US defensive exposure: BRK-B?

[petronius]

I recently asked for advice here on my UK share allocation (VUKE vs CTY).

I also mentioned that at this point in time I am reluctant to embrace US high valuations (and wary of currency risk).

However, I am a fan of geographical diversification and I am looking for ways to increase my exposure to North American markets in a way that is somehow defensive.

I own some VHYL (Vanguard global high yield ETF) that includes a substantial portion of US shares with higher than average dividend yields. This is a way to avoid FAANGs and other very expensive companies while retaining US exposure.

I am now considering Warren Buffett's Berkshire Hathaway as another defensive option, and would love to gather opinions on this.

The unique business model of BH is well known - here is a recent article from the US TMF:

https://www.fool.com/investing/2019/08/ ... haway.aspx

[SalvorHardin]

Berkshire’s my third largest holding, I’ve held them for almost twenty-five years and intend to do so for the foreseeable future. I don’t expect spectacular performance from it nowadays; if anything Berkshire tends to underperform when it seems as if everyone is chasing the latest “thing” whilst it outperforms in the bad times.

It’s a good defensive share at the moment in large part because of its big cash pile (over $100 billion) which if markets do take a big tumble I hope will be deployed fairly quickly.

My view is that nowadays Berkshire is increasingly like an S&P500 tracker, but without the extremes of the technology sector and with a higher concentration of companies with strong “moats”.

A good example is the Burlington Northern Santa Fe railroad (BNSF), Berkshire’s most valuable subsidiary IMHO. No-one is going to build another railroad to compete with BNSF (too difficult to acquire the land and far too expensive) and trucks can’t realistically compete with it for moving freight for more than 500 miles because of fuel costs and the laws of physics. BNSF’s main competitor is the Union Pacific railroad (my second largest holding, which has a similarly wide moat).

There are a few companies out there which have some of Berkshire's style. Those that get a bit of attention on the US Fool's Berkshire Hathaway board include Markel Corporation, Dover Corporation and Canada's Fairfax Financial (I've owned Fairfax shares in the past and may do so in the next few years).

As to currency risk, I largely ignore it, taking the view that in the long-term Sterling will be a weaker currency than the US dollar. America has many more geographic advantages over us, more resources, a bigger population, a much larger internal market (thus bigger economies of scale) and it is culturally more well disposed towards business than Britain where the attitude of sneering towards "trade" still holds sway amongst much of the old and new establishment. If I could only invest in one country it would be America not Britain.

[petronius]

Thanks for your informative reply SalvorHardin. Interesting points about moats and Burlington Northern Santa Fe railroad.

I agree with your assessment of US business advantages over UK. The only problem is that one has to pay a lot for those advantages at the moment! BRK could be a way to avoid the irrational exuberance that may have elevated fashionable companies to unsustainable levels.

Do you hold BRK-B through a UK trading platform? Is there any specific tax consideration to be aware of?

Thanks,

Petronius

[SalvorHardin]

I agree with your assessment of US business advantages over UK. The only problem is that one has to pay a lot for those advantages at the moment! BRK could be a way to avoid the irrational exuberance that may have elevated fashionable companies to unsustainable levels.

Do you hold BRK-B through a UK trading platform? Is there any specific tax consideration to be aware of?

My shares are certificated (B-shares).

Tax is straight forward. As a Brit living in England I complete form W-8BEN every three years, which confirms to America's IRS that I am a non-resident alien. The registrars send me the form (it's easy to complete), I complete it and return it to them (my online brokers have an online W-8BEN). Berkshire Hathaway doesn't pay dividends but if it did a 30% withholding tax would be automatically deducted from your dividends; a completed W-8BEN would reduce this deduction to 15%. This withholding tax can be used to reduce your UK tax liability, enter it in the foreign section of the UK tax return.

I expect Berkshire Hathaway to start paying dividends after Warren Buffett retires.

Capital gains tax. When I've sold Berkshire shares in the past the gain was liable to UK capital gains tax, not American tax. As a rule British investors who don't live in America don't need to complete a US tax return in respect of their American investments, unless they own shares in a limited liability partnership (there are quite a few LLPs quoted in New York) or have some other source of earned or self-employed income from America (e.g. royalties).

You can hold the shares through an online broker. I have several American and Canadian shareholdings (on the NYSE) held this way. The brokers send me a W-8BEN form every three years.

[petronius]

Great info, thanks!

[Hariseldon58]

I previously held Berkshire and would agree with he comments by salvor Hardin.

I have decided that the bulk of my US exposure is via an S&P500 tracker and UC07 , a US large value ETF from UBD. It’s a low cost way of holding the larger US corporations minus the expensive ones, this may or may not be a good idea, tune will tell..