Fairfax stock positions

[ourkid8]

@glider3834 Don't forget we still own the real-estate of Toys-r-us Canada.  Fairfax also partnered with Kennedy Wilson to buy European, US and Japanese real estate assets.

 

https://www.globest.com/sites/globest/2012/03/13/kw-fairfax-join-for-360m-in-european-assets/

Edited October 21, 2021 by ourkid8

[Viking]

8 hours ago, StubbleJumper said:

@Viking Thank-you for investing the time to meticulously quantify those holdings.  Followers of FFH knew the rough importance of each, but such a systematic coverage is an excellent resource for all of us.

 

Sometimes when I see a list, my mind jumps to what is not on the list.  In this case, your size-ranked list made me think a bit about where the Toys R Us holding would fit if it were publicly traded.  Recently, FFH astutely unloaded the operational element of Toys, but retained the real estate (I say "astutely" because I am guessing that Toys is getting its ass handed to it by Amazon...).  When FFH bought Toys for CAD$300m in 2018, the story was that the real estate alone was worth the purchase price, and now FFH has effective severed the real estate from the operations.  So, given that real estate prices in Canada have gone absolutely bonkers over the past three years, what are those properties worth today?  Has big-box real estate tracked the insanity of the residential real estate market?  Is it possible that those real estate holdings are worth something similar to FFH's holding in Recipe (ie, US$336m) today?   If anyone has any insight on the value of big-box sites, I'd love to read it.

 

Thanks again for the excellent work.

 

 

SJ

@StubbleJumper it is crazy to me how easy it is to get anchored in ones views; including when they are wrong. And once anchored, how persistent those views become. My spreadsheets help me to understand what Fairfax currently actually owns (versus what i think they own).
 

But the real value of the spreadsheets is to be able to compare to the past. i like to compare Fairfax’s holdings today to its holdings 4 or 5 years ago. Has anything meaningful changed? If so, is it a good change for the company and shareholders? If so, how good? 
 

i view Fairfax today as a turnaround. But if nothing has changed at the company why should shareholders expect a different future?
 

My next write up is going to dive into this topic: how does the Fairfax of today compare to the Fairfax that existed 4 short years ago?

 

Here is a teaser of the Fairfax of 4 short years ago: No hard market in insurance. Still shorting stocks. No Atlas. Eurobank was broken. Blackberry debs had a $10 strike. No TRS of FFH. No Stelco. Digit was just a dream… And that is just with the big holdings  
 

 

 

[StubbleJumper]

9 minutes ago, Viking said:

Here is a teaser of the Fairfax of 4 short years ago: No hard market in insurance. Still shorting stocks. No Atlas. Eurobank was broken. Blackberry debs had a $10 strike. No TRS of FFH. No Stelco. Digit was just a dream… And that is just with the big holdings

 

Yes, all of that, and four years ago the stock traded for US$530.  At the end of September, I added some shares at CAD$520.  There's bit of over-shoot and under-shoot on FFH's share price.

 

 

SJ

[glider3834]

On 10/21/2021 at 3:13 PM, Viking said:

6.) Resource positions = 10% of portfolio. Also large

I suspect this helps provide an inflation hedge along with their real estate exposure & their short duration positioning (to take advantage of higher interest rates) on the fixed income side

 

On 10/21/2021 at 3:13 PM, Viking said:

4.) Emerging market positions = 16% of portfolio. This is large. India is about 2/3 of this total. This is not including Digit preferred shares.

 

India is probably the #1 EM globally 

https://asia.nikkei.com/Opinion/Global-investors-should-start-paying-attention-to-India-s-rise

But the real story is that India has unfailingly delivered higher annualized returns than the Emerging Markets Index across all time periods. India has also performed better than China, for the most part. Cumulatively, over the past 10 years, in dollar terms, MSCI India has returned 124% as against 66% for the Emerging Markets Index, and 106% for the CSI 300, which includes the top 300 stocks traded on the Shanghai and Shenzhen stock exchanges.

 

 

On 10/21/2021 at 3:13 PM, Viking said:

10.) Top 3 individual positions = 28% of total. 72% is invested in something other than Atlas, Eurobank and Blackberry. Not as concentrated as I thought.

 

& around 9% of their total investment portfolio (including fixed income)

[Viking]

On 6/30/2021 at 10:14 AM, Thrifty3000 said:

It sounds 100% consistent with the strategy they've been executing over the last decade - establishing a diversified "portfolio" of capital allocators, each having demonstrated potential to outperform at multi-billion dollar scale (Fairfax India, Fairfax Africa, David Sokol, Byron Trott, Wade Burton, etc, etc). Out of a dozen or so allocators some will fail to impress. But, that doesn't matter. Fairfax only needs three or four to become true rock stars, and Fairfax will be able to shovel loads of free cash into the rock stars' piles for decades. The lackluster performers will fade out.

