What would you guys buy TODAY? given 100% cash

[rjstc]

Good question!

 

PREC.FR, STAL.FR, ALNEX.FR, SHFK, HNFSB, some community banks, and some Japanese net-nets.

 

Oddball, is that ALNEX on Paris or Frankfurt?

[oddballstocks]

Good question!

 

PREC.FR, STAL.FR, ALNEX.FR, SHFK, HNFSB, some community banks, and some Japanese net-nets.

 

Oddball, is that ALNEX on Paris or Frankfurt?

 

It's the Alternext exchange, so it might be European not just French small caps.  I really like all three of the French stocks right now.  Nexeya and Installux are more domestic, but they're cheap!  Precia is very international, but they're headquartered in France.

[Green King]

Good question!

 

PREC.FR, STAL.FR, ALNEX.FR, SHFK, HNFSB, some community banks, and some Japanese net-nets.

 

Oddball, is that ALNEX on Paris or Frankfurt?

 

It's the Alternext exchange, so it might be European not just French small caps.  I really like all three of the French stocks right now.  Nexeya and Installux are more domestic, but they're cheap!  Precia is very international, but they're headquartered in France.

 

community banks ? eh ? i looked at around 30 in the pink sheets and haven't find any good one better than BAC. Care to share one ?

[Fairfaxnut]

GVC (Glacier Media), BAC.WS.A, FFH, and EBIX

[giofranchi]

FFH, OAK, LRE, LMCA, BRK, BAM… and a MOUNTAIN of cash!

I am much more interested in emerging from the next few years with my purchasing power intact, than in getting rich. To get rich, there will be plenty of time afterwards. :)

 

giofranchi

 

[giofranchi]

No one mentions BRK? I'd also buy BAC, some ECO, LUK/JEFF. Also for some foreign ones Nintendo, Aida Engineering in Tokyo. LRE London. BMW3 in Frankfort, EXOR in Milan.

 

I am curious about EXOR: could you elaborate a little bit? Is it just a matter of the meaningful discount to NAV it is trading at, or do you also really like what you see?

Thank you,

 

giofranchi

[ASTA]

Hello Gio,

Take a look at Bestinver's hedgefund and you can see that they have over 20% of their portfolio in Exor. And MOI had a interview of them explaining a bit of it.

I might buy it as well if it goes to 15 :D

Cheers,

ASTA

[giofranchi]

Hello Gio,

Take a look at Bestinver's hedgefund and you can see that they have over 20% of their portfolio in Exor. And MOI had a interview of them explaining a bit of it.

I might buy it as well if it goes to 15 :D

Cheers,

ASTA

 

Thank you ASTA!

I know that Bestinver has a meaningful position in Exor. I will look for the interview on their website.

It seems you have already done your homework on Exor: can you tell me their track record on a 5, 10, and 15 years basis? I have checked very quickly, and all I could find was the increase in NAV during the past 3 years. Not enough for me! Also because the management team seems relatively new, and therefore unproved (Enrico Vellano became CFO in 2006, Alessandro Nasi became Vice President of Business Development of CNH in 2008, and Mario Bonaccorso joined Exor in 2007). If I cannot project earnings at least 5 years into the future, with some sort of confidence, I almost never invest. Even if the price looks very cheap.

 

giofranchi

[Packer16]

I would put some into core growing "jockey" firms such as FFH, JEF and MIL, some into cheap segments like TV broadcast TVL, NXST and GTN, O&G like SD, LUKOY and UPL, lease finance like AIQ, SSW, ATSG and FLY, financials like BAC.WT, LNC.WT and BPOP and RE like BAM and Wheelock.  This mix provides some diversity with a focus on value.

 

Packer

[frog03]

Some comments on Bestinver.

 

1)  They always compare their performance vs. index without dividends

2)  Once you include dividends, their hedge fund launched five years ago has not beaten the index

3)  The position reports are as of 6/30 on the fact sheet

 

So, the investment may be fine but a positive view by Bestinver is only a starting point...

[giofranchi]

Hello ASTA!

Whoever invests and has real skin in the game knows that we are all dealing with uncertainty, because we are all dealing with the future, and nobody knows what the future might have in store for us! Right? So everyone’s view should be regarded and examined with the utmost respect. Arrogance doesn’t belong here! At least that’s my firm belief.

