13F Fun

So, for fun, I wrote a script that grabs manager holdings and compares the portfolio since the last time a 13F was filed. This is available at places like dataroma.com but I wanted to be able to check out my own institutions that may not be superinvestors.

When I wanted to diff the 13F files, I used to download them to a spreadsheet and do it manually.  It was a pain because for companies like BRK who may have the same stock listed across subsidiaries, you had to aggregate the holdings. Many of you know what a pain that is.

Computer Stuff (uh, yes, it's a tangent)
Anyway, to make matters more interesting (OK, for most of you this part is irrelevant and not very interesting) I wrote this whole program on a Linux laptop (Ubuntu 14.04 at the time; I have since upgraded to Ubuntu 16.04) using the VIM editor (I used to use vi in a Unix environment a long time ago in my hedge fund days). Programmers know how much of a pain VI/VIM is until you get used to it. I had to refresh my memory but thought it was so cool to use vi again so I stuck it out and used it to write the whole program.  (Now I use mostly Geany on my Linux machine, Notepad++ on Windows machines, and Idle or Spyder (depending on project) for Python).

The program itself is written in PHP, and I used the XAMPP/Apache web server as my local host.  Anyway, something like this would have been much easier for me to write in Python, but I think I wanted some stuff on the web so wrote it directly in PHP.  I haven't worked with Flask/Django so wouldn't know how to put Python-generated content on a website (well, there are other ways; I do use Python to update google sheets and then use PHP to grab google sheet data etc. for some non-financial stuff I do).

All of this happened a few months ago, actually.

Linux/Open Source
...and here's another thing (another tangent off a tangent).  After turning my old, dead (or so I thought) Dell laptop (XPS M1710 that used to run Windows XP) into a Linux machine, I have really been loving the experience.

And what I noticed is that if you go to Barnes & Noble and look for computer-related magazines, you will see a bunch of them about Ubuntu, Linux and others.  I love those Linux magazines but they are expensive.  Why are they expensive?  Because they are all published in Britain!  Linux Voice, Linux Format etc... they are all published in the UK.  Even the website design/programming related magazines are all UK magazines.

If you have kids, the other cool thing these days (other than Pokemon Go) is the Raspberry Pi, which is basically just a cheap computer on a motherboard  (google it to see what it's about).  And that's a UK invention, so of course, all of the Raspberry Pi related magazines are published in the UK.

Maybe there is something about the publishing industry in the UK that make these magazines possible.  Or maybe there is too much commercialism in the U.S. for there to be support for anything open source (and therefore anything threatening Microsoft). I don't know. If it's open source, nobody is going to make money, and if nobody is going to make money, who is going to buy ad pages?  Maybe that's it.

But it makes me wonder.  As a geek into this sort of thing, it seems like the UK is a much more exciting place. Also, it seems like they are more committed to teaching coding in the schools.

This sort of makes me wonder where the next wave of great innovations will come from. But, OK, who am I kidding? I'm sure the U.S. will keep leading the way.

Anyway, that's straying too far from what this blog is supposed to be about.

Back to 13F's
Let's browse through some 13F's.  Most of this stuff has been seen and discussed already.  Many websites track 13F's closely and write about it, so I won't mention most of the big investors.

Having said that, let's look at BRK.


BERKSHIRE HATHAWAY INC

Name	dollar amt	%port	#shares	change	%chg
KRAFT HEINZ CO	28,812,169	22.21%	325,634,818
WELLS FARGO & CO NEW	22,704,405	17.50%	479,704,270
COCA COLA CO	18,132,000	13.98%	400,000,000
INTERNATIONAL BUSINESS MACHS	12,329,439	9.51%	81,232,303
AMERICAN EXPRESS CO	9,211,866	7.10%	151,610,700
PHILLIPS 66	6,250,563	4.82%	78,782,000	3,231,255	4%
US BANCORP DEL	3,430,598	2.64%	85,063,167
DAVITA HEALTHCARE PARTNERS I	2,981,889	2.30%	38,565,570
WAL MART STORES INC	2,937,332	2.26%	40,226,402	-15,009,461	-27%
MOODYS CORP	2,311,805	1.78%	24,669,778
CHARTER COMMUNICATIONS INC N	2,134,924	1.65%	9,337,491	9,337,491	new
DEERE & CO	1,779,577	1.37%	21,959,246	-1,321,748	-6%
GOLDMAN SACHS GROUP INC	1,628,365	1.26%	10,959,519
APPLE INC	1,455,768	1.12%	15,227,702	5,415,955	55%
GENERAL MTRS CO	1,415,000	1.09%	50,000,000
VERISIGN INC	1,119,894	0.86%	12,952,745	-32,255	-0%
LIBERTY MEDIA CORP DELAWARE	1,073,699	0.83%	37,499,996	7,499,996	25%
U S G CORP	1,051,494	0.81%	39,002,016
LIBERTY GLOBAL PLC	902,592	0.70%	30,712,739	6,903,848	29%
VERIZON COMMUNICATIONS INC	837,652	0.65%	15,000,928
BANK OF NEW YORK MELLON CORP	809,137	0.62%	20,827,212
VISA INC	759,438	0.59%	10,239,160
COSTCO WHSL CORP NEW	680,511	0.52%	4,333,363
M & T BK CORP	636,319	0.49%	5,382,040
AXALTA COATING SYS LTD	618,786	0.48%	23,324,000
SUNCOR ENERGY INC NEW	617,696	0.48%	22,275,381	-7,724,619	-26%
KINDER MORGAN INC DEL	496,708	0.38%	26,533,525
MASTERCARD INC	434,555	0.34%	4,934,756
TORCHMARK CORP	392,788	0.30%	6,353,727
RESTAURANT BRANDS INTL INC	351,030	0.27%	8,438,225
GENERAL ELECTRIC CO	333,233	0.26%	10,585,502
WABCO HLDGS INC	296,420	0.23%	3,237,094
TWENTY FIRST CENTY FOX INC	242,148	0.19%	8,951,869
SANOFI	163,461	0.13%	3,905,875
VERISK ANALYTICS INC	126,763	0.10%	1,563,434
MEDIA GEN INC NEW	59,672	0.05%	3,471,309
GRAHAM HLDGS CO	52,663	0.04%	107,575
JOHNSON & JOHNSON	39,677	0.03%	327,100
NOW INC	33,116	0.03%	1,825,569
PROCTER & GAMBLE CO	26,705	0.02%	315,400
MONDELEZ INTL INC	26,305	0.02%	578,000
UNITED PARCEL SERVICE INC	6,399	0.00%	59,400
LEE ENTERPRISES INC	170	0.00%	88,863
CHARTER COMMUNICATIONS INC D	0	0.00%	10,326,803	-10,326,803	-100%
Total Sum	129,704,731

