After a bad start to the year that saw his holding company register losses of 8% in the first quarter according to our estimates, Prem Watsa‘s US-traded public equity portfolio has taken another, even worse beating in the second quarter. Watsa’s Canadian holding company Fairfax Financial Holdings had the second-worst performance for the quarter ending June 30 among the over 700 hedge funds that we track. The 34 stocks Watsa was invested in on March 31 with a market cap of over $1 billion delivered a weighted average returns loss of 17.7% during the second quarter. In addition, the firm now ranks as the worst performer in our database in 2015, with a year-to-date loss of 23.8%. In our performance calculations, we exclude bonds and options a fund holds and take into account only the weighted average returns of its long positions in stocks with a market cap of at least $1 billion (with some exceptions). As such, the actual returns of a firm can be vastly different than our calculated returns. Nonetheless, for a value investor like Watsa who has minimal turnover in his portfolio from quarter to quarter, they provide a fairly accurate glimpse of the performance of the bulk of his public equity positions. Fairfax Financial Holdings performed poorly in the second quarter primarily because of three of its top four stock picks, which constituted more than 70% of the fund’s public equity portfolio. Those picks all slumped heavily in the second quarter. Let’s analyze each of the three stock picks of the firm to understand why Fairfax Financial Holdings had such a dismal second quarter.
One may ask, why are we interested in the 13F filings of a select group of hedge funds? We use these filings to determine the top 15 small-cap stocks held by these elite funds based on 16 years of research that showed their top small-cap picks are much more profitable than both their large-cap stocks and the broader market as a whole; yet investors have been stuck (until now) investing in all of a hedge fund’s stocks: the good, the bad, and the ugly. Why pay fees to invest in both the best and worst ideas of a particular hedge fund when you can simply mimic the best ideas of the best fund managers on your own? These top small-cap stocks beat the S&P 500 Total Return Index by an average of nearly one percentage point per month in our backtests, which were conducted over the period of 1999 to 2012. Even better, since the beginning of forward testing at the end of August 2012, the strategy worked just as our research predicted and then some, outperforming the market every year and returning 135% over the last 34 months, which is more than 80 percentage points higher than the returns of the S&P 500 ETF (SPY) (see more details).
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Resolute Forest Products Inc (NYSE:RFP) became the top stock pick of Fairfax Financial Holdings by the end of the first quarter of this year when its earlier top pick BlackBerry Ltd (NASDAQ:BBRY) suffered a significant decline. At the end of March, the fund held slightly over 29.04 million shares of Resolute Forest Products Inc (NYSE:RFP) valued at $500.72 million. During the second quarter the forest products company slumped by 34.87%, and is currently trading near its 52-week low. The company removed its logging equipment from Quebec, Canada on July 6 when it failed to reach an agreement with the Canadian government on subsidies. The company’s director of Canadian public affairs and government relations has said that if the talks with the government don’t lead to any resolution, it will close its sawmill in Pointe-aux-Outardes by the second week of September. Among the hedge funds we track, Francis Chou‘s Chou Associates Management was the second-largest shareholder of Resolute Forest Products Inc (NYSE:RFP) at the end of the second quarter.