Fairfax 2024

[Viking]

2 hours ago, Dinar said:

@Viking, I thought that the equity portfolio was USD 15bn, no?

 

@Dinar , here are Fairfax's numbers as of Dec 31, 2023.

 

 

In my equity spreadsheet summary I include the FFH-TRS at its current notional (market) value of +$2 billion. This bumps the value of Fairfax's equity portfolio to $19 billion.  

Edited March 19, 2024 by Viking

[Viking]

2 hours ago, dartmonkey said:

The mark to market portion of the equity portfolio was $8.7b on Dec 31st, according to the annual report, and on March 8th, Viking estimated (posted here) that it might be worth $9.0b.

 

The other 2 portions, associates and consolidated, were worth $7.1 and $2.8b, respectively, for a total equity portfolio of $18.9, but the earnings from these other 2 portions are already included in the estimate.

 

@dartmonkey you are spot on. My current estimate has Fairfax's mark-to-market equity portfolio at about $9 billion. About $2 billion of this is the FFH-TRS. 

 

My earnings estimate for 'net gains on investments' is $1 billion for 2024:

• FFH TRS = $2 billion = $250 x 1.96 million = $500 million
• Remaining mark-to-market holdings = $7 billion x 7% = $500 million

[Hoodlum]

Fairfax is offering $1B in 30yr notes at 6.35%.  Is this replacing existing debt or do they have other plans for this?

 

https://www.fairfax.ca/press-releases/fairfax-announces-pricing-of-senior-notes-offering-03-19-2024/

 

 

Edited March 19, 2024 by Hoodlum

[glider3834]

8 minutes ago, Hoodlum said:

Fairfax is offering $1B in 30yr notes at 6.35%.  Is this replacing existing debt or do they have other plans for this?

 

https://www.fairfax.ca/press-releases/fairfax-announces-pricing-of-senior-notes-offering-03-19-2024/

 

 

Good question for AGM

[Santayana]

I'm sure at least some of it will be for what they're putting together for IDBI.

[nwoodman]

For those too lazy to reach for a calculator:

 

Based on the information provided, the current 30-year U.S. Treasury yield is around 4.44% as of March 19, 2024. Several reputable sources, including Trading Economics, Bloomberg, and Barron's, confirm this yield level.

 

The Fairfax Financial notes, with a coupon rate of 6.350%, are offering a spread of approximately 191 basis points (1.91%) over the current 30-year Treasury yield of 4.44%.

Spread = Fairfax Financial notes coupon rate - 30-year Treasury yield = 6.350% - 4.44% = 1.91% or 191 basis points

This spread is within the range of 100 to 200 basis points that is typically observed for investment-grade corporate bonds with a 30-year maturity.

 

Seems pretty competitive.  @StubbleJumper will be happy…for a while.

 

Only 5 more similar sized offerings to go

 

 

Edited March 19, 2024 by nwoodman

[petec]

6 hours ago, nwoodman said:

Seems pretty competitive.

 

The very fact they can issue this tells you how far they have come. Exceptional piece of finance.

[nwoodman]

1 hour ago, petec said:

 

The very fact they can issue this tells you how far they have come. Exceptional piece of finance.

Spot on.  I don’t think the existing and potential future credit upgrades have been fully factored in by the market.  Access to “cheaper’’ money than your competitors in an environment with sticky inflation is a great position to be in.  Fairfax doesn’t ever seem short of stuff to do.

[valueventures]

If Gildan Activewear gets sold, that would open up a spot in the S&P/TSX 60. How likely do you think it is that FFH would be added? Would that spot be more likely to go to another company in the same / similar sector as Gildan, or is financials in play? Thanks!

Edited March 20, 2024 by valueventures

[Saluki]

On 3/19/2024 at 8:41 AM, Jaygo said:

 

I think the fiduciary duty is for the stewardship of the business long term and that includes keeping relationships healthy by sometimes letting out a little line in fishing parlance.

 

In my own business ive had many opportunities to take advantage of desperate situations to maximise my dollars but generally do not as i dont think it is moral or long term business friendly.

 

I would say trying to maximise every penny is short term thinking and not responsible to the shareholders who can take no action on their own short of selling and moving on. 