(sorry, but my tables show adding and dumping Charter Communication, but that's due to change in the class of stock, I suppose, from the merger.  Name changes also show up like this in my tables so look at the whole table before assuming a position was dumped).

Buffett has really been accumulating PSX. It's been on my to-do list for a while, to make a post about it.  It is interesting because it is reasonably valued and doesn't seem to be impacted too much by crude oil prices.  They haven't been growing much, but their earnings have been pretty stable throughout a period when crude oil prices just tanked.  Their refining margins seem pretty stable too so it doesn't look like they are over-earning on excessive refinery margins either.  

You know that Buffett likes management as he has owned COP in the past. Maybe this is the good side.  

Buffett has been reticent, in recent years, about making comments about individual investments.  I remember he shied away from answering someone's question about why he bought DE, and didn't answer a question about PSX either.  He just said it's not a crude oil play. He used to talk up a lot of his holdings much more liberally.  I think the change came after IBM. He did explain why he liked IBM and it hasn't turned out too well. Maybe he didn't like the attention of talking up a name and having so many people focus on it as a big mistake (my view is that it's still too early to tell!). 

But we know that he likes managements that explain very clearly what they are going to do, and especially when they accomplish it. He is most interested in what management has in mind in terms of capital allocation; how much capex will be done, how much will be returned to shareholders in dividends and share repurchases.  And you will notice that PSX is very clear on those issues in their reports and presentations. 

Anyway, looking at the BRK 13-F, I was curious what it would look like if we exclude Buffett's big picks and looked only at Todd and Ted's excellent adventure. I just cut and pasted the above into a spreasheet and deleted what I thought were obvious Buffett picks.  Of course, that includes the big ones, and some other smaller ones.  This list may still include some Buffett stocks, but that's OK. 

Here's a look-see: 

Name	dollar amt	%port
DAVITA HEALTHCARE PARTNERS I	2,981,889	16.74%
CHARTER COMMUNICATIONS INC N	2,134,924	11.99%
APPLE INC	1,455,768	8.17%
GENERAL MTRS CO	1,415,000	7.95%
VERISIGN INC	1,119,894	6.29%
LIBERTY MEDIA CORP DELAWARE	1,073,699	6.03%
LIBERTY GLOBAL PLC	902,592	5.07%
VERIZON COMMUNICATIONS INC	837,652	4.70%
BANK OF NEW YORK MELLON CORP	809,137	4.54%
VISA INC	759,438	4.26%
AXALTA COATING SYS LTD	618,786	3.47%
SUNCOR ENERGY INC NEW	617,696	3.47%
KINDER MORGAN INC DEL	496,708	2.79%
MASTERCARD INC	434,555	2.44%
TORCHMARK CORP	392,788	2.21%
RESTAURANT BRANDS INTL INC	351,030	1.97%
GENERAL ELECTRIC CO	333,233	1.87%
WABCO HLDGS INC	296,420	1.66%
TWENTY FIRST CENTY FOX INC	242,148	1.36%
SANOFI	163,461	0.92%
VERISK ANALYTICS INC	126,763	0.71%
MEDIA GEN INC NEW	59,672	0.34%
GRAHAM HLDGS CO	52,663	0.30%
JOHNSON & JOHNSON	39,677	0.22%
NOW INC	33,116	0.19%
PROCTER & GAMBLE CO	26,705	0.15%
MONDELEZ INTL INC	26,305	0.15%
UNITED PARCEL SERVICE INC	6,399	0.04%
LEE ENTERPRISES INC	170	0.00%
CHARTER COMMUNICATIONS INC D	0	0.00%
Total Sum	17,808,288

Anyway, the concentration in DVA, CHTR and AAPL etc. is very interesting. I am still not a big fan of AAPL, by the way.  But this is a long term thing, not a short term thing.  I know AAPL is evolving from a hardware, gadget company to a services company, but I am still not convinced this market cap can be maintained.

