Fairfax 2023

[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

[dealraker]

3 hours ago, MMM20 said:

 

“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.

 

Stock of apparent great future returns seem to wait on the end of melodramatic forum posts?  Or is that just my selective memory?  LOL.  

[MMM20]

21 hours ago, dealraker said:

Stock of apparent great future returns seem to wait on the end of melodramatic forum posts?  Or is that just my selective memory?  LOL.  

 

Sorry, I don't follow. If that post came off as too much of a troll... my bad.

 

Most of the melodramatic posts were happening in late 2020 / early 2021 by guys who thought Prem was a confirmed dinosaur and the stock was never going anywhere, but maybe that's just my selective memory!

 

Seems cheaper today than it did then, but I'm just a guy on the internet and I'm wrong about half the time.

 

Let's not take ourselves too seriously.

 

Edited October 2, 2023 by MMM20

[dealraker]

1 hour ago, MMM20 said:

 

Sorry, I don't follow. If that post came off as too much of a troll... my bad.

 

Most of the melodramatic posts were happening in late 2020 / early 2021 by guys who thought Prem was a confirmed dinosaur and the stock was never going anywhere, but maybe that's just my selective memory!

 

Seems cheaper today than it did then, but I'm just a guy on the internet and I'm wrong about half the time.

 

Let's not take ourselves too seriously.

 

Being silly MMM20.  Nothing more.   

[MMM20]

Just now, dealraker said:

Being silly MMM20.  Nothing more.   

[gfp]

I wonder what the losses will be on their poorly timed forward purchases of 3 year bond futures.

edit: I guess most of the losses would have already been reflected in the Q2 figures?

 

 

V. Watsa

[indiscernible] portfolio, right, it's only the bond portfolio. And the important point that is all on 80% of our bond portfolio is government treasuries mainly, but government wherever we operate, Canada -- Canadian governments and other countries. And only 14%, I think. we said was corporate, something like that. And that's all very short term that's coming due relatively soon. And what we have done, Tom, is because these are coming due in the next 3 months, 6 months, we like the rates in the first quarter. So we locked in 3.7% -- 3.75% for U.S. government treasuries for 3 years. So we locked it in ahead of the maturity. We are happy with 3.75, could go to 4.25%, 4.5%, I don't know. It could go to 2.5, 3.75 was good. We locked it in, and that's ahead of the maturities in the next 3 months, 6 months.

Edited October 2, 2023 by gfp

[SafetyinNumbers]

6 minutes ago, gfp said:

I wonder what the losses will be on their poorly timed forward purchases of 3 year bond futures.

 

 

V. Watsa

[indiscernible] portfolio, right, it's only the bond portfolio. And the important point that is all on 80% of our bond portfolio is government treasuries mainly, but government wherever we operate, Canada -- Canadian governments and other countries. And only 14%, I think. we said was corporate, something like that. And that's all very short term that's coming due relatively soon. And what we have done, Tom, is because these are coming due in the next 3 months, 6 months, we like the rates in the first quarter. So we locked in 3.7% -- 3.75% for U.S. government treasuries for 3 years. So we locked it in ahead of the maturity. We are happy with 3.75, could go to 4.25%, 4.5%, I don't know. It could go to 2.5, 3.75 was good. We locked it in, and that's ahead of the maturities in the next 3 months, 6 months.

Shouldn’t be much. I think the 3 year was up ~20bps last quarter. There should be some offset from IFRS 17 as the discount rate is up. That should also help the actual combined ratio (vs the reported combined ratio which is not discounted).

[MMM20]

2 hours ago, gfp said:

I wonder what the losses will be on their poorly timed forward purchases of 3 year bond futures.

edit: I guess most of the losses would have already been reflected in the Q2 figures?

 

 

V. Watsa

[indiscernible] portfolio, right, it's only the bond portfolio. And the important point that is all on 80% of our bond portfolio is government treasuries mainly, but government wherever we operate, Canada -- Canadian governments and other countries. And only 14%, I think. we said was corporate, something like that. And that's all very short term that's coming due relatively soon. And what we have done, Tom, is because these are coming due in the next 3 months, 6 months, we like the rates in the first quarter. So we locked in 3.7% -- 3.75% for U.S. government treasuries for 3 years. So we locked it in ahead of the maturity. We are happy with 3.75, could go to 4.25%, 4.5%, I don't know. It could go to 2.5, 3.75 was good. We locked it in, and that's ahead of the maturities in the next 3 months, 6 months.