 

This was exactly the issue in the Blue Chip Stamps litigation involving Berkshire many years ago. The issue was favoring one group of shareholders vs another and long term greedy vs short term greedy.  I'm no expert on Canadian corporate law and how it differs from Delaware corporate law, but there is some value in not having sharp elbows when it comes to dealing with people.  

 

Every big bank or insurance firm does a lot of trades on exchanges and bilaterally with other big players. There are people in every firm that deal with "out trades".  You call for a bid on a forex transaction, for instance, and unlike most trades (dollar/euro, dollar/yen, dollar/ swiss franc, dollar/kroner ), you want to trade the British Pound, but you forget that it is always quoted the other way GBP/Dollar and you give the wrong price. You verbally confirm the trade and realize that you quoted the price wrong. Or some trainee makes a fat finger trade for 1000 lots of something instead of a 100. If the other guy holds your feet to the fire and says "a deal's a deal", then you win that round and did good for your clients.  But there aren't many huge firms, and they keep trading amongst each other like a weekly poker game, so after a few rounds of that behavior you may find that people won't trade with you any more.  

 

Knowing what you know about how people behave, would you sell your office building on handshake deal to Sam Zell or Trump? Would you rather sell your family business to Berkshire or to Bain Capital? 

 

Looking at it the other way, if Prem is making decisions for FF India and he takes the better deals for FFH and dilutes them at the bottom, then he'll never be able to offer another separate publicly traded vehicle like this.  If he ensures it does well and the shareholders make money, then he can launch more of these.  Maybe put the Kennedy Wilson and other real estate, like the Toys R Us assets,  into a separate JV that is publicly traded and focused on Real estate. Maybe the Shipping stuff can be spun out with other logistics or infrastructure assets?  Who knows.  

[villainx]

Also value of the cash is ... cash to readily deploy.

Edited March 20, 2024 by villainx

[Spooky]

3 hours ago, Saluki said:

This was exactly the issue in the Blue Chip Stamps litigation involving Berkshire many years ago. The issue was favoring one group of shareholders vs another and long term greedy vs short term greedy.  I'm no expert on Canadian corporate law and how it differs from Delaware corporate law, but there is some value in not having sharp elbows when it comes to dealing with people.  

 

 

Canadian corporate law is a bit different than Delaware - the fiduciary duty is to act in the best interest of the corporation but you have to consider the interests of all the stakeholders in your decisions. In practice, courts still give a lot of deference to boards of directors so as long as you can demonstrate you considered the stakeholders other than shareholders in the decision making process. It is not just straight maximization of shareholder value.

[SafetyinNumbers]

5 hours ago, valueventures said:

If Gildan Activewear gets sold, that would open up a spot in the S&P/TSX 60. How likely do you think it is that FFH would be added? Would that spot be more likely to go to another company in the same / similar sector as Gildan, or is financials in play? Thanks!

I think FFH would be pretty likely to go in mostly because it’s so big versus the next option by size. The committee might lean on the weightings to avoid putting it in now but it’s just going to be a bigger weight going forward so it increases the risk of XIU underperforming XIC. 

[This2ShallPass]

On 3/16/2024 at 3:42 PM, Maverick47 said:

115 CR is about a 20% worsening from the ideal target of 95.  That’s a pretty poor underwriting result, not very likely in my opinion, but a reasonable worst case scenario, and it comes nowhere near to damaging the future viability of the company.

For worst case scenario, I looked at damages from Katrina which is the largest ever ($195B) and adjusted for inflation. So a Hurricane like that would cause $300B in damages today. Someone here mentioned Fairfax typically has 1% cat loss exposure and Berkshire 4%. That would cost Fairfax $3B. 

 

Then say we're really unlucky and got hit with another hurricane half the size, so 2 bad hurricanes in a 2-3 year period. That would be a loss of ~$4.5B. Bad but manageable, they lose little more than 1 year of operating earnings..

[This2ShallPass]

On 3/18/2024 at 10:30 AM, petec said:

On a separate topic, is anyone else bemused as to why they took the FIH fee in cash? If it is so undervalued should they not (given the FFH board's fiduciary duty is to FFH shareholders) have taken it in shares?

