Guarantees, IPOs and Hurricane Charlie in 2004

Investors’ experiences over the last few years have taken their toll on their confidence. At the same time, the current interest rate scenario does not reward cash, despite recent hikes in interest rates. Chasing higher yields and seeking safety are usually contradictory. However, this has not prevented the appearance and marketing of “guaranteed” products. Unfortunately, the only thing which seems guaranteed is the commission of the agent or broker.

Indeed, increasing leverage has been encouraged. Unfortunately, increasing leverage does not always mean increased returns: All it means is more rapid rises and falls in capital and increased exposure. Of course, encouraging an investor to buy more of a “guaranteed” product with more leverage, also guarantees more commission.

The last quarter has witnessed trendless markets. Several hedge funds have found the last quarter a difficult one, and have been unable to find a trend in which to take a successful position. In this kind of environment, even many “absolute return” vehicles have not had positive returns.

Much of investors’ fear is due to their losses in Telecoms and technology. Recent developments seem to suggest that investors are again a little courageous in the area of technology. Google’s IPO has attracted a lot of attention. At the same time, in India, The Tata Group successfully launched the Public Issue of share in Tata Consulting Services. However, the picture is still not so clear as several UK listings have had to be repriced to attract investors.

The story in Telecoms is very gloomy and most investors are steering clear. However, contrarian investors have now begun to invest in the sector. We are aware that the market often over-reacts to bad news and that it pays to be “fearful when others are greedy and greedy when others are fearful.” Kurm Investments now has a direct investment in a Telecom Stock, amounting to 9% of holdings. In contrast with the 1990s, some such companies have strong (post-bankruptcy) balance sheets, positive cash flows and cheap share prices. The industry is still a difficult one at the moment, but a carefully made investment could pay handsomely.

Kurm has significant exposure to Insurance and Reinsurance. Hurricane Charlie, which just hit the coast of Florida and caused much damage, has certainly had impact on the industry. Indeed, the balance sheets of many insurers have been hurt. However, all the insurance businesses in which have investments, direct or indirect, are well capitalised and underwrite prudently. While this does not mean that they will not experience losses, it does mean that they will not suffer so badly. Indeed, they may benefit from a further flight to quality and a predicted slight rise in premia. We will see the impact in next quarter’s numbers.

Kurm has also made two unlisted investments this past quarter. The Company has invested US$1 million in Fairholme Holdings in Bermuda. This company in turn has co-invested some of its capital with Warren Buffett’s Berkshire Hathaway and Jack Byrne’s White Mountains in the purchase from Safeco of its life insurance operations. We thus have two of the shrewdest insurance investors as our partners. In addition Kurm has invested £100,000 sterling in Alchemy Partners, via Pi Capital. Alchemy Partners are a team of private equity investors, with a successful record of investing in difficult transactions where the company needs much operating input, is sold without auction. This is a profitable niche in the private equity market. About 25% of Kurm’s capital is now invested in unlisted investments.

Whether in public or private investments, the approach of buying pieces of business with excellent management teams whose incentives are aligned with ours, will ultimately prove to be a safe, conservative and profitable way to grow capital.