 

It's the same strategy they implemented to build a handful of outstanding insurance companies. Consolidating capital and authority among a handful of the most talented insurance managers they could find. Now they're doing it with their portfolio of non-insurance capital allocators. I think it's brilliant. Definitely fun to watch. And, I think so few people get it.

 

Imagine if you're Prem. Hmm... Do I give my next free dollar to a great insurance company in a hard market, or do I give it to Wade Burton, Byron Trott, David Sokol, and so on? Which proven opportunity to compound our investment at a high rate do we pick? What an incredible situation to be in!

 

It's different than Berkshire's strategy, where Buffett was the primary capital allocator for most of the company's existence. Berkshire will soon be handing the capital allocation reigns to a portfolio of TWO capital allocators - Todd and Ted - of whom only one has shown an ability to outperform.

 

This idea of nurturing a larger portfolio of capital allocators has been in the works for years at Fairfax. A beautiful example of ultra long term strategic thinking, IMHO.

@Thrifty3000 was re-reading some older posts (you were providing context for the Mosaic Capital take private deal) and i really like your big picture assessment that Fairfax has been building out for years a diversified “collection” of very good asset allocators to manage their large investment portfolio. This demonstrates very good strategic thinking / long term planning and execution. And it provides clarity around succession planning at Hamblin Watsa as the old guard ages out. And yes, interesting to compare Fairfax’s approach to Berkshire’s; VERY different.

 

Some examples:

- Burton/Chin in-house team at Fairfax: managing $1.5 billion of equities and increasing to $3 billion

- various limited partnerships managing $2.1 billion: BDT Capital Partners is one example (a $630 million position Dec 2020).

- India team managing $1.7 billion (Fairfax India, Quess, Thomas Cook, IIFL triplets): this group has been delivering stellar results for years

- Kennedy Wilson/real estate managing billions in real estate and fixed income investments: very successful decade long partnership

- Atlas/Sokol is $1.8 billion position: great start to relationship. New build growth is locked and loaded.

 

Much smaller examples include:

- Helios/Africa: early days here; New team looks promising but we will see

- Mosaic Capital taken private in June: focus on small to mid-cap Canadian companies

 

And then you have all the individual equity holdings:

- Stelco: very good capital allocation decisions post bankruptcy

- RFP: very good capital allocation decisions last 3 years

 

For the individual equity holdings good ‘capital allocation’ is a key input in assessing the overall quality of a management team. Grading each of the management teams of Fairfax’s various equity holdings would be an interesting exercise
 

 

Edited October 25, 2021 by Viking

[glider3834]

https://www.thehindubusinessline.com/companies/thomas-cook-india-witnessing-a-huge-surge-in-demand-for-leisure-travel/article37119888.ece

[Xerxes]

19 hours ago, Viking said:

@Thrifty3000 was re-reading some older posts (you were providing context for the Mosaic Capital take private deal) and i really like your big picture assessment that Fairfax has been building out for years a diversified “collection” of very good asset allocators to manage their large investment portfolio. This demonstrates very good strategic thinking / long term planning and execution. And it provides clarity around succession planning at Hamblin Watsa as the old guard ages out. And yes, interesting to compare Fairfax’s approach to Berkshire’s; VERY different.

 

Some examples:

- Burton/Chin in-house team at Fairfax: managing $1.5 billion of equities and increasing to $3 billion

- various limited partnerships managing $2.1 billion: BDT Capital Partners is one example (a $630 million position Dec 2020).

- India team managing $1.7 billion (Fairfax India, Quess, Thomas Cook, IIFL triplets): this group has been delivering stellar results for years

- Kennedy Wilson/real estate managing billions in real estate and fixed income investments: very successful decade long partnership

- Atlas/Sokol is $1.8 billion position: great start to relationship. New build growth is locked and loaded.

 

Much smaller examples include:

- Helios/Africa: early days here; New team looks promising but we will see

- Mosaic Capital taken private in June: focus on small to mid-cap Canadian companies

 

And then you have all the individual equity holdings:

- Stelco: very good capital allocation decisions post bankruptcy

- RFP: very good capital allocation decisions last 3 years

 

For the individual equity holdings good ‘capital allocation’ is a key input in assessing the overall quality of a management team. Grading each of the management teams of Fairfax’s various equity holdings would be an interesting exercise
 

 

 

If someone truly believes the "“collection” of very good asset allocators" theory, they ought to have a significant % of their wealth in FFH and for the long-haul, because that "collection" by definition diversifies away the top man risk, and one is outsourcing to Prem Watsa who in turn is outsourcing to that "collection". And you need time and space for the whole thing to play itself out and for that BV to grow and compound.

 

If one is playing the "closet-the-discount" to BV trade, as most people are doing here, than that "collection of great asset allocator theory" is largely irrelevant, since BV is where it is right now, and you are just riding the closing toward it. 

