After years of expressing bearish views on the economic weaknesses in global markets, Fairfax Financial Holdings Ltd. founder and CEO Prem Watsa is turning to a brighter focus on investment opportunities he sees.
With several years of lacklustre investment returns weighing on the Toronto-based firm, Fairfax is "basically starting from scratch" after removing all its extensive equity hedges at the end of last year, Mr. Watsa told a packed concert hall of shareholders at the Fairfax annual meeting in Toronto on Thursday.
The insurance and investments company is at an inflection point after the unexpected results of the U.S. presidential election altered executives' views of the potential for economic growth and rising corporate profits south of the border. Mr. Watsa said that Fairfax's actions to ease up on its protective hedges and reduce the duration of its fixed income portfolios led to a $1.2-billion (U.S.) net loss on Fairfax's investments in 2016, the company's fourth overall loss in 31 years.
But that's over now, Mr. Watsa said, and he wants to return Fairfax to generating top investment returns in what he sees as a difficult stock-pickers' market.
Fairfax's conservative world view has resulted in the buildup of $10-billion in cash within its insurance companies, bolstered by the recent liquidation of its long-bond portfolio, and some shareholders at the meeting were curious about how the company plans to put that capital to work.
The money is "not going to burn a hole in our pocket," Mr. Watsa said, but the company has gone after some large transactions recently, including a nearly $5-billion deal for Switzerland-based Allied World Assurance Company Holdings AG, which Fairfax has said will be transformative for its insurance business.
The company has also become increasingly fond of making investments through a combination of debt and warrants, Mr. Watsa said. In these financing arrangements, Fairfax would look to hold bonds that have a yield of about 6 or 7 per cent, along with warrants that give Fairfax the right to buy an underlying security at a certain price in the future.
These kinds of deals require less regulatory capital to be held by the insurance businesses, but also provide Fairfax a way to make investments outside the public markets at a moment when Mr. Watsa said asset prices and stock valuations are overheated.
The company also wants to broaden its reach and reputation as a potential investment partner for businesses in North America. "In Canada, we are pretty well the first call," Mr. Watsa said. "In the United States, less so."
But even as Mr. Watsa's disposition grows sunnier, there are many facets of the company's careful approach that will not be changing. Fairfax still has more than $110-billion worth of consumer price index-linked derivative contracts outstanding – these are essentially a bet on deflation in the U.S. or Europe.
"While many risks to global economic growth remain, such as protectionism, China unravelling and the euro disintegrating, we believe the chances for robust growth have significantly increased," Mr. Watsa wrote in the company's annual report.
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