Plus, I saw a video about AAPL recently and the thing that struck me was how old all the senior managers are.  Now, age discrimination is not cool at all, and I love how companies are hiring older people; we need to keep older folks working, and many do want to work.  I love that sort of thing. Not to mention Buffett/Munger.  

But when you have a company in a quickly evolving industry, especially in tech, my impression is that youth is pretty important.  The AAPL senior management seems older than the IBM senior management back in the 80's and 90's when they were sort of stuck.  Those aren't the kind of guys that are going to be the leaders in innovation. 

Anyway, that's just my impression.  I felt like, holy cow, no wonder why they make some mind-boggling and strange decisions; they are a generation apart from a lot of their users. I think this will be an issue at some point. 

But then again, what do I know. I am not a tech guy, really. 

Moving on... 

SQ Advisors

Let's see what Lou Simpson has been up to.  He obviously still likes his main holdings, but look!  There's a new name!  Allison Transmission Holdings (ALSN).  This is an old Carlyle name, and ValueAct has a position. Carlyle is completely out, I think. 

ALSN seems like a good post idea here too; I may do that after taking a closer look.  Revenues haven't grown much, but the story is in the free cash flows from increasing margins.  They are generating tons of cash and are repurchasing shares etc.  A formula that we like.  This leads to another digression.  

Name	dollar amt	%port	#shares	change	%chg
BROOKFIELD ASSET MGMT INC	395,284	16.73%	11,961,690	-979,557	-8%
BERKSHIRE HATHAWAY INC DEL	356,730	15.10%	2,432,332	-222,699	-8%
AMETEK INC NEW	344,723	14.59%	7,456,694	-484,585	-6%
SCHWAB CHARLES CORP NEW	292,606	12.39%	11,560,900	-719,054	-6%
WELLS FARGO & CO NEW	275,483	11.66%	5,820,464	-381,628	-6%
LIBERTY GLOBAL PLC	249,859	10.58%	8,685,850	-505,729	-6%
ALLISON TRANSMISSION HLDGS I	129,536	5.48%	4,588,604	4,588,604	new
WABCO HLDGS INC	128,135	5.42%	1,399,310	-102,928	-7%
CROWN HOLDINGS INC	74,230	3.14%	1,464,961	-1,496,522	-51%
US BANCORP DEL	62,431	2.64%	1,548,005	-413,603	-21%
VALEANT PHARMACEUTICALS INTL	48,868	2.07%	2,427,903	-163,496	-6%
BROOKFIELD BUSINESS PARTNERS	4,632	0.20%	243,059	243,059	new
Total Sum	2,362,517

Share Repurchases

There was an article the other day in the New York Times about how bad share repurchases are. I was scratching my head throughout the whole article because we sort of like share repurchases. This is a typical problem with the press.  Something is either good or bad. Corporations are good or bad. All banks are good or bad.  Moslems are good or bad. Cops are good or bad. 

Anyway, I don't want to spend much time getting too much into this, but I think most of us here agree that there are good share repurchases and bad ones.  If you buy shares under intrinsic value with excess cash flow, it's probably good.  If you overpay with debt-funded cash, then it might be bad.  Even still, it depends. 

The examples sited in the article were typical errors in thinking too.  Oftentimes, companies repurchase shares because there is no better alternative.  For example, companies that have very little growth potential will start to repurchase shares more. So you can mistake cause and effect. Someone may argue that they aren't growing because they are using their capital to repurchase shares. Managements will tell you that they are repurchasing shares because the growth opportunities are not that exciting. 

We can bash companies for repurchasing shares, but let's not forget that there was popular word in the old days called di-worsification.  I think that was a Peter Lynch word.  What about M&A? People keep reminding us that M&A's usually end badly. What about excess capacity? Building more factories with not much demand growth won't help anybody. As for retailers, do we really need more stores?

Share repurchases recycle capital back into the economy. It is not automatically good or bad. Look at Japan and their low returns on capital; largely because they don't want to return capital to shareholders. They would rather hoard the cash, make stupid acquisitions overseas, speculate, buy expensive real estate, diworsify into an industry they have no knowledge of, build unnecessary facilities for unnecessary employees etc...  

So maybe unbelievable to some, there are things far worse than share repurchases. 

Anyway, I am preaching to the choir here, so let's move on... 

Alleghany

This is a company many of us follow and like.  The equity portfolio manager, though, is relatively new and doesn't have much to do with Y's long term performance so there may not be much interest in picking apart this portfolio. 

But we are curious so we will take a look.  Who knows where the next great idea comes from? Anyway, it is kind of interesting to look at this as the characteristic of the portfolio seems to have changed from before. 

Notice GOOG at the top with an 11% position.  This is not what you would really imagine as a Y stock. But I like GOOG so it's fine with me. Not that I would second guess anyone. It is a relatively concentrated portfolio and I usually consider that a good thing. 