Plus big picture FFH is still positioned so short duration vs all but maybe WRB, right? If rates keep rising they are most likely a net beneficiary vs competition and can keep expending our duration. We aren’t talking a long duration bond portfolio down 50% the past 3 years.

 

Edited October 2, 2023 by MMM20

[gfp]

1 hour ago, MMM20 said:

Plus big picture FFH is still positioned so short duration vs all but maybe WRB, right?

 

Nobody's shorter than Warren!  The master at work

[MMM20]

11 minutes ago, gfp said:

 

Nobody's shorter than Warren!  The master at work

I meant WR Berkley but might have that wrong!
 

Edited October 2, 2023 by MMM20

[gfp]

1 minute ago, MMM20 said:

I meant WR Berkley but might have that wrong!
 

I know what you meant.  I'm saying Berkshire's bond duration has 'em all beat.

[UK]

47 minutes ago, gfp said:

 

Nobody's shorter than Warren!  The master at work

 

True! But the problem is they are kind of diversified and far from 'pure play' in terms of this 'rate exposure', especially because of their enormous position in Apple?

 

Edited October 2, 2023 by UK

[MMM20]

@gfp 

 

yeah I guess so - I would just say BRK’s portfolio is still much longer duration overall when you include the equities and think about it from an overall asset allocation perspective. BRK is more sensitive to higher discount rates lowering the NPVs of AAPL, GEICO, the utility, and the railroad, but of course still a cash machine and can reinvest at lower valuations so still arguably a counter cyclical element to intrinsic value.
 

FFH is still more than half cash and short term bonds and a much higher proportion of ~0 cost float. So while historically they haven’t had anything close to BRK’s FCFE (vs market cap) to redeploy, it seems to me that’s changed over the past couple years and FFH is in a similar position of strength now, albeit with both 1) an overall “lower risk” portfolio heavy in cash and short term bonds and 2) higher float leverage so still inherently much more downside in a 100 year flood (and much higher upside too especially from this valuation)
 

Am I way off with this?

 

Edited October 3, 2023 by MMM20

[dartmonkey]

Berkshire 2022 AR (p. K-70). Hard to beat for short duration, and a nicely timed shift in 2022, just like Fairfax:

 

December 31,                                                       2022                  2021

ASSETS

Insurance and Other:

Cash and cash equivalents*                             $32,260             $85,319

Short-term investments in U.S.TreasuryBills.    92,774              58,535

Investments in fixed maturity securities             25,128              16,434

Investments in equity securities                      308,793             350,719

Equity method investments                               28,050                16,045

...

Total                                                                  725,989              741,993

[gfp]

Berkshire has $122k Billion in T-bills, $22.3 Billion in bonds with average maturity of something less than 2 years and $25 billion in cash earning whatever cash earns on corporate Gov. MM sweep accounts.

 

So outside of equities, Berkshire's very large pool of float is invested almost entirely in T-bill like instruments.  Berkshire will make something like $8 Billion in government interest this year.

 

I don't know of any other insurance company, except maybe Global Indemnity recently as they shop the company for sale, that kept their entire fixed maturity portfolio at around 6 months.

 

Just the absurdity of a Trillion dollar asset company holding only $22.3 in bonds is remarkable enough, but even those bonds are less than 2 year duration.

[glider3834]

5 hours ago, gfp said:

I wonder what the losses will be on their poorly timed forward purchases of 3 year bond futures.

edit: I guess most of the losses would have already been reflected in the Q2 figures?

