Fairfax 2020

[Xerxes]

This is from Q1 report:

"Portfolio investments comprise investments carried at fair value and equity accounted investments, the aggregate carrying value of which was $37,867.5 ($37,435.3 net of subsidiary short sale and derivative obligations) at March 31, 2020 compared to $38,235.0 ($38,029.4 net of subsidiary short sale and derivative obligations) at December 31, 2019. The decrease of $594.1 principally reflected net unrealized losses on common stocks, total return swaps, equity warrants and U.S. treasury bond forward contracts, in addition to the specific factors which caused movements in portfolio investments as discussed in the paragraphs that follow.

Subsidiary cash and short term investments (including cash and short term investments pledged for short sale and derivative obligations) decreased by $630.2, primarily reflecting proceeds from sales and maturities of short-dated U.S. treasury bonds principally reinvested into U.S. corporate bonds, partially offset by the reinvestment of U.S. treasury bond proceeds into corporate and other short term investments.

Bonds (including bonds pledged for short sale and derivative obligations) decreased by $808.2 primarily reflecting sales and maturities of short-dated U.S. treasury bonds, partially offset by the reinvestment of proceeds into U.S. corporate bonds.
Common stocks decreased by $772.8 primarily reflecting net unrealized losses as a result of the global economic and social disruption caused by the COVID-19 pandemic."

I am not sure what companies are included in the $772 figure for common stock decrease. But it cannot include Resolute/Atlas/Recipe. Of that $772 figure, I calculate $380 million due to BB, K-W and Stelco losing value from Dec 31 to March 31.

Now, $173 million of that $772 is reversed by the bounce back on BB, K-W and Stelco from March 31 to date. Not including BB converts as I am not sure how those are accounted quarter to quarter.

[StubbleJumper]

SJ, I think of the names that are marked to market, there is only BB and K-W of consequence + Stelco. The first two are up about 32-33% from March 31 to date. Stelco is up 75% in CAD terms.

BB and K-W have a combined unrealized gain of USD $118 million.
Add to Stelco's ~$55 USD gain, it comes to $173 million unrealized gain.
Divided by 26.8 million outstanding shares that is very small number.

Blackberry Ltd
46,724,700 FFH ownership

Kennedy-Wilson Holdings Inc.
13,322,009 FFH ownership

Stelco
12,200,000 FFH ownership

The rest of the ones you named are equity accounted, but perhaps that there is a pickup in their earning vis a vis Q1.

Good point on the equity accounting.  I don't generally spend much time thinking about mark-to-market gains, but that doesn't excuse my being brain-dead and asking about companies that are consolidated or equity accounted!  So, it looks like maybe a couple hundred million from the major equity holdings, plus likely a considerable chunk from the total return swaps and possibly something considerable for the miscellaneous equities....so it's likely low-to-mid 9-digits.  Quarterly financial reporting is going to look bizarre for a great many companies!

Thanks for setting me straight,

SJ

[petec]

On this topic, it seems to me that Fairfax may have been deliberately reconstructing their equity portfolio to reduce M2M volatility. Does anyone else have this sense?

[Thrifty3000]

On this topic, it seems to me that Fairfax may have been deliberately reconstructing their equity portfolio to reduce M2M volatility. Does anyone else have this sense?

I 100% get that sense. Their marks to model in India are super aggressive. And, they’re trying to go the same route with Africa. But, you just have to look at the compensation system to see the benefits to them, and why their judgment probably gets clouded. Of course, now they’re in the same boat as Biglari, where it could be years before their next performance fee payout.

[Thrifty3000]

They were carrying Quess at something like 70 times trailing look through earnings, until they impaired it last quarter to a humble 50 times. I think Bangalore is carried at around 100 times look through earnings. Geez. But, they excused these sky high marks because arms length transactions were done with suckers willing to pay those prices.

(I have no doubt Bangalore will eventually be worth it’s carrying value, as more capacity is added and real estate is developed. But, Fairfax was able to fast track years of performance fees thanks to the high marks.)

[petec]

On this topic, it seems to me that Fairfax may have been deliberately reconstructing their equity portfolio to reduce M2M volatility. Does anyone else have this sense?

I 100% get that sense. Their marks to model in India are super aggressive. And, they’re trying to go the same route with Africa. But, you just have to look at the compensation system to see the benefits to them, and why their judgment probably gets clouded. Of course, now they’re in the same boat as Biglari, where it could be years before their next performance fee payout.

It's not the scale/aggressiveness of the marks. It's the accounting structure. More and more of the equities seem to be consolidated or equity accounted, so that stock market moves don't affect BV. I can't decide whether I think this is a great way of enabling them to focus on the long term or a naughty way of disguising losses.

[Thrifty3000]

I think it mostly provides stability and allows better long term focus. Berkshire enjoys the same benefits. I’m sure, for example, it was nice not having to mark BNSF down to fair market value on March 31.

[petec]

I think it mostly provides stability and allows better long term focus. Berkshire enjoys the same benefits. I’m sure, for example, it was nice not having to mark BNSF down to fair market value on March 31.

Sure. But they own BNSF, and control its cash flows, and there isn't a market price.

Not so Eurobank and Seaspan.

[Xerxes]

Pete
FFH is definitely using the full extent of accounting when it suits them, but two things:

- I really doubt that they are going to overinvest hundreds of  millions so that is passes the threshold above 20% ownership to be equity accounted

- equity accounting also has a huge impact on book value. Ex When impairment was done on recipe and resolute that also pass through income statement hitting book value. Worse it doesn’t bounce back quarter to quarter. My view is that Equity method is a better way to account for large strategic holdings that are below 50%. 

On BRK side, there is no shortages of interviews where Buffet actually tells people to ignore mark to market accounting.

[petec]

Pete
FFH is definitely using the full extent of accounting when it suits them, but two things:

- I really doubt that they are going to overinvest hundreds of  millions so that is passes the threshold above 20% ownership to be equity accounted

- equity accounting also has a huge impact on book value. Ex When impairment was done on recipe and resolute that also pass through income statement hitting book value. Worse it doesn’t bounce back quarter to quarter. My view is that Equity method is a better way to account for large strategic holdings that are below 50%. 

On BRK side, there is no shortages of interviews where Buffet actually tells people to ignore mark to market accounting.

Yes - I am not saying M2M is particularly worthwhile. My main concern is whether FFH are being a little manipulative, seeming to find ways to lock in relatively high equity accounting values and then being slow to impair. I don't really have an issue with it frankly because no accounting system is perfect but it's something to be aware of.