SAN FRANCISCO (Dow Jones) -- For Cascade Investment LLC and manager Michael Larson, the road to overseeing the personal wealth of Microsoft Chairman Bill Gates got off to a bumpy start.

In the late 1990's, Cascade and a group that included Saudi Prince Alwaleed Bin Talal invested in Teledesic LLC, a business run by cellular pioneer Craig McCaw that had dreams of building a broadband satellite-communications network.

Despite $200 million from the prince and the support of Cascade, Teledesic fizzled in late 2002 amid a depressed climate for telecom and technology stocks in general.

This past week, Cascade and the prince joined forces once again, only this time on a much more down-to-earth investment, offering $3.7 billion to buy Four Seasons Hotels Inc. (FS) .

For Cascade, the proposal to take over a proven franchise with a bright future was more faithful to Larson's usual value-investment style -- an approach that in 2006 has outpaced the broad market's results. Indeed, to analyze some of Cascade's other equity holdings is to look at a group of stalwart stocks picked in the value-investing tradition made famous by Warren Buffett, who has become a close adviser to Gates as the two billionaires have vowed to give their fortune away to charity.

In the first part of his career, Gates co-founded Microsoft Corp. (MSFT) and built it into a major software company. His second major act was to crush his rivals and dominate the industry.

In June, the curtain went up on Act III, or what might be called Gates 3.0: With Buffett's help, Gates is embarking on the biggest philanthropic endeavor of modern times.And in his bid to make that charity an enduring powerhouse of generosity, Gates has directed Cascade Investment to amass a wide-ranging collection of investments, holdings that that have nothing to do with high technology and everything to do with long-term value.

Michael Larson, a former bond-fund manager with Putnam Investments, is the financial engineer and stock picker behind that historic undertaking.

As head of Bill Gates Investments, the 46-year-old Larson oversees Gates' personal wealth, which is housed within Cascade outside Seattle. At the same time, BGI is also responsible for the $32 billion Bill & Melinda Gates Foundation.

At Cascade, Larson's main goal is to diversify Gates's wealth away from the technology bias of his large Microsoft stake. He's done that mostly through bonds. But Cascade also has at least $3 billion invested in "old economy" stocks, which have outperformed the Standard & Poor's 500 Index this year.

Larson's record managing the foundation's money is also impressive for a money manager whose marching orders are to carefully and steadily build up the organization's philanthropic vault. Returns averaged 8.53% a year from 1999 through 2005, exceeding his 5% annual target. The S&P 500 gained less than 2% a year on average over those seven years.

Buffett's presence

It's not clear how Cascade and BGI generate returns because the firms are closely guard their strategies and holdings. Larson didn't return calls requesting an interview and representatives from the foundation and Microsoft both declined to comment.

However, Cascade discloses some of its large equity holdings with the Securities and Exchange Commission, although regulators have granted the firm confidential filing status, which allows it to only divulge those stakes that have already been made public.

Many of Cascade's biggest equity holdings are in industries that have been around since the days when the word "windows" was equated with anything but antitrust crackdowns. Among the top holdings are Canadian National Railway Co. ( CNI) , trash collector Republic Services Inc. (RSG) and Berkshire Hathaway Inc. (BRKA) (BRKB) , the insurance-focused conglomerate run by Buffett.

As of late June, those holdings were worth just over $3 billion, according to data that Cascade filed with the SEC.

In 2006, the stocks returned almost 17% on average through the end of September, exceeding the 6% gains by the S&P 500 during the same period, according to Morningstar data. (That excludes one Cascade holding -- Western Asset/Claymore Trust -- and uses Berkshire's Class B shares, not the company's Class A stock).

Indeed, with its lack of racy technology plays, Cascade's equity portfolio bears several similarities in common with Buffett's famed investment style.

Gates and Buffett have developed a closer personal and professional relationship in recent years. In late 2004, Gates joined the board of directors at Berkshire. This year saw Buffett's historic decision to transfer the bulk of his estimated $44 billion personal fortune to the Bill & Melinda Gates Foundation.

"I've seen a migration of Bill Gates's investing mentality towards Mr. Buffett's over the years," said Timothy Vick, author of "How to Pick Stocks Like Warren Buffett" and a senior portfolio manager at Sanibel Captiva Trust. "As they've become closer personally, their investing styles have come together too."

Vick said he doesn't follow Cascade closely, but a review of its equity investments suggests a "whole market" approach like Buffett's that tries to capitalize on select stocks within an industry on the rebound, he said.

"I see some Buffett influence in the stock portfolio, but it's more akin to the Buffett of old, before he started concentrating his money in quality franchises like Wells Fargo, American Express, and Coke," Vick added. "Cascade basically relies on old-economy stocks where value can be unlocked."

