This $18 Billion Fund Struggles to Find Upside Momentum

If you are invested with “Mutual Fund Manager of the Decade” Bruce Berkowitz are simply interested in reading up on the man, there is a quite lengthy piece on him in Institutional Investor.   It does appear the ‘magazine cover’ indicator has struck again ala Ken Heebner with CGM Focus (CGMFX). Berkowitz was highlighted in late 2010 in Fortune Magazine.  Since then, the fund has struggled.   Still, it has only been a half a year, which is a relatively short period of time, and running such a concentrated fund will lead to these sort of periods.

Some excerpts from the story:

  • Given the financial uncertainty of the postcrash world, where pockets of opportunity may be found in all kinds of places, flexibility is essential. Hedge fund managers like Einhorn have long known this. But Berkowitz has learned it too, growing Fairholme to more than $20 billion in assets since founding the firm nearly a dozen years ago.
  • In many ways, Berkowitz (who along with Fernandez and other insiders has some $300 million invested in Fairholme) is a traditional value investor who plows through piles of paperwork and reams of financial data to find unappreciated companies. Like Buffett, he follows the principles of Benjamin Graham, the legendary value investor who focused on a company’s assets and ability to generate cash. But his strategy stands apart, marked by extremely concentrated holdings and a willingness to go where others fear to tread, and then to wait, often doubling down as stocks fall in the short term.
  • Fairholme is the largest investor in American International Group (NYSE:AIG), after the U.S. government. The reviled insurer represents 7.5 percent of  Fairholme Fund’s portfolio, which is loaded up with financials and other loathed sectors. Additional big holdings include Bank of America Corp (NYSE:BAC), CIT Group (NYSE:CIT), Citigroup (NYSE:C), Goldman Sachs Group (NYSE:GS), Morgan Stanley (NYSE:MS) and Regions Financial Corp. (NYSE:RF) Consumer names are sparse, and the one that is there is the retailer almost no one wants: Sears Holdings Corp. (NASDAQ:SHLD) To counter any risk that the portfolio might crater, and to take advantage of opportunities fast, Berkowitz keeps massive amounts of cash on hand — 23 percent of  Fairholme’s assets as of March 31.
  • The returns of Berkowitz’s strategy have been terrific. Since the Fairholme Fund launched in December 1999, it has beaten the market every year except one; from inception through the end of last year, the fund had an annualized return of 14.47 percent, versus just 0.45 percent for the Standard & Poor’s 500 (NYSE:SPY) index. By comparison, Hedge Fund Research’s HFRI fund-weighted composite index returned 6.75 percent annualized over that period.
  • But the financial world has changed since Berkowitz started investing two decades ago, and he and Fernandez expect that many of the best opportunities going forward won’t involve domestic stocks — the mainstay of  Fairholme over the past decade — but will exist in various corporate restructuring efforts as companies around the globe unwind their debts and shore up their balance sheets.
  • At the same time, Fairholme faces the constraints of its own success: Its ballooning asset size means that bets will need to be ever larger and that investments in smaller companies won’t make a meaningful enough contribution to returnsIn the 12 months through February of this year, investors put $4.6 billion in new moneyinto the flagship Fairholme Fund, according to Morningstar (NASDAQ:MORN).
  • For the first four months of this year, the Fairholme Fund lagged the S&P 500 — down 2.7 percent versus the index’s 8.4 percent rise — a rare period in which it has not only underperformed but lost money for investors.   “It’s sheer fantasy to think that someone could go up consistently every month for years upon years,” Berkowitz says. “It is just insane to think that a four-month period is anything.”
  • I think Bruce has modeled himself to a great degree after Warren Buffett, and it is an enormous competitive advantage,” says William Ackman, founder of New York–based hedge fund firm Pershing Square Capital Management, who worked with Fairholme and Canada’s Brookfield Asset Management to bring real estate developer General Growth Properties (NYSE:GGP) out of bankruptcy last year. Berkowitz’s word, like Buffett’s, can be counted on, a rarity in the fast-moving world of finance, Ackman notes. “If you are not partnered with the right people, they can take advantage of the changes to retrade the deal,” he says. With Berkowitz and Fernandez, “every time there was a twist or turn, they were willing to work with us and the company.”

That’s only part of the first quarter of the story – it goes very in depth from there especially on his investment