Furthermore, your portfolio makes perfect sense! And, if I should make a guess, I would say that it will perform very well!

Unfortunately, I have got a psychological restraint that doesn’t let me behave like a copycat investor 100%: I call it “the businessman negative bias towards what he doesn’t understand”. :(

I like to partner with Mr. Watsa, but I would never invest in RIM, just because Mr. Watsa did so. I like to partner with Mr. Einhorn, but I would never invest in GM, just because Mr. Einhorn did so. I like to partner with Mr. Malone, but I would never invest in Sirius, just because Mr. Malone did so. Etc.

Why? Because I think I can forecast with a sufficient degree of confidence what the annual return on my firm’s investment in FFH might be for the next 10 years. The same is true for GLRE and LMCA. On the contrary, I have no clue about RIM’s, GM’s, and Sirius’s long term future earnings. They are either beyond me (RIM and Sirius), or I know I have not done my homework (GM). Same thing applies to BAC: I understand and I truly believe that BAC is “statistically” very cheap, but I have not really done any due diligence on BAC, so I am psychologically frozen, and I cannot invest… It surely is a weakness of mine!

Thank you for the link to the interview about Exor.

And I hope you don’t mind me having answered to your message publicly. You should write more frequently on the board! ;)

Best regards,

 

giofranchi

[Hielko]

If you give me 100% cash I would probably replicate my current portfolio mostly, but to throw some names on this board that I really like, and aren't mentioned so far:

 

- TLI.L (Traded life interests. Almost no market correlation, yet offering a 10%~20% IRR)

- ASFI (~Market cap in cash. Strong positive cash flow and buying back a lot of shares)

- DSWL (Chinese manufacturer. Also market cap in cash, long history of paying dividends and profitable)

[Packer16]

I would be very careful with life settlement investments.  They are just about impossible to evaluate from the "outside" and there have been a few blow-ups and historical returns have been less than 8% with alot of unknowable risks (like extension of life expectancy due to better technology, changes in mortality tables that occurred a few years ago).  They are very sensitive to life expectancy as you are paying policy premiums while the insured is alive.  In addition, in few states some of these policies have been ruled void as the insured has no beneficial interest.  The IRRs are based upon a mark to model value that can and has changed very quickly over time.

 

Packer 

[Hielko]

I know. Think that's probably why the opportunity is there in the first place. The case for TLI:

 

- No debt (rights offering completed last month): collections > premium payments past 4 years

- Average age insured: 89 years (LE ~4.7 years, and most LE's have been reassessed recently)

- Higher age => LE more certain (LE's for people aged 89 are actually not really improving)

- You can easily add 1 or 2 years to the average LE (that's HUGE at that age) and still get excellent returns

- Successful history of collecting (and selling) policies

- Fund is liquidating: no risk of management doing something stupid with your money

- No correlation between the cash flows from policy maturities and the market is a huge plus

[txitxo]

Some comments on Bestinver.

 

1)  They always compare their performance vs. index without dividends

2)  Once you include dividends, their hedge fund launched five years ago has not beaten the index

3)  The position reports are as of 6/30 on the fact sheet

 

So, the investment may be fine but a positive view by Bestinver is only a starting point...

 

Bestinver has a long term track record which is almost unmatched in Europe, they are classical, hard-core value investors, but I would certainly not invest in their hedge fund. They have a perverse incentive structure, they get paid 50% of their overperformance over Bestinfond (which is their flagship fund). That means that since BHF has much fewer positions than Bestinfond they can make money purely out of the higher volatility or by making Bestinfond underperform. The hedge fund has a high-water mark, but only for 3 years. There is not reason whatsoever to assume that these guys will not do their best to perform as well as possible with both funds, but following Charlie Munger,  I never bet against the power of incentives. In fact I am pulling my money out of Bestinfond and putting it into Bestinver International (which is only a palliative because both funds have a significant overlap). I am keeping a eye on them and I may pull out my money in the future if I see anything I don't like.

 

  García Paramés, who is the manager responsible for the overperformance of the first 15 years, had an near-death experience in 2006, barely surviving a plane crash, and right afterwards he instituted the new system, with two additional managers and a hedge fund. He may have decided it was time to smell the roses and it is still not clear whether the new, expanded team can match the historical results.

