Fairfax 2023

[gfp]

Routine renewal of the NCIB, including automatic plan to continue repurchase activity during blackout periods if they wish -

https://www.fairfax.ca/press-releases/fairfax-financial-holdings-intention-to-make-a-normal-course-issuer-bid-for-subordinate-voting-shares-and-preferred-shares-2023-09-28/

[SafetyinNumbers]

2 hours ago, gfp said:

Routine renewal of the NCIB, including automatic plan to continue repurchase activity during blackout periods if they wish -

https://www.fairfax.ca/press-releases/fairfax-financial-holdings-intention-to-make-a-normal-course-issuer-bid-for-subordinate-voting-shares-and-preferred-shares-2023-09-28/

The automatic plan is new, I think. 

[Crip1]

Meanwhile...
 

Interest rates have been volatile for the past few weeks as the 10-year has moved 45 basis points in less than a month. Besides the Fed saying “Higher for Longer” there has not been much news showing inflation getting worse. Though it’s been sticky, it is moving lower. Besides that, the resumption of student loan payments and likelihood of a Government shutdown are only going to take steam out of the economy. Noteworthy is that the inversion of the yield curve is moving lower, seemingly each day. It will be REALLY interesting to see what Fairfax does on their Fixed Income investments in the next few months. For the past year or two the risk-reward of buying long-term debt was skewed towards risk over reward. The more than longer-term rates move higher and inflation measures continue to look more benign, the risk-reward analysis will at some point flip to reward. When this happens, the returns which are currently locked in through 2025 will extend depending on what percentage of their fixed income investments they move into longer-term bonds.

 

-Crip

[UK]

https://www.wsj.com/finance/investing/catastrophe-bond-market-4a96483c?mod=hp_minor_pos21

 

 

[newtovalue]

End of Q3 today - any estimates of book value? 

 

I'll go first - no major cat events, small bond losses MTM due to rising yields, equities relatively flat. 

 

Roughly i would bet $870-900 USD. My method is not scientific as @Viking - but hopefully in the right ballpark.

[MMM20]

1 hour ago, newtovalue said:

End of Q3 today - any estimates of book value? 

 

I'll go first - no major cat events, small bond losses MTM due to rising yields, equities relatively flat. 

 

Roughly i would bet $870-900 USD. My method is not scientific as @Viking - but hopefully in the right ballpark.

 

Mine is US$869.420 and stock hits US$1000 by Dec or we get another big dutch auction.

[newtovalue]

7 minutes ago, MMM20 said:

 

Mine is US$869.420 and stock hits US$1000 by Dec or we get another big dutch auction.

@MMM20 - Slow clap for you 

 

funniest guy on the board

[MMM20]

3 hours ago, newtovalue said:

@MMM20 - Slow clap for you 

 

funniest guy on the board

I’m gonna take this at face value and just say thanks. I still think the stock is trading at about a third of intrinsic value… I know some here think that’s funny but I’m deadly serious and here for the ride.

 

Edited September 29, 2023 by MMM20

[newtovalue]

haha - just having some fun! 

 

but agree with you - i think a long way to go until intrinsic value and i keep adding to my position. good luck to both of us!

[StubbleJumper]

Confession:  I purchased more FFH today.  After bitching and complaining about FFH's poor risk management decisions with respect to position sizing (ie, the "hedging" derivatives, Blackberry, etc), I have committed the same sin.  After the rise in the share price over the past few years, I should be looking at the position size and trimming my FFH position.  Instead, today I added.

 

What could possibly go wrong?

 

 

SJ

[Parsad]

7 hours ago, MMM20 said:

I’m gonna take this at face value and just say thanks. I still think the stock is trading at about a third of intrinsic value… I know some here think that’s funny but I’m deadly serious and here for the ride.

 

 

Happy to sell you all my FFH at $3,300 CDN per share today if you want!  Cheers!

[SafetyinNumbers]

1 hour ago, Parsad said:

 

Happy to sell you all my FFH at $3,300 CDN per share today if you want!  Cheers!

What would the over/under be on when we trade there?

[Parsad]

2 minutes ago, SafetyinNumbers said:

What would the over/under be on when we trade there?

 

7-10 years from now.  Cheers!

 

[Viking]

What was the change in the value of Fairfax’s equity portfolio in Q3?

 

Fairfax’s equity portfolio (that I track) ended Q3 with a total value of about $16.5 billion. This was an increase of about $187 million or 1.1% from June 30 to September 30, 2023. The increase in the quarter works out to about $8/share.

