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How to profit from the divergent views of Fairfax and Brookfield in the new Trump era

File photo of Fairfax Holdings CEO Prem Watsa.

Mark Blinch/The Globe and Mail

When two of the world's top investors take opposite views of the market on the same day, copycats get confused. But here's a simple solution: Just buy the two investors.

On Friday, the chief executive officers of Brookfield Asset Management Inc. and Fairfax Financial Holdings Ltd. released strong statements on where they see opportunities ahead – and while one executive sounded noticeably bullish, the other took an unusually bearish turn.

Bruce Flatt, chief executive of Brookfield, which has about $250-billion under management in areas such as infrastructure and real estate, was the bear. He told shareholders that plain old cash looked like the best asset to be accumulating right now and suggested that markets could take a turn for the worse.

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"Cash becomes extremely valuable in one circumstance in particular: when financial accidents happen," Mr. Flatt said in a letter accompanying his company's third-quarter results. "It certainly feels like we are closer to the place where cash will be more valuable than we have been for eight years."

Before anyone could digest the implications of this apparent move to the sidelines, Fairfax announced that it was moving off the sidelines.

It halved its hedges against a stock market downturn – to 50 per cent of the company's equity and equity-related holdings, down from more than 112 per cent at the end of September. The company, which provides insurance through various subsidiaries but is a noted investment manager as well, added that it would consider reducing these hedges even more if post-election U.S. economic indicators look upbeat.

"We believe the U.S. election may result in fundamental changes that may bolster economic growth and business development," Prem Watsa, Fairfax's CEO, said in a statement released on Friday afternoon. "As a result, there is the potential for a longer-term rally in U.S equity markets."

If you're inclined to follow the lead of sophisticated institutional investors, or at least mull their ideas over the weekend, this double-whammy of news was conflicting. Should you turn bullish or bearish, or should one view cancel out the other?

The best approach is to quit copying and start buying (full disclosure: I own shares in Brookfield Asset Management and two spinoffs, Brookfield Infrastructure Partners LP and Brookfield Business Partners LP).

While the shares of Fairfax and Brookfield Asset Management haven't been dazzling investors over the past year, their respective performance has crushed benchmark indexes over the longer term – which is where these stocks tend to shine.

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Over the past 10 years, Fairfax shares have delivered gains of 377 per cent, including dividends, while Brookfield Asset Management shares have delivered gains of 165 per cent – multiples of the S&P/TSX composite index over the same period. Over the past five years, Brookfield has been the clear winner with gains of 176 per cent, versus 84 per cent for Fairfax and 40 per cent for the index.

These strong results aren't the product of luck or number massaging. Rather, they reflect shrewd moves on the part of their leadership teams, as both companies have sought languishing, out-of-favour assets and were content to wait years for their bets to pay off.

This approach steered Brookfield toward U.S. real estate during the depths of the financial crisis and is now taking them to Brazilian infrastructure in the hope that the struggling emerging economy will turn around.

Fairfax benefited from its bearish bets on the U.S. stock market prior to the financial crisis and has since been making big, deep-value investments in companies such as BlackBerry Ltd. and International Business Machines Corp.

With different outlooks, it might look as though Brookfield and Fairfax must now diverge. But don't count on it: They are more nimble than any copycat.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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