Author Topic: Fairfax2019  (Read 13438 times)

TwoCitiesCapital

  • Hero Member
  • *****
  • Posts: 2144
Re: Fairfax2019
« Reply #20 on: January 21, 2019, 07:08:28 PM »

Just a follow up....there is lots of opportunity out there Shalab I agree...Fairfax’s advantage is they went into this sell off period with $28 billion of bonds and cash....of  note is that interest rates dropped substantially creating appreciation in their large treasury portion of those holdings and allowing them the opportunity to buy into a frozen bond market. In the past this has been their strength.

There was a window that if Fairfax acted that they would have seized large near term and long term profits in the investment portfolio....which has been the drag on Fairfax. So when you say there are many opportunities now which there are....many have had to wait for their holdings to appreciate to buy other things because they had little dry powder to buy into the worst December in almost 90 years.

Fairfax got a fast ball right down the middle of the plate ....

Did they hit that fast ball? Only they know that right now...but I don’t have to pay for that probability right now because the stock is cheap enough that they will do fine if they did not hit that fast ball out of the park.

I'm not convinced they did. I would love it if Fairfax had locked in Treasury yields at 3.2% or rolled into credit in December, but neither seems REALLY compelling if you're waiting for a fat pitch.

3.2% was the highest rates in 7 years, BUT Fairfax believes we're in a period of unprecedented economic growth and rising rates...which makes 3.2% less compelling especially when compared to historical Treasuries. Did credit spreads widen in December? Yes. But they're still mostly tight by historical standards.

I think they'd have waited for higher rates and spreads before making a move given their outlook on valuations and rates.


Well, locking in at 3.2% might have been the thing to do in retrospect, but in the short term it probably doesn't make that much difference.  My guess is that half the $27B of cash/bonds were rolled during 2018 and if they were rolled into 2-year treasuries, what would be the weighted average rate?  Would it have been around 2.7% over the year?  So the "penalty" for not having perfectly managed the bond port might be ~50 bps on $27B? 

It would clearly have been better to have nailed it perfectly, but I don't mind the small-ish penalty that they've taken on the theory that rates are headed north over the next five-ish years.


SJ

Absolutely agree! That was basically my point - in hindsight, locking in at 3.2% or rolling to credit would have been the right things to do, but wouldn't have made sense if Fairfax is truly waiting for a fat pitch which is what we all believe they're doing. So there was likely 0 benefit to Fairfax from the December tumult or the spike and subsequent fall in rates. If anything, the fall in rates is going to hurt them as they roll the 2-year Treasuries. Was simply rebutting that Fairfax put money to work in December.


wondering

  • Full Member
  • ***
  • Posts: 104
Re: Fairfax2019
« Reply #21 on: April 18, 2019, 01:59:17 PM »
I was reading the Chou Funds 2018 annual report, and one of Francis' more recent purchases caught my eye.  Sometime in 2018, in the Chou RRSP Fund, Francis purchased 2,000 shares of Fairfax for a Canadian cost of $1,344,170 (or $672/share if my math is right).

Two observations

1) Francis is seeing value in Fairfax, even at $672 Cdn/share
2) I am guessing that he never bought Fairfax in the past because of appearance of conflict of interest since he was on the board a number of years ago.  I am guessing that the appropriate "cooling off" period has lapsed?

investmd

  • Full Member
  • ***
  • Posts: 128
Re: Fairfax2019
« Reply #22 on: April 24, 2019, 02:55:55 PM »
Thanks for sharing this insight.
It's a strange buy for Chou as in my opinion he usually seeks deeply undervalued/distressed stocks with a 2-10x potential. FFH doesn't fit that bucket. Maybe in the Chou RRSP, he is restricted to buying Canadian equities. I don't think he bought FFH in his flagship Chou Associates fund?

Broeb22

  • Full Member
  • ***
  • Posts: 165
Re: Fairfax2019
« Reply #23 on: April 24, 2019, 03:12:39 PM »
If Fairfax can return to compounding at 15%, which should be easier when you’re not betting the world will end with expensive puts, the stock could be a 2x from revaluation alone starting at approximately 1x book value, and 5 years of 15% growth on top of the re-rating gets you to a 4x. The classic Davis double.

TwoCitiesCapital

  • Hero Member
  • *****
  • Posts: 2144
Re: Fairfax2019
« Reply #24 on: April 24, 2019, 03:38:05 PM »
If Fairfax can return to compounding at 15%, which should be easier when you’re not betting the world will end with expensive puts, the stock could be a 2x from revaluation alone starting at approximately 1x book value, and 5 years of 15% growth on top of the re-rating gets you to a 4x. The classic Davis double.

