STEW: A Contrarian Bet on Buffett's Legacy via a Discounted Closed-End Fund

The SRH Total Return Fund (NYSE: STEW) offers investors a unique opportunity to gain exposure to Warren Buffett's Berkshire Hathaway at a significant discount to its net asset value (NAV). With shares currently trading at a -23.14% discount to NAV—a historically wide margin—the fund presents a compelling value proposition for contrarian investors. By analyzing its concentrated Berkshire Hathaway holdings, fixed leverage strategy, and accretive distribution policy, we argue that STEW could be poised for a valuation rebound, especially as markets reassess the enduring value of Buffett's legacy.

What Makes STWE a Contrarian Play?

STEW is a closed-end fund (CEF) designed to deliver total returns through a portfolio focused on undervalued equity securities. Its defining feature is an over 37% allocation to Berkshire Hathaway, with Class A shares alone accounting for 37.47% of its assets. This concentration reflects the fund's strategy of mirroring Berkshire's long-term, value-driven approach. However, the market's aversion to concentrated risk has kept STEW's shares trading at a steep discount to NAV.

Value Investing: The Discount to NAV

The fund's -23.14% discount to NAV as of July 2025 is its most attractive feature. Historically, STEW has averaged a -22.53% discount over the past year, with the gap occasionally widening to -24.54%. This persistent discount creates a margin of safety for investors. For example, if STEW were to close its discount by just 5 percentage points, the share price would rise by approximately 7% without any change in NAV.

Leverage Analysis: A Double-Edged Sword

STEW employs 9.60% fixed leverage (via debt and preferred shares) to amplify returns. This strategy has historically boosted NAV performance: in 2024, the fund's NAV returned 21.82%, outperforming its share price gain of 19.89% due to the persistent discount. The fixed leverage structure means returns are magnified in rising markets, but downside risks are also amplified.

Critically, the fund's low turnover rate (7% annually) and focus on long-term holdings minimize transaction costs, allowing leverage to work efficiently. While leverage increases volatility, it also underscores the fund's commitment to a patient, value-oriented strategy—a hallmark of Buffett's approach.

The Case for Berkshire Hathaway Exposure

Berkshire's stock has underperformed the broader market in recent years, but STEW's managers argue that its portfolio reflects undervalued assets. Berkshire's $700 billion equity portfolio, including stakes in Apple, Bank of America, and Coca-Cola, is managed with a long-term horizon. STEW's 37% allocation to Berkshire effectively grants investors a leveraged, discounted entry into this portfolio.

Managed Distributions: A Contrarian's Ally

STEW offers a 3.92% annualized yield based on its current market price, supported by a managed distribution policy. The fund's July 2025 distribution of $0.1650 per share (a 20% increase from 2024) is designed to provide steady income. Importantly, distributions are paid at NAV, which means a portion of each payment effectively reduces the discount if reinvested. This mechanism creates an accretive effect: over time, the fund's discount could narrow as distributions are recycled into undervalued shares.

Risks to Consider

• Concentration Risk: Over 37% in Berkshire leaves STEW vulnerable to Berkshire's performance. If Buffett's successors underperform, the fund's NAV could decline.
• Discount Persistence: There's no guarantee the discount will narrow. CEF discounts can widen further if investor sentiment sours.
• Leverage Costs: Interest expenses on the fund's debt (part of its 1.49% expense ratio) could erode returns if markets stagnate.

Investment Thesis: A Contrarian's Opportunity

The combination of STEW's discount to NAV, its low expense ratio, and its strategic leverage creates a compelling case for long-term investors. Here's why now could be the time to act:

1. Valuation Inversion: The fund's discount implies investors are pricing in Berkshire's underperformance indefinitely—a pessimism that may not hold if Berkshire's portfolio begins to outperform.
2. Buffett's Legacy: While Buffett's eventual departure is a risk, Berkshire's institutional structure and diversified holdings reduce dependency on any single individual.
3. Accretive Distributions: The managed payout strategy ensures investors receive a return even if the discount persists, while also incentivizing a eventual convergence between price and NAV.

Final Take

STEW is not for the faint of heart. Its Berkshire concentration and leverage amplify both risk and reward. However, for investors willing to look past near-term volatility and trust in Buffett's long-term value discipline, STEW offers a rare entry point to a legacy portfolio at a steep discount. With a historically wide margin of safety, low costs, and a distribution policy that rewards patience, this closed-end fund could be a cornerstone of a contrarian value portfolio.

Investment Recommendation: Consider a gradual position in STEW with a 3–5 year horizon. Pair it with other undervalued assets to mitigate concentration risk, and monitor the discount for signs of narrowing. The fund's structure and strategy suggest that patience could be richly rewarded.