Name	dollar amt	%port	#shares	change	%chg
ALPHABET INC	288,446	11.06%	410,000
CVS HEALTH CORP	205,841	7.89%	2,150,000
MICROSOFT CORP	153,510	5.89%	3,000,000
BLACKROCK INC	136,984	5.25%	400,000	175,000	78%
ROPER INDS INC NEW	136,429	5.23%	800,000	-25,000	-3%
CSX CORP	130,400	5.00%	5,000,000
ALLERGAN PLC	115,517	4.43%	500,000	500,000	new
VISA INC	111,255	4.27%	1,500,000	-1,500,000	-50%
JPMORGAN CHASE & CO	108,383	4.16%	1,744,178
BARRICK GOLD CORP	106,750	4.09%	5,000,000	5,000,000	new
PPG INDS INC	104,149	3.99%	1,000,000	-525,000	-34%
WALT DISNEY CO	102,711	3.94%	1,050,000
DENTSPLY INTL INC NEW	99,264	3.81%	1,600,000
EXXON MOBIL CORP	93,740	3.60%	1,000,000	700,000	233%
VERIZON COMMUNICATIONS INC	92,417	3.54%	1,655,000	-375,000	-18%
DISNEY WALT CO	83,148	3.19%	850,000
EOG RES INC	56,995	2.19%	683,406	-316,594	-32%
AIR PRODS & CHEMS INC	54,685	2.10%	385,000
COMCAST CORP NEW	51,817	1.99%	795,000	795,000	new
OLD REP INTL CORP	48,225	1.85%	2,500,000	-331,467	-12%
ARAMARK	46,628	1.79%	1,395,000
BERKSHIRE HATHAWAY INC DEL	41,986	1.61%	290,000
HOME DEPOT INC	32,561	1.25%	255,000
DEVON ENERGY CORP NEW	31,890	1.22%	880,000
NEWELL BRANDS INC	30,985	1.19%	637,877	637,877	new
KIMBERLY CLARK CORP	27,493	1.05%	200,000
PEPSICO INC	27,016	1.04%	255,000
HESS CORP	24,338	0.93%	405,000
L BRANDS INC	23,163	0.89%	345,000
OCCIDENTAL PETE CORP DEL	21,535	0.83%	285,000
POLARIS INDS INC	14,309	0.55%	175,000	175,000	new
ARES CAP CORP	2,674	0.10%	188,326	4,660	3%
ARES COML REAL ESTATE CORP	1,538	0.06%	125,115
CONSOLIDATED TOMOKA LD CO	578	0.02%	12,166	12,166	new
ARES DYNAMIC CR ALLOCATION F	131	0.01%	9,550	224	2%
SABRE CORP	0	0.00%	1,890,000	-1,890,000	-100%
SMUCKER J M CO	0	0.00%	205,000	-205,000	-100%
PERRIGO CO PLC	0	0.00%	750,000	-750,000	-100%
JARDEN CORP	0	0.00%	740,000	-740,000	-100%
CHURCH & DWIGHT INC	0	0.00%	365,000	-365,000	-100%
ISHARES TR	0	0.00%	181,000	-181,000	-100%
Total Sum	2,607,491

OK, this post is getting a little long so I will break it up. More to follow... 

Alleghany Annual Report 2014

Alleghany (Y) also just published their annual report for 2014.  As usual, it's a really good read.

A long time ago, Dorothy Boyd said to Jerry McGuire, "You had me at 'hello'".

Well, Alleghany had me with this:

BPS grew +12.7% in 2014 compared to +13.7% for the S&P 500 index.  Y noted that the five year performance for Y of +9.6%/year lagged the S&P 500 index total return of +15.5%/year because the S&P 500 was coming off of a low point and that the index might be overvalued today.

Here is a summary of 1 year, 5 year and 10 year BPS changes for Y compared to the S&P 500 index:

                             Y BPS           S&P (total return)
1 year                    +12.7%          +13.7%
5 year                    +9.6%            +15.5%
10 year                  +8.6%              +7.7%
Since 2007            +7.5%              +7.3%

And since Buffett mentions a "through-the-cycle" performance figure to offset the S&P 500's crisis low point advantage in the five year performance figure, I did the same for Y.  Y narrowly beats the S&P 500 index on that basis.  That's not bad at all, actually, when you see how conservatively they have been managed.

Here is a chart from the annual report:

BPS has done well in the past ten years, but the stock price lagged a little bit, but that is due (as is explained in the annual report) to the fact that Y traded at 1.22x BPS in 2004 and was at 1.0x BPS at the end of 2014.

And then there was an interesting paragraph in the letter that raised my eyebrows.  I know investment managers (including Buffett) have been struggling with beating the S&P 500 index recently.  I notice that even many of the well-known value investors have been underperforming.

But this paragraph was kind of interesting:

The S&P 500 is a challenging benchmark because it is not a static population of companies.  Losers are kicked out of the index, and vibrant, growing companies are added.  It also represents America's leading companies, including a number of companies that dominate their industries.  By contrast, the New York Stock Exchange Composite index is more representative of the average company.  In 2014, the NYSE Composite returned 6.9%, and has returned about 6.9% a year over the past decade. 

