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  • Chris Mayer

Notes from Toronto

I’m back from the Fairfax Financial annual meeting in Toronto. I headed up two days earlier to attend conferences and other stuff around the meeting. The whole thing is kind of like what goes on in Omaha every May. Fairfax’s meeting day is a miniature version of Berkshire’s, with better food.


As Buffett does, Prem Watsa spends most of the meeting taking questions from the audience. Watsa is the founder, chairman and CEO of Fairfax Financial. And as with Berkshire, Fairfax is a holding company with insurance operations and various listed and wholly owned investments. Fairfax, too, has a remarkable long-term track: ~17% compounded from 1985-2018.


It seems you can’t talk about Fairfax without somehow inviting comparisons with Berkshire. But Watsa is not really like Buffett in several important ways.


First, let me say: I own Fairfax Financial in the Woodlock House fund. I’ll explain why below. But I am not uncritical about it. Listening to Watsa at the meeting, I have my doubts – as I always do – about Watsa, in particular.


As you may know, Watsa’s investment returns at Fairfax have not been good in recent years. This meeting reminded me of meetings from past years, where Watsa has to explain poor investment returns.


This year, he pointed out that Fairfax’s investments returned about 3% annually over the last 5 years. The five years before that weren’t so hot either, about 4.4% annually. That’s ten years of 3-4% returns during a time that has been benign to say the least.


Here is a table of returns from the annual letter (also shown during Watsa’s presentation at the meeting):



Watsa had hedges against a market crash that did not pan out. These cost Fairfax a boatload of money – not to mention the opportunity cost. Here is Watsa in the annual letter:


“In the past, to protect our equity exposures in uncertain times, we shorted indices (mainly the S&P500 and Russell 2000) and a few common stocks. After much thought and discussion, it became clear to me that shorting is dangerous, very short term in nature and anathema to long term value investing. As I mentioned to you in last year’s annual report, shorting has cost us, cumulatively, net of our gains on common stock, approximately $2 billion! [Editor’s note: For perspective, Fairfax’s market cap is only about $13 billion]. This will not be repeated! In the future, we may use options with a potential finite loss to hedge our equity exposure, but we will never again indulge anew in shorting with uncapped exposure. Your Chairman continues to learn – slowly!!”


Watsa is 68 years old, a self-proclaimed value investor. I find it hard to fathom that he has only just learned this.


Still, I like that he’s upfront about it and that he says he won’t do it again. That admission is partly why I am interested in Fairfax today. Without Watsa shooting himself in the foot with errant macro calls, in which he has no edge over anybody, maybe Fairfax can capture a little of its old magic.


But then I sit there at the meeting I still hear a guy who seems a bit too confident in his macro views. Some of the things he says make me wonder. For example, he said, more than once – and with great confidence – that he thinks interest rates are going up.


Someone asked him a question to press him on that view a bit – citing Von Hoisington. (Hoisington is well known for the view, held for many years now, that rates are going lower.) Watsa did not mount much of a defense here, and mostly just talked about how Von Hoisington is a friend of his.


Well, maybe Watsa is right, or maybe not. Doesn’t matter. Point is it seems an odd thing for a self-proclaimed value investor to have conviction in. I’d rather hear him make some self-deprecating remark about not having a crystal ball.


Still, I like Watsa. I think he’s basically honest. I mean, I don’t think you’ll get screwed owning Fairfax because of self-dealing on Watsa’s part. He also has many other fine traits as an investor, including price discipline and patience.


Anyway, I tend to think his greatest talent may not be as an investor, but as a manager of people. Fairfax seems to have many talented people running its various businesses. And Watsa emphasized again and again at the meeting how decentralized Fairfax is. There have been few major defections of Fairfax managers. People come to Fairfax. And they stay.


This is no small thing. It does speak to a culture conducive to success over the long-term. (I think of Thorndike’s Outsiders. A decentralized organizational structure is on his checklist).


So why do I own it?


I think there are two basic reasons why.


1. I don’t think I’m going to lose money on it.


Fairfax is well-financed and it trades close to book value per share. If Fairfax doesn’t work for whatever reason – investment results still struggle, or we have another bad catastrophe year and the insurers lay an egg – Fairfax ought to still muddle along. Three years from now, you basically get your money back, or maybe eke out a small return. I think the risk of a permanent impairment here is low.


2. Potential upside is compelling


Watsa’s goal is to get to 15% growth in book value per share. To get there he says Fairfax needs a 95% combined ratio and a 7% return on its investments. (Of course, there are other combinations, but this is the one Watsa talks about).


