Fairfax India: A Gateway to International Diversification

Fairfax India offers deep value and diversification in a key emerging market

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May 31, 2022
Summary
  • Fairfax India is a closed-end investment company run by Fairfax Financial.
  • It is currently available at at about half its tangible book value, but investors need to be comfortable with its high performance fees.
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Last week, I wrote about Helios Fairfax, an Africa-based closed-end investment company run by

Prem Watsa (Trades, Portfolio)'s Fairfax Financial Holdings (TSX:FFH, Financial). Fairfax also operates an India-focused closed-end investment company, Fairfax India Holdings Corporation (TSX:FIH.U, Financial)(FFXDF, Financial), which we will cover in this article.

India is a developing country with young demographics which is expected to experience high growth in the decades ahead. Fairfax India is a good way for those without experience in this market to participate in India's growth with the help of an experienced investing team led by a seasoned value investor.

Fairfax India (FIH) is an investment holding company whose objective is to achieve long-term capital appreciation while preserving capital by investing in public and private equity securities and debt instruments in India and Indian businesses.

Below is an overview of Fairfax India's investments. From the table below, we can see Fairfax India shows a compounded annualized return of 19.3% on book value since inception.

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Prem Watsa (Trades, Portfolio) had the following to say about Fairfax India in his 2022 letter to investors:

"All of Fairfax India’s investments are in outstanding companies with a history of strong financial performance, led by founders and management who are not only excellent but also adhere to the highest ethical standards. The crown jewel (and largest) of Fairfax India’s investments, constituting by fair value on December 31, 2021, more than 1/3 of its investments, continues to be Bangalore International Airport (BIAL) run by Hari Marar, who aims to make it one of the best airports in the world. As discussed last year, Fairfax India created Anchorage, a holding company for its BIAL investment, with OMERS as a partner for 11.5%. Anchorage will be Fairfax India’s holding company for airports and infrastructure investments in India and Fairfax India expects to take it public in the near future.

While the book value per share of Fairfax India is $19.65, we believe that the underlying intrinsic value is much higher. Fairfax India has taken the opportunity over the last four years to buy back 14.4 million shares for $191 million or an average price of $13.26 per share, including the 7.0 million shares it bought in 2021 through a substantial issuer bid for $105 million or an average price of $14.90 per share. Recently, Fairfax purchased 5.4 million shares at $12.00 per share."

Currently Fairfax India's stock is trading at just 56% of its tangible book value, so at least on paper, it looks very undervalued.

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The balance sheet is straightforward. The company uses a small amount of leverage, but otherwise appears conservatively financed.

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Before thinking of investing in Fairfax India, though, investors should note the high management and performance fees. Fairfax Financial charges Fairfax India an investment and advisory fee, calculated and payable quarterly, of 0.5% of the value of Fairfax India’s undeployed capital plus 1.5% of its common shareholders’ equity less the value of its undeployed capital. It further charges a performance fee of 20% of any increase in Fairfax India’s book value per share (BVPS) (including distributions) above a non-compounded 5% increase each year from the BVPS at inception in 2015. The performance fee is calculated and payable at the end of each three-year period since inception above the high watermarks, i.e. the amount payable at the end of any three-year period would be reduced by the aggregate of the performance fees paid in respect of all prior three-year periods.

Fairfax controls Fairfax India via multiple voting shares and also owns 30% of the total equity (economic interest). OMERS, a large pension fund based in Ontario, Canada, is the largest non-Fairfax stock holder with 14.61% of the subordinate voting shares.

While Fairfax India is an intriguing and highly undervalued name selling for 56% of its tangible book value, the high performance fee is a bit of a turnoff. One way to avoid the fees would be to hold the stock of Fairfax Financial (

TSX:FFH, Financial) itself. The downside of this approach is that Fairfax India is a just a small part of the much larger Fairfax enterprise.

The company offers a way for international investors to access parts of the Indian market for investments not normally available to the retail investors. Many of FIH's portfolio companies are private and the opportunity to invest in them will not be available to retail investors.

India is likely to overtake Japan as Asia’s second-largest economy by 2030, when its GDP is also projected to surpass that of Germany and the U.K. to rank as the world’s third-largest after China and the U.S. Currently, India is the sixth-largest economy, behind the U.S., China, Japan, Germany and the U.K. India’s nominal GDP is forecast to rise from $2.7 trillion in 2021 to $8.4 trillion by 2030. The long-term outlook for the Indian economy is supported by a number of key growth drivers like its large and fast-growing middle class, which is helping to drive consumer spending, as well as its youthful demographics.

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I am/we currently own positions in the stocks mentioned, and have NO plans to sell some or all of the positions in the stocks mentioned over the next 72 hours. Click for the complete disclosure
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