 

The S&P500 finished Q3 down 3.6% so Fairfax outperformed by 4.7% which is quite a large margin over three months.

 

Currency was a big headwind for Fairfax in Q3; the US$ went on a tear higher in September. Fairfax has a lot of international equities so this makes its outperformance in the quarter even more impressive.

 

Please note, I include holdings like the FFH-TRS position in the mark to market bucket and at its notional value (which was $1.6 billion at Sept 30). I also include debentures and warrants that are in the money in this bucket.

 

To state the obvious, my tracker portfolio is not an exact match to Fairfax’s actual holdings. It also does not capture changes Fairfax has made to its portfolio during the quarter. As a result, my tracker portfolio is useful only as a tool to understand the probable directional movement in Fairfax’s equity portfolio (and not the precise change).

 

Please let me know if you see any errors. I do mess up every once in a while.

 

 

Split of total holdings by accounting treatment

 

The split by account treatment is provided below. About 50% of Fairfax’s equity holdings are mark to market and will fluctuate each quarter with changes in equity markets. The other 50% are Associate and Consolidated holdings.

 

 

Split of total gains (losses) by accounting treatment

• The total change was an increase of $187 million = $8/share
• The mark to market change was an increase of $266 million = $11.44/share. Only changes in this bucket of holdings will show up in ‘net gains (losses) on investments’ (along with changes in the value of the fixed income portfolio) when Fairfax reports results each quarter.

 

What were the big movers in the equity portfolio?

• Thomas Cook India was the star performer in Q3. Their business was hit hard by Covid. They reported results for the most recent quarter were much higher than expected. Importantly, all parts of the company (including Sterling Resorts) are now performing at a very high (record?) level.
• The FFH total return swap position (giving exposure to 1.96 million Fairfax shares) continues to perform exceptionally well. This position is up +$900 million since it was initiated in late 2020.
• Eurobank got hit by the recent severe weather issues in Greece. Also by ECB announcement? Regardless, Eurobank looks very well positioned. Currency was a headwind.
• Fairfax’s big equity purchase in Q2 was to significantly increase its position of Occidental (its current value is $391 million). With oil spiking over $90, the timing of this purchase is looking pretty good today.

 

Below is a copy of my Excel spreadsheet (next 2 pages) if you want a closer look.

 

For Associate and Consolidated holdings, the excess of fair value to carrying value was $488 million or $21/share (pre-tax). Book value at Fairfax is understated by about this amount (less the tax impact). What is the split?

• Associates                  $268 million = $11.56/share
• Consolidated              $220 million =  $9.48/share

 

 

Fairfax Sept 30 2023.xlsx

Edited September 30, 2023 by Viking

[MMM20]

Don’t get me wrong @Parsad

 

Intrinsic value ~3x higher doesn’t mean I think it’ll trade there next year or that I’d pay that price for it. But if I did pay you that price, I bet I’d do just fine over a decade. That’s really my point.
 

My main point though is that a persistent discount to intrinsic value and above market IV *per share* growth what makes a long term hold compounder, right?

 

A high teens multiple of normalized earnings is a reasonable proxy for intrinsic value of a low-mid teens compounder with good aligned management and good capital allocation…and a long runway… because it pencils to a ~10-12% per share compounding from there. This is in a world of ~5% fixed income and ~7% long term expected returns in global equities. Do we agree on all that?

 

Will I be surprised if this trades at 2x BV after a few more years of great execution in a good enough market and a ~$1300-1500 BVPS? No, because the market has proven to be so reactive and backward looking in this one. A longer stretch of good results tends to bring out the incremental buyers. The buyers are higher. 

 

I won’t be convinced otherwise by arguments about historical trading ranges.

 

I will continue to ignore backward looking measures of value and see if that keeps paying off  

 

And i’ll continue on over here on Fairfax island with the weirdos and misfits. 

 

Enjoy the weekend everyone.

 

Edited September 30, 2023 by MMM20

[SafetyinNumbers]

1 hour ago, MMM20 said:

Don’t get me wrong @Parsad

 

Intrinsic value ~3x higher doesn’t mean I think it’ll trade there next year or that I’d pay that price for it. But if I did pay you that price, I bet I’d do just fine over a decade. That’s really my point.
 

My main point though is that a persistent discount to intrinsic value and above market IV *per share* growth what makes a long term hold compounder, right?