'Not a risk taker'

In a rare interview with Fortune magazine in 1999, Larson said Cascade and BGI put most of their money in bonds. The rest was invested in private-equity, stocks, commodities and real estate, according to the magazine's profile. "I'm not a risk taker," Larson told Fortune, noting that the main reason he invests in stocks at all is that some parts of the equity market aren't correlated to the performance of Microsoft shares.

Larson also took great pains to point out that while he e-mails and talks regularly with Gates, he's the decision maker when it comes to investments.

Larson studied economics at Claremont McKenna College, in Claremont, Calif., then got an MBA from the University of Chicago. Two other portfolio managers at Cascade, Alan Heuberger and Robert Thomas, are also Claremont alumni.

After stints at Arco and Putnam followed by an effort to start his own investment business, he was recruited to manage money for Gates.

Today, Larson maintains strong ties to Claremont, serving on the university's board of trustees, alongside other captains of the financial industry -- Henry Kravis and George Roberts of private-equity firm Kohlberg Kravis Roberts.

"He's very personable and straightforward in his advice and counsel," said Kevin Ennis, a lawyer at the Los Angeles-based firm of Richards, Watson & Gershon who used to be president of Claremont's alumni association.

Utility play

Ties to Buffett, while often not direct, still echo through some of Cascade's investments.

Earlier this month, PNM Resources (PNM) and Cascade agreed to create an unregulated energy company, known for the time being as EnergyCo, to serve the fast-growing West and Southwest regions of the United States.

The move capitalizes on utility deregulation in the U.S., a trend that's encouraged Buffett and other investors to make big acquisitions in power- generation recently. In 2005, Berkshire's MidAmerican Energy subsidiary agreed to buy PacifiCorp, the leading investor-owned electricity provider in the Northwest, for $9.4 billion. Buffett has said he'll make more big purchases in the sector.

"For Cascade, the establishment of EnergyCo provides a platform for capitalizing on solid growth opportunities in the unregulated energy sector," Larson said in a written statement on Nov. 3.

The money-management traits in common with Buffett extend beyond stock picks. Like the Oracle of Omaha, Cascade has inserted itself in corporate-governance issues like advocating for greater representation by independent board members.

Mark Beatty, Cascade's in-house lawyer, wrote a letter to the New York Stock Exchange in 2003 to criticize a proposed change to the rules on board independence. Beatty argued against special voting shares that often give founding families control over companies, even though they don't own a majority of the stock.

Cascade has also taken activist positions at companies it's invested in, including theme park operator Six Flags Inc. (SIX) and scrap metal company Schnitzer Steel Industries Inc. (SCHN)

Ethanol and energy

While steering a value-oriented course in the stock market, Cascade nevertheless has shown an appetite for betting on hot, new technologies.

Last November, Cascade invested $84 million in convertible preferred stock sold by Pacific Ethanol Inc. (PEIX) , to help the company build an ethanol production plant in California.

"They are tuned in to the alternative fuels space and the right way to conduct business and are helpful whenever asked," said William Langley, Pacific Ethanol's chief financial officer. "They are very thorough and understand what they're doing and what they want to accomplish."

Pacific Ethanol shares have tripled since the beginning of November as surging crude oil prices spurred interest in alternative fuels like ethanol.

Another departure from the Buffett investing playbook is Cascade's use of debt in private-equity transactions. Buffett shuns debt, but Cascade and the other investors behind the Four Seasons buyout offer plan to finance some of the deal by borrowing $750 million.

In any case, if there's one over-arching approach that's in keeping with the Buffett school of thought, it's Cascade's long-term view of its investments.

Four Seasons' Sharp, who is bidding with Cascade and Prince Alwaleed Bin Talal, said on Monday that he wasn't considering a buyout until he was told there could be some long-term strategic investors "who might be interested in facilitating an orderly transition of ownership of Four Seasons to a privately held company."

Executives at PNM and Pacific Ethanol tell the same story.

"One of the keys for us is that they are a long-term investor," Jeff Sterba, chief executive of PNM, said during a conference call with analysts earlier this month. "We were looking for an entity that has a long-term view and perspective on participating in the energy market and ... one of our largest investors turned out to be the ideal partner."

Pacific Ethanol's Langley said Cascade's team has made it very clear it's interested in helping build a "long-term alternative fuels business."

After all, Gates has set out to ensure that his philanthropic efforts will be his greatest legacy. With Michael Larson's steady investment strategy underpinning that objective, Gates's charitable work might just outlast the software empire that made it all possible.

  (END) Dow Jones Newswires
  11-12-06 2011ET
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