 

 

V. Watsa

[indiscernible] portfolio, right, it's only the bond portfolio. And the important point that is all on 80% of our bond portfolio is government treasuries mainly, but government wherever we operate, Canada -- Canadian governments and other countries. And only 14%, I think. we said was corporate, something like that. And that's all very short term that's coming due relatively soon. And what we have done, Tom, is because these are coming due in the next 3 months, 6 months, we like the rates in the first quarter. So we locked in 3.7% -- 3.75% for U.S. government treasuries for 3 years. So we locked it in ahead of the maturity. We are happy with 3.75, could go to 4.25%, 4.5%, I don't know. It could go to 2.5, 3.75 was good. We locked it in, and that's ahead of the maturities in the next 3 months, 6 months.

just for context, looks like they locked these rates in on around 9% of their fixed income portfolio

 

 

[SafetyinNumbers]

4 hours ago, MMM20 said:

@gfp 

 

yeah I guess so - I would just say BRK’s portfolio is still much longer duration overall when you include the equities and think about it from an overall asset allocation perspective. BRK is more sensitive to higher discount rates lowering the NPVs of AAPL, GEICO, the utility, and the railroad, but of course still a cash machine and can reinvest at lower valuations so still arguably a counter cyclical element to intrinsic value.
 

FFH is still more than half cash and short term bonds and a much higher proportion of ~0 cost float. So while historically they haven’t had anything close to BRK’s FCFE (vs market cap) to redeploy, it seems to me that’s changed over the past couple years and FFH is in a similar position of strength now, albeit with both 1) an overall “lower risk” portfolio heavy in cash and short term bonds and 2) higher float leverage so still inherently much more downside in a 100 year flood.
 

Am I way off with this?

 

I agree with your take @MMM20. The float to market cap ratio locks in so much ROE vs the comps. Fairfax’s equity portfolio is also a lot cheaper on traditional measures of value so arguably adds relatively high long term built in ROE. Plus they have a disproportionate amount of earnings to redeploy in safe acquisitions like buying the rest of Allied World, Brit and Odyssey over the next few years which will just makes them all the more durable.

 

I’m betting the index huggers chasing the stock will start using the increased durability as a narrative for why they are buying stock at 1.5x book value. It will still be the right thing to do as it might even get to 3x like it did in 1998. For that to happen, the ROE has to be elevated for a few years in a row.
 

We are off to a good start in 2023. The low risk income off the float, hard insurance market, high level of associates income, Digit/BIAL IPOs make it seem likely the ROE can stay strong for a few years which is why I continue to think Fairfax is a fat pitch. @Viking’s earnings forecast could be conservative. Value investors rightly focus on the margin of safety but I think most investors actually interpret that as avoiding drawdowns.
 

While a lot of us here spend a lot of time thinking about Fairfax almost no one else does. It’s still well under owned by Canadian asset managers despite its weight in the S&P/TSX Composite at ~89bps at Q323. Today, it outperformed by almost another 5%. 100 bps is within spitting distance but passing Intact which is around 125bps might be the bigger deal as PMs likely only want to own one P&C insurer even though Fairfax is special because of its equity portfolio and capital allocation strategy. Ironically, the higher it goes, the higher it’s likely to go which means most value investors will likely sell too early. 

 

Earnings estimates still show declining earnings for the next few years mostly because expectations are for lower interest rates and low investment returns on equity portfolio. These analysts from what I can tell haven’t actually taken the time to appreciate how cheap, for example, Eurobank might be and how big a chunk of the portfolio it is. While it may be conservative to assume low single digit returns on the equity portfolio, it doesn’t mean it’s a probable forecast.
 

Quants and active manager that rely on quants (i.e. almost every asset manager) can’t even see Fairfax because of the declining earnings forecasts and high variability of historical results. I think there is a good chance analysts will start increasing their estimates to something more realistic if Fairfax keeps executing which again should be easier given the composition of earnings is more predictable. That will finally get the quants thinking about Fairfax.
 

Of course, anything can happen and nothing is guaranteed in markets. It’s always a bet and we mostly all see the odds differently. 

[Haryana]

 

Berkshire vs Fairfax, Millennium Till Month

 

[nwoodman]

3 hours ago, Haryana said:

 

Berkshire vs Fairfax, Millennium Till Month

 

So including divs FFH @ 1x’s book is a 12% CAGR.  Interestingly this is close to my base case.  Still plenty of room for P/B expansion and earnings growth.  Extraordinary really.  Thanks for the graph.