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%.