 

A mid-high teens multiple of normalized earnings is a reasonable proxy for intrinsic value of a low-mid teens compounder with good aligned management and good capital allocation…and a long runway… because it pencils to a ~10-12% per share compounding from there. This is in a world of ~5% fixed income and ~7% long term expected returns in global equities. Do we agree on all that?

 

Will I be surprised if this trades at 2x BV after a few more years of great execution in a good enough market and a ~$1300-1500 BVPS? No, because the market has proven to be so reactive and backward looking in this one. A longer stretch of good results tends to bring out the incremental buyers. The buyers are higher. 

 

I won’t be convinced otherwise by arguments about historical trading ranges.

 

I will continue to ignore backward looking measures of value and see if that keeps paying off  

 

And i’ll continue on over here on Fairfax island with the weirdos and misfits. 

 

Enjoy the weekend everyone.

 

I’m in your camp @MMM20. We know the mechanism for buyers to pay higher and higher multiples comes from quants and index huggers.

Over time, instead of projecting declining earnings estimates every year as they do now, analysts will project growing earnings which will invite more quants in.

 

With the persistent growth in book value, Fairfax’s weight in the S&P/TSX composite will go over 100bps (it’s 90bps now) probably in the next 6-12 months. The cost of being underweight will hurt more and more.
 

The hurdle to buy Fairfax at book value should be low but most actively managed funds can’t even look at it because it doesn’t pass the quant screens (see Morningstar’s analysis for example). It will be fun to watch the narratives on Fairfax adjust to accommodate the higher multiples that are paid over time. 
 

Clearly, I’m taking the under on @Parsad‘s 7-10 year estimate for the shares getting to C$3300.
 

 

[sleepydragon]

I am not sure quant or indexer will help much. Quant don’t trade much in CAN stocks as far as I know. And adding to index will boost maybe 1-5% max unless it’s being added to SP500.

 

if Fairfax is listed in US exchange, then it will rise a lot I think. 

[SafetyinNumbers]

1 hour ago, sleepydragon said:

I am not sure quant or indexer will help much. Quant don’t trade much in CAN stocks as far as I know. And adding to index will boost maybe 1-5% max unless it’s being added to SP500.

 

if Fairfax is listed in US exchange, then it will rise a lot I think. 

It’s already in the index (32nd biggest component). Passive and quants have taken so much market share from active managers that active managers are forced to act like passive and quants. They need to buy whatever is getting more relevant to keep up and sell whatever is underperforming. They need to buy what quants buy to keep up with their performance so they don’t lose market share.
 

Ultimately, when Fairfax is added to the S&P/TSX 60, passive will have to buy an additional ~4% of the float but that will take a long time as the index is already dominated by financials.

 

What makes you think quants aren’t active in Canada?

[Santayana]

There have been quant managers active in Canada for over 20 years.

[glider3834]

16 hours ago, Viking said:

What was the change in the value of Fairfax’s equity portfolio in Q3?

 

Fairfax’s equity portfolio (that I track) ended Q3 with a total value of about $16.5 billion. This was an increase of about $187 million or 1.1% from June 30 to September 30, 2023. The increase in the quarter works out to about $8/share.

 

The S&P500 finished Q3 down 3.6% so Fairfax outperformed by 4.7% which is quite a large margin over three months.

 

Currency was a big headwind for Fairfax in Q3; the US$ went on a tear higher in September. Fairfax has a lot of international equities so this makes its outperformance in the quarter even more impressive.

 

Please note, I include holdings like the FFH-TRS position in the mark to market bucket and at its notional value (which was $1.6 billion at Sept 30). I also include debentures and warrants that are in the money in this bucket.

 

To state the obvious, my tracker portfolio is not an exact match to Fairfax’s actual holdings. It also does not capture changes Fairfax has made to its portfolio during the quarter. As a result, my tracker portfolio is useful only as a tool to understand the probable directional movement in Fairfax’s equity portfolio (and not the precise change).

 

Please let me know if you see any errors. I do mess up every once in a while.

 

 

Split of total holdings by accounting treatment

 

The split by account treatment is provided below. About 50% of Fairfax’s equity holdings are mark to market and will fluctuate each quarter with changes in equity markets. The other 50% are Associate and Consolidated holdings.