 

 

[Thrifty3000]

18 hours ago, Viking said:

@Thrifty3000 was re-reading some older posts (you were providing context for the Mosaic Capital take private deal) and i really like your big picture assessment that Fairfax has been building out for years a diversified “collection” of very good asset allocators to manage their large investment portfolio. This demonstrates very good strategic thinking / long term planning and execution. And it provides clarity around succession planning at Hamblin Watsa as the old guard ages out. And yes, interesting to compare Fairfax’s approach to Berkshire’s; VERY different.

 

Some examples:

- Burton/Chin in-house team at Fairfax: managing $1.5 billion of equities and increasing to $3 billion

- various limited partnerships managing $2.1 billion: BDT Capital Partners is one example (a $630 million position Dec 2020).

- India team managing $1.7 billion (Fairfax India, Quess, Thomas Cook, IIFL triplets): this group has been delivering stellar results for years

- Kennedy Wilson/real estate managing billions in real estate and fixed income investments: very successful decade long partnership

- Atlas/Sokol is $1.8 billion position: great start to relationship. New build growth is locked and loaded.

 

Much smaller examples include:

- Helios/Africa: early days here; New team looks promising but we will see

- Mosaic Capital taken private in June: focus on small to mid-cap Canadian companies

 

And then you have all the individual equity holdings:

- Stelco: very good capital allocation decisions post bankruptcy

- RFP: very good capital allocation decisions last 3 years

 

For the individual equity holdings good ‘capital allocation’ is a key input in assessing the overall quality of a management team. Grading each of the management teams of Fairfax’s various equity holdings would be an interesting exercise
 

 

 

Aww shucks. #Blushing  Thanks for the shout-out @Viking!

 

Given the continued progress on the non-insurance capital allocation strategy, the thesis on FFH still seems like a no brainer:

 

a) FFH generates and allocates hundreds of millions of dollars of free cash annually, among

b) a portfolio of insurance businesses capable of generating solid long term returns on capital

c) a stable of non-insurance capital allocators that can earn double digit returns in their sleep - Burton, Sokol, Trott, etc.

d) stock repurchases at a steep discount to intrinsic value

 

^ In a yield starved world full of greedy capitalists, can you guess which of those conditions I'm betting will no longer exist a few years from now? Haha.

[Viking]

6 hours ago, Xerxes said:

 

If someone truly believes the "“collection” of very good asset allocators" theory, they ought to have a significant % of their wealth in FFH and for the long-haul, because that "collection" by definition diversifies away the top man risk, and one is outsourcing to Prem Watsa who in turn is outsourcing to that "collection". And you need time and space for the whole thing to play itself out and for that BV to grow and compound.

 

If one is playing the "closet-the-discount" to BV trade, as most people are doing here, than that "collection of great asset allocator theory" is largely irrelevant, since BV is where it is right now, and you are just riding the closing toward it. 

 

 

Xerxes, your post really gets to the heart of why an investor might want to back up the truck and buy shares of Fairfax. Or not.
 

But first, a point of clarification. The transition/upgrading to “collection of very good asset allocators” has been going on at Fairfax for the past 4 years. It is largely done. (Of course this objective is never really done as It is an ongoing process.) Also, investors do not need to wait for the benefits to start to flow through to earnings. It is already happening and has been happening for a few years.

The issue is the benefit to earnings has been masked by the continuing and significant drag of legacy issues. Fairfax has been paying for years to clean up the sins of its past. These legacy issues were significant and cost the company hundreds of millions most years to clean up. In just 2020 it cost the company something like $700 million to close out its final short position.
 

Covid hit in March 2020 and rippled through Fairfax’s insurance business and investments causing yet more losses in 2020. This further muddied the waters making it more difficult for investors to see the improvements Fairfax has been making.

What ‘legacy issue(s)’ remain outstanding? That are going to cost Fairfax $200 or $300 million in 2021 or 2022 to clean up? Remaining runoff? Brit? Bryte? International insurance? Perhaps. Farmers Edge write down? Small potatoes (in the big scheme of things). Moving forward the size and frequency of issues should be more manageable by Fairfax as a normal part of doing business.

 

My view is ‘legacy issues’ will be much less of a drag moving forward. Most of the sins of the past have been corrected (this would make a great post all on its own…).  

 

As a result Fairfax’s reported results for years have understated the real earnings power of the underlying business. But this only matters when the constant drag from paying for past mistakes ends. And i think that is where we are at. 
 

At the same time, i expect insurance earnings to pop nicely the next couple of years due to the hard market. And investment earnings will also increase nicely as we exit covid and the various “asset allocators” Fairfax has partnered with continue to execute well. 
 

I view Fairfax as a turnaround story. And i think the turnaround is largely done. And in plain sight for investors to see. Earnings in Q1 and Q2 were phenomenal. And largely ignored (with the stock trading at US$410). Crazy what happens to earnings when the drag from legacy issues slows significantly.

 

As earnings grow the stock price will eventually respond and as investor sentiment improves we should see the PE multiple expand (with the stock trading closer to BV). This will likely play out over a couple of years and should provide investors will very satisfactory returns.
 