Honestly, I've never really looked at the S&P 500 that way, but I suppose it's true.  It isn't a static population of companies.  And yes, it's true that losers are kicked out and then "vibrant, growing companies" are added.  And yes, it also represents "America's leading companies, including a number of companies that dominate their industries."

In some sense, isn't that sort of what you want in a portfolio?  Is this why Buffett so likes to recommend people just buy an S&P 500 index fund?  (And if the S&P 500 is filled with leading, vibrant, dominant companies and the NYSE Composite are just average companies, how about going long the S&P 500 index and shorting the NYSE Composite?!  Long the excellent, short the average!).

McGraw Hill Greatest Fund Manager on the Planet!
So, wait a second.  The S&P 500 index is actively managed (as described above) and everyone has trouble beating them.  Doesn't that make the S&P 500 index committee the best portfolio managers around?  There is more than $1.25 trillion of assets directly tied to the index.  If they are that good and can outperform everyone else, surely they can charge 1.0% management fee.  That's $12.5 billion in management fees right there.  Assuming they can get a 50% operating margin (which should not be a problem with that kind of revenues and a single index committee) that's $6.3 billion in operating income, and then put a 10x multiple on that and it's suddenly a $63 billion business right there inside a $27 billion market cap company!

But, alas, it's not so simple as we'll see in a second.


NYSE Composite
Since the S&P 500 index is an actively managed index of great, vibrant companies, Y suggests looking at the NYSE Composite as "more representative of the average company".

Y's performance certainly looks better against the NYSE Composite; BPS of +12.7% in 2014 versus +6.9% and +8.6%/year over 10 years versus +6.9%/year.

But I don't know if the NYSE Composite is a good benchmark.  First of all, the NYSE Composite includes all common stocks (tracking stocks and REITs too, I think) listed on the NYSE.  That includes a lot of ADR's, which are foreign companies.  If you want to include foreign companies, there are better benchmarks.  The ADRs represent a skewed group of foreign stocks because it would only include companies who have ADRs listed on the NYSE.

Also, choosing companies only listed on the NYSE would skew the population as some of the best managed companies are not traded there (Apple, Google etc...).

A much better benchmark might be the Russell 1000 or Russell 3000.  Maybe the Wilshire 5000.

But let's just look at the Russell 1000 and 3000.  I pulled some total return figures for these indices (and put them next to the S&P 500 index and Y BPS figures):

                        Russell       Russell          S&P               Y
                        1000            3000             500                BPS      
1 year               +13.2%      +12.6%        +13.7%          +12.7%
5 year               +15.6%      +15.6%        +15,5%          + 9.6%
10 year              +8.0%         +7.9%         + 7.7%           +8.6%
Since 2007        +7.5%         +7.5%          +7.3%           +7.5%

Looking at this, it seems like the Russell indices are a lot closer to the S&P 500 index.  This is probably because it includes the many NASDAQ-listed companies.  Also, the NYSE Composite was probably dragged down in recent years due to the lagging foreign ADRs; we know Europe and emerging markets are in the gutter these days.

The Russell indices also add "vibrant, growing companies" and drop losers, but it is done mechanically.  The NYSE also drops losers too (delisting) and they do add companies by lobbying companies to join the NYSE.  So none of these indices are really static populations.

By the way, the Russell 1000 is the top 1000 U.S. companies by market cap and the Russell 3000 is the top 3000 companies.  Since this is market cap (or float) weighted, they will correlate highly as most of the change in the index will be determined by the largest 1000 companies.

As you see, the Russell 1000 tracks the S&P 500 index very closely.  This is obviously why the S&P index committee would never get 1.0% fees on assets tracking the index.

More Detailed ROE
Here's a look at how the ROE breaks down:

Ares Management, L.P. (ARES)
Y bought a stake in ARES back in 2013.  This deal makes sense in that Y needs expertise in managing their fixed income portfolio.  It was mentioned in the letter:

ARES closed at $17.14 at the end of 2014 and had paid two dividends in 2014 totalling $0.42.   Annualizing that, you get around 4.9% dividend yield on the closing price.   And if this is expected to grow, it's not bad at all.

ARES is now at $19.66.  Economic net income per share in 2014 was $1.26/share.   That's a 6.4% earnings yield.  Distributable earnings were $0.92/share, or a yield of 4.7%.   ARES makes most of it's income in fixed income so doesn't have the big ups and downs of private equity.

Anyway, it's an interesting idea.

Insurance Stuff
The insurance businesses have been doing really well, but a lot of that is that there haven't been a lot of events recently.

Here are some interesting comments on the business, though:

This is the sort of conservatism that I like in Y.

And here's an interesting commentary on the insurance business and deflation:

Investments
The equity portfolio at Y didn't do too well; 5.6% vs. 13.7% for the S&P 500 index.  They have a new manager running the portfolio and it's still a little early so I wouldn't give too much weight to a single year performance.  We'll see how it performs over time.

There is a lot of commentary of the current environment; the usual cautious stuff about QE etc.

And then there is an analysis of what's going on in the energy markets.  Here's the conclusion:

I didn't really think about it this way, that the peak was in 2008.   Maybe that is correct and the latest collapse is just a part of the extended bear market in crude oil.   If that is the case, then maybe a turn is a little closer than thinking about the collapse last year as the beginning of something.

