I'm a keep-it-simple investor, but I do own a hedge fund.
That's what I call my very small holding in Fairfax Financial Holdings Ltd., a company with interests in insurance and investment management. The CEO is Prem Watsa, who follows the same value-investing approach as Warren Buffett and is known as a worrier about financial markets. That's why I own Fairfax shares – as a hedge against a stock-market crash.
In issuing fourth-quarter results last week, Fairfax confirmed that it is maintaining a defensive stance through the use of short positions and derivatives linked to stocks and stock indexes. A Bloomberg report said the company's portfolio of stocks and related investments was 100-per-cent hedged, up from 88 per cent at the end of last year. This move reflects Mr. Watsa's concerns about how a deflationary environment will play out in financial markets and the global economy.
Most everything else I own is a boring mix of exchange-traded funds and dividend growth stocks, plus some guaranteed investment certificates. The Fairfax shares add a level of diversification by behaving in a way that is unconnected to the stock market. The S&P/TSX composite index was down 16 per cent for the 12 months to Feb. 23, while Fairfax shares rose 9 per cent. While the index rallied back 3 per cent over the previous month, Fairfax rose 1.2 per cent.
In investing, a hedge is supposed to provide defence against losses elsewhere in your portfolio. Many hedge funds actually add risk because of their aggressive strategies, their fees are often high and the level of transparency is low. I'd never touch one. But I like the idea of true hedging, and that's where my Fairfax shares come in.
If you're interested in Fairfax, I suggest you Google Mr. Watsa and see what he's about. Fairfax shares trade at more than $700 a share, but don't let that stop you. As with any stock, you can buy in any number. There's also a modest dividend yielding 1.9 per cent.
It happens that, because of investment losses, Fairfax's fourth-quarter results didn't match analyst projections. Yawn. The financial world looks a bit daunting right now, and I'm happy to let Mr. Watsa keep worrying about it for me.
Rob Carrick