Shareholders attend the Fairfax Financial Holdings annual general meeting in Toronto on Wednesday, April 9, 2014.The Canadian Press
Fairfax Financial Holdings Ltd. is dramatically altering its investment approach in anticipation of economic changes stemming from the result of the U.S. election.
The Toronto-based insurance and investment company said Friday that it would scale back its equity hedging program, which was put in place to protect the company against the possibility of a widespread financial storm arising from global economic woes.
Equity hedges now cover about half of the company's equity and equity-related holdings, down from 112.7 per cent of its equity portfolio in its most recent quarter, which concluded Sept. 30. Fairfax said it could cut this hedging program back even further in the future.
"We hedged our equity investments to protect our shareholders' capital from exposure to the impact of deteriorating economic fundamentals," said Prem Watsa, chief executive officer of Fairfax, in a statement. "We believe the U.S. election may result in fundamental changes that may bolster economic growth and business development. As a result, there is the potential for a longer term rally in U.S equity markets that reduces the need for the capital preservation protection of equity hedging."
This change of course comes after years of Mr. Watsa warning investors about a great disconnect between stock markets and the underlying economic instability of countries around the world. Mr. Watsa, who approaches investing from a long-term value perspective, has said the worth of the hedging will be clear many years from now.
The decision to reduce hedges is even a marked departure from earlier this month when the company said it would keep its "defensive equity hedges and deflation protection as we remain concerned about the financial markets and the economic outlook in this global deflationary environment."
The company took nearly $200-million in investment losses in its most recent quarter, in large part attributed to stock price volatility and market changes in its Consumer Price Index-linked derivative contracts.