You have to hand it to Mohnish Pabrai. For a guy whose firm is sliding downward rather swiftly, he’s certainly confident.
The head of Irvine, California–based Pabrai Investment Funds, excitedly tells investors in an October 11 letter that he raised $9.8 million from new and existing investors in the third quarter after opening two of his three hedge funds for the first time in several years.
“While there are no guarantees, all three funds are likely to do quite well in the next few years,” Pabrai tells clients in the letter. Pabrai was not available to comment in time for publication.
For two of the three funds, the next opening is scheduled for January 1, 2017, while the other fund had an additional opening on November 1 of this year. The additional assets bring the total for the firm to $460 million. This is down more than 25 percent from the $617.8 million the firm reported having as of December 31, 2015, in its most recent annual ADV filing with the Securities and Exchange Commission.
The bulk of the decline is apparently the result of redemptions. Pabrai Investment Fund 2 is down 5.5 percent for the first three quarters of the year, Pabrai Investment Fund 3 is off by 9 percent over the same period, and Pabrai Investment Fund 4 is down 6 percent for the year. The funds were down somewhere in the midteens last year and have declined by more than 34 percent from mid-2014 through mid-2016.
However, the three hedge funds had a very strong third quarter, surging between 14.4 percent and 15.8 percent, according to the firm’s client letter. This performance evidently explains Pabrai’s optimism and desire to reopen the funds to new money.
“With the substantial discount to underlying intrinsic value, I believe our portfolio is like a tightly coiled spring,” Pabrai tells investors, explaining why he thinks he will do well over the next few years.
Pabrai is also mindful that even after that bleak two-year period, since his oldest fund’s inception in 1999, it has posted an 11.9 percent annualized return, roughly double the 6 percent annualized gain generated by the Dow Jones industrial average over the same period; the Nasdaq composite index returned 3.4 percent, and the Standard & Poor’s 500 stock index returned 4.6 percent over the period.
Pabrai is an obsessive value investor, a self-described disciple of Warren Buffett. He and his friend and fellow value investor Guy Spier shelled out $650,100 to have lunch with the Oracle of Omaha at the Smith & Wollensky restaurant in Manhattan in 2008 as part of a charity auction.
Mumbai, India–born Pabrai founded Pabrai Investment Funds in 1999 after serving as founder and CEO of TransTech, an IT consulting and systems integration company he founded in 1990 in his home. From 1986 to 1991, Pabrai worked for Tellabs in research and development for the company’s high-speed data networking group.
Pabrai likes to run a very concentrated portfolio. At the end of the second quarter, he owned just eight U.S. stocks, one more than he had in the previous quarter.
The firm has a huge bet on the global auto industry. The two largest positions accounted for roughly half of its assets — Fiat Chrysler Automobiles shares and General Motors Co. warrants. Its fourth-largest position is Ferrari, accounting for nearly 15 percent of assets. In the third quarter, Fiat Chrysler gained nearly 20 percent, while Ferrari surged 31 percent.
The firm’s smallest stake is in Buffett’s company, Berkshire Hathaway.
Pabrai added one new stock to his portfolio in the third quarter, Southwest Airlines Co., which is a relatively small position, accounting for less than 6 percent of assets.
Altogether, half of the eight U.S. stocks in the firm’s portfolio were positions established this year, the other three being Fiat; Seritage Growth Properties, the real estate investment trust (REIT) created from hundreds of Sears Holdings stores; and AerCap Holdings, the aircraft leasing giant.
“We’ve added some very nice assets to the portfolio in 2016 at significant discounts to underlying intrinsic value,” Pabrai tells clients, although his letter does not identify or discuss specific holdings. “In addition, we have the finest collection of managers we’ve ever had running the fractions of businesses that we own.”
