Wealthy figure Bill Gates Owns Over Half of His Trust's Portfolio in Two Outstanding Stocks
The Bill & Melinda Gates Foundation (BMGF) undertakes various philanthropic projects globally, and as of December 2023, they have distributed grant payments amounting to $78 billion. This charitable giving is supported by the BMGF Trust, which manages the foundation's endowment fund.
Notably, the BMGF Trust recorded an annual return of 11.4% over a three-year period ending in June 2024. During the same period, the S&P 500 (^GSPC 1.09%) achieved an annual return of 10%, considering dividends. This outperformance makes the BMGF Trust an excellent case study for individual investors.
As of June 2024, the BMGF Trust had $48 billion spread across 23 investments. however, nearly half of the funds, 54%, were invested in just two stocks. 33% were allocated to Microsoft (MSFT -0.10%) and 21% were invested in Berkshire Hathaway (BRK.A 1.37%) (BRK.B 0.86%). Both investments have shown strong performance over the past three years, outperforming the S&P 500.
Let's delve into Microsoft and Berkshire Hathaway.
Microsoft: 33% of the BMGF Trust
Microsoft boasts two primary growth drivers: commercial software and public cloud services. It holds a strong competitive position in both categories. According to Morgan Stanley, its market share in commercial software is anticipated to reach 19% this year, due to its strong performance in Office, Dynamics, and Power Platform products.
Microsoft has witnessed an increase in software market share in recent years and is likely to continue this trend as it integrates AI features into its products. For example, the generative AI assistant Microsoft 365 Copilot, which was rolled out last November, has already been adopted by nearly 70% of Fortune 500 companies.
Microsoft is a formidable competitor thanks to its combination of industry-leading commercial software with cloud infrastructure and platform services (CIPS). While its cloud computing unit Azure lost 3 percentage points of CIPS market share in the previous year, as per Synergy Research Group, RBC Capital believes Microsoft is in a stronger position than its competitors due to its unique partnership with OpenAI.
In the first quarter of fiscal 2025, which concluded in September 2024, Microsoft reported impressive financial results. Revenue increased by 16% to $65.6 billion, driven by robust sales growth in cloud services. Meanwhile, GAAP earnings grew by 10% to $3.30 per diluted share. Notably, the acquisition of Activision added 3 points to sales growth and subtracted 2 points from earnings growth.
Microsoft CEO, Satya Nadella, stated, "Our AI business is on track to surpass an annual revenue run rate of $10 billion in the next quarter, making it the fastest business in our history to reach this milestone." Morgan Stanley analysts believe this figure can compound at 53% annually to reach $67 billion in fiscal 2029, making Microsoft "the clearest AI winner in software."
Looking forward, Wall Street forecasts Microsoft's earnings to grow by 14% annually up until 2028. Despite this, the current valuation of 35 times earnings might seem expensive. Nevertheless, given Microsoft's robust competitive position in the commercial software and cloud services markets, it warrants a premium valuation. Investors comfortable with volatility may consider buying a small position.
Berkshire Hathaway: 21% of the BMGF Trust
Berkshire Hathaway is a holding company with a diverse portfolio of subsidiaries. Ranging from freight railroad transportation and manufacturing to retail and utilities. However, its insurance businesses are its most significant feature as they generate "float," or investable capital obtained from unpaid insurance premiums.
Berkshire leads in insurance float, having more investment capital than other insurance firms. CEO Warren Buffett and his co-investment managers Todd Combs and Ted Weschler have effectively utilized this capital. Berkshire's book value per share (a measure of intrinsic value) has increased by approximately 80% over the past five years.
Notably, Berkshire's insurance segment consistently turns a profit due to disciplined underwriting. This year, Berkshire has achieved a combined ratio of 89%, far below the industry average of 101.5%. Ratios below 100% signify profitable underwriting.
In the third quarter, Berkshire narrowly missed Wall Street's estimates. Operating earnings (excluding gains and losses on stocks) declined by 6% to $10.1 billion, falling 4% short of the consensus estimate. The decline was primarily due to a decrease in insurance-underwriting earnings, offset by an increase in earnings from energy and freight railroad transportation segments.
Going forward, Wall Street expects Berkshire's operating earnings to grow by 5% annually up until 2026. This valuation of 24 times operating earnings might look expensive. However, Buffett himself seems to concur, as he did not repurchase stock during the third quarter of 2024 - the first time in 25 quarters he did not purchase shares. This suggests that Berkshire's stock might be overvalued in Buffett's opinion.
The BMGF Trust's investment in Microsoft and Berkshire Hathaway has yielded significant returns, outperforming the S&P 500 over the past three years. This success in investing has contributed to the BMGF Trust's $48 billion fund, with 33% allocated to Microsoft and 21% invested in Berkshire Hathaway.
Investors interested in following the BMGF Trust's strategy might consider Microsoft due to its strong performance in commercial software and public cloud services. The company's robust growth, driven by products like Office, Dynamics, and Power Platform, and its integration of AI features, such as Microsoft 365 Copilot, make it an attractive investment option.
