Canada’s Prem Watsa (Trades, Portfolio), who invests the float of his insurance conglomerate much like Warren Buffett (Trades, Portfolio), has posted gains on his stock portfolio since removing equity hedges in November on President Donald Trump’s election victory.
Watsa affixed the hedges on his equity portfolios in 2010, fresh off of the financial crisis, which he called in advance and prepared for by buying credit default swaps. Though hedging against another potential crash lost money year after year, Watsa continued to worry about market shocks. As motive for maintaining money-losing investments, Watsa said either economic fundamentals would rise to meet rising markets, or the market would correct to meet them.
“From the distant past comes the warning of our mentor, Ben Graham, whom I have quoted before: ‘Only 1 in 100 survived the 1929 - 32 debacle if one was not bearish in 1925,' Watsa said in a 2012 shareholder letter. “We continue to be early - and bearish!”
When he removed the short position on the Russell 2000, S&P 500 and S&P/TSX 60 indexes in November, they had lost his company $1.19 billion net for the year 2016.
Watsa said in a 2016 release that he exited the hedges, “Primarily as a result of fundamental changes in the U.S. in the fourth quarter that may bolster economic growth and business development in the future,” referring to pro-business policies promoted by Trump.
Predicting the “Trump rally” has generated results that are more positive. Second-quarter results released Thursday showed common stocks contributed $261 million to pre-tax earnings to the financial position of his company, Fairfax Financial (TSX:FFH, Financial), compared to a negative contribution of $169 million in second-quarter 2016. For the first six months, common stocks contributed pre-tax earnings of $415 million, increased from a pre-tax loss of $489.4 million in the same quarter 2016.
Watsa also reported net change in unrealized gains of on stocks of $293 million, improved from $193 million in losses in the comparable quarter of 2016, and net gains on investments of $261.9 million, up from $169.1 million in losses for the same periods.
In total, including long equity exposures and net equity exposures, net gains on investments declined to $205.1 million, versus $229.2 million in second-quarter 2016. Net change in unrealized gains was $288.5 million, compared to $44.4 in losses, and net realized losses totaled $83.4 million, steeper than $44.4 million realized in the prior-year quarter.
Fairfax’s decision to drop the index hedges and reduce the bonds terms in its portfolios to one year increased its cash and short-term investments position to more than $11 billion at quarter-end, with cash and marketable securities of roughly $1 billion.
Stocks in Watsa’s portfolio have had a mixed year to date, with more gains than losses in his top 20. His largest position, BlackBerry (BBRY, Financial), has risen 32.1%, while his third largest, Kennedy-Wilson Holdings (KW, Financial), fell 11.8% and fourth largest, Resolute Forest Products (RFP, Financial), dropped 12.2%.
See Prem Watsa (Trades, Portfolio)'s portfolio here.
