Mohnish Pabrai is the managing partner of Pabrai Investment Funds. As per the 13F filing of June 30, 2011, the overall value of the reported stock investments (spread over four funds) stood slightly above $307 million. These funds are, Pabrai Investment Funds I through IV.
Mohnish Pabrai, a value manager, has earned quite a following among value investors due to many reasons:
- Over a term of five years or more, his funds have consistently surpassed the major indexes by a handsome margin. This out-performance was huge during the early years (1999 to 2004) although there have been individual years when the funds lagged these indexes by substantial amounts.
- Pabrai is among the minority managers that run concentrated portfolios making large bets on a small number of stocks. To his credit, many investors consider his selections as good hunting-ground, when looking to add to their own portfolios.
- He has marketed himself extremely well especially with a couple of popular books on value investing theme:
- Mosaic: Perspectives on Investing
- The Dhandho Investor: The Low-Risk Value Method to High Returns
- In June 2007, he made headlines by bidding $650,100 for a lunch with his guru Warren Buffett. The actual lunch happened almost a year later.
- In the hedge fund industry, his funds follow a unique fee structure: there are no management fees – instead, a 25% performance fee applies after a 6% annual hurdle. The fee structure is patterned after the original Warren Buffett partnership of the 1950s.
Pabrai Investment Funds I was launched in 1999 with $1 million in assets. Prior to 2004, the annual meeting and communication to partners were the few sources of information regarding his positions. Like Buffett, Pabrai is averse to discussing equity trades. He emphasized this point by quoting Buffett in his 2005 annual letter:
Despite our policy of candor, we will discuss our activities in marketable securities only to the extent legally required. Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are.
From the public information available, it is therefore impossible to gather a complete picture of Mohnish Pabrai investments over the years. There is no SEC requirement to discuss portfolio positions. The funds crossed the 13F filing threshold of $100 million, when it ended 2004 with $145 million in assets under management. Pabrai’s 13F filings since January 2005 are a wealth of information. The market values of investments in Mohnish Pabrai’s 13F filings from the last five years are summarized below:
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Below are some observations:
- Potash Corporation (POT), accounting for over 20% of the total value of the stock investments, is the biggest holding per the latest filing. This stake was initiated in the 4th quarter of 2008 when the price per share ranged between $17.80 and $31.79. The share count was doubled in the 3rd quarter of 2009 when the price per share ranged between $28.36 and $32. Since then, the count has remained steady, accounting for a 3:1 stock-split in 2011. The stake proved solid returning well over 50% in the 2+ years of ownership.
- A large stake in Brookfield Properties (BPO) was initiated in the 2nd quarter of 2009 when the share price ranged between $6.71 and $7.41. The fund hit a homerun with BPO as the stake has almost tripled in two years (accounts for over 16% of the total portfolio as of the latest filing). Even after the latest sell-off, Pabrai is looking pretty with over 100% on that investment. For those investors seeking to shadow Mohnish Pabrai, BPO does not offer a good entry point.
- Similarly Pabrai also built a large stake in Brookfield Infrastructure Partners (BIP), another Brookfiled Asset Management (BAM) company. The current price of this stake, initiated in the 4th quarter of 2010 when the share price ranged between $19.63 and $22.56, is close to those figures, giving a reasonable entry point to investors attempting to follow him.
- The 4th largest holding as of the latest 13F filing is Goldman Sachs (GS) which was initiated in the 4th quarter of 2008 when the share price ranged between $128 and $53.31. This large cap stock whose stake was doubled as of the latest filing when the share price ranged between $160 and $135 is a fairly unusual pick as it is widely held. The fact that Pabrai chose to double the share count at much higher prices is an indication of his very bullish stance on this pick. The current prices of GS offer a very good entry point for investors trying to emulate him.
- Cresud (CRESY), a small-cap position was started around the same timeframe when the share price was between $5 and $10. It accounted for ~5% of the portfolio and the stake progressively increased to almost thrice the share count by the end of 2009. The position has since been trimmed by around 25% as the stock price more than doubled before settling back.
- From the 4th quarter of 2008, Pabrai funds started investing in a number of other large cap stocks. The stakes included large positions in Wells Fargo (WFC) and Teck Resources (TCK) – formerly Teck Cominco). WFC stake has been held steady since its initiation in the first quarter of 2009 (during the market lows). TCK, initiated at the same time was sent on its way out within the next two years at much higher prices.
2008 was the toughest year for Pabrai Funds as it lagged most market indexes by losing 60% of its value. Mohnish Pabrai implemented a couple of changes to portfolio allocation and stock selection starting in the third quarter of 2008:
- He switched from the “10x10” model of diversification to a “2-5-10” model. “10x10” model means holding 10% positions in each of the ten most compelling ideas. “2-5-10” model means typically holding 5% positions, sometimes holding 2% positions, and once in a while holding up to a 10% position.
- Started working with a check-list.
The former change essentially decreased the concentration of securities from an average of 10 to an average of 25. The latter is an attempt at reducing errors in stock selection by employing a check-list to filter stocks. The shift to a large-cap bias appears to be another philosophical change, although it is not spelled out.
We will look into Mohnish Pabrai's evolution as a highly successful hedge fund investor and the effect of changes to portfolio allocation and stock selection in future articles.