Fairfax India new issue

[giofranchi]

One question I have is what are the fees on the illustrative India fund returns they include in the prospectus?

 

Packers

 

Packer,

I don't know the answer to your question... But please consider:

20.5% is net of fees and expenses... Therefore, gross CAGR should be higher.

How much higher? I don't know... To be conservative, let's say 21%.

That was before the government of Mr. Modi was elected.

How much could a pro-business environment help?

I don't know... Let's say another 1%? I think that assumption might turn out to be conservative too.

 

If we could except a 22% gross CAGR, I think you might agree this is a very good vehicle and a worthwhile investment.

 

Cheers,

 

Gio

[Packer16]

The reason I ask is the carry reduces the rate of return significantly even to the point of making the investment less than the index over almost all time periods if the investment fund returns have no carry associated with them.

 

Packer

[Zorrofan]

The reason I ask is the carry reduces the rate of return significantly even to the point of making the investment less than the index over almost all time periods if the investment fund returns have no carry associated with them.

 

Packer

 

MKL invested in this fund too, they would pay the same fees no?  So I can't see them being willing to under-perform the index. Or am I missing something??

 

cheers

Zorro

[original mungerville]

The reason I ask is the carry reduces the rate of return significantly even to the point of making the investment less than the index over almost all time periods if the investment fund returns have no carry associated with them.

 

Packer

 

You are saying the investment fund returns need to have "carry" associated with them to beat the index...I'm not following.

 

What carry are you referring to?

[Packer16]

Fairfax India pays a carry of 20% of the return above 6% to Fairfax in addition to a 1.5% asset management fee.  If the HWIC Asia fund does not have this carry, then the net return to Fairfax India may be materially less the HWIC Asia fund.  The fees for the HWIC Asia fund are not disclosed in the prospectus so I was wondering what these fee were so a comparison could be made.

 

Packer

[bearprowler6]

I suspect the HWIC Asia fund performance numbers were meant to be indicative rather than an absolute reflection of Fairfax India's future performance. Accordingly, I am not sure that one needs to make the direct comparison being suggested. Furthermore, the investment mandate within Fairfax India is far broader than in the HWIC Asia fund as the latter must adhere to investment insurance regulations of the various investee companies in that fund.

[original mungerville]

Fairfax India pays a carry of 20% of the return above 6% to Fairfax in addition to a 1.5% asset management fee.  If the HWIC Asia fund does not have this carry, then the net return to Fairfax India may be materially less the HWIC Asia fund.  The fees for the HWIC Asia fund are not disclosed in the prospectus so I was wondering what these fee were so a comparison could be made.

 

Packer

 

But Gio was talking about 22% gross return which presumably means before all fees and expenses.

 

My understanding is it is a 20% performance fee above 5% plus a 1.5% management fee.

 

So 22% - 5% = 17% * 0.2 = 3.4% performance fee plus 1.5% = 4.9% or roughly 5% total.

 

So 22% gross becomes 17% net.

 

One critical question here is does FIH plan to hedge the dollar/rupee exchange rate or not? (And were the HWIC Asia Fund investments hedged or not?) As one poster previously alluded to, currency hedging or exchange rate losses could be an important cost over time given India's past inflation rates. Has anyone dug into this?

 

 

 

 

 

 

 

 

 

[giofranchi]

One critical question here is does FIH plan to hedge the dollar/rupee exchange rate or not? (And were the HWIC Asia Fund investments hedged or not?) As one poster previously alluded to, currency hedging or exchange rate losses could be an important cost over time given India's past inflation rates. Has anyone dug into this?

 

I don’t know the answer to this either…

 

But I know:

1) Fairfax thinks the new Indian government has taken the right measures to check inflation,

2) The 20.5% CAGR net of fees and expenses of the HWIC Asia Fund was in USD, therefore they did quite a good job to shelter themselves from an inflation environment that presumably has been far worse than the one we should expect in the future.

 

Cheers,

 

Gio

 

[Packer16]

In running the numbers the impact of the carry is only about 3% plus 2% for the other investment gets an adjustment of 5% assuming the fund has a 1.5% asset management fee.  From the table then the illustrative fund would only outperform on a life and 1-yr basis.  Good performance but not one I am willing to pay a premium to NAV for.

 

Packer

[giofranchi]

From the table then the illustrative fund would only outperform on a life and 1-yr basis.  Good performance but not one I am willing to pay a premium to NAV for.

 

Packer,

let me understand better, because I think I am missing something.

If you are not willing to pay a premium to NAV, it means you think the 22% gross CAGR I hinted at is not achievable (not even a 20% gross CAGR for that matter! Which is lower than what the HWIC Asia Fund earned NET).

Why?

You are saying that performance of the HWIC Asia Fund is distorted by last year results which have been too high?

 

Thank you,

 

Gio

 

[giofranchi]

Moreover, why do you assume the HWIC Asia Fund results are all we should be looking at? Fairfax invested very successfully in Thomas Cook, in IKYA, and in Sterling Resorts too, which are not included in the performance of the HWIC Asia Fund.

 

Gio

 

[Packer16]

I am assuming the 20.5% in the prospectus is for a fund with no carry after fees.  In the footnotes it states that 2.2% of the performance is due to securities from other countries so India performance is 18.3%.  Less a carry of about 2.5% gets us to 15.8% versus an index of 9.0%.  Now this 4.7% less than the stated performance.  So for 10-yr and 5-yr periods the illustrative investment would have lagged the index for the 3-yr it is about breakeven and exceeds clearly only over the life of fund.  Another consideration is the size of the fund throughout the period versus the size of Fairfax India.  If in the earlier periods the fund was smaller than Fairfax India then I think replicating these returns will be difficult.  Most of the return was generated from 2001 to 2007. 

