I was wondering if someone could help me understand something I noticed with FFH's goal to hit a 7% investment return.
The average investment portfolio allocation (2000-2017) with respect to cash & short term investments/bonds/stock is the following:
28%/52%/18% (2% in real estate and preferred shares).
The 2017 allocation is 49%/26%/23% (2% in real estate and preferred shares).
Their 10 year stock return was 4.2% as per their annual report. Assuming a 1.5% return on cash and 2.8% return on bonds. The total investment return is in the order of 2.4% currently.
This is significantly far from FFH's goal of 7%.
So I did a little digging into their 2017 annual report and came across pg 174 which describes their investment portfolio returns since 1986.
Taking their total return on average investment, I calculated their investment return based on the business cycles. What I got was this:
Time interval Geometric Return
Since inception 8.02%
Last 5 years 1.79%
Last 10 years 5.12%
Last 15 years 6.50%
Business Cycle
1986-1991 10.8%
1991-2001 8.9%
2001-2009 10.4%
2009-2017? 3.9%
So historically, their returns were above their target 7%. With the last cycle performing poorly (due to the hedging activity).
There was a change in accounting practice whereby at least on the table, 2007 to present is IFRS and before that CGAAP.
But included in the table are columns that include "Change in unrealized gains/losses on investments in associates". This is the difference between the Fair value less carrying value of T+1 and FV less carrying value of T0.
I notice that over time, there has been a progressive increase in unrealized value over time which is contributing to the total return.
I am a bit conflicted with respect to whether this is too aggressive (ie counting your eggs before that are actualized) or whether this would be appropriate given FFH's tendency to seemingly build value in its associates over time (eg Thomas Cook, First Capital).
An investment in FFH is really a bet on their ability to improve their investment returns over time. If the inclusion of their unrealized fair value gains is kosher, than perhaps the probability of FFH achieving their average return of 7% would be slightly less far-fetched.
Interested in hearing your thoughts on this manner.
Jerome