Yes, but as has been discussed exhaustively, 15% is no easy feat when interest rates are at 2.5% on the 10-year treasury. So either those equities need to do 15-20% per annum to make up for the dead-weight of the fixed income portfolio at 2.5-3% OR they need interest rates to rise to lock in longer term yields that are much higher than 3%.

I know the Prem keeps benchmarking himself to that number, but I haven't really heard anyone make a case for why we should expect 15-20% on the equity side. They haven't done that in the past decade even if you exclude the equity hedges and I don't expect them to suddenly start when valuations are very full and the bull market seemingly slowing after a 10-year expansion.

Even if there is a pullback, they're already fully invested on the equity side. It's not as if there are billions in cash, or hedges, that could be rolled into equities at more favorable valuations to help achieve that 15% ROE. Further, any sustained pullback is likely to impact Fairfax's stock as well - particularly since they're unhedged at this time.

I just don't see much reason to own this today. Maybe if you think that India or Greece or Blackberry is suddenly going to go gangbusters, it could be worthwhile, but then why not just Eurobank, Fairfax India, or Blackberry directly. Personally, I rolled all of my proceeds out of Fairfax and into Fairfax India earlier this year with the expectation that the India vehicle will dramatically outperform the parent in the near-to-mid term.

petec

  • Hero Member
  • *****
  • Posts: 1805
Re: Fairfax2019
« Reply #25 on: April 25, 2019, 12:38:55 AM »
Maybe if you think that India or Greece or Blackberry is suddenly going to go gangbusters, it could be worthwhile, but then why not just Eurobank, Fairfax India, or Blackberry directly.

I think the answer to that is you can, but the parent has advantaged access to new investments in some cases. You couldn't for example, have got the SSW deal in the market. Over time that advantage may add up.

What drives your confidence in the timeframe of the return in Fairfax India? I don't dispute its potential but I have no idea when it will be realised. Do you?

Broeb22

  • Full Member
  • ***
  • Posts: 165
Re: Fairfax2019
« Reply #26 on: April 25, 2019, 05:50:53 AM »
TwoCities,

Fairfax's investment leverage appears to be approx. 2.78x if you back out the 4.25 billion of assets and the 4.25 billion of non-controlling interests. I get to 37.4 billion - 4.25 billion divided by 11.78 billion.

Is that not the right way to think about their investment leverage? If not, how do you figure the investment leverage?

If that is the right number, then an after-tax investment return just north of 5% would achieve a 15% book value growth, assuming investment leverage stayed relatively stable.

Is this way off-base?

petec

  • Hero Member
  • *****
  • Posts: 1805
Re: Fairfax2019
« Reply #27 on: April 25, 2019, 07:53:23 AM »
TwoCities,

Fairfax's investment leverage appears to be approx. 2.78x if you back out the 4.25 billion of assets and the 4.25 billion of non-controlling interests. I get to 37.4 billion - 4.25 billion divided by 11.78 billion.

Is that not the right way to think about their investment leverage? If not, how do you figure the investment leverage?

If that is the right number, then an after-tax investment return just north of 5% would achieve a 15% book value growth, assuming investment leverage stayed relatively stable.

Is this way off-base?

No, it's directionally right, and in-line with their guidance that a 95% combined ratio and a 7% investment return gives 15% book value growth after debt costs, taxes, etc.

The issue is that if you assume the investment book is 70/30 debt/equity, and you assume a 4% return on debt, you've got to have a 14% return on the equity investments to get to 7% overall. That's not pie in the sky but nor is it easy. That's why they're trying to be smart about debt+warrant deals, to juice the returns on the debt side.

StevieV

  • Full Member
  • ***
  • Posts: 177
Re: Fairfax2019
« Reply #28 on: April 25, 2019, 08:31:29 AM »
Same math implies the flip side as well, correct?

That is, because of the tilt towards fixed income, particularly high equity returns are necessary to boost the overall returns substantially.  However, mediocre equity returns shouldn't prevent book value from compounding in the high single digits and worse than mediocre equity returns shouldn't stop book value growth from being positive (assuming underwriting and fixed income performs). 

petec

  • Hero Member
  • *****
  • Posts: 1805
Re: Fairfax2019
« Reply #29 on: April 25, 2019, 08:50:30 AM »
Same math implies the flip side as well, correct?

That is, because of the tilt towards fixed income, particularly high equity returns are necessary to boost the overall returns substantially.  However, mediocre equity returns shouldn't prevent book value from compounding in the high single digits and worse than mediocre equity returns shouldn't stop book value growth from being positive (assuming underwriting and fixed income performs).

Certainly they ought to be able to do mid single digits. But it's not like there's no downside risk. A 10% equity loss would wipe out a 4% fixed income gain, roughly. And position sizes are big - if Eurobank, Seaspan, and Blackberry all go to the wall, you'll know about it. Thankfully there's little risk of that in my view ;)