Prem Watsa’s Fairfax Financial Holdings is having a tough start for 2015. Watsa’s 34 picks in Fairfax’s 13F portfolio at the end of 2014 have led to a loss of 8% in the first quarter compared to the first quarter 0.9% gain in the S&P 500 ETF (SPY). But there’s a story in his portfolio. Let’s look to see the causes of his underperformance.
But first, a note on why we’re doing this. We track funds like Fairfax Financial Holdings because historically their stock picks managed to generate alpha. In our backtests the most popular large cap stocks among hedge funds delivered an annualized alpha of less than 1 percentage point whereas hedge funds’ most popular small-cap picks achieved to deliver nearly 10 percentage points in annual alpha. Our back tests covered the 1999-2012 period. We have also been tracking the performance of these small-cap stocks since the end of August 2012. They returned a mind blowing 137% over this 31 month period and outperformed the S&P 500 index funds by more than 82 percentage points (read the details here).
The sole reason for Prem Watsa’s Fairfax Financial Holdings’ underperformance is due to BlackBerry Ltd (NASDAQ:BBRY). Not only did BlackBerry Ltd (NASDAQ:BBRY) lose 18.6% for the first quarter of 2015, but Fairfax Financial Holdings held 46.6 million shares valued at $500 million as of the beginning of 2015. That’s a whopping 33.15% of the firm’s portfolio tied to this single stock.In fact, 66% of the firm’s capital is tied to Blackberry and Resolute Forest Products Inc (NYSE:RFP) and when we add 3rd place International Business Machines Corp. (NYSE:IBM); these three stocks alone count for over 80% of the firm’s portfolio. We wouldn’t dare try to teach Mr. Watsa a lesson in diversity, who is also known by many as Canada’s Warren Buffett. Let’s just sit in amazement and call it a big bold bet thatBlackBerry Ltd (NASDAQ:BBRY) CEO John Chen can turn the company around.
The rest of Watsa’s picks were not so bad. As previously stated, International Business Machines Corp. (NYSE:IBM) was the 3rd largest in Fairfax Financial Holding’s portfolio with 1.36 million shares valued at $218 million. In the last quarter of 2015, Mr. Watsa’s conviction appeared to be stronger as Fairfax Financial Holdings added to this position by 28%.This is inline with Watsa’s American counterpart, Warren Buffett, as Berkshire Hathaway is one of the most bullish shareholders of the company, holding 76.97 million shares valued at $12.35 billion of the technology company. For the first quarter of 2015, International Business Machines Corp. (NYSE:IBM) returned 0.7%.
Watsa had a double-digit gainer in Pfizer Inc. (NYSE:PFE) which ran up 12% in the first quarter. As of year-end 2014, Fairfax held 235,000 shares valued at $7.32 million. Another notable investors bullish on Pfizer is Ken Fisher of Fisher Asset Management. His firm holds 31.2 million shares valuing the investment at $971 million and representing 2% of Fisher Asset Management’s equity portfolio. Cliff Asness’ AQR Capital Management and Diamond Hill Capital have the largest positions in Pfizer Inc. (NYSE:PFE) after Fisher, whose position was the largest among the funds in our database.Pfizer’s 12% run in the first quarter was nice for everyone, but Fairfax’s position in Pfizer, however, wasn’t big enough to cover the Blackberry loss as the investment represented only 0.47% of the equity portfolio.
Fairfax had a slow start with Johnson & Johnson (NYSE:JNJ) as the stock fell in the first quarter by 3.1%. But since Fairfax’s position was again minor, the drop didn’t affect the firm very much. At the beginning of 2015, Fairfax held 82,000 shares of Johnson & Johnson (NYSE:JNJ) valuing the investment at just $8.6 million and representing just 0.56% of the firm’s portfolio. The appeal is easy however. Johnson & Johnson boasts a track record of not decreasing its dividend for 52 years and currently provides a payout of approximately 2.8%. Again, Ken Fisher’s fund, Fisher Asset Management, appears on Johnson & Johnson’s list of notable investors with about $1 billion invested in the company.
One interesting item on Fairfax’s filing is its investment in the real estate investment and services company, Kennedy-Wilson Holdings Inc (NYSE:KW). Fairfax’s still holds 400,000 shares which valued the investment at just $10 million at the beginning of 2015. Kennedy-Wilson Holdings Inc (NYSE:KW) gained 3.8% for the quarter but again, the investment only represented 0.65% of the firm’s portfolio. Notable investors include Alan S. Parsow’s Elkhorn Partners with 3.7 million shares and Seawolf Capital, run by Porter Collins, Daniel Moses, and Vincent Daniel, which had approximately 840,000 shares.