They too see sustainable prices in the $70-80/barrel range.

Long Term Performance Target
There was a comment in the outlook section of the letter that made me scratch my head a little bit.  Look:

It says that Y increased BPS at almost 9%/year over the past decade, "at the upper end of our stated objective of 7-10% annual growth over the long-term."

But that makes it sound like their goal was 7-10% growth in BPS since 2004.  I only remember seeing this 7-10% goal recently, so I went back to the old letters to see.

Check this out:

2004 AR:  "Our long-term goal is to increase our stockholders' equity per share at double-digit rates, but only if we can do so without taking excessive risk." 

2005 AR: "Alleghany's principle financial objective is to grow book value per share at double-digit rates without employing excessive amounts of financial leverage or taking undue amounts of operating risk." 

This continued for another year or so, and maybe there was a year where it wasn't mentioned at all, but the next time a goal was mentioned was during the crisis:

2008 AR:  "Alleghany's goal is to compound its book value per share at attractive rates over a long period of time. " 

This was obviously due to the fact that Y wasn't growing BPS at double digit rates at that point.

The first time I noticed the 7-10% goal was in 2011:

2011 AR: "Our goal is to increase book value per share at a rate of growth that exceeds the total return on the S&P 500 over time. We believe that book value per share growth of 7-10% per year will achieve this goal, and that there is a good chance that our current portfolio of insurance, reinsurance, private capital and public equity investments will allow us to achieve these results over time.  Importantly, our business model calls for market-beating book value growth with a low risk profile." 

I may be wrong about this; I just quickly looked through the old annual reports.

It's not a big deal, but I thought it was a little misleading.  It's only because I've been reading the reports for a long time that it made me think, hey, wait a minute.

It's still a decent performance over time and I still like Y.  I do think they are well-managed.  And again, this sort of performance given their conservatism is pretty good (read the letters; some will describe them not as conservative but extremely pessimistic, especially compared to Buffett's letter!).

Conclusion
I always enjoy reading the Y annual report.  I think it's run by great people and like it a lot.  It's a little conservative for my taste, but look, they are beating or at least keeping up with the S&P 500 index without taking a lot of risk.

They are also investing in private businesses, like BRK and MKL.  It's interesting that MKL and Y are both taking a similar approach, breaking out their investments into private businesses; disclosing EBITDA of them etc.

It's definitely an interesting situation at 1.0x BPS.

Y So Cheap?

Alleghany (Y) announced earnings earlier this week; BPS is up +9.4% in the first six months to $451.65/share.  The stock is trading at $417.70/share so is trading at around 0.92x BPS.  The stock market is down 1.5% since then, so maybe less of a discount now.   But it does look cheap. 

Interestingly, book value was up 6.9% but thanks to share repurchases (2%+ of outstanding), BPS went up +9.4%.  

I guess in this market that seems expensive, why not repurchase shares at below book value?  That makes a lot of sense.  

  

Is 0.9x BPS Really Cheap? 

OK, so the question is, should Y trade at or above BPS?  I always liked Y; their annual reports, how they think, how they operate etc.  But they have always been a little bit on the conservative side for my taste.  The annual reports read like gloom and doom reports, and I always wondered if that would get in the way of good performance.  Warren Buffett is conservative too, but he'll back up the truck when he sees something he likes regardless of the outlook.   

Anyway, here's a look at Y's BPS performance over the years and the P/B ratio of the stock:

Y Long Term Performance and P/B Ratio

So it looks like Y has always traded at around BPS since 1987.   It traded above book in 1997 and 2000 (bubble times?) and most recently between 2004 and 2007 (peak of the credit bubble).  So judging from that, we can't really expect Y to trade very much above book in a normal environment.  The business model sort of evolves and has changed over time so we can't really say for sure.  But a prudent expectation is for Y to trade at around BPS over time.   Their big transformational merger with Transatlantic also increases the size of a business that comes with low multiples (many reinsurers, even with much higher ROE than Y trade at or below BPS). 

Long Term Relative Performance

Now let's take a closer look at the long term performance of Y.  Getting long term BPS change for Y is sort of a pain because of their 2% stock dividends they used to pay (so you can't just compare BPS values in different years to each other like you can with BRK or MKL.  Someone should ban these stock dividends that make comparisons a pain!) 

This is really not that surprising given the extremely conservative nature of the folks at Y.  Check this out: 

For the 26 years since 1987, Y has actually underperformed the S&P 500 index total return.  Y's BPS grew +9.6%/year versus a total return of +10.7% for the S&P 500 index (and +17.4%/year for BRK; I put BRK's BPS growth there just for fun). 

Y also underperformed in the 20 year time period. The five year time period is sort of irrelevant because that is off of the financial crisis low and is more a function of how far down something went during the crisis.

So that's really disappointing. 

But Wait! 

Weston Hicks became CEO in December 2004, so the important performance metric here might be to see how he has done.  In the above table, I put the returns for Y, S&P 500 and BRK since the end of 2004.  By this measure, despite Y's (to me) overly conservative and gloomy-doomy world view, Y has outperformed the index by +1.2%.  