 

 

Split of total gains (losses) by accounting treatment

• The total change was an increase of $187 million = $8/share
• The mark to market change was an increase of $266 million = $11.44/share. Only changes in this bucket of holdings will show up in ‘net gains (losses) on investments’ (along with changes in the value of the fixed income portfolio) when Fairfax reports results each quarter.

 

What were the big movers in the equity portfolio?

• Thomas Cook India was the star performer in Q3. Their business was hit hard by Covid. They reported results for the most recent quarter were much higher than expected. Importantly, all parts of the company (including Sterling Resorts) are now performing at a very high (record?) level.
• The FFH total return swap position (giving exposure to 1.96 million Fairfax shares) continues to perform exceptionally well. This position is up +$900 million since it was initiated in late 2020.
• Eurobank got hit by the recent severe weather issues in Greece. Also by ECB announcement? Regardless, Eurobank looks very well positioned. Currency was a headwind.
• Fairfax’s big equity purchase in Q2 was to significantly increase its position of Occidental (its current value is $391 million). With oil spiking over $90, the timing of this purchase is looking pretty good today.

 

Below is a copy of my Excel spreadsheet (next 2 pages) if you want a closer look.

 

For Associate and Consolidated holdings, the excess of fair value to carrying value was $488 million or $21/share (pre-tax). Book value at Fairfax is understated by about this amount (less the tax impact). What is the split?

• Associates                  $268 million = $11.56/share
• Consolidated              $220 million =  $9.48/share

 

 

Fairfax Sept 30 2023.xlsx 189.03 kB · 3 downloads

thanks viking

 

John Keells (JKH) convertibles - not a big investment but a very tidy one so far, with strike LKR 130 & current share price at 192.5,  look like they are up around 48% plus Fairfax are getting interest at 3% p.a while they wait to exercise. This would probably make it close to top 20 position or $200M investment on a converted position basis.

 

When you think of the enormous economic challenges Sri Lanka has faced over last year or so & still has a lot to work through - in that context JKH's USD results below are pretty remarkable.

 

 

 

Assuming conversion, Fairfax would hold close to 24% of the business and would make Fairfax the largest shareholder which gives this investment real strategic value IMHO. 

 

 

[sleepydragon]

3 hours ago, SafetyinNumbers said:

It’s already in the index (32nd biggest component). Passive and quants have taken so much market share from active managers that active managers are forced to act like passive and quants. They need to buy whatever is getting more relevant to keep up and sell whatever is underperforming. They need to buy what quants buy to keep up with their performance so they don’t lose market share.
 

Ultimately, when Fairfax is added to the S&P/TSX 60, passive will have to buy an additional ~4% of the float but that will take a long time as the index is already dominated by financials.

 

What makes you think quants aren’t active in Canada?

Long short quants make bets each day on thousands of stocks, hoping they can be right 55% on each bet. That’s how they make money. When you make thousands of bets simultaneously and even though each has a tiny edge, you can print money everyday. In Canadian stocks, there’s only about 200-400 or so liquid stocks that quant can trade in size daily. The sharpe ratio will be quite low and so will be kept at a very small size. There is also less data to generate alphas (news, analyst coverage, social media etc..). In US, quant trades up to 3000 stocks daily.

 

[SafetyinNumbers]

4 hours ago, sleepydragon said:

Long short quants make bets each day on thousands of stocks, hoping they can be right 55% on each bet. That’s how they make money. When you make thousands of bets simultaneously and even though each has a tiny edge, you can print money everyday. In Canadian stocks, there’s only about 200-400 or so liquid stocks that quant can trade in size daily. The sharpe ratio will be quite low and so will be kept at a very small size. There is also less data to generate alphas (news, analyst coverage, social media etc..). In US, quant trades up to 3000 stocks daily.

 

I think you are referring to algorithmic quant trading which is an absolute return strategy. I’m referring to quant-based investing which is a relative return strategy with the relevant benchmark being the S&P/TSX composite for Fairfax. It’s also called factor-based investing. 

 

You are correct that liquidity is important and only a few quants will go into smaller names but they do exist. Liquidity is probably one of the reasons Fairfax trades cheaper than others. A direct reason how liquidity impacts the share price is not having listed options. Just having listed options means dealers would have to have inventory which would increase the share price. Ultimately, it’s just supply and demand (i.e. a voting machine) in the short term.

