How to invest like billionaires

THE WORLD'S RICHES are presumably incredibly wealthy because they know how to put their money to work. Of course, there are some exceptions – like Royalty who have inherited their wealth.

Still, if you want clues to where the best places are to invest, it is handy to know which assets the rich are buying and selling.

The iBillionaire Index, launched about 18 months ago, aims to track what the wealthiest are investing in on the US stock market. Its record, back-tested, shows – unsurprisingly – that returns are superior to the S&P 500.

All of the stocks included in the iBillionaire Index are also in the S&P 500 index, which tracks the biggest publicly listed companies in the US, yet the iBillionaire outpaces the S&P 500 by at least 1% each year. This might not sound like much, but it adds up over time.

How does the index provider identify which stocks are moving in and out of billionaires’ stock portfolios? iBillionaire says it taps into the investment strategies of people like Warren Buffett, George Soros and Carl Icahn by monitoring information filed with the Securities and Exchange Commission.

"Performance only considers the equities in the billionaires’ portfolios. We do not take into account options (calls and puts), bonds or preferred stocks," it says of the iBillionaire Index methodology.

You can use the iBillionaire Index to search for ideas for your own stock portfolio. For example, if you are thinking about buying Apple (ticker: AAPL), you might take some comfort from seeing that this is the most popular share among Wall Street billionaires.

And, you might be interested to see that Facebook (ticker: FB) and Google (ticker: GOOG) are among the 30 stocks most favoured by America’s wealthiest stock market investors.Amazon (ticker: AMZN) – also incredibly powerful in the global internet economy – is not in the iBillionaire Index basket.

Warren Buffett’s Berkshire Hathaway (ticker: BRK) is also absent from the list of shares. This suggests that although more than 40 000 people make an annual pilgrimage to the Berkshire Hathaway annual shareholders’ meeting in Omaha each year, the very wealthiest are not in the group.

Another way to hitch a ride with Buffett and friends is by investing in an Exchange Traded Fund (ETF) that matches the iBillionaire index. An ETF is a collective investment scheme that invests in a spread of shares, but is bought and sold like stocks instead of through a fund provider.

It is easy to buy US-listed ETFs from South Africa. You can do this through a stock broker or online, through a web-based trading platform, using your foreign currency investment allowance.

These days you have a lot of money to play with before you hit a limit. You do not need SA Reserve Bank permission to invest your first R1m. In order to invest an additional R4m each year, you will require the approval of the South African Revenue Service.

The Direxion iBillionaire ETF (ticker: IBLN) only launched in August, so you may want to wait for it to build assets under management until you also invest. It’s a good idea opt for popular funds because they are more liquid, so you can sell quickly later if you need to.

IBLN has a gross expense ratio of just over 1% and a net expense ratio of 0.65%. Bear in mind you will pay charges for converting from rands to US dollars and you will also pay a stockbroking fee.

These expenses will erode excess gains over the S&P 500 so compare this fund with S&P 500 trackers, as you may find it is more beneficial to opt for a lower cost S&P 500 tracker in the long run.

On the other hand, it is cheaper to buy ETFs than a selection of stocks individually. If you are a buy and hold investor, you will probably find it more cost effective to invest in an ETF that includes the big companies you’d like to own – like Apple and Google – than each stock separately.

There are other risks highlighted by Direxion in the iBillionaire ETF prospectus. These include that:

*The Form 13F filings that are used to select securities are filed up to 45 days after the end of the quarter. “Thus, a given investor may have already sold their position in the security by the time the security is added to the index.”; and

*Form 13F filings do not include full details about investors purchases, for example the prices at which stocks are bought or sold and therefore may not provide the complete picture about the investors’ portfolio or strategy;

*Stocks in the index must also be US companies, must be part of the portfolio of at least one of the managers elected by the index provider and must have a market capitalisation of at least US$1bn.

The ETF provider notes, too, that there is no guarantee the wealth of a person equates to improved stock selection. So, there are no guarantees this index, or the ETF that tracks it, will perform better than the market, even though they have been constructed with that objective.

Billionaire index: snapshots










ETF portfolio – not an exact match of the index:



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