SafetyinNumbers

An example from Twitter. Ian is a smart guy and owns LATAM airports but they all screen well. FIH doesn’t.

Great analysis as always Viking. It will be interesting to compare these returns to the accounting return. It’s part of what gives me high confidence in forward ROE over the next 5 years. These deferred gains may take years to realize in names like Eurobank meanwhile the accounting return on carrying value remains high enough that ROE gets a big boost at 3:1 leverage.

Most active managers also use quant screens.

Fixed income makes sense because presumably they are passing through the income. My point was that anything that looks like FIH trades at a discount like FIH. The discount to IV is even bigger because of how conservative they are with marks. Even the public positions trade at a discount in part because of how much FIH owns.

I think we just disagree about what market structure entails. These companies screen well and that’s what quants like.

Can you list them? I’m surprised that there are so many closed end funds that trade at premiums to listed NAV.

Hi Ashton, There is a thread set up to discuss the week by @NormR and a link to his website that lists all of the events. Thanks for coming to Toronto and hope I get the chance to meet you.

Go talk to OMERS. They have 20m shares.

I think the take under talk is nonsense because of the much worse capital treatment for the insurance companies. Also just because a take under is proposed doesn’t mean shareholders have to accept it. They usually do because they want to avoid a drawdown after experiencing a takeover premium.

If FIH consolidated all of its holdings it would likely trade at a different multiple. The holdcos with premium valuations are rollups and consolidate their holdings. They are eligible for ETFs and adored by quant funds. Again it comes back to market structure.

They did a reorganization and merged the operating company and holding company together which may have caused an issue. On a separate note, as soon as the reorganization was done, the buyback turned back on again.

I think the conclusion is incorrect. The market likes stocks that screen well and holdcos don’t. It’s a market structure issue.

I want the discount to close but I don’t want it to happen at the expense of making long term investments. I think they could have marked the portfolio up like Brookfield would and while that would mean a higher share price it would also have meant more fees. I have also seen with ELF.TO that, despite buying back half of the float, paying special dividends, increasing the regular dividend 30x and splitting the stock 100-1, it still trades at a 30%+ discount when they own the most liquid stocks in the world. Ultimately, I’m taking a longer term view and don’t subscribe to your view that they are nefarious actors.

So ultimately buying shares at higher prices. It’s a tough problem.

I think the big assumption here is that when the BV goes up to reflect the IPO, holders of FIH will lift their offers to a similar discount to BV that it trades at now. I’m less sure that new buyers will show up unless the discount is bigger.

They have recycled assets in the past. They will do so in the future. The longer FIH exists, the more frequent realizations will come.

The discount won’t close for long. You will sell on the discount closing short term and then the discount will grow again. There are no natural buyers at a small discount and that includes FIH itself. The only reason the discount has narrowed recently is because there is a view on the Anchorage IPO happening in the next 12-18 months. I disagree on poor NAV growth. The BV growth has been slow but IV has grown reasonably well depending on how it’s measured. I think it’s some premium to liquidation value given the network they have built.

A bigger stopper to buybacks is that the float isn’t that big to begin with after Fairfax and OMERS shares given how much they have bought back already.

A value trap is usually a situation where the IV isn’t growing. That’s not the case here.

I prefer to see them issue debt to buyback shares vs turning away potential investment opportunities. Do you think if IDBI happens and it’s a GP/LP structure with management/performance fees attributable to FIH, that it will help close the discount?

I call what they do, Expected Value, which is a probabilistic approach to investing. This is why they can make venture bets and buy commodity companies which makes Buffettians and Mungarians wince. Their size makes them skew towards quality especially with respect to the jockeys. Quality with respect to commodity companies means low costs and long reserve life.

Thanks! I’m not used to having concentrated positions and Fairfax is pretty special. I haven’t traded around my position and have only added. My plan is to trim when I forecast forward ROE < 10% which should keep me in the position for a long time. I think it will be challenging (but rewarding) to hold on as the multiple expands well beyond 1.7x.

Someone needs to buy the stock for it to go up. Buybacks are exactly that. If buying something at 5x earnings which is then buying back stock, it should go up even without multiple expansion.

The structural issues are it’s not eligible for passive ETFs, it’s a PFIC and it doesn’t screen well for quants. It’s hard to replace that demand for shares so the price is set by the marginal buyer who wants a big discount to BV. Could they be more like Brookfield and mark everything to a full valuation? Probably not, because it’s not the culture.

I think it’s idiosyncratic. Could see some profit taking but the seasonal trade is still in Fairfax’s favour which is not surprising given all of the news flow over the next 5 months.