The next step i am hoping Fairfax takes in its journey is to start generating much higher free cash flow on a consistent basis. And start buying back stock in volume while the share price is crazy cheap. Aggressive share buybacks by Fairfax would accelerate the timing of the stock price trading closer to BV. 

Edited October 26, 2021 by Viking

[glider3834]

HWIC Asia Fund (parent FFH) looks like this is the investment vehicle through which FFH holds its IIFL positions 

https://trendlyne.com/portfolio/superstar-shareholders/custom/?query=Hwic Asia Fund Class A Shares

note recent $15mil approx investment in 5paisa part of cap raising closed in July 2021 -https://inc42.com/buzz/zerodha-rival-5paisa-to-raise-over-inr-250-cr-through-equity-issue/

 

Other investments include

- 49% stake in Quantum Advisors - US$3 bil Asset manager  https://hedgefunddb.com/Home/FundDetails/801-70375/QUANTUM-ADVISORS-PRIVATE-LIMITED

- 39% of Eagle Insurance - appears to be a small insurer in Mauritius https://www.eagle.mu/our-history

- HWIC has 2.97% interest in JKH & remaining 10.75% held by FFH (via their broker Citigroup) - https://keells.com/resource/annual-report/John_Keells_Holdings_PLC_AR_2020_21_CSE.pdf

 

 

 

Edited October 27, 2021 by glider3834

[Viking]

Along with WRB, i like to use Chubb to get a read of what is currently going on in the insurance industry.

 

The million $ question today is when is the hard market going to end? After Q2 results were reported i think there was a general consensus (among analysts) that the hard market had peaked in Q1 (in terms of rate increases) and there was concern rates would come down quickly beginning in Q3. And you saw this reflected in stock prices of insurers (weakness). 
 

So what are we actually seeing from insurers in Q3? While rate increases have moderated a little from the Q1 peak, the increases continue to run well in excess of expected loss costs trends. The hard market is continuing with no end in sight. This is GREAT news for Fairfax. Every additional quarter from here they are able to grow their top line at +20% will be a significant driver of higher profitability in future years.
 

Here is my key take away from the Chubb call:

 

Elyse Greenspan -- Wells Fargo -- Analyst

Hi, thanks. Good morning. Evan, you talked about robust price increases that we've seen for a while across the industry. As you think out over the course of the next year, do you think the industry can broadly maintain rate in excess of loss trend just as you think about the underlying dynamics out there?

 

Evan G. Greenberg -- Chairman and Chief Executive Officer

Elyse, I do. I think, look, I don't have a crystal ball, but from everything I see right now about rates and the shape and pattern of how, when I look over a number of quarters, what I would call is simply a moderation in the rate of increase, when I look at that and I look at the loss cost environment, and then I look at our retention rates against the kinds of rates we're achieving, so we achieved certain rate increases, but through a retention rate on business, which then tells me about the tone of the marketplace. All of that tells me that the industry should continue to achieve rate in excess of loss cost for some time to come.

Edited October 27, 2021 by Viking

[Parsad]

2 hours ago, Viking said:

Along with WRB, i like to use Chubb to get a read of what is currently going on in the insurance industry.

 

The million $ question today is when is the hard market going to end? After Q2 results were reported i think there was a general consensus (among analysts) that the hard market had peaked in Q1 (in terms of rate increases) and there was concern rates would come down quickly beginning in Q3. And you saw this reflected in stock prices of insurers (weakness). 
 

So what are we actually seeing from insurers in Q3? While rate increases have moderated a little from the Q1 peak, the increases continue to run well in excess of expected loss costs trends. The hard market is continuing with no end in sight. This is GREAT news for Fairfax. Every additional quarter from here they are able to grow their top line at +20% will be a significant driver of higher profitability in future years.
 

Here is my key take away from the Chubb call:

 

Elyse Greenspan -- Wells Fargo -- Analyst

Hi, thanks. Good morning. Evan, you talked about robust price increases that we've seen for a while across the industry. As you think out over the course of the next year, do you think the industry can broadly maintain rate in excess of loss trend just as you think about the underlying dynamics out there?

 

Evan G. Greenberg -- Chairman and Chief Executive Officer

Elyse, I do. I think, look, I don't have a crystal ball, but from everything I see right now about rates and the shape and pattern of how, when I look over a number of quarters, what I would call is simply a moderation in the rate of increase, when I look at that and I look at the loss cost environment, and then I look at our retention rates against the kinds of rates we're achieving, so we achieved certain rate increases, but through a retention rate on business, which then tells me about the tone of the marketplace. All of that tells me that the industry should continue to achieve rate in excess of loss cost for some time to come.

 

I spoke to Francis today, and he said the specialty lines aren't increasing much, but reinsurance is very strong.  So I would imagine that Fairfax's reinsurance businesses are going to continue to do well into 2023, but their more generalized specialty lines will not benefit nearly as much.  Fortunately, they do a ton of reinsurance!  Cheers!

