ACI Partnership Fund A strange travelling festival moves from annual meeting to annual meeting each spring as investors gather to seek wisdom from famous investors.
Along the way, the revellers stop to hear from Prem Watsa, the chief executive of Fairfax Financial who holds forth at the firm’s annual meeting in Toronto. It moves on to culminate in Nebraska at the Berkshire Hathaway meeting, where Warren Buffett and Charlie Munger entertain a gathering of thousands.
As it happens, Mr. Watsa followed Mr. Buffett’s example to grow Fairfax into one of the largest insurance-based conglomerates in the world. The journey has been a profitable one because Fairfax’s stock changed hands at $3.25 a share when Mr. Watsa gained control of the firm in 1985 and it’s now near the $1,000-a-share mark. Despite the gains, the firm is a relative bargain near 0.9 times book value.
The Fairfax festivities provide the opportunity to catch up with old friends. This year I had the pleasure of sitting down with U.S. money manager James East, who I hadn’t seen since the year before the COVID-19 pandemic.
He’s a big fan of Fairfax, which, after its recent surge, accounts for roughly 30 per cent of his fund’s assets. Mr. East runs a multifamily office and the ACI Partnership Fund LP (modelled after the partnerships Mr. Buffett offered in the 1960s) from his home base in Charlotte, N.C. The fund has been operating since the waning days of 2007, when Mr. East moved on from designing engine parts for NASA’s space shuttles to managing money for his friends and colleagues.
Mr. East likes to hold quality companies, purchased at modest prices, for long periods of time, and his fund’s core holdings have typically been held for more than six years. The fund also has an international flavour having held stocks in the United States, Canada, Japan, Norway, Britain, Africa, Australia and Greece over the years.
The fund’s portfolio has fared well, with average annual gains of 9.2 per cent from the end of 2007 through to the end of 2022. By way of comparison, the MSCI World Index climbed by an average of 6 per cent over the same period. The portfolio handily beat the index and was 24-per-cent less volatile along the way. (The returns herein are in U.S. dollar terms.)
For instance, the financial crisis of 2008 clobbered the index, which dropped 40 per cent that year. On the other hand, the fund’s portfolio climbed 9 per cent thanks – in part – to an investment in Fairfax, which profited by buying hedges of the sort featured in Michael Lewis’s book The Big Short (and the movie it inspired of the same name.)
Mr. East also dodged last year’s downturn by avoiding bubbly tech stocks to gain 15 per cent, while the index plunged 18 per cent. While he last purchased Fairfax shares in 2020 and 2021, he still likes the company and believes the market has the erroneous view that it is being run by a once great investor who lost his touch.
The market also hasn’t fully recognized the global insurance powerhouse Fairfax has become and Mr. East points to its insurance operations as being better than many of its “top tier” competitors – including Markel (MKL-N) and Berkshire Hathaway. (I hope he’s right, because Fairfax is currently my largest personal holding.)
Mr. East sees an unusual opportunity in more cyclical names, including a few purchases in the Canadian oil patch. He figures the fossil-fuel industry has been hated for the better part of a decade, which deprived it of capital for supply replacement and maintenance.
In particular, he favours oil and gas producers Baytex Energy (BTE-T) and Crescent Point Energy (CPG-T), which are both headquartered in Calgary. Baytex has operations in the Western Canadian Sedimentary Basin and in the Eagle Ford in the U.S., while Crescent Point operates in Alberta, Saskatchewan and North Dakota. Both companies trade for less than 10 times trailing 12-month earnings and near five times industry analysts’ estimates of their earnings over the next 12 months. Mr. East hopes to hold them for three to five years.
While it’s difficult for Canadians to invest in the ACI Partnership Fund LP, it’s an easy matter to follow Mr. East’s lead when it comes to individual stocks. With a little luck, they’ll do well over the long term and I hope to catch up with him again when the festival comes to town next year.