Fairfax India new issue

[petec]

Does anybody understand the way the high water mark is calculated?!   P90?

Look at pp 90-91 of the final prospectus, available on sesar.ca. Basically,  the starting highwater  mark is the NAV at the IPO, i.e. About $9.63 per share. Then NAV  +  total distributions in the just completed 3-yr period is calculated, the first calculation date being Dec 31, 2017 and then every 3 yrs. The difference between that amount and the current highwater mark is the appreciation. If that appreciation is positive, a performance fee of 20% of the amount exceeding 5% per annum goes to FFH, and the current NAV becomes the new highwater amount. If the NAV + distributions is not higher than the highwater mark, then there is no performance fee and no modification of the highwater mark.

That's what I thought - I just found the wording confusing.   Thanks.

[dartmonkey]

I had a follow-up question regarding investing in FIH.  Indian equity markets have generated ~15% return over the last 15 years or so.  Because of the hefty fee structure, FIH has to generate an alpha of 5% just to get market return.  Because of the large fund size of FIH, I think it is fairly difficult to do that.  How have you guys gotten comfortable with the fee structure?

Remember the 15% is local fx, including inflation.   The real numbers are going to be different.

Exactly. Indian rates have exceeded US rates by about 6-7% in the last 15 years, and by 8-9% in the last 5-6 years, so a 15% nominal return would get FIH only about 6-7% in USD.

Of course, there's still the 1.5% management fee. Investing in FIH is tantamount to expecting at least 2.5% alpha. If FIH gets 17.5% in INR instead of 15% in the SENSEX, that might be 9.5% in USD, and FIH would pay FFH 1.5% + (9.5-5)*20% = 2.4%, and FIH would break even with the Indian market index; higher alpha is gravy.

[petec]

I had a follow-up question regarding investing in FIH.  Indian equity markets have generated ~15% return over the last 15 years or so.  Because of the hefty fee structure, FIH has to generate an alpha of 5% just to get market return.  Because of the large fund size of FIH, I think it is fairly difficult to do that.  How have you guys gotten comfortable with the fee structure?

Remember the 15% is local fx, including inflation.   The real numbers are going to be different.

Exactly. Indian rates have exceeded US rates by about 6-7% in the last 15 years, and by 8-9% in the last 5-6 years, so a 15% nominal return would get FIH only about 6-7% in USD.

Of course, there's still the 1.5% management fee. Investing in FIH is tantamount to expecting at least 2.5% alpha. If FIH gets 17.5% in INR instead of 15% in the SENSEX, that might be 9.5% in USD, and FIH would pay FFH 1.5% + (9.5-5)*20% = 2.4%, and FIH would break even with the Indian market index; higher alpha is gravy.

Assuming, of course, that the Indian market continues to do what it's done before    

[dartmonkey]

I had a follow-up question regarding investing in FIH.  Indian equity markets have generated ~15% return over the last 15 years or so.  Because of the hefty fee structure, FIH has to generate an alpha of 5% just to get market return.  Because of the large fund size of FIH, I think it is fairly difficult to do that.  How have you guys gotten comfortable with the fee structure?

Remember the 15% is local fx, including inflation.   The real numbers are going to be different.

Exactly. Indian rates have exceeded US rates by about 6-7% in the last 15 years, and by 8-9% in the last 5-6 years, so a 15% nominal return would get FIH only about 6-7% in USD.

Of course, there's still the 1.5% management fee. Investing in FIH is tantamount to expecting at least 2.5% alpha. If FIH gets 17.5% in INR instead of 15% in the SENSEX, that might be 9.5% in USD, and FIH would pay FFH 1.5% + (9.5-5)*20% = 2.4%, and FIH would break even with the Indian market index; higher alpha is gravy.

Assuming, of course, that the Indian market continues to do what it's done before    

Admittedly, there are a lot of assumptions here, but the assumption that the Indian market might go up 15% a year, or 6-7% in real terms, is not a heroic one. This is almost exactly the average real total stock market return, according to Siegel.

[petec]

I had a follow-up question regarding investing in FIH.  Indian equity markets have generated ~15% return over the last 15 years or so.  Because of the hefty fee structure, FIH has to generate an alpha of 5% just to get market return.  Because of the large fund size of FIH, I think it is fairly difficult to do that.  How have you guys gotten comfortable with the fee structure?