 

 

Packer

[giofranchi]

So for 10-yr and 5-yr periods the illustrative investment would have lagged the index for the 3-yr it is about breakeven and exceeds clearly only over the life of fund. 

 

This doesn’t bother me at all. I am used to very lumpy results and have come to accept by now that events which lead to market beating results don’t come often and materialize only once in a while… Still they make a very important difference over time!

 

Another consideration is the size of the fund throughout the period versus the size of Fairfax India.  If in the earlier periods the fund was smaller than Fairfax India then I think replicating these returns will be difficult.

 

This also doesn’t bother me much: the Indian stock market is over $1 trillion, and on top of that there is the private market to which FIH will surely have access. Both the Indian stock market and the private market will grow with the economy. I think there will be plenty of opportunities for many years to come.

 

15.8% annual imo is nothing to complain about! ;)

 

Moreover FIH will have access to private equity type of dealings, which probably were precluded to the HWIC Asia Fund. And it will operate in a more business friendly environment (also inflation is clearly trending down since 2012).

 

Cheers,

 

Gio

[frommi]

Gio by your logic Senvest Capital should trade at 1.5-1.8x bookvalue, too. But it doesn`t, has never and probably will never, despite the fact that it has a similar fee/expense structure and CAGR like FIH.

[giofranchi]

Gio by your logic Senvest Capital should trade at 1.5-1.8x bookvalue, too. But it doesn`t, has never and probably will never, despite the fact that it has a similar fee/expense structure and CAGR like FIH.

 

It is not “my logic”… It is math.

If Senvest Capital has the same CAGR I expect of FIH, and I am using here the number Packer has calculated 15.8%, an investor who bought at 1.2xNAV 15 years ago has enjoyed a CAGR for his/her investment of 14.4%, provided Senvest Capital trades at BV today.

Would you call a 14.4% CAGR sustained for 15 years a bad investment? I don’t think so.

 

Gio

 

[frommi]

Yes but that is history, you can`t be sure to get these results in the future.

[giofranchi]

Yes but that is history, you can`t be sure to get these results in the future.

 

And that's exactly why I invest in FIH, while I don't invest in Senvest Capital (with all due respect for Senvest!). ;)

 

Gio

[giofranchi]

I think there are at least three features which could not be easily copied by a single investor, nor by another investment fund:

1) FIH’s proprietary research capabilities and broad network in India

2) FIH’s attractive structure for long-term investments (permanent capital)

3) FIH’s access to private equity type investments

 

Gio

 

[original mungerville]

I think there are at least three features which could not be easily copied by a single investor, nor by another investment fund:

1) FIH’s proprietary research capabilities and broad network in India

2) FIH’s attractive structure for long-term investments (permanent capital)

3) FIH’s access to private equity type investments

 

Gio

 

I largely agree. One poster was suggesting FIH NAV could be recreated buying Indian public equities and therefore a premium to NAV for FIH is not warranted. Meanwhile, my feeling is that

 

1) several of these deals are going to be purchases of private businesses which can be purchased at far lower p/e ratios relative to public equities in India. Further, they will tend to seek out

2) trustworthy management whereas many managements of public businesses in India can be corrupt to a degree (this also happens in other countries, including developed countries) and

3) with managerial rather than entrepreneurial skills/tendencies (ie the private businesses purchased by FIH will be more entrepreneurial).

 

I could then see FIH trying to take these public to realize the NAV increase upfront rather than wait to have earnings build over many years. So buy at 8x earnings, operate for a few years and once major expansion plans are in place, take public to fund those plans while moving the p/e from 8x to 16x or higher.

 

[giofranchi]

We wouldn't be doing this (FIH) if we did't think we could achieve 20% annual gross, or 15% annual net, for our shareholders.

--Prem Watsa at the 2015 FFH Annual Meeting

 

 

Gio

[giofranchi]

Why the jump in share price yesterday and today? Any noteworthy piece of news that I have missed? ???

 

Gio

[Alekbaylee]

Dunno but Fairfax is poised to gain big if a Canada-India free trade were to materialize...

http://www.theglobeandmail.com/report-on-business/international-business/canada-chases-ambitious-free-trade-pact-with-india/article23906875/

[Guest notorious546]

We wouldn't be doing this (FIH) if we did't think we could achieve 20% annual gross, or 15% annual net, for our shareholders.

--Prem Watsa at the 2015 FFH Annual Meeting

Gio

 

*cough* sales pitch *cough*

[petec]

We wouldn't be doing this (FIH) if we did't think we could achieve 20% annual gross, or 15% annual net, for our shareholders.

--Prem Watsa at the 2015 FFH Annual Meeting

Gio

 

*cough* sales pitch *cough*

 

It's a closed end fund and they've already sold it.  And they say the same for FFH itself.  So much as I appreciate the cynicism, and I do, I suspect they believe this.

[giofranchi]

Q1 2015 Results

 

Fairfax India Holdings Corporation (TSX: FIH.U) announces net earnings of $4.01 million in the first quarter of 2015 ($0.06 per basic share). Book value per basic share (which equals the Net Asset Value Per Share used in calculating fees payable by Fairfax India) was $9.59 at March 31, 2015.

 

Subsequent to its initial public offering, Fairfax India, pending identifying and completing longer term investments in Indian businesses, invested most of the net proceeds of the offerings in permitted investments. At March 31, 2015, Fairfax India held $40.4 million of cash and cash equivalents and permitted investments of $976.9 million.

 

Gio

PRFIH-FIH-announces-net-earnings-of-4mn-dollor-in-the-first-quarter-of-2015.pdf