I'm definitely curious on how they managed to get such an unfair agreement in the first place.

 

Say I come to you with a proposition to make you a lot of money and you pay me a hefty fee in return. I then convince you my fees are calculated on a metric that I can control. 3 years pass and I tell you I have made $100,000 for you and my fees are $20k. You pay me the $20k and turn around to sell your shares to get the $80k in profit. To your shock, you find out no one is willing to buy for the price I told you and your profit is only $30k. But, here's the rub, you have already paid me $20k! Your net is $10k. I used your money, 100% of risk is yours and ended up with more money than you did. This is the reality of FIH shareholders like me (it just so happens I have way more Fairfax but that doesn't make it right).

 

On 3/18/2024 at 3:33 PM, gfp said:

 I think it just comes down to 'fair and friendly' and doing the right thing and it comes back around over and over when you always try to behave that way.

I'm happy they chose to get cash, but there's nothing fair and friendly about this structure. It fleeces the minority shareholders and is just another case of Fairfax not treating minority shareholders right.

 

[thowed]

@This2ShallPass  I understand your frustration.  However let's invert.  It's the old problem of whether to charge fees on Share Price on NAV.

 

When FIH launched, there was high excitement, and it traded at a fair Premium to NAV.  At that point it was more in investors' interests for Performance Fee to be on NAV.  So at that point, they were doing the right thing.

 

Now at a big discount to NAV, it's better the other way round.

 

Arguably Performance Fee on NAV is more correct, as that is more in their control, whereas the share price is not.

 

I suppose there's a separate argument that one of the Board's jobs is to make the NAV and Price converge...

[SafetyinNumbers]

58 minutes ago, thowed said:

@This2ShallPass  I understand your frustration.  However let's invert.  It's the old problem of whether to charge fees on Share Price on NAV.

 

When FIH launched, there was high excitement, and it traded at a fair Premium to NAV.  At that point it was more in investors' interests for Performance Fee to be on NAV.  So at that point, they were doing the right thing.

 

Now at a big discount to NAV, it's better the other way round.

 

Arguably Performance Fee on NAV is more correct, as that is more in their control, whereas the share price is not.

 

I suppose there's a separate argument that one of the Board's jobs is to make the NAV and Price converge...

The parties that fell down are the initial minority shareholders that negotiated on our behalf like OMERS, Markel etc… The mechanism is set up to close the discount every three years based on minority shareholders being incentivized to do so. The world switched to quants (screens for quality) and passive in the mean time so they are likely constrained or afraid to buy more. Investors for the most part don’t buy things because they are cheap anymore.

 

FFH and FIH have fulfilled their end of the bargain by buying a lot of stock back. It’s really hard to say they haven’t tried. I haven’t done the math but they must have offset a considerable portion of the performance fees on an intrinsic value basis. 
 

If the IDBI bank deal is structured like a sidecar, maybe the fees generated could offset a lot of the fees paid by FIH to FFH and that will be the narrative change needed to close the discount somewhat. I’m not counting on it but it’s a free option as it stands.

[This2ShallPass]

7 hours ago, thowed said:

Now at a big discount to NAV, it's better the other way round.

 

Arguably Performance Fee on NAV is more correct, as that is more in their control, whereas the share price is not.

 

I don't mind if we're at a premium. The only reason a closed end fund sells at a premium is because of the reputation of the manager. If I can make 20% more because of Fairfax's reputation then giving them extra in fees is fine.

 

In my opinion, it's completely not ok to charge fees at a price that no one else in the world is willing to pay for. Ignore Fairfax for a minute, would you be ok with any inv manager making more money from you than you can realize in profits?

 

6 hours ago, SafetyinNumbers said:

The parties that fell down are the initial minority shareholders that negotiated on our behalf like OMERS, Markel etc…

Yes looks like it. But most of us are buying Fairfax India because of how much we trusted Fairfax.

[SafetyinNumbers]

42 minutes ago, This2ShallPass said:

 

 

Yes looks like it. But most of us are buying Fairfax India because of how much we trusted Fairfax.

I’m not clear on what you are trying to say here. Is the argument that investors don’t trust FFH any longer so that’s why the FIH discount exists? Arguably, that’s why the discount on FFH exists. Investor’s don’t like anyone they invest with to invest differently than them. Since most are quality (stocks that screen well) investors they can’t own FFH or FIH. 