 

Regarding the thread theme, my recommendations would be:

 

- FFH (as a safe store of value in NA)

- Any good value fund or basket of cheap stocks concentrated on the Eurozone.

 

  Run like hell from Australia and Canada (the expensive crap indicator goes crazy for them), keep out of the US and UK (same danger levels as in 2000 and 2007). The Eurozone is safe, and the best world market should be Japan, but when stocks go up there the yen will sink (or viceversa) so tread with care.

 

  If I am right in my "predictions", there will be a big crash in the NA stock market in the next 1-2 years, perhaps getting us close to the secular lows that we haven't seen yet. If I am wrong, and the sky doesn't fall after all, FFH bought at close to BV is a very nice long term investment, same as  Eurozone stocks at the current levels.

 

[Packer16]

As to LS fund, the are not cash flow positive.  The only reason they appear to be is policy sales.  It looks like they needed cash to service the policies so they sold some policies to cover the funding gap.    Given the timeframe they sold, they probably sold the best policies as they could readily obtain cash for these policies. 

 

So they have a CF negative position and the are using aggressive underwriting assumptions.  Their normal case is what I have seen as an aggressive case (using the 2008 VBT tables).  In addition, I could not find how these policies were originated.  Most of the ones I have seen in pools are from "financial planning" exercises where middle-men take huge fees and the insured has more wealth and is in better shape then the what can be seen in the 2008 VBT tables. 

 

Another issue is the non re-underwriting of policies purchased.  How do they know these policies have a positive NPV?  Typically policies that have a low enough IRR are discontinued as the cash drain can be an issue.  Without reunderwriting how do they know what to do with the policies?

 

Just some observation.  This area is a minefield and required a good "inside" look to even begin to get comfortable with some of the modelling assumptions in the NAV calcs.

 

Packer

[Hielko]

Packer,

 

They are certainly not CF negative. They build up debt because initially premiums paid > face value of the policies collected (and they had an expensive GBP/USD hedge, now cancelled). Because their lender wasn't particularly flexible they had to pay back their debt, and they sold some policies earlier this year and they did a rights issue to raise cash. Liquidity isn't an issue anymore. They have no debt now, and they have a loan facility for 3 years of premium payments, and for the past 4 years face value of policies collected > premiums paid. This can only get better with the average age going up.

 

I don't think you need a good inside look to get comfortable with the modelling assumptions in the NAV calcs: you can simply do your own modelling based on the CDC life tables. Again: the higher the age, the less uncertainty there is. Check figure 1 in this report: http://www.cdc.gov/nchs/data/lifetables/life89_1_3.pdf The probability of dying when you are old hasn't changed a lot the past 100 years. Positive changes in LE's are mostly made at a younger age. You can also check the LE for 89 years old in the life tables for the past decade. You see that there is absolutely no positive trend there!

 

You probably do have some negative self selection bias in the sample here, since the insured group is wealthy, and wealthy people life longer than the average. But at the same time when you get the complete group of 89 years olds you have to figure that a big part of the survivors are already part of the wealthy group that had a higher than average LE, so this should not impact the LE of people that are 89 year old and wealthy in a significant way compared to the 89 year old and not necessarily wealthy group. And we do have a huge margin of safety here. You can add 20~40% to the average LE and you still get a very good risk adjusted return! You can also take a look at policy maturities for the past year.

 

About the NPV: they use a 12% discount rate in their NPV calcs. I don't agree with that discount rate given the low correlation with the market, but if it's +NPV with a 12% discount rate it money well spend on the premiums imo (and you currently can buy TLI at a discount to NAV).