Remember the 15% is local fx, including inflation.   The real numbers are going to be different.

Exactly. Indian rates have exceeded US rates by about 6-7% in the last 15 years, and by 8-9% in the last 5-6 years, so a 15% nominal return would get FIH only about 6-7% in USD.

Of course, there's still the 1.5% management fee. Investing in FIH is tantamount to expecting at least 2.5% alpha. If FIH gets 17.5% in INR instead of 15% in the SENSEX, that might be 9.5% in USD, and FIH would pay FFH 1.5% + (9.5-5)*20% = 2.4%, and FIH would break even with the Indian market index; higher alpha is gravy.

Assuming, of course, that the Indian market continues to do what it's done before    

Admittedly, there are a lot of assumptions here, but the assumption that the Indian market might go up 15% a year, or 6-7% in real terms, is not a heroic one. This is almost exactly the average real total stock market return, according to Siegel.

Fair point.   I was thinking about it from the perspective of the -ve correlation between stock market returns and GDP growth.  It's a complex relationship, but if Modi does transform India I think it's quite possible that the overall market will disappoint as markets are opened up to competition and capital floods in.   

[roughlyright]

Or, if you're extra bullish on India, own both. Whatever FIH pays to FFH will accrue to Fairfax shareholders, will it not? So if you own both you're kind of paying yourself 1.5 and 20...

ok thanks everyone. that 1.5% and 20 goes watsa not shareholders i thought?...

Or, if you're extra bullish on India, own both. Whatever FIH pays to FFH will accrue to Fairfax shareholders, will it not? So if you own both you're kind of paying yourself 1.5 and 20...

ok thanks everyone. that 1.5% and 20 goes watsa not shareholders i thought?...

The fees go to Fairfax, of course, not Watsa.

Fairfax owns 30 million shares in the fund, so for every share of FFH you own, you indirectly own 1.5 shares of FIH. So if you own 1000 shares of FFH, you already own 1500 shares of FIH, and you are paying yourself somewhere between 1.5% (if FIH gets a return of 5% or less) and 4.5% (if FIH gets a 20% return). If you buy more FIH, you will pay more fees to FFH shareholders, but you will not get any more of them as a FFH shareholder. So no, buying FIH shares is not paying from one pocket to the other, and you should be concerned about the fees.

Not that that stopped me from quadrupling my FIH stake. The fund seems attractive to me from both sides.

Dartmonkey,

   I am curious as to why you find the FIH attractive, when we are already owning a shares of indirectly via FFH ownership. Particularly, I did not understand what you mean by "The fund seems attractive to me from both sides". do you mind sharing your thesis on FIH, Please?

Roughlyright

[dartmonkey]

Dartmonkey,

   I am curious as to why you find the FIH attractive, when we are already owning a shares of indirectly via FFH ownership. Particularly, I did not understand what you mean by "The fund seems attractive to me from both sides". do you mind sharing your thesis on FIH, Please?

Roughlyright

I have about 25% of my portfolio in FFH (that number is a fair bit higher today than it was last week) so I indirectly have about 0.5% in FIH as you say. It is easy to see why getting 1.5 and 20 is attractive from the FFH side, since it immediately adds a minimum of $15 million going straight to FFH (albeit 30% of that is going from one FFH pocket to another).

Why do I find it attractive from the FIH side? There can not be a more pure jockey play than investing in a billion dollar fund that is as  yet entirely undeployed. So the only possible explanation is my high regard for Watsa in general and for Fairfax's Indian operations in particular, and the chance that a small, highly regarded fund with extensive local connections may be able to find good opportunities for investing capital in India, particularly with a business-friendly regime in place and a lot of catching up to do with other less developed countries. Combining that with the complete absence of Indian investments in my portfolio (apart from FFH), and my concerns that equity markets in North America may be overvalued, I added 2% of directly held FIH to my indirect 0.5% stake via FFH.

[roughlyright]

Thank you so much Dartmonkey. I appreciate the explanation.
It is like owning the hedgefund and the management company. I like the deal 

[bluedevil]

Does anyone know if buying FIH from an American Roth IRA account might subject any gains to Canadian capital gains taxes?

[Zorrofan]

what's up with the share price today?  it is a pretty hefty premium at this point!

cheers
Zorro