Berkshire Hathaway remains a solid pick

Tribune Media Services columnist

Q: I've owned Berkshire Hathaway Inc. Class B shares for several years. They've done better this year, but what does the future hold? -- --L.R., via the Internet

A: Perhaps only the gecko with the British accent that stars in TV commercials for the firm's Geico auto insurance could challenge the star power of Warren Buffett.

Chairman and Chief Executive Buffett, the world's second-richest individual, behind Microsoft founder Bill Gates, is having an exceptional year. His company's third-quarter profit more than quadrupled over the prior year, when its insurance operations had to pay out billions of dollars in hurricane claims.

Berkshire Hathaway's powerful General Re Corp. unit is the world's only AAA-rated reinsurer and should continue to gain new business while other insurers lick their financial wounds. Reinsurance is a contract in which an insurance company agrees to help cover another insurer against risks. It recently took on asbestos claims from Lloyd's of London.In addition, Geico has been having a profitable year in which it has been able to raise premiums.

Berkshire Hathaway Class B stock (BRKB) is up 21 percent this year after a flat 2005 and a 4 percent increase in 2004. The firm's Class A shares (BRKA), the most expensive stock on the New York Stock Exchange at more than $100,000, can be converted into 30 Class B shares.

Buffett buys businesses at attractive prices, finances at low cost and boosts profitability. His Berkshire Hathaway owns more than 50 companies in a variety of industries, including Fruit of the Loom and Dairy Queen.

Most recently, Buffett bought stock in Target Corp. and Johnson & Johnson and is showing interest in utilities. He holds significant investments in high-visibility firms such as American Express Inc., H&R Block Inc., Anheuser-Busch Cos., Coca-Cola Co. and Washington Post Co.

The ratings on the shares are one "buy," two "holds" and one "underperform," according to Thomson Financial. Earnings are expected to increase 56 percent this year and 6 percent next year, according to Thomson.

There is speculation about what will happen when Buffett, 76, eventually no longer runs the show. He says he has two able executives waiting in the wings, one who would handle operations and another in charge of investments, but, realistically, no replacements could hope to equal Buffett's expertise and stature.

Another worry is the lack of worthy investment opportunities to put the company's $42 billion in cash to work. Furthermore, the overall size and complexity of Berkshire Hathaway makes assessing its true value somewhat difficult.

Q: What's your opinion of John Hancock Sovereign Investors Fund? --K.J., via the Internet

A: It doesn't have much to brag about except for its low volatility.

This fund that specializes in large-cap leaders hasn't matched the Standard & Poor's 500 over the past decade.

The John Hancock Sovereign Investor Fund Class A (SOVIX) is up 13 percent over the past 12 months to rank in the upper half of large growth and value funds. Its three-year annualized return of 8 percent puts it in the lowest one-fifth of its peers.

"While the fund would benefit in the event of a recovery of large-cap stocks, it still wouldn't be my first choice," said John Coumarianos, analyst with Morningstar Inc. in Chicago, who expects it to do relatively well in the short and intermediate term. "It has been a laggard in performance because it hasn't been keen enough to get good businesses at cheap enough prices."

Lead manager John Snyder, with the fund since 1984, finds companies he believes can increase revenue, market share or earnings. He is willing to pay more if he feels a firm is definitely going to succeed.

John Hancock Sovereign Investor Fund is required to keep at least 65 percent of its assets in stocks with rising dividends, and Snyder often exceeds that. Barry Evans and Peter Schofield have been fund co-managers since 1996.

Financial services and industrial materials each comprise about 20 percent of portfolio, with other concentrations in health care, energy and consumer goods. Largest holdings were recently General Electric, Exxon Mobil, Emerson Electric, Abbott Laboratories, Bank of America, Automatic Data Processing, Cisco Systems, Altria Group, Johnson & Johnson and IBM.

This 5 percent "load" (sales charge) fund requires a $1,000 minimum initial investment and has a 1.19 percent annual expense ratio.

Coumarianos has some concern about John Hancock's recent acquisition by Manulife Financial Corp., because mergers inevitably affect configurations of funds and also managers. Most Manulife funds are in variable annuity products that haven't been outstanding, he said.

Q: I'm considering investing in Ginnie Mae securities through a mutual fund. What are the advantages of mortgage-backed securities and are they taxable? --G.P., via the Internet

A: Their strong points are safety and income.

The Government National Mortgage Association, or Ginnie Mae, buys home mortgages from banks and financial institutions, bundles them and then markets portions of them to investors.

The resulting pass-through income securities composed of pools of government mortgages are backed by full faith and credit of the U.S. government. That means you are free of any default risk.

Proceeds from mortgage holders making principal and interest payments are passed through to the investor every month. Ginnie Maes, which are subject to federal and state taxes, generally yield more than traditional Treasury bills.

"The element of risk on all mortgage-backed securities is when the borrower prepays the mortgage loan before it is due," said Michael Decker, senior vice president with the Bond Market Association in New York. "That means as an investor you're not sure when you're going to get your principal back on your investment."

A further complication is the fact that prepayments by mortgage holders tend to increase in volume as interest rates go down.

"Not only do you get your principal returned early, but you're in a lower-rate environment, and that means you'll have to reinvest it at a lower rate," Decker said.

Andrew Leckey is a Tribune Media Services columnist. E-mail him at

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