[wondering]

https://www.theglobeandmail.com/business/rob-magazine/article-new-platforms-needs-lots-of-fresh-content-and-michael-macmillan-has/

 

Subscriber-only article about Blue Ant - a FFH investment

 

Summary

- media and broadcasting company funded in 2011

- content provider for streaming services

- old fashion cable TV still accounts for 1/3 of revenue

- 2014 purchased Omnia - gaming/YouTube content

- bought a share of Enthusiast Gaming in 2020

- sold most of its shares for $100 million gain

- opportunistic player

-Streaming and video-on-demand has shifted because of subscription fatigue

- rise of free advertiser-supporter streaming TV

- platforms (ex Samsung TV Plus, Pluto, and Roku) have seen significant growth recently

- Blue Ant changed by increasing its library of originally produced programming

- bought and started several international production houses

- this content airs on Netflix, Crave, Sky, and BBC

- Love Nature (nature appreciation channel) airs in 135 markets.

 

[glider3834]

4 hours ago, wondering said:

https://www.theglobeandmail.com/business/rob-magazine/article-new-platforms-needs-lots-of-fresh-content-and-michael-macmillan-has/

 

Subscriber-only article about Blue Ant - a FFH investment

 

Summary

- media and broadcasting company funded in 2011

- content provider for streaming services

- old fashion cable TV still accounts for 1/3 of revenue

- 2014 purchased Omnia - gaming/YouTube content

- bought a share of Enthusiast Gaming in 2020

- sold most of its shares for $100 million gain

- opportunistic player

-Streaming and video-on-demand has shifted because of subscription fatigue

- rise of free advertiser-supporter streaming TV

- platforms (ex Samsung TV Plus, Pluto, and Roku) have seen significant growth recently

- Blue Ant changed by increasing its library of originally produced programming

- bought and started several international production houses

- this content airs on Netflix, Crave, Sky, and BBC

- Love Nature (nature appreciation channel) airs in 135 markets.

 

smart timing on their Enthusiast gaming sales  - I like these 'platform content' bets (Blue Ant & Boat Rocker) by Fairfax because they have strong tailwinds (in our house we only watch streaming TV) - Boat Rocker still expects its revenue to materially ramp up in FY22 as fewer covid restrictions allow them to ramp up production - not  too worried by the share price dip since IPO. 

 

 

 

[Viking]

On 8/17/2020 at 4:22 AM, wondering said:

https://www.enthusiastgaming.com/enthusiast-gaming-announces-acquisition-of-omnia-media-forming-largest-gaming-media-esports-and-entertainment-platform-in-north-america/

 

Blue Ant (a small FFH investment) sells Omnia to Enthusiast Gaming (TSX:EGLX) for $11 million Cdn plus 18 million shares of Enthusiast.

 

Links about these companies

 

https://blueantmedia.com/portfolio/omnia-media/

 

https://www.enthusiastgaming.com/about-us/

 

interesting.  I wonder if FFH had a hand valuing the transaction?

Here is the post from @wondering that covers how Blue Ant got its significant stake in Enthusiast Gaming 14 short months ago.

[Viking]

2021 has been a very active and very good year for Fairfax owned media companies. Boat Rocker and Blue Ant look to be very well positioned to continue to benefit from the explosion in content creation. Boat Rocker will be using the proceeds from its recent IPO to drive significant growth. Blue Ant has significant resources to fund future growth (recently realized $100 million from reducing its stake in Enthusiast Gaming). Fairfax sold its small investment in Rouge Media in Q1. 

 

1.) Boat Rocker

- https://boatrocker.com/home/default.aspx

- presentation:  https://www.boatrocker.com/investor-relations/events-and-presentations/default.aspx

 

Fairfax 2020AR: Fairfax acquired a controlling stake in Boat Rocker Media in 2015 and to date has invested Cdn$110 million. Under the leadership of co-founders David Fortier and Ivan Schneeberg and CEO John Young, the business has grown revenue from Cdn$70 million in 2015 to an expected Cdn$700 million in 2021. Once a Canadian-focused production company with notable hits such as Orphan Black and Being Erica, Boat Rocker is now global with 85% of revenue from outside Canada. Several well executed acquisitions over the past three years yielded a growing Talent Management business, one of the largest animation studios in North America and a blossoming Hollywood-based production studio. The demand for quality content continues to grow at unprecedented levels. Boat Rocker is in the process of doing an IPO, which will provide the business with capital to grow organically and by acquisition. Fairfax will not be selling any of its shares in the IPO.

 

2.) Blue Ant Media

- https://blueantmedia.com

- old article (2 years old): https://playbackonline.ca/2019/12/09/media-company-of-the-year-blue-ant-media-2/

 

Fairfax 2020AR: There were many business winners and losers created from the disruption caused by the pandemic. One interesting ‘‘win’’ happened at our investee Blue Ant Media led by Michael McMillan, the former CEO of Alliance Atlantis, which was looking for opportunities in the fast evolving media landscape. Blue Ant purchased a Los Angeles-based gaming company called Omnia Media, and in 2020 merged Omnia with Enthusiast Gaming, a TSX-listed gaming company, receiving as consideration mainly shares of Enthusiast priced at Cdn$1.65. Enthusiast shares have recently been trading above Cdn$8, a win-win for Blue Ant and Enthusiast.