[This2ShallPass]

51 minutes ago, SafetyinNumbers said:

I’m not clear on what you are trying to say here. Is the argument that investors don’t trust FFH any longer so that’s why the FIH discount exists?

No, I just meant it's true what you're saying (OMERS and Markel didn't step up). But most retail invested in FIH because of Fairfax and not these other parties, so I feel Fairfax has the responsibility to setup the agreement that was fair in the first place and not rely on others to help close the discount.

[SafetyinNumbers]

9 minutes ago, This2ShallPass said:

No, I just meant it's true what you're saying (OMERS and Markel didn't step up). But most retail invested in FIH because of Fairfax and not these other parties, so I feel Fairfax has the responsibility to setup the agreement that was fair in the first place and not rely on others to help close the discount.

They negotiated in good faith with credible counterparties. Then they used capital they could have earned fees on to buy back stock. As minority investors, we should want to give them a low cost of capital but at that valuation, we all think we have better uses for our capital. The small set of active investors that can buy FIH still think that at 30% discount.  

[dartmonkey]

2 hours ago, This2ShallPass said:

Ignore Fairfax for a minute, would you be ok with any inv manager making more money from you than you can realize in profits?

 

Yes, I think that's fine, because in the long run, it makes no difference, especially if Fairfax starts taking its performance fee in cash. 

 

It is probably true that they didn't anticipate every possible combination of book value, intrinsic value and share price, and now that book value has done well but the share price has not, taking performance fees on the basis of book value makes it seem that Fairfax has taken advantage of FIH investors, but in the long run, the weighing scale aspect of the stock market will prevail, and the share price will track book value as it did in the beginning, and the fees paid on the basis of book value will end up being about the same as if they were paid on the basis of share price.

 

Of course, it's not much fun if you want to sell your shares before that convergence happens, but as an investor, knowing that fees were based on book value, you took that risk.

[Viking]

My view is Fairfax India has been a gift for investors for at least the past 5 years. The stock has been on perpetual sale. And for lengthy periods of time it has been available at obscenely low prices (sub $10). 

 

Performance fee? It is what it is. There are the facts as to how it works (the mechanics). But in terms of debating whether it is good or bad... well, from my perspective, it is kind of like trying to debate the weather. 

 

With any investment, fit is always paramount. If you don't like the fee don't invest in Fairfax India. I am not saying the fee structure is good or bad - each person needs to decide that on their own based on their analysis of the situation and how they are wired.

 

Personally, the fee structure has never impacted my decision to invest in Fairfax India (I don't own any today, but I have held large positions in the past). 

 

1.) To me the key question with Fairfax India is what is BIAL worth? The answer to this question is going to drive your future return on this investment over the next 5 years much more than anything else. 

 

2.) The next question (linked to the first) is what does Fairfax India do with Anchorage and when? (This, of course, gets back to BIAL.)

 

3.) The emerging question is what is Fairfax India's involvement with the bid for IDBI Bank? This would be a massive purchase. Where is the significant $ going to come from? And what does that mean for current Fairfax India shareholders? I am pretty sure Prem said at the AGM last year that Fairfax India would not be issuing any new shares for less than book value (perhaps someone else can confirm/deny this).

 

4.) And finally, how serious is the current regulatory issue with IIFL Finance? That is Fairfax India's second largest holding and the stock has been bludgeoned lately. 

Edited March 21, 2024 by Viking

[nwoodman]

6 hours ago, This2ShallPass said:

But most of us are buying Fairfax India because of how much we trusted Fairfax.

If history is any guide, that would be at the bottom of my thesis list.  Not saying they have acted with impropriety but your interests rank much lower than you think.  

[Viking]

20 minutes ago, nwoodman said:

If history is any guide, that would be at the bottom of my thesis list.  Not saying they have acted with impropriety but your interests rank much lower than you think.  

@nwoodman I agree. However, I was quite surprised by how much (little) Fairfax paid to take out Recipe. Fairfax got a good to great deal. But at the time I thought they could have paid less and still got it through. Is this another new trend?