% of world GDP, Andrew Langford, COR, default, Emerald Isle, Europe, European sovereign debt crisis, Event Driven, Fairfax, FBD Holdings, Greece, home bias investing, Ireland, Irish value investing, ISEQ, Prem Watsa, Price/Book, Return on Equity, taxes, Thatcher, Total Produce, Trinity Biotech, UK, Wilbur Ross
Continued from here. OK, let’s take a look at my next investment allocation:
Ireland (16%): So much for all my rabbiting on about home-bias, what a terrible job I’ve done here..! Ireland accounts for a whopping great 0.3% of world GDP, and yet I’ve got 16% of my portfolio invested in the Emerald Isle (yes, please visit, all tourist revenues gladly accepted)!? OK, so, in my defence:
i) C’mon, everybody’s doing it! I’m confident 16% is far lower than the average Irish investor (and US investors are just as bad – how many realize US GDP is now just 22% of world GDP?).
ii) As Philip O’Sullivan (taking off the green jersey?!) reminded me, these stock picks are not that Irish anyway! Total Produce (TOT:ID/LN) is essentially pan-European, Trinity Biotech (TRIB:US) operates primarily in the US (& Europe) – I guess FBD Holdings (FBD:ID, FBH:LN) is my only true Irish exposure!
iii) My exposure actually doubled recently, somewhat accidentally. I previously had TRIB classified as an Event Driven allocation, based on the sale of its coagulation division a little over 2 years ago (for a consideration that exceeded TRIB’s then recent market-cap). With Event Driven investments, I like to set a maximum 2 year value-realization deadline – mostly, one can expect to have sold out long before then.
But if you’re still holding after 2 years, and it’s a poor/so-so investment, you probably need to question your thesis, and think long & hard about selling. In TRIB’s case, the thesis worked out perfectly, but I was v happy to hang onto a growth story at a value price. That required re-classification. Hmmm…the majority of TRIB’s revenues are in the US, but its business is fairly insensitive to the US economy, and it’s (genuinely, unlike some companies I could mention!) head-quartered in & managed from Ireland. Somewhat arbitrarily, I’ve assigned TRIB to my Ireland, rather than US, allocation. After all, good/bad sentiment towards the Irish economy & market will tend to impact all ‘Irish‘ stocks, regardless of their listing/exposure.
Thinking about this, I can understand some of the comforting aspects of home-bias. I know these Irish companies so well – I know their histories & business models, I know the individuals & management who can deliver & those who don’t, I remember the successes, the mistakes, the lies and the true fucking disasters… Every day I live with a mental picture of their charts & technicals, their results and their valuation fundamentals. Rather distracting if you’re trying to enjoy a bloody lap dance..!
But it saves me plenty of time & energy. With all that baggage on-board, something’s always ticking over on a sub-conscious level – I sometimes feel all I’ve got to do is wait around for an investment to just click in my brain! And I really mean wait - bloody years passed before I finally bought TOT & FBD, for example. And I think that’s key: Harness the positive aspects of home-bias, but resist the compulsion to buy your home stocks at all costs. I ultimately buy an Irish stock only (& simply) because it has become far more compelling than other global investment choices.
So, my Ireland allocation’s clearly v stock-specific – but also serves as an addition/alternative to the UK as another great bet on Europe. [Note: Ireland (& Germany) have been top European performers this year]. For slightly different reasons, of course – clearly an independent currency & monetary policy are off the table for Ireland. And no, I don’t believe Ireland’s on the verge of exiting the Euro! But like the UK, Ireland has a vibrant export sector, and a well-qualified labour force. Best of all, it managed to preserve its low-tax regime in the face of EU bailout-related threats. Standing firm on taxes is one of the few things I can genuinely praise the Irish government for (OK, let’s try ignore why the bailout was actually needed…). That victory is incredibly important to Ireland’s hopes for recovery.
[If anybody wants to complain about Ireland's tax competition, bring it on..! Remember: The EU made a colossal mis-calculation when it challenged Ireland it couldn't have a preferential 10% tax rate (to attract foreign multinational firms). The presumption was Ireland would be forced to bring the lower rate up to/towards the regular 32% corporate tax rate. But Ireland, in a master-stroke, quite legitimately called the EU's bluff and responded:
'Aah Jesus, lads, you have a good point there... Tell you what, we'll slash that top rate right down, and just offer one low 12.5% rate to everybody. There - why don't you shove that up yer fookin' arses..!']
