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MUTUAL UNDERSTANDING
Bill and Warren's excellent adventure
Microsoft founder's Cascade fund shows how to make most of value investing
By Jonathan Burton, MarketWatch
Last Update: 8:12 PM ET Nov 10, 2006

SAN FRANCISCO (MarketWatch) -- With stakes in energy, railroads, communications and hotels offsetting his massive technology-sector exposure, Bill Gates can teach investors a thing or two about portfolio diversification.
Gates, the chairman of computer-software giant Microsoft Corp. (MSFT
Microsoft Corporation

MSFT ) and the world's richest person, has a close personal and professional connection with Warren Buffett, the chairman of conglomerate Berkshire Hathaway Inc. (BRK.A
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:
BRK.A ) (BRK.B
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BRK.B ) and the world's second-richest person. Gates is on Berkshire's board, and Buffett has pledged the bulk of his personal wealth to the Bill & Melinda Gates Foundation to augment its charitable efforts.

Focus on funds, ETFs

The kindred spirit that ties Gates and Buffett also factors in the Microsoft co-founder's personal investments. Cascade Investment LLC, the Kirkland, Wash.-based entity that oversees Gates's investment portfolio, is quiet about its investment moves. But Securities and Exchange Commission filings paint a picture of a value-conscious stock portfolio that Buffett would not only bless, but probably has influenced too. See full story.
"It's a whole market approach like Buffett's that tries to capitalize on select stocks within an industry on the rebound," Timothy Vick, senior portfolio manager at Sanibel Captiva Trust, wrote in an interview conducted by e-mail.
Chart of CNI
As of June 30, the most recent filing date available, the stock portion of Cascade's portfolio was worth about $3.4 billion, with about $1.4 billion of that in shares of Canadian National Railway Co. (CNI
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CNI ) The stock has been a top performer, up 30% in the past 12 months, reflecting the global trade boom and rail's low costs relative to trucking and other transport options.
And purely from a diversification standpoint, railroads are tailor-made for an investor like Gates, whose estimated $50 billion fortune still mostly hinges on the future of Microsoft. In the universe of asset allocation, shares of railroad companies and technology firms typically don't revolve in the same orbit.
Chart of RSG
Other top investments included: Republic Services Inc. (RSG
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RSG ) , a trash-hauling business; Latin American communications titan Grupo Televisa SA (TV
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TV ) ; PNM Resources Inc. (PNM
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PNM ) , an electricity and natural-gas utility in New Mexico and Texas, and not least, Class A shares of Berkshire, with its strong presence in the insurance business and dozens of privately held and public companies representing a wide array of industries.
Smaller Cascade holdings as of June 30 included Otter Tail (OTTR
Otter Tail Power Company

OTTR ) , a Midwestern-based utility and holding company; amusement park operator Six Flags Inc. (SIX
six flags inc com

SIX ) ; and Four Seasons Hotels Inc. (FS
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FS ) (CA:FSH: news, chart, profile) , the luxury resort chain that Gates and other partners offered to take private earlier this week in a $3.7 billion deal.
Vick, the author of a book on Buffet's thrifty approach to stocks, said that like Berkshire, Cascade's investment strategy is highly opportunistic.
"Gates dabbles occasionally in new technologies, but basically relies on old-economy stocks where value can be unlocked," Vick noted. "It's certainly not the portfolio of someone who has made his billions and now wants to sit tight and collect interest."
Good company
The stocks in the Cascade portfolio have attracted attention from other well-regarded investment managers.
Canadian National Railway, for example, is a large holding in Vanguard Wellington Fund (VWELX
Vanguard Wellington;Inv

VWELX ) , Janus Fund (JANSX
Janus Fund

JANSX ) and DWS Equity Partners Fund (FLEPX
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FLEPX ) , according to investment researcher Morningstar Inc.
Similarly, Republic Services has investors in Legg Mason Special Investment (LMASX
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LMASX ) , Mutual Shares (TESIX
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TESIX ) and Meridian Growth Fund (MERDX
Meridian Growth
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MERDX ) . Like railroads, waste management is a business with little relationship to the technology industry, making the business an effective diversification move for Gates. RSG stock is up 22% in the past 12 months.
Chart of TV
Grupo Televisa, in turn, moves Gates into one of the world's fastest-growing emerging markets and a company with interests in cable television, satellite service and publishing. Televisa's stock is up 29% in the past 12 months, benefiting Cascade along with popular mutual-funds including T. Rowe Price Latin America (PRLAX
T Rowe Price Int:Lat

PRLAX ) , Dodge & Cox International Stock (DODFX

DODFX ) , and Franklin Global Communications (FRGUX
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FRGUX ) .
Chart of PNM
PNM Resources is a small-capitalization holding that follows Buffett's lead into utilities, an industry much like insurance, where easing regulatory constraints are creating investment opportunities. Mutual-funds riding this trend with a stake in PNM recently included Lord Abbett Small Cap Value (LRSCX
Lord Abbett Res:SCV;A
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LRSCX ) , Franklin Balance Sheet Investment (FRBSX
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FRBSX ) and Harbor Small Cap Value (HASCX
Harbor:Sm Cap Val;Inst
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HASCX )
Berkshire, of course, is the temple of the Oracle of Omaha himself, a path to investing directly alongside Buffett -- and now, the Gates Foundation.
Chart of BRK.A
Mutual funds that adhere to Buffett's precepts and are major investors in Berkshire stock include Weitz Value (WVALX
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WVALX ) , Fairholme (FAIRX
Fairholme:Fairholme
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FAIRX ) , FMI Large Cap (FMIHX
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FMIHX ) and Tilson Focus (TILFX
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TILFX ) .
"The appeal of Buffett is enduring," said Jeff Auxier, manager of the Auxier Focus Fund (AUXFX
Auxier Focus Fund;Inv
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AUXFX ) , another portfolio with a large stake in Berkshire shares. "Buffett's wisdom is in his temperament. Great investors take emotion out of the equation. Doing your homework, waiting for the right price, really works." End of Story
Jonathan Burton is MarketWatch's investments editor, based in San Francisco.

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