[Packer16]

Attached is the latest data I could find:

 

http://doc.morningstar.com/document/fe1886096c1f960d429014e3465baecf.msdoc/?clientid=morningstareurope&key=b05d173f8e969ca1

 

http://doc.morningstar.com/document/03f558ebd04b3e30f3929645bf488727.msdoc/?clientid=morningstareurope&key=b05d173f8e969ca1 

 

The semi-annual report shows a negative CF for 2010 and 2011 (after manager fee and loan interest) (see cash flow statement).  So the pool may be CF positive before fees and interest but it is negative after fees and interest.  I think the total fees are on the order of 2.0% so they are going to eat into any return.  You can also look at historic NAV values which are not too impressive:

 

http://tools.morningstar.co.uk/uk/cefreport/default.aspx?tab=1&SecurityToken=F0000008IB]2]0]FCGBR$$ALL&Id=F0000008IB&ClientFund=0&CurrencyId=GBP 

 

The use of shorter than VTB 2008 lives is an aggressive practice that most other LS funds have not done.  What you are saying is these lives will die faster than the VTB 2008 curves.  This may be true but I could find no data to support this - like disease diagnosis, etc.   

 

The biggest concern I would have is they don't appear to have an approach to let low/negative NPV policies lapse.  There are bound to be some given the vintage of the portfolio (2006). 

 

I don't think you can get comfortable by doing a "static" analysis using the VTB 2008 tables.  I know this from looking at both "inside" and "outside" analysis.  In addition, this "static" analysis is what has led to massive write-downs in value of LS portfolio in the recent past.  The "inside" analysis includes re-underwriting lives with modified mortality tables and using MC modelling etc.  What concerns me is a significant portion of the portfolio has not been re-underwritten since 2008.  Why?  How would you know if you should let these policies lapse (low/negative NPV) without re-underwriting the loans?  Are they not receiving updated health files to adjust the LEs?       

 

Just some thoughts.

 

Packer

[steph]

I would buy:

 

USA: BRK/FFH/AIG/ENH/GLW/JNJ/MDT

Europe: CIR/Duro Felguera/Bijou Brigitte/Binckbank/Unilever

Asia: Hengdeli/Chow Sang Sang/Toyota Industries

 

Have a nice day!

[Hielko]

Attached is the latest data I could find:

 

http://doc.morningstar.com/document/fe1886096c1f960d429014e3465baecf.msdoc/?clientid=morningstareurope&key=b05d173f8e969ca1

 

http://doc.morningstar.com/document/03f558ebd04b3e30f3929645bf488727.msdoc/?clientid=morningstareurope&key=b05d173f8e969ca1 

 

The semi-annual report shows a negative CF for 2010 and 2011 (after manager fee and loan interest) (see cash flow statement).  So the pool may be CF positive before fees and interest but it is negative after fees and interest.  I think the total fees are on the order of 2.0% so they are going to eat into any return.

 

FYI: the latest annual report: http://www.fundtoolkit.com/FundPages/RCM/Documents/ReportandAccounts/TLI_Annual30.06.12.pdf

 

What I would look at is the table showing policy maturities and premiums paid. Cash flow is lagging a bit because policies are not immediately paid. Interest expense is not really relevant anymore since TLI is now basically debt free, and cash flow positive. See for management fees note 5 of the annual report. Fee is 0.4% of NAV + costs (I assumed ~$1M in total expenses/year).

You can also look at historic NAV values which are not too impressive:

 

http://tools.morningstar.co.uk/uk/cefreport/default.aspx?tab=1&SecurityToken=F0000008IB]2]0]FCGBR$$ALL&Id=F0000008IB&ClientFund=0&CurrencyId=GBP

 

You really need to look forward here, and not too much at the past since the average age of the portfolio is going up, LE's are going down, and premium payments should also go down with more and more investments reaching 'maturity'. And the past also contains an expensive currency hedge, interest costs and a rights offering that diluted NAV/share.

 

The use of shorter than VTB 2008 lives is an aggressive practice that most other LS funds have not done.  What you are saying is these lives will die faster than the VTB 2008 curves.  This may be true but I could find no data to support this - like disease diagnosis, etc.

They also provide a portfolio LE based on a no underwriting assumption (simply using the 2008 tables). I'm also not particularly comfortablewith the shorter LEs - I have used the 2008 curves in my valuation - but at the same time I don't think there is a particular reason to distrust the fund manager. They have used a third party to update the LE's of 66% of the portfolio since 2011 on a policy by policy basis, and there isn't a particular big incentive for them to cheat here since the fund is in liquidation mode and policies are hold till maturity (sold a few earlier this year to tackle the debt).

 

The biggest concern I would have is they don't appear to have an approach to let low/negative NPV policies lapse.  There are bound to be some given the vintage of the portfolio (2006).