Other interesting metrics are returns since previous market peaks.  This can also be pretty telling.  Since the peak (on a year-end basis) in 2000, Y has outperformed the S&P 500 index by +5.5%/year, and since the 2007 peak by +0.4%.

Here's a nice chart from a June investor presentation: 

Y also talks about risk adjusted return in their annual report.  It's not the most important thing for me, but it may be of interest to others who are more worried about the stock market.  

If you are going to invest in a stock but are worried about the stock market, you may want to invest in a business that is almost overly conservative and has a world view that is very gloomy.  This way, you can rest assured that they won't overreach for performance and get hit in a bear market (or I should say, get hit too hard in a bear market). 

Y has proven itself over time through various insurance cycles (huge events in the past decade+), some bear markets and a 100-year event financial crisis.  So in that sense, I would view Y as on the safe side of things. 

Of course, with insurance, you can never really know.  All surprises tend to be on the downside.

Why Not Other Insurers? 

OK, so why bother with Y when we have BRK and MKL?  Well, BRK and MKL are really good investments. It's amazing how well BRK has done even in recent years given it's size.  So I won't argue there.  I won't say Y is better than BRK/MKL.  But I still like it, even though I may not give it a big allocation (again, just due to their seeming over-conservatisim). 

There are plenty of other insurance companies with higher ROE's trading at book or less.  So why not look at the others? 

Well, I am more interested here in Y as an investment conglomerate than as an insurance company.  I look at them more as value investors.  I think a lot of us who follow Y, MKL, FRFHF and others think of it the same way.   So yes, there are other insurance companies that are very good businesses. 

Conclusion

I think Y is a solid investment.  It may not trade much above BPS in the near term; their stated goal is to increase BPS 7-10%/year over time, and I think it's great if they can achieve that and worth BPS if that is the case. 

With BRK now trading at 1.4x book and intrinsic value expected to grow at 10% (on the high side, I think), Y is not so bad at 0.9x if it can achieve 7-10%/year growth in EPS.  (How many mutual funds can you name that have long term records comparable to Y?  And even if you find some that do, fund returns are pretax (you would have had to pay taxes on dividends and capital gains along the way). 

Either way, this is an interesting situation to watch as there have been changes since the Transatlantic merger which I tend to view as positive (more disclosure etc.).  Check out the financial supplement they put out on their website, for example.   Also, their interest income is increasing due to their investments with Ares.  I know there is added risk in reaching for yield here with risk spreads as low as they are, but the folks at Y, given their conservative nature, would no doubt keep overall exposure in check. 

Alleghany Annual Report 2013

Alleghany (Y) just put out their annual report for 2013, but before that let's take a quick look at something else.

Not long after my post on Alleghany's (Y) investor day, Weston Hicks presented at a Merrill Lynch conference.  I think it's the first time I've ever heard him speak so it was pretty interesting (I wasn't there; I just listened to the replay).

You can get a link to the presentation at Y's website:  Presentation

For anyone interested in Y, it's definitely worth a listen.  It's pretty short too (unlike, say, the JP Morgan investor day; not complaining about that.  The more info there is, the better!).

Hicks talked about the history of Y.  I guess it sort of shows us why they are so conservative (they survived this long because of that conservatism).

Here are some interesting slides from the presentation:

Y CEO's tend to be CEO's for a long, long time.  This obviously is important as it leads to CEO actions that are long term in nature.

...and they have been in various businesses over the years according to what made sense at the time:

...and here are the keys to Y's success:

Burns is right, there is nothing wrong with getting rich slowly.  I suppose that was thrown in there to counter views that Y is too boring and conservative (who said they are boring and too conservative?  Did I say that?).  But yes, there is nothing wrong with being a tortoise.  As Buffett says, to finish first, one must first finish.

And here is the value proposition of Y which applies to other Berk-alikes:

And here's an interesting quote that he showed during the presentation which went into the annual report too:

And the evolution of Y over the past decade (pretty much since Hicks took over):

As I mentioned in my last recent post, the investment team has been regrouped and renamed (Roundwood is a new name; Roundwood is named after Roundwood Manor, the home of the Alleghany Corp founders).

One year doesn't prove anything, but the equity portfolio performed well in a big year for the stock market despite being only 80% or so invested.   I do like that they will keep the number of positions below 25 with low turnover.  That seems to me a good idea.  It did say in the annual report that Y has invested with Jack Liebau before with good results.

...and here's the private business group:

Here's an interesting chart.  There is more in the annual report which I'll talk about later, but in the presentation he showed the rolling five year returns of Y's book value compared to the S&P 500 index.  Berkshire Hathaway (BRK) showed a similar thing in a table a while back.

Hicks jokingly said "no comment" about the last time Y underperformed the S&P 500 index on a five-year basis (which was in 2007).  Y underperformed dramatically in the five years through 2013.  I don't think too many rational investors care about that since the five year return on the S&P 500 index is obviously a result of the financial crisis low and quick recovery thanks to the Fed and not representative of what the S&P 500 index can do going forward.

Y's stock price has barely outperformed the S&P 500 index over the past decade, and their book value outperformed by only 1.1%/year.  That's not that exciting, but as Y explains later in the annual report, they have achieved this with a much lower risk profile.