[nwoodman]

13 hours ago, glider3834 said:

thanks viking

 

John Keells (JKH) convertibles - not a big investment but a very tidy one so far, with strike LKR 130 & current share price at 192.5,  look like they are up around 48% plus Fairfax are getting interest at 3% p.a while they wait to exercise. This would probably make it close to top 20 position or $200M investment on a converted position basis.

 

When you think of the enormous economic challenges Sri Lanka has faced over last year or so & still has a lot to work through - in that context JKH's USD results below are pretty remarkable.

 

 

 

Assuming conversion, Fairfax would hold close to 24% of the business and would make Fairfax the largest shareholder which gives this investment real strategic value IMHO. 

 

 

Thanks, always good to see another example of a rational capital allocation coming to light

[nwoodman]

On 9/30/2023 at 3:20 PM, Viking said:

What was the change in the value of Fairfax’s equity portfolio in Q3?

 

Fairfax’s equity portfolio (that I track) ended Q3 with a total value of about $16.5 billion. This was an increase of about $187 million or 1.1% from June 30 to September 30, 2023. The increase in the quarter works out to about $8/share.

 

The S&P500 finished Q3 down 3.6% so Fairfax outperformed by 4.7% which is quite a large margin over three months.

 

Currency was a big headwind for Fairfax in Q3; the US$ went on a tear higher in September. Fairfax has a lot of international equities so this makes its outperformance in the quarter even more impressive.

 

Please note, I include holdings like the FFH-TRS position in the mark to market bucket and at its notional value (which was $1.6 billion at Sept 30). I also include debentures and warrants that are in the money in this bucket.

 

To state the obvious, my tracker portfolio is not an exact match to Fairfax’s actual holdings. It also does not capture changes Fairfax has made to its portfolio during the quarter. As a result, my tracker portfolio is useful only as a tool to understand the probable directional movement in Fairfax’s equity portfolio (and not the precise change).

 

Please let me know if you see any errors. I do mess up every once in a while.

 

 

Split of total holdings by accounting treatment

 

The split by account treatment is provided below. About 50% of Fairfax’s equity holdings are mark to market and will fluctuate each quarter with changes in equity markets. The other 50% are Associate and Consolidated holdings.

 

 

Split of total gains (losses) by accounting treatment

• The total change was an increase of $187 million = $8/share
• The mark to market change was an increase of $266 million = $11.44/share. Only changes in this bucket of holdings will show up in ‘net gains (losses) on investments’ (along with changes in the value of the fixed income portfolio) when Fairfax reports results each quarter.

 

What were the big movers in the equity portfolio?

• Thomas Cook India was the star performer in Q3. Their business was hit hard by Covid. They reported results for the most recent quarter were much higher than expected. Importantly, all parts of the company (including Sterling Resorts) are now performing at a very high (record?) level.
• The FFH total return swap position (giving exposure to 1.96 million Fairfax shares) continues to perform exceptionally well. This position is up +$900 million since it was initiated in late 2020.
• Eurobank got hit by the recent severe weather issues in Greece. Also by ECB announcement? Regardless, Eurobank looks very well positioned. Currency was a headwind.
• Fairfax’s big equity purchase in Q2 was to significantly increase its position of Occidental (its current value is $391 million). With oil spiking over $90, the timing of this purchase is looking pretty good today.

 

Below is a copy of my Excel spreadsheet (next 2 pages) if you want a closer look.

 

For Associate and Consolidated holdings, the excess of fair value to carrying value was $488 million or $21/share (pre-tax). Book value at Fairfax is understated by about this amount (less the tax impact). What is the split?

• Associates                  $268 million = $11.56/share
• Consolidated              $220 million =  $9.48/share

 

 

Fairfax Sept 30 2023.xlsx 189.03 kB · 3 downloads

Thanks @Viking,  the alpha is impressive. Always nice to see a position like OXY showing up that is in the  "I wish I had done that, but it  doesn't matter because Fairfax did".  

[MMM20]

 

“May you live in interesting times. May you also own Fairfax Financial, with its massive short duration fixed income portfolio, when interest rates spike off the lower bound and they then go on offense, growing and redeploying that capital without a huge hole in their balance sheet like competitors who for some reason get to wave it all away as short term losses (those 30yr 3% coupon bonds are held to maturity, everyone!), but it takes years for the market to notice the implications because of liquidity or indexing or blackberry or something, and you get buy at a huge discount to a step change higher intrinsic value. You’re welcome.”

 

I heard that was inscribed on some tablets in 3000 BC.

 

Edited October 1, 2023 by MMM20