Why do you think that there are low/negative NPV policies in the portfolio? Shouldn't it be that the older the portfolio the lower the probability that a policy has a negative NPV? The average LE is going down, so the # of premium payments needed before maturity are also going down while the face value of the policy remains constant. So NPV should go up in time.

 

I don't think you can get comfortable by doing a "static" analysis using the VTB 2008 tables.  I know this from looking at both "inside" and "outside" analysis.  In addition, this "static" analysis is what has led to massive write-downs in value of LS portfolio in the recent past.  The "inside" analysis includes re-underwriting lives with modified mortality tables and using MC modelling etc.  What concerns me is a significant portion of the portfolio has not been re-underwritten since 2008.  Why?  How would you know if you should let these policies lapse (low/negative NPV) without re-underwriting the loans?  Are they not receiving updated health files to adjust the LEs?       

 

Just some thoughts.

 

Packer

They have updated a significant amount of policies since 2011, but not yet everything. That's why they also provide a +10% and +20% LE for policies that have no recent assessment. The +10% adjustment is in line with the adjustments made to policies that have been reassessed recently.

[Guest hellsten]

50% SHLD. 49,99999% cash. For diversification I'd put the rest in a bag of chocolate or fruit. I haven't decided yet.

[giofranchi]

Regarding the thread theme, my recommendations would be:

 

- FFH (as a safe store of value in NA)

- Any good value fund or basket of cheap stocks concentrated on the Eurozone.

 

  Run like hell from Australia and Canada (the expensive crap indicator goes crazy for them), keep out of the US and UK (same danger levels as in 2000 and 2007). The Eurozone is safe, and the best world market should be Japan, but when stocks go up there the yen will sink (or viceversa) so tread with care.

 

  If I am right in my "predictions", there will be a big crash in the NA stock market in the next 1-2 years, perhaps getting us close to the secular lows that we haven't seen yet. If I am wrong, and the sky doesn't fall after all, FFH bought at close to BV is a very nice long term investment, same as  Eurozone stocks at the current levels.

 

50% SHLD. 49,99999% cash. For diversification I'd put the rest in a bag of chocolate or fruit. I haven't decided yet.

 

Very sound advice! Thank you, txitxo and hellsten (the bag of chocolate or fruit part is also much fun! ;D )

 

giofranchi

[Packer16]

I am just providing observations I have seen in looking at these from the inside and outside and may not be obvious to someone with just outside (reporting) information.  These are complex instruments whose value is based upon many unknowable factors to outsiders and some insiders as well (individual's health, genetics, LE, advances in medicine, changes in individual's habits, lack of periodic reporting and re-underwriting, insurance cos not accepting claim (no beneficial interest)).  Management tries to make their best guess but that is all it is.  Given all these unknowable factors that have a significant impact on value, the best investors underwrite very conservatively (always worse than the VBT 2008 tables).  If you have an aggressive valuation, I would expect a write-down in the future.  The problem in this case is there is not enough info (individuals health and lifestyle) to make an assessment that there assumptions are correct but I can tell you they are outside of the norm and compared to others aggressive using the discount rates they are using.  Knowing a few of these from the inside, I would not invest unless I really knew management well and felt they had a process to weed out the valuation issues of the past (no beneficial interest, change in LE assumptions in 2011 (this had a huge impact on many NAVs but not on this one.  Why?), lack of medical records to re-underwrite policies).  At some point this asset class is a good buy but I don't think that there is enough information available to tell.  This for me is truly a too hard asset class.   

 

The reason I bring up negative NPV policies is the origination of these policies from a skewed pool.  Given the size of the pool there is bound to be a NPV policy.  If management has not thought about this or developed a policy, it shows they are there to collect fees not to actively manage the pool as they should.  In other words, they have an incentive to keep negative NPV policies in pool to collect the 2% fees they get based upon pool size.  Look at it like this each of these polices have negative CF until the insured dies then they get the death benefit, therefore, there is a point where the policy NPV becomes negative.

