Friday File, Part Three: India (Fairfax India and Graham Value Conference notes and thoughts)

By Travis Johnson, Stock Gumshoe, April 30, 2018

Fairfax India Holdings (FIH-U.TO, FFXDF) is a separate investment fund controlled (and about 1/3 owned) by Fairfax Financial (FFH.TO, FRFHF). For those unfamiliar, it was started because Fairfax wanted to put more into India, but felt there was a limit to what they could invest in that one country — so they launched a separate fund a little over three years ago to focus on India. The benefit to Fairfax is they get to have more exposure to India but have it separated a bit from their regulated insurance porfolios… and also that they manage the fund and collect fees on it.

It’s sort of like a hedge fund, with an annual fee and a performance fee — it doesn’t have much in the way of employees or expenses, so the annual fee is effectively the operating expense, with all investment decisions made by Fairfax, and the performance fee is 20% of the three year increase in book value over a hurdle rate of 5% a year. The fee is paid only once every three years (assuming it’s earned), so the first fee was paid this year. I remain of two minds about this, I’m not crazy about large performance sharing fees like this but fees based on multi-year increases in book value are better than some incentive fees… and I think it’s worthwhile if it gets you access to an inaccessible high-growth market and a strong investment manager, which I believe we get here… and, of course, the fees just go to the parent, so as a Fairfax Financial shareholder I benefit indirectly from that as well.

Since it’s a separate company, Fairfax India has it’s own separate annual meeting, with Prem Watsa and the management team (and the heads of most of the companies they’ve invested in) talking about the business and answering shareholder questions.

How is India doing? There were several notes on that big-picture issue…

The ease of doing business is improving significantly There has been a full recovery of economic growth following the 2016 demonetization Direct subsidies are electronic now, and many more bank accounts — less “frictional costs” and graft, and a full national ID system based on biometrics make business easier Goods and Services Tax is now national and will increase productivity Banks are recapitalized, bankruptcy is now possible under the law

Prem’s intro was essentially that Fairfax ...

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