Fairfax Financial has outperformed its Canadian peers in 2025.Nathan Denette/The Canadian Press
Investing is hard, and it has changed substantially since the global financial crisis. Today, most institutions use a “core and explore” strategy: They allocate the majority of client capital to a core portfolio of high-quality stocks that broadly track the institutions’ benchmarks, then deploy the remainder into less conventional sectors or stocks that may not screen as well.
The best practitioners of this approach know not to overstay their welcome in lower-quality stocks. They look for reasons to sell quickly. That instinct, however, often leads to mispricing. In the case of Fairfax Financial Holdings Ltd. FFH-T, it appears that the marginal holder has been selling for reasons unrelated to intrinsic value. That creates an opportunity for investors who are focused on absolute, not relative, returns.
Fairfax is trading near price levels first reached this past June, but its price-to-book multiple has declined from 1.7 times to 1.4 times. Historically, Fairfax shares underperform seasonally from June 30 to Oct. 31, when the property and casualty insurance company faces greater exposure to catastrophic losses during U.S. hurricane season. Unsurprisingly, investors are weary when short term earnings are at their highest risk! In fact, over the past 11 years, Fairfax has underperformed the S&P/TSX Financials ETF (XFN) in nine of them since 2015.
Book excerpt: How Fairfax Financial got its groove back
In 2025, that seasonal underperformance reached its widest margin in more than a decade – nearly 20 per cent versus XFN – despite no major hurricanes making landfall in the continental United States. What explains this disconnect? Investors appear to have broadly sold down P&C insurers amid concerns about slowing premium growth in a softening insurance market and weaker investment income as interest rates declined. Yet Fairfax still outperformed its Canadian peers – Intact Financial Corp. IFC-T, Definity Financial Corp. DFY-T and Trisura Group. Ltd. TSU-T – while banks led the broader financial sector.
Fairfax has several reasons to outperform and I expect it to continue. Relative to peers, it trades at a lower valuation, is actively buying back shares and will be added to the S&P/TSX 60 Index this month, increasing demand for shares and reducing supply – all while expecting a comparable and potentially significantly higher return on equity given the nature of its investment portfolio, which has much higher exposure to equities. Being in the S&P/TSX 60 also means more institutions may choose to add Fairfax to their core portfolios, which will only help expand the company’s price-to-book multiple.
Another source of selling appears to come from value investors. Many of them held through the stagnant 2010-to-2020 decade, when the stock barely moved, and have since enjoyed a remarkable rally. Over 15 years, their compounded annual return now approaches 15 per cent. Some of these investors cite the historical price-to-book range from that period as a reason to take profits, arguing the stock is once again near the top of its range. But such reasoning assumes mean reversion and overlooks fundamental changes in Fairfax’s balance sheet and business mix.
While short-term interest rates may decline, long-term rates could rise. And while certain insurance markets may soften, lower premium growth means more capital for share buybacks or to buy out minority interests of insurance subsidiaries Allied World Assurance Co. Holdings Ltd. and OdysseyRe. Both actions are accretive to Fairfax’s forward return on equity.
Investors also confuse a soft insurance market with lower underwriting income, but that ignores the cyclicality of reserve releases from the previous hard market, which should support profitability for years to come. Too often ignored is the company’s equity portfolio, recorded well below fair value, which could meaningfully lift future return on equity as gains are realized over the medium term.
Fairfax’s historical price-to-book range from 2005 to 2025 has little relevance today. Fairfax has amortized roughly US$2-billion in goodwill and intangible assets since 2017, following its Allied World acquisition – despite substantial premium growth. It has also repurchased shares above book value, which reduces equity and, from an accounting perspective, boosts return on equity. Both developments support a higher price-to-book multiple, all else equal.
With hurricane season now over, the company’s usual seasonal headwinds turn into tailwinds. Over the past decade, Fairfax has outperformed XFN seven times between Nov. 1 and June 30, with the past four years particularly strong.
This year may follow the same pattern. Since Nov. 1, Fairfax has outperformed XFN by about 4 per cent. If the shares trade up another 25 per cent from here by next June 30, Fairfax would once again trade at 1.6 times book value – similar to where it traded in June, 2025.
The company also enjoys an unusual catalyst: the publication of The Fairfax Way by David Thomas, the first book chronicling the firm’s 40-year history and highlighting why investors have trusted their long-term savings with Fairfax – much as early readers of Robert Hagstrom’s The Warren Buffett Way, published in 1994, did with Berkshire Hathaway Inc. Having read the book, I think it will be difficult for probabilistic investors to read The Fairfax Way and not want to buy the shares, which ultimately will support the multiple.
Berczy Park Capital has continued to increase its position in Fairfax, which now represents 58 per cent of net assets, up from 35 per cent from when I last wrote about Fairfax on May 1, 2024. Under almost any reasonable scenario, Fairfax appears positioned to compound at more than 15 per cent annually for the foreseeable future – comfortably above our 10-per-cent hurdle rate. Of course, as any probabilistic investor appreciates, there are no guarantees.
Asheef Lalani, CFA, is chief investment officer at Toronto-based family office Berczy Park Capital and is an independent director of Mako Mining Corp. and Sailfish Royalty Inc. He was previously a portfolio manager for UBS Securities.