2013 Annual Report
Y grew book value per share +8.9% to $412.96/share in 2013.  The five year increase in BPS was +9.1%/year versus +17.9%/year for the S&P 500.  But we'll get to the discussion about this a little later.

But first, some interesting cut and pastes from the letter to shareholders:

I like the way they present change in shareholders' equity.  It's easy to understand what drove the change in net worth in the past year:

And here's a new table that breaks out ROE and book value growth contribution by group.  This is a nice way to present it.  We can see the investment return figures separately too so we get a good idea on what is driving the growth at Y.

Whale Trade!?
OK, I'm kidding about a whale trade, but you'll see what I mean in a second.  There was a very interesting change in this year's annual report.  As I've said in other posts (unrelated even to Y), Y has over the years explained that they seek equity and private business investments to sort of hedge their interest rate exposure as they saw inflation as inevitable.

But this year, I think for the first time, they said they are worried about deflation.   There is talk about demographics, world trade, possible spike in energy prices causing a recession, robots and other deflationary forces (not to mention too much debt around the world).

So they have an equity portfolio as they worried about inflation (well, that's not the only reason why they own equities).  The equity portfolio was sort of an inflation/interest rate hedge.  And now, they are worried about deflation, so they went out and bought zeroes to hedge against deflation.  So that's kind of like hedging your hedge, isn't it?   Isn't this how J.P. Morgan got into trouble?  They had a hedge on, but then they had too much of a hedge so they put on a hedge against their hedge.  And it turned out their hedge against their hedge wasn't really a good hedge, and that sort of blew them up.

I wrote about the risk of increasing complexity in a portfolio; it happens all the time.  I called it the Rube Goldberg portfolio (read here).

In situations like this, sometimes what happens is that you get surprise inflation and the stock market tanks along with the zeroes.  What can go wrong usually does in the financial markets!  Inflation driven by economic recovery would be OK, but it can also be driven by exogenous events. Who knows what that might be.

But OK.  The whale trade comparison is overkill here.  Insurance companies routinely manage their duration according to interest rate expectations (as do banks with their ALM) so this is just a part of that, I suppose.  Let's call it a tail hedge (hedge against fat tail events).

I wonder what out-of-the-money, long dated call options on zeroes are trading at?  Maybe that would've been a low cost tail hedge.  With so much expectation of rate normalization, I can't imagine them being overpriced.

Anyway, moving on.


Equity Valuations
I talk about equity valuations here every now and then, but I don't really obsess over it.  I actually don't care as those things are only meaningful at the extremes.   If I see extreme valuations and many signs of speculation/bubble, then of course I get a little worried.  But I still focus on individual companies so don't worry too much about it.

Having said that, I am interested in what others have to say about valuation, and Hicks does mention it in his letter:

I too worry about unsustainable profit margins sometimes, but I notice that a lot of companies have exited commodity businesses and are moving more into specialty, higher margin areas.   This is why I think it's really important to look at this stuff on a company by company basis.

Y's equity portfolio did well:

Risk-Adjusted Return of Y
So here's an interesting take on Y's performance over the past decade:

This is an interesting analysis.  I think much of Y's book is marked to market unlike, say, BRK, which has a large portfolio of businesses that is not.  In that sense, this may be a fair analysis, at least in terms of comparing Y to the S&P 500 index.  But then this would invite similar comparisons to other companies; how does Y fair against them using the same metric?  I bet Markel would look pretty good.  JP Morgan would probably look pretty good too.

The letter concludes:

Conclusion

So, just within the past few weeks, we get to see much more of Y.  I think the 2013 letter is one of the best for Y, and the presentation material from the investor day and Merrill Lynch conference is really good too. 

Stanley Druckenmiller ranted about how hedge funds these days talk about "risk-adjusted" returns.  He thinks that's really pathetic; in his day, they were expected to earn 20-30% or more year in and year out no matter what the markets did.  These days, high fee funds earn single digit returns and tell people that the returns are good on a "risk-adjusted" basis.   He calls that nonsense. 

So looking at it that way, it looks sort of like Y pulled out this "risk-adjusted" thing to set itself apart from the S&P 500 index.  So if some people criticize that, it's understandable. 

But I also do get Y's point of view.  They are and have been very conservative in their management over the years (read their letters to shareholders).  So it's true that it is not bad that they kept up with the market (over ten years) despite what I would call an overly conservative stance. 

And to illustrate the value of their conservatism, Hicks reached back into the history of Y; they have survived for so long because of it.  If that's too boring, too bad.  Better boring than dead.

I really like what is happening there, though.  I have argued in the past that companies that don't earn a ROE higher than 10% isn't worth much more than book value and I still sort of feel that way. But if the ROE is close to 10% conservatively managed with upside according to normalization of interest rates and other things, then maybe it's not so bad.  We are not talking about a business that is taking a lot of risk and reaching for a 10% ROE.  It's a conservatively managed 7-10% in a 3% interest rate world with possible upside depending on how things develop.  That's a big difference.  In the fixed income world, you would have to dip down into the lower credit ratings to get a 7-10% return. 

So in that sense, Y is not a bad idea at under BPS.