Fairfax 2024

[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?

[Xerxes]

4 hours ago, Viking said:

 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).

 

 

100%
 

He made that statement after a shareholder (whose family office was heavily invested in FIH) expressed a concern about the discount. 

[This2ShallPass]

2 hours 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.  

100%, lesson learned.

 

I'll say this one last time and then hold my peace (this topic riles me up every time). Big huge Fairfax used money from small retail investors, 100% risk was yours and made more money in FEES than you were able to make in PROFITS!! Their promise is you'll eventually make the money at some future time, but couldn't wait for such future time to collect their fees. Think about that.

 

In my humble opinion, that is not how you should conduct yourself in any situation. Neither fair nor friendly..

 

5 hours ago, Viking said:

Personally, the fee structure has never impacted my decision to invest in Fairfax India

This is not why I invested either but it's fair to bring it up when the discussion is around fees. I reduced my stake but am still in it because of BIAL, it's a true crown jewel.  And honestly there's lot of FOMO for me w FIH or I would have completely exited (stuck w them for the last 8 years and couldn't exit when BIAL is starting to hit it's stride). Just curious, why did you sell?

 

[This2ShallPass]

7 hours ago, SafetyinNumbers said:

They negotiated in good faith with credible counterparties.

We just have to agree to disagree on this @SafetyinNumbers. If they just kept this as a deal with OMERS and Markel then that would be fine. But they opened it up to the public and knew very well retail investors would buy because it has the Fairfax name. 

 

[Viking]

35 minutes ago, This2ShallPass said:

Just curious, why did you sell?

 

@This2ShallPass Fairfax has always been my preferred core holding for a whole bunch of reasons. Fairfax has been cheap since Covid hit in 2020 - so i have been way overweight Fairfax since then. And when i am way overweight Fairfax i am not really interested in holding a big position in Fairfax India.

 

In addition to my core positions, i also will do some tactical trades with a small part of my portfolio. Stocks i think i understand pretty well. Positions of maybe 1% or 2% of my portfolio. Buy when they get cheap and sell when they run up for hopefully a quick 5% or so gain. My trades are done in tax free accounts. I call it mucking around. 
 

Fairfax India is a stock i usually trade in and out of a couple times a year. I haven’t this year because it hasn’t dropped to my buy price. Instead i have traded in and out of Canfor (CFP.TO) a couple of times already. And also Baytex (BTE.TO). I recently also bought some BCE.TO and T.TO (Canadian telecom stocks are hated right now).

 

If i ever get my Fairfax weighting down to something more reasonable then i probably would take a closer look at Fairfax India as more than just a quick trade type of holding. I like management at Fairfax India a lot. And i love BIAL. 
 

My biggest issue with Fairfax India is liquidity. I find it very difficult to build out a position - without causing the price to move. My bigger concern is if i ever need to quickly liquidate my position. Solution? Keep it a small position.

 

Edited March 22, 2024 by Viking

[SafetyinNumbers]

13 minutes ago, Viking said:

 

@This2ShallPass Fairfax has always been my preferred core holding for a whole bunch of reasons. Fairfax has been cheap since Covid hit in 2020 - so i have been way overweight Fairfax since then. And when i am way overweight Fairfax i am not really interested in holding a big position in Fairfax India.

 

In addition to my core positions, i also will do some tactical trades with a small part of my portfolio. Stocks i think i understand pretty well. Positions of maybe 1% or 2% of my portfolio. Buy when they get cheap and sell when they run up for hopefully a quick 5% or so gain. My trades are done in tax free accounts. I call it mucking around. 
 

Fairfax India is a stock i usually trade in and out of a couple times a year. I haven’t this year because it hasn’t dropped to my buy price. Instead i have traded in and out of Canfor (CFP.TO) a couple of times already. And also Baytex (BTE.TO). I recently also bought some BCE.TO and T.TO (Canadian telecom stocks are hated right now).

 

If i ever get my Fairfax weighting down to something more reasonable then i probably would take a closer look at Fairfax India as more than just a quick trade type of holding. I like management at Fairfax India a lot. And i love BIAL. 
 

My biggest issue with Fairfax India is liquidity. I find it very difficult to build out a position - without causing the price to move. My bigger concern is if i ever need to quickly liquidate my position. Solution? Keep it a small position.

 

One could probably call the company if they ever needed to sell a lot shares. They have a weekly block exemption. 