 

If you look at these globally I know of no fund that invests in these assets out there that has made more than 2 to 5% after fees.  The origination and servicing fees are high and most of the origination is skewed vs VBT 2008.  I agree that interest may not be relevant (but it may be if they need to use the LoC to pay premiums on policies) but expenses are.  I know my approach depends upon valuation as a key input and given the uncertainties in LS settlement valuation, I would not invest in these.  As a matter of fact, these have been great short candidates because management has an incentive to keep valuation high to collect fees.  I am not saying that this is the case bu the incentive is there. 

 

One reason for the discount to the NAV is the lack of marketability and income.  Even if management's projections are correct, you will not receive all the proceeds until 10+ years.  So is a 20 - 30% discount enough for you to lock up your money for 10 years?  I would rather invest in securities that have more certain values, whose value may be realized quicker and I don't have to pay 2% per year to own.   

 

Packer     

[Hielko]

I appreciate your comments Packer.

 

I understand your position w.r.t. how hard it is to value the LE's. And if the returns on this investment would be bad if the LE would not be 4.7 (management assumption) but 5.3 (2008 CDC tables) I would absolutely not invest. But I think that even if the average LE would not be 5.3 years, but for example 8.3 years (adding 3 full years to the LE based on the CDC tables!) returns are still going to be alright. And no matter how healthy you are living when you are 89 years old: it's not going to add 3 full years to your LE. You don't have to be a medical expert for that prediction.

 

Sloppy valuation based on a 8.3 year LE:

 

8.3 years * ($8.4M premiums + 1$M fund overhead) = $78M

face value policies: $165M

future value: 165-78 = $87M

present value 5% discount rate: 87/(1.05^8.3)=$58M

per share in pence: (58/72)*0.6236=> 50.2p/share

current share price: 47.2p

 

I would consider getting a >5% return on an investment that has almost no systematic risk pretty decent, and adding 3 full  years to the LE based on the CDC tables is more than generous. And there is obviously a lot of upside if LE's are closer to the CDC tables.

 

change in LE assumptions in 2011 (this had a huge impact on many NAVs but not on this one.  Why?)

I think the reason is mostly related to the age of the insured group. Positive improvements in LE have mostly been made at lower ages. The 2008 tables give a 4.8 year LE when you are 89 year old while the 2004 tables gave a 5.3 year LE, and the 2000 tables gave a 5.0 LE. So at this age there isn't really a positive trend.

 

The reason I bring up negative NPV policies is the origination of these policies from a skewed pool.  Given the size of the pool there is bound to be a NPV policy.  If management has not thought about this or developed a policy, it shows they are there to collect fees not to actively manage the pool as they should.  In other words, they have an incentive to keep negative NPV policies in pool to collect the 2% fees they get based upon pool size.  Look at it like this each of these polices have negative CF until the insured dies then they get the death benefit, therefore, there is a point where the policy NPV becomes negative.

I get what you are saying, but wouldn't it be really weird to have a negative NPV policy in the pool at this point in time? If a policy has a negative value today it would have been massively minus NPV 6 years ago. It's not like they bought viatical policies where medical developments can radially improve LE's (and thus change the NPV in a big way).

[Packer16]

As to negative NPV policies I have seen these in many pools.  This is something that changes all the time as technology improves and is why the policies need to be re-underwritten often.  So policies becoming negative or more negative is not uncommon over time as the insured conditions become more seasoned.  In this case since we don't have the data we don't know. 

 

In theory these investments have no systematic risk but when you look at their stock prices they do because the other buyers if these securities are market participants.  Look at the performance during the financial crisis (when having diversified sources of risk is more important). 

 

In your calcs you need to use total life (avg life *2) and include about a year to get the cash if the insurer does not have any problems.  Based upon history it looks like the policies will be back-end loaded.  In addition, you have to pay interest on loans used to pay premiums.  I have done IRR calcs using average life (like you have) and you end up with significantly different results if you do a policy by policy calculation using MC and LEs to calculate payments.  But by using these parameters and VTB 2008 LEs , the IRR will be less than 5% you calculated. 

 

I just do not feel less than 5% is a good return when I can get 20%+ FCF yield from some of stock we discuss here with fewer unknowns.  I also do not see any information that would say that VTB 2008 should be used as a worst case especially since some of LEs have not been updated since origination.  This claim has been made by many before who have had to change their story over time.  The risk here is you get some folks that have genetically long lives.  You just don't know.  In my mind this a crap shoot where I don't know the odds.

 

Packer