STEW - STEW: Value Large Cap Equities CEF 18% Discount

Summary

• SRH Total Return Fund is an equity closed end fund.
• The vehicle is generally focused on value oriented equities, with a very large stake in  Berkshire Hathaway, which accounts for over 42% of the fund.
• The CEF is currently trading at an 18% discount to NAV.
• The fund recently changed its name from Boulder Growth & Income Fund, and has American billionaire Stewart R. Horejsi as one of its main shareholders.
• This CEF has a very limited composition, with the top 10 holdings representing over 88% of the fund.

Thesis

SRH Total Return Fund ( STEW ) is an equity closed end fund. The vehicle is generally focused on value oriented equities, with a very large stake in Berkshire Hathaway ( BRK.B ), which accounts for over 42% of the fund. The vehicle used to be named 'Boulder Growth & Income Fund' and suffered a name change in 2022:

Denver, March 25, 2022 - Boulder Growth & Income Fund, Inc. (NYSE: BIF) today announced that its Board of Directors (the "Board") has approved a change to the name and ticker that will become effective on April 4, 2022. On that date the Fund's name will change to SRH Total Return Fund, Inc. and the Fund will trade on the New York Stock Exchange under a new ticker symbol "STEW".

The Board approved the change due to the belief that the new name better describes the Fund's investment objective of providing total return to investors. The Board also agreed the change was appropriate to remove the geographic reference in the name, as such association that was no longer applicable to either Paralel Advisors LLC and Rocky Mountain Advisors, LLC, the Fund's respective investment adviser and investment sub-adviser.

An investor needs to note the CEF has a very large holder in Mr. Stewart R. Horejsi , who is an American billionaire:

Mr. Horejsi is a big admirer of Mr. Buffett, so always expect STEW to have large positions in Berkshire Hathaway.

This CEF is very concentrated, with the top 10 holdings composing 88% of the fund. Do not expect a lot of changes here. Berkshire will always be a very large chunk of this CEF, with management adding/taking out names that could potentially generate alpha. Given its long track record and ownership structure, the CEF is trading with a -18% discount to NAV. The range for the discount is very tight, with very few opportunities here to trade a gap down in the discount to NAV.

Despite its large cap value build, the fund will not escape the next leg down in the market. We have already seen the discount to NAV move towards the bottom of the range. Although the top holdings seem concentrated, having a position in a diversified conglomerate like Berkshire ensures granularity. Expect more weakness short term, weakness which can be used for long term positioning. For a retail investor interested in value names and especially Berkshire, STEW is the correct vehicle to extract dividends from such a portfolio.

Analytics

• AUM: $1.2 billion.
• Sharpe Ratio: 0.55 (3Y).
• Std. Deviation: 20 (3Y).
• Yield: 4%
• Premium/Discount to NAV: -18%
• Z-Stat: -1.35
• Leverage Ratio: 13%

Holdings

The fund has a small amount of holdings:

We can see that the top 10 holdings compose 88% of the fund, with Berkshire accounting for over 42% of the portfolio. The rest of the names are generally value oriented equities, although Microsoft and Cisco are also present in the portfolio.

This is the modus operandi for this CEF - expect a small list of names, with Berkshire Hathaway at the top of the list.

Performance

The fund has a comparable performance to Berkshire Hathaway and the S&P 500 index in the past year:

Longer term, STEW lags on a total return basis:

Ultimately, there is a cost to the CEF structure in management fees, and the fund to a large extent tracks BRK.B, hence the ability to generate outperforming alpha is limited here.

Premium/Discount to NAV

The CEF has a very well defined range for its discount to NAV:

STEW is not a name with a high beta to market risk-on / risk-off environments. Given its track record and ownership structure, expect the discount to reside in its historic range for the foreseeable future. A significant divergence with its historic range could be a good trading opportunity.

Distributions

The fund has a managed distribution policy:

SRH Total Return Fund, Inc. (the "Fund"), acting pursuant to a Securities and Exchange Commission exemptive order and with the approval of the Fund's Board of Directors (the "Board"), has adopted a plan, consistent with its investment objectives and policies to support a level distribution of income, capital gains and/or return of capital (the "Plan"). In accordance with the Plan, the Fund distributed $0.12 per share on a quarterly basis during the year ended November 30, 2022. Beginning in January 2023, the quarterly distribution increased to $0.125 per share. The fixed amount distributed per share is subject to change at the discretion of the Fund's Board. Under the Plan, the Fund will typically distribute most or all of its available investment income to its stockholders, consistent with its primary investment objectives and as required by the Internal Revenue Code of 1986, as amended (the "Code").

Basically the CEF will distribute $0.125 quarterly going forward, but if there are no capital gains in its portfolio then return of capital will be used:

We can see that from the latest Section 19a Notice, where 64% of the distribution is actually ROC.

Conclusion

STEW is an equities closed end fund. The vehicle has a very long track record, and has recently experienced a name change from 'Boulder Growth & Income Fund'. The CEF's main shareholder is Stewart R. Horejsi, an American billionaire. Mr. Horejsi is a big fan of Mr. Buffett, hence the large holding in Berkshire in this CEF (over 42% of the portfolio). Expect this to persist as long as Mr. Horejsi is involved. This CEF is very concentrated, with the top 10 holdings composing 88% of the fund. However, having a position in a diversified conglomerate like Berkshire ensures granularity. The vehicle has a managed distribution policy that disburses $0.125 quarterly, which currently amounts to a 4% yield. Given the underperformance in the equities in the portfolio, the fund is now using a high amount of ROC. Expect more weakness in the name in the short term and a high ROC utilization. Investors who want to extract dividends from the Berkshire Hathaway common equity are well served by STEW. Otherwise, the fund lags in total return when compared to Berkshire outright or DIA and SPY for longer periods of time.

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