Why Fairfax can’t avoid the spotlight
(even if it wants to).
110%
Total return generated by Fairfax Financial over past five years
44%
Total return generated by Fairfax Financial over past six months
Fairfax Financial Holdings is assiduous about avoiding the spotlight; its founder, Prem Watsa, famous for staying out of the media. Despite all that, the company has been making a lot of news lately.
More importantly, it’s good news: a mixture of acquisitions, new ventures and harvesting profits — including this week’s lucrative sale of a major stake in the Bank of Ireland. All of it has been clearly delighting shareholders.
Over the past six months, the company — whose shares trade in U.S. dollars, gaining it extra points from the surging currency — has generated a total return of 44%. That’s more than 40 times the gain for the S&P/TSX Composite over the same period.
While Mr. Watsa has been occasionally called Canada’s version of Warren Buffett — and, alternately, his fund management called “overrated” — there is no question that shareholders in the last five years have been well rewarded for keeping faith with Fairfax. Since March 31, 2010, Fairfax has recorded a total return of 110% — more than two-and-a-half times the overall market gain.
Analysts are already bullish on Fairfax’s next big potential play: Cara Operations, in which Fairfax is the largest shareholder. When the foodservice company priced a $200-million initial public offering this week, at $23 per share, the securities were priced at the mid-point of the marketing range proposed during the company’s road show.
Of the five analysts who cover Fairfax, three rate it a buy, one rates it a hold and one, CIBC’s Paul Holden, rates it a sector underperform, according to Bloomberg. Fairfax shares closed Wednesday at $709; some projections see it heading to $775.
One thing that has investors bidding up Fairfax’s stock is the highly conservative, bordering-on-bearish approach that’s taken hold in the company. “There is a defensive strategy associated with their investment philosophy. There is a significant deflation hedge. And that attracts people to the stock,” noted one observer.
At the end of 2014, 89.6% of the company’s equity and equity-related holdings were subject to equity hedges. In short, if the market drops, Fairfax gains. In 2013 those contracts cost the company US$536.9 million in losses, but last year they turned around and delivered net gains of US$347.4 million.
Fairfax has also written more than US$100 billion in inflation-linked (or CPI-linked) derivative contracts (for an average term of 7.4 years), up from almost US$83 billion at the end of 2013. As long as inflation stays low or at zero, Fairfax (which has a track record of impressive derivative wins) gains.
With Canada and India having just completed the ninth round of negotiations toward a free trade deal (India’s president Narendra Modi, known for his pro-economy reforms, is due to visit Canada this month) Fairfax is already moving aggressively into India’s economic growth story.
In November 2014, Mr. Watsa — born in Hyderabad — launched Fairfax India Holdings Corp., an investment holding company targeting investments in India. The entity is aimed at “acquiring control or significant influence positions” in Indian companies. The fund closed with US$561 million in proceeds from the public and an additional US$500 million from Fairfax and cornerstone investors. Each US$10 unit now trades at US$11.46.
In March, just after posting impressive earnings of US$1.664 billion, Fairfax announced the US$1.88 billion purchase of the global insurer Brit PLC. The deal cost less than 10 times earnings, and Fairfax celebrated the purchase as “accretive to Fairfax on several metrics including gross revenue per share and investments per share.”
Investors certainly seemed to agree. When Fairfax began selling a variety of securities to fund the acquisition — common shares, preferred shares and notes — the offering had to be upsized, just to meet the strong demand.
When Fairfax sold half of its stake in the Bank of Ireland, it cashed in shares worth four times what they were at the time of purchase, just four years ago. The sale generated about US$378 million. It also made news in the Irish Times, the Irish Examiner, and the Irish Independent, as well as global business wires. The company may prefer it otherwise; investors are no doubt savouring the limelight.
There is a defensive strategy associated with their investment philosophy