ratio of 20.13 and a forward price-earnings ratio of 66.34. GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 3 out of 10.
At the end of the quarter, the trust held shares of 23 stocks valued at a total of $17.35 billion. The top holdings were Berkshire Hathaway Class B shares with 47.32% of the equity portfolio, Waste Management Inc. (WM) with 9.94% and Canadian National Railway Co. (CNI) with 7.66%.
In terms of sector weighting, it was most invested in financial services (via Berkshire), industrials and consumer defensive.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Portfolio updates reflect only common stock positions as per the regulatory filings for the quarter in question and may not include changes made after the quarter ended.
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