I tend to think Ireland will ultimately muddle through the current crisis… First, people often extrapolate current facts, figures & trends in a rather absurd manner. They completely miss the fact that people & economies are inherently flexible (this doesn’t mean I’m predicting a happy future just ’round the corner either). Second, I think a little bit of credit’s now owed to the Irish people:
Sure, they acquired astounding wealth within a generation, and almost completely lost the run of themselves. But under it all, there was always a sneaking unease & disbelief – a case of the Emperor’s new clothes. Whenever the foreigners left the room, Irish people were afraid to look each other in the eye – who knows, maybe an hysterical fit of the giggles would have broken out, and somebody would pipe up ‘You‘re having me on, this can’t be for real..?!‘
Perhaps we can put it down to a cultural memory of famine & emigration? Or maybe it’s young memories of the ’80s, when Ireland stagnated in relative poverty, and was forced to watch the Thatcher boom from the sidelines? Or should we simply ascribe it to character? Whatever the root cause, it kept alive the feeling that all this good fortune might just be illusory – maybe even somewhat undeserved… Today, that’s been transformed into a slightly defiant resignation – ‘The party’s over, we’ve been here before, we have to dig our way out of this hole, we’ll make it out again in the end, all guns blazing!’
Maybe that’s why the Irish are generally just getting on with it… While Greece marches, riots & fire-bombs to protest the right of hairdressers to retire at 50 (a v hazardous occupation, apparently). You have to wonder – did the Greeks really fool themselves they’d achieved economic nirvana, or were they just fooling the rest of the world? Of course, this all highlights the real fucking tragedy here:
The Irish have pretty much given up on thoughts of the good life, and instead are bending their backs to a Sisyphean debt burden. But much of this burden comes from the wholesale assumption of bank debt by their
idiot gombeen politicians, with no care or recognition for the will of the Irish people. The Greeks, on the other hand, continue to riot in the streets & have defaulted on their debt. And this is the debt that funded the profligate spending (& tax avoidance) they actively campaigned for, they were promised, they voted for, and then they completely pissed away… Where’s the justice in all this, I ask you?
OK, let’s bring the blood pressure back down: Considering how bombed out the Irish stock-market is, I can’t imagine more bad news actually having much of an impact on prices, or sentiment. Can you..?! Btw the ISEQ’s still down 69% from its high, not much of a recovery from a peak-to-trough collapse of 82%! As I observed about the UK, I’m not at all convinced a bad European scenario would be necessarily deleterious for the Irish market. On the other hand, any improvement (or pragmatic solution(s)) for Europe will be good for Ireland too. And, considering recent developments, that may include some possible respite on interest rates, assumed bank debt etc. We’ll have to wait & see... Meanwhile, in a European context, I believe Ireland presents investors with another skewed risk/reward proposition.
So, perhaps you’d like to bet on the Irish?
It’s a small market, of course, but it can still punch above its weight! If you’re interested, FBD Holdings (FBD:ID, FBH:LN) is an excellent stock to consider for domestic Irish exposure. I was always bemused by the old investment saw - invest in banks, they offer the simplest & most efficient exposure to any domestic economy. There’s some logic to that, but it completely ignores the astonishing risks you run when investing in any bank! The sensible alternative is insurers – they offer the same domestic exposure, but usually with a fraction of the risk.
FBD’s a property & casualty insurer, it’s Irish-owned (the others have been mostly bought out, or gone bust), it’s got an excellent current/historical Combined Operating Ratio (COR), and it’s steadily growing market share. This expansion’s important, as it should hopefully continue to offset the ongoing catch-up with lower property values. FBD also has a bullet-proof balance sheet, consisting of cash/deposits/bunds, and zero debt. With financial risk now eliminated, the only thing really missing here is a share buyback programme:
Buybacks would marginally lower book value per share, but that’s pretty irrelevant – FBD’s intrinsic value is far higher, and I calculate a buyback would improve that value significantly. For example, I reckon a 10% share buyback at current prices would improve Return on Equity (RoE) by about 15%. This should translate into an accordingly higher Price/Book multiple, which I estimate would enhance intrinsic value per share by about 11%.
Generally, all credit to Andrew Langford, the CEO. Sure, FBD’s a little more expensive than Irish banks, at a Price/Book of 1.35. But with a far superior RoE of 20%+, itsrelative valuation is obviously more attractive. It also trades on a historic P/E multiple of 6.6. Enough said, really! I actually have Total Produce (TOT:ID/LN) pegged with a higher Upside Potential right now, based on their current (respective) intrinsic values. But I suspect FBD will do a far better job of compounding its intrinsic value over the next few years. And sentiment & the economy may even reach an inflection point where a UK, or continental, insurer might become brave/interested enough to pounce - FBD’s had plenty of acquisition overtures in the past…
In fact, I’m looking for Prem Watsa‘s email, if anybody’s got it?!
Consider his recent investment in Bank of Ireland (BKIR:ID/LN), via Fairfax Financial Holdings (FRFHF:US), and alongside Wilbur Ross. Note also his regular insurance company acquisitions, and his value investing credentials – FBD could offer him a v cheap (but high quality) potential acquisition opportunity. I just want to make sure it’s on his radar…
To be continued.