 

3.) Rouge Media -sold in Q1, 2021

- https://rougemediagroup.com

 

Fairfax 2020AR: the company sold substantially all of its interest in Rouge Media for consideration of approximately $10 and expects to record a nominal gain in the first quarter of 2021.

 

Rouge Media sale is another (small) example of Fairfax:

1.) selling an underperforming business with tough prospects

2.) reducing the number of privately held investments

Edited October 31, 2021 by Viking

[Viking]

On 10/25/2021 at 3:53 PM, Viking said:

Xerxes, your post really gets to the heart of why an investor might want to back up the truck and buy shares of Fairfax. Or not.
 

But first, a point of clarification. The transition/upgrading to “collection of very good asset allocators” has been going on at Fairfax for the past 4 years. It is largely done. (Of course this objective is never really done as It is an ongoing process.) Also, investors do not need to wait for the benefits to start to flow through to earnings. It is already happening and has been happening for a few years.

The issue is the benefit to earnings has been masked by the continuing and significant drag of legacy issues. Fairfax has been paying for years to clean up the sins of its past. These legacy issues were significant and cost the company hundreds of millions most years to clean up. In just 2020 it cost the company something like $700 million to close out its final short position.
 

Covid hit in March 2020 and rippled through Fairfax’s insurance business and investments causing yet more losses in 2020. This further muddied the waters making it more difficult for investors to see the improvements Fairfax has been making.

What ‘legacy issue(s)’ remain outstanding? That are going to cost Fairfax $200 or $300 million in 2021 or 2022 to clean up? Remaining runoff? Brit? Bryte? International insurance? Perhaps. Farmers Edge write down? Small potatoes (in the big scheme of things). Moving forward the size and frequency of issues should be more manageable by Fairfax as a normal part of doing business.

 

My view is ‘legacy issues’ will be much less of a drag moving forward. Most of the sins of the past have been corrected (this would make a great post all on its own…).  

 

As a result Fairfax’s reported results for years have understated the real earnings power of the underlying business. But this only matters when the constant drag from paying for past mistakes ends. And i think that is where we are at. 
 

At the same time, i expect insurance earnings to pop nicely the next couple of years due to the hard market. And investment earnings will also increase nicely as we exit covid and the various “asset allocators” Fairfax has partnered with continue to execute well. 
 

I view Fairfax as a turnaround story. And i think the turnaround is largely done. And in plain sight for investors to see. Earnings in Q1 and Q2 were phenomenal. And largely ignored (with the stock trading at US$410). Crazy what happens to earnings when the drag from legacy issues slows significantly.

 

As earnings grow the stock price will eventually respond and as investor sentiment improves we should see the PE multiple expand (with the stock trading closer to BV). This will likely play out over a couple of years and should provide investors will very satisfactory returns.
 

The next step i am hoping Fairfax takes in its journey is to start generating much higher free cash flow on a consistent basis. And start buying back stock in volume while the share price is crazy cheap. Aggressive share buybacks by Fairfax would accelerate the timing of the stock price trading closer to BV. 

 

In my post above I said: "My view is ‘legacy issues’ will be much less of a drag moving forward. Most of the sins of the past have been corrected (this would make a great post all on its own…)."

 

OK, so what was the 'original sin' that Fairfax committed? The decision to short equity markets (in a major way) beginning about 10 years ago (I only went back to 2011). What was the cost? About $4.5 billion pre-tax over a 10 year period (the numbers below come from the Fairfax year end news releases from Feb of each year). Holy shit! So for the past 10 years Fairfax has started each and every year $450 million (on average) in the hole. (The average of the last 9 years is $550 million.) 

 

Is anyone surprised that growth in BV over the past decade has been so poor? Especially when you factor in a $10 dividend payment that has been made each and every year.

 

The good news is Fairfax has confirmed that they will no longer be shorting individual stocks or indexes and as of Dec 31, 2020 all short positions had been closed out. So starting Jan 1, 2021 Fairfax was starting its first year in a decade without a $450 million hole to fill. WOW! So beginning in 2021 shareholders will start to see what Fairfax can actually earn without one hand tied behind its back. And 6 months into the year earnings have been stellar  

 

To expect results at Fairfax to improve in the coming years investors have to ask the key question: What, if anything, has changed? No longer shorting is a massive change. 

 

	short
2020	-$529
2019	-$58
2018	-$38
2017	-$418
2016	-$1,192
2015	$502
2014	-$195
2013	-$1,982
2012	-$1,006
2011	$414
Total	-$4,501
avg	-$450

 

Fairfax called these positions: 'equity hedges', then 'equity hedges and short positions' and then more recently just 'short exposure'.