On the insurance side of the equation, the overall combined ratio has not been 95% or better in either of the last two years. In 2016, Fairfax’s combined ratio clocked in at 92.5%.


On the investing side, well… look at the table again. It’s been a long time. But again, the hedges are gone and Watsa seems focused on old-fashioned investing in companies again. If you back out the hedges, he’s close to his goal.


I think 15% is do-able. I like a number of Fairfax’s investments (including Fairfax India, which we’ll get to below). We’ve had a couple of bad years with catastrophes – and almost everyone has taken hits because of it – so perhaps we’re due for a better year on the insurance side.


Of course, 15% growth in book value implies a 15% return on the stock, assuming no change in valuation. That’s not bad, given the relatively low risk nature of owning Fairfax. Plus, the upside could be much greater. If Fairfax met those targets, we could see the stock trade for 150% of book value, or more. That would juice returns quite a bit. He's also buying back stock.


We’ll see. I like the set-up.


*** Fairfax India Holdings


After a break for lunch, Fairfax India holds its annual meeting. Fairfax India is a listed holding company focused on India. The mothership, Fairfax Financial, owns 33.7% of it and collects a nice fee: 1.5% on deployed capital, 0.5% on un-deployed capital. It also gets a performance fee: 20% over 5%, calculated over a three-year period and payable in shares.


I also own Fairfax India in the fund (at less than half the size of Fairfax Financial). The fee is the biggest pushback I hear from people on Fairfax India. It always comes up. They can’t stomach that fee. (And as more than one person said, “Warren would never do that.” I agree.)


I’m willing to pay the fee because Fairfax India gets me exposure I can’t get elsewhere. I think the performance of those assets will be good enough that I’ll be fine with the fee.


I thought the Fairfax India meeting was the more interesting of the two. The whole team comes over from India and they talk about their businesses. Fairfax India now has nine investments. The newest is Seven Islands, an Indian shipper.

This leads me to my favorite character at the meeting: Captain Pinto. He started Seven Islands. And everybody kept calling him Captain Pinto, like he just stepped out of a Tin Tin story.


Captain Pinto got a chance to speak and in a slow, laconic, Indian-accented voice told his tale: “After 20 years at sea, 10 in command… I started my own shipping company with 5 lakh.” I liked him instantly.


But Seven Islands is a small investment. The ones I’m most excited about are the Bangalore Airport (which I’ve mentioned before) and IIFL. The latter is a financial firm with three segments: loans and mortgages, asset management and capital markets (investment banking, currency trading, etc.). It has a great track record. Take a look at these charts from their latest presentation:



The firm consistently earns 2%+ on assets and generates a high-teens ROE. See here, page 7, for more.


IIFL is splitting into three pieces, which could be a catalyst for the shares. The stock trades for only ~14x earnings. It could run for a long, long time. This stock made up a quarter of Fairfax India’s NAV at year-end.


The annual letter does a good job walking through IIFL. I tweeted this before, but it is worth sharing again. See in particular, pages 7-9 in the annual letter where they walk you through IIFL.


Fairfax India may find other interesting things to do. They still have dry powder. And they plan to exit, or partially exit, existing investments by listing them. One of their holdings, Catholic Syrian Bank – to be renamed CSB Bank – is in the process of going public. These events will also show how much value Fairfax India created.


Of course, there are always risks. There is an election in India this year. That could unsettle things. But over the long-term, Fairfax India gives you some great exposure to assets in India.


(By the way, there is also a Fairfax Africa, which is much smaller. I have no opinion on it.)


*** Mailbag


A reader writes:


“In your last post, you talked about John Elkann and how he has done a great job at Exor and helped make it a 10 bagger over the past decade. While I totally agree (and have voted with my wallet, as Exor has been the largest holding (~10%) of my partnership since it launched a couple years ago), I think you may be somewhat downplaying the role of Sergio Marchionne in Exor’s run. After all, he was CEO of Fiat, Ferrari, and CNH, and Vice-Chairman of Exor itself. I love that John got to learn at Sergio’s knee for a decade-plus, but I do have some modest concerns about how much of the success should be attributed to John vs. Sergio. I think Exor will be more than fine going forward, but I also think that the “John without Sergio” dynamic bears watching going forward. The Partners Council he established a couple years back is staffed by excellent businesspeople and thinkers and should help him navigate going forward, but there is simply no replacing Sergio.”


I agree. As Charlie Munger would say, I have nothing to add.


Thanks for reading. Write me at info [at] woodlockhousefamilycapital.com


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Published April 12, 2019

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