[Cigarbutt]

20 hours ago, This2ShallPass said:

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..

In their annual 'sustainability' report, FFH describe their "catastrophe exposure tolerance".

In 2023, there were 4.0% catastrophe points.

-----

So, from a statistical/model point of view, the unlucky scenario you describe should not happen that often.  

[nwoodman]

13 hours ago, Viking said:

@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?

"Fair" point.  Just a no-go for me, but never say never.  

 

One of the things that has been bouncing around in my addled brain was Prem's comments regarding the  100-year company.  He mentioned this in the 2020 letter.  

 

"As you know, we are building Fairfax for the next 100 years (long after I am gone, I think!!). Recently, I came across two books on long lived companies: ''The Living Company, Habits for Survival in a Turbulent Business Environment'' by Arie de Geus, and ''Lessons from Century Club Companies, Managing for Long Term Success'' by Vicki Tenhaken. They both make the point that companies that have survived for over 100 years have four characteristics:

 

1. They are sensitive to the business environment, so that they always provide outstanding customer service.

 

2. They have a strong culture - a strong sense of identity that encompasses not only the employees but also the community and everyone they deal with. Managers are chosen from the inside and considered stewards of the enterprise.

 

3. They are decentralized, refraining from centralized control.

 

4. They are conservatively financed, recognizing the advantage of having spare cash in the kitty.

 

Fairfax has many of these characteristics and we continue to build our company for the future"

 

The characteristics themselves aren't necessarily an epiphany, but I do think they may have solidified something in Prem's thinking.  Perhaps this even extends to the treatment of stakeholders such as passive minority shareholders of public subs.  Time will tell.

Edited March 22, 2024 by nwoodman

[dartmonkey]

11 hours ago, This2ShallPass said:

100% risk was yours and made more money in FEES than you were able to make in PROFITS!! Their promise is you'll eventually make the money at some future time, but couldn't wait for such future time to collect their fees. Think about that.

It's an investment fund, of course the risk is with investors, not the fund managers. If you think they will do a good job getting you a good return, then you invest and pay the fees.

 

What seems to bother you is that the fees are not determined based on the share price, but based on the book value. It is true that this is not the norm in the investment industry, and I wonder how they justified this choice. To me, it seems more fair, since it is a value that can not be influenced by short term movements of the share price. On the other hand, it is something the manager has some control over (Muddy Waters would have something to say about that), and if the share price trails book value at the end of a given calculation period, I can see how it would seem neither fair nor friendly.

 

I haven't been able to find any discussion about this fee structure (that is, the fact that it is based on book value), from 2014 when the structure was set up.

[SafetyinNumbers]

15 hours ago, This2ShallPass said:

We just have to agree to disagree on this @SafetyinNumbers. If they just kept this as a deal with OMERS and Markel then that would be fine. But they opened it up to the public and knew very well retail investors would buy because it has the Fairfax name. 

 

I still don’t understand your point but ok agree to disagree.

[ICUMD]

On 3/21/2024 at 4:08 PM, Viking said:

 

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).

This is the billion dollar question.

 

Fairfax has said aside from insurance, Fairfax India will be the vehicle for all other investments in India. They have recently placed an all cash offer for IDBI bank.  Where does the cash come from?

 

If they aren't issuing new shares at discounted market prices as previously stated, their only other option is to find an investment partner, like Omers. 

 

Alternatively, could money laden Fairfax opt to buyout Fairfax India and take it private? They would then have deep enough pockets to chase IDBI. It would also optically solve their issue of discount.

 

Pretty sure Prem wants to close that IDBI deal badly.

[This2ShallPass]

8 hours ago, SafetyinNumbers said:

I still don’t understand your point but ok agree to disagree.

You're saying Fairfax negotiated with OMERS and Markel as counterparties and it's up to OMERS, Markel and other large minority investors to take care of the discount and also represent the minority overall in the negotiation. Am I correct? To me, those other people don't matter as much as very few investors would have bought FIH because of them.

 

[This2ShallPass]

On 3/21/2024 at 8:03 PM, Cigarbutt said:

So, from a statistical/model point of view, the unlucky scenario you describe should not happen that often.  

Definitely hope not Good to see Fairfax has stated 1 yr op earnings as their upper limit of loss tolerance. The chart shows they have done pretty well over the years, only year they came pretty close was during Katrina..