Edited November 1, 2021 by Viking

[Parsad]

30 minutes ago, Viking said:

 

In my post above I said: "My view is ‘legacy issues’ will be much less of a drag moving forward. Most of the sins of the past have been corrected (this would make a great post all on its own…)."

 

OK, so what was the 'original sin' that Fairfax committed? The decision to short equity markets (in a major way) beginning about 10 years ago (I only went back to 2011). What was the cost? About $4.5 billion pre-tax over a 10 year period (the numbers below come from the Fairfax year end news releases from Feb of each year). Holy shit! So for the past 10 years Fairfax has started each and every year $450 million (on average) in the hole. (The average of the last 9 years is $550 million.) 

 

Is anyone surprised that growth in BV over the past decade has been so poor? Especially when you factor in a $10 dividend payment that has been made each and every year.

 

The good news is Fairfax has confirmed that they will no longer be shorting individual stocks or indexes and as of Dec 31, 2020 all short positions had been closed out. So starting Jan 1, 2021 Fairfax was starting its first year in a decade without a $450 million hole to fill. WOW! So beginning in 2021 shareholders will start to see what Fairfax can actually earn without one hand tied behind its back. And 6 months into the year earnings have been stellar  

 

To expect results at Fairfax to improve in the coming years investors have to ask the key question: What, if anything, has changed? No longer shorting is a massive change. 

 

	short
2020	-$529
2019	-$58
2018	-$38
2017	-$418
2016	-$1,192
2015	$502
2014	-$195
2013	-$1,982
2012	-$1,006
2011	$414
Total	-$4,501
avg	-$450

 

Fairfax called these positions: 'equity hedges', then 'equity hedges and short positions' and then more recently just 'short exposure'.

 

The question is, were the hedges removed at a time when they would have been most valuable? 

 

with a ton of cash and short-term bonds, I think they are ok.  But I'm not entirely sure removing shorting altogether was the best idea.  Cheers!

[glider3834]

39 minutes ago, Viking said:

 

In my post above I said: "My view is ‘legacy issues’ will be much less of a drag moving forward. Most of the sins of the past have been corrected (this would make a great post all on its own…)."

 

OK, so what was the 'original sin' that Fairfax committed? The decision to short equity markets (in a major way) beginning about 10 years ago (I only went back to 2011). What was the cost? About $4.5 billion pre-tax over a 10 year period (the numbers below come from the Fairfax year end news releases from Feb of each year). Holy shit! So for the past 10 years Fairfax has started each and every year $450 million (on average) in the hole. (The average of the last 9 years is $550 million.) 

 

Is anyone surprised that growth in BV over the past decade has been so poor? Especially when you factor in a $10 dividend payment that has been made each and every year.

 

The good news is Fairfax has confirmed that they will no longer be shorting individual stocks or indexes and as of Dec 31, 2020 all short positions had been closed out. So starting Jan 1, 2021 Fairfax was starting its first year in a decade without a $450 million hole to fill. WOW! So beginning in 2021 shareholders will start to see what Fairfax can actually earn without one hand tied behind its back. And 6 months into the year earnings have been stellar  

 

To expect results at Fairfax to improve in the coming years investors have to ask the key question: What, if anything, has changed? No longer shorting is a massive change. 

 

	short
2020	-$529
2019	-$58
2018	-$38
2017	-$418
2016	-$1,192
2015	$502
2014	-$195
2013	-$1,982
2012	-$1,006
2011	$414
Total	-$4,501
avg	-$450

 

Fairfax called these positions: 'equity hedges', then 'equity hedges and short positions' and then more recently just 'short exposure'.

thanks Viking for summary - yep glad they are gone

[glider3834]

42 minutes ago, Parsad said:

 

The question is, were the hedges removed at a time when they would have been most valuable? 

 

with a ton of cash and short-term bonds, I think they are ok.  But I'm not entirely sure removing shorting altogether was the best idea.  Cheers!

I am not sure exactly what hedges/shorts they had in place - but assuming they had hedges on S&P500 - it has doubled since end of 2016 when it was around 2,300 when I gather Fairfax removed its hedges, so that probably also validates their shift to a more bullish stance. Even the corrections in 2018 & 2020 didn't push past that 2300 level from what I can see. Maybe they had individual shorts that could have been more optimally removed but I think what Fairfax did was say we are making a strategic decision & we will be consistent through the whole portfolio. I think they still will hedge to lock in gains on an individual equity positions but not speculative shorts where the potential losses are unlimited.

 

Yes agree - I think their high % of cash & short term investments (versus other insurers) also provides a 'hedge' in some ways for their equity position - it provides liquidity given equity concentration & gives them opportunity to raise their bond allocation at higher yields. 

 

 

 

 

Edited November 1, 2021 by glider3834

[glider3834]

1 hour ago, Viking said:

 

In my post above I said: "My view is ‘legacy issues’ will be much less of a drag moving forward. Most of the sins of the past have been corrected (this would make a great post all on its own…)."

 

OK, so what was the 'original sin' that Fairfax committed? The decision to short equity markets (in a major way) beginning about 10 years ago (I only went back to 2011). What was the cost? About $4.5 billion pre-tax over a 10 year period (the numbers below come from the Fairfax year end news releases from Feb of each year). Holy shit! So for the past 10 years Fairfax has started each and every year $450 million (on average) in the hole. (The average of the last 9 years is $550 million.) 

 

Is anyone surprised that growth in BV over the past decade has been so poor? Especially when you factor in a $10 dividend payment that has been made each and every year.

 

The good news is Fairfax has confirmed that they will no longer be shorting individual stocks or indexes and as of Dec 31, 2020 all short positions had been closed out. So starting Jan 1, 2021 Fairfax was starting its first year in a decade without a $450 million hole to fill. WOW! So beginning in 2021 shareholders will start to see what Fairfax can actually earn without one hand tied behind its back. And 6 months into the year earnings have been stellar  

 

To expect results at Fairfax to improve in the coming years investors have to ask the key question: What, if anything, has changed? No longer shorting is a massive change. 

 

	short
2020	-$529
2019	-$58
2018	-$38
2017	-$418
2016	-$1,192
2015	$502
2014	-$195
2013	-$1,982
2012	-$1,006
2011	$414
Total	-$4,501
avg	-$450

 

Fairfax called these positions: 'equity hedges', then 'equity hedges and short positions' and then more recently just 'short exposure'.

I just realised if we back out the $1 bil probably in shorts over 2017-2020, they probably would have done a double digit growth in BVPS over 2017-2020 period versus 9% p.a reported.

[Viking]

1 hour ago, Parsad said:

 

The question is, were the hedges removed at a time when they would have been most valuable? 

 

with a ton of cash and short-term bonds, I think they are ok.  But I'm not entirely sure removing shorting altogether was the best idea.  Cheers!

Fairfax is very good at certain things. They are also very bad at some things. They have a terrible 10 year track record at ‘equity hedge’ and ‘short exposure’. So i am happy they will not be doing this any more. And I hope they focus on/do more of the things they are very good at  

[Viking]

1 hour ago, glider3834 said:

I just realised if we back out the $1 bil probably in shorts over 2017-2020, they probably would have done a double digit growth in BVPS over 2017-2020 period versus 9% p.a reported.

Where the analysis gets even more interesting is when you add a couple more big loss items that will not keep repeating (at the same level) for the next decade:

1.) CPI linked derivatives: this investment has cost Fairfax an additional $650 million or so over the past decade. The position will likely not be renewed so it will not continue to cost Fairfax an average of $65 million per year for the next decade.

2.) cost to fix/exit all the poorly performing equity investments the past 5 or so years. This bucket deserves its own post as it is hard to grasp and i don’t have exact numbers. My guess is the drag was likely $100-$150 million per year (on average). Year after year Fairfax took very large financial hits to fix many of the equity holdings. RFP. EXCO bankruptcy. Fairfax Africa final merger with Helios. APR sale to Atlas. AGT take private? Farmers Edge before IPO? These are just a few that come to mind quickly. There are more. Now the good news is my read is most of the problem children have been fixed. And the portfolio of equity holdings is better quality Oct 2021 than at any time in the past 10 years. So i expect future costs to fix equity holdings problems to be much lower than past years. 
 

So when you add the cost to short, CPI bet and fixing the equity holdings the annual total cost was likely about $600 million (pre tax) each and every year (on average). And much of this cost goes away moving forward. That is a massive win for current shareholders. 

Edited November 1, 2021 by Viking

[StubbleJumper]

Once again, can we please stop using the terms equity "hedges" and inflation "hedges?"  Those terms imply that FFH was engaging in responsible risk management practices.  What FFH actually did was "hedge" more than 100% of its equity portfolio and it had deflation "hedges" with a notional value of more than $100B for a company that had annual revenues that were less than one-third that high.  When you "hedge" more than 100% of your exposure to the underlying, you are no longer managing risk, but rather speculating.

 

So, let's instead tell the brutal truth.  What FFH actually did was use derivatives for the purpose of market speculation.  Management did this, it didn't work, and it cost shareholders dearly.  We should not use the word "hedge" as an euphemism to somehow suggest that management made responsible choices with respect to position sizing.

 

 

SJ

[Xerxes]

^^^ agree

There is a clear point where hedging becomes a directional play on the market.

 

 

Viking,

A comment on your post:   FFH first committed in 2017 (not 2021) (post Trump presidency + rate moving higher + animal spirits being unleashed) to not do any more shorting. And that is when I started buying small positions.

 

But I agree that the no-short mandate is now more serious.

 

Can you guys imagine if they were truly short Tesla in 2020. In this very forum earlier in 2021 and late 2020, people were hoping that FFH was shorting Tesla which was grossly overvalued at the time (which itself was probably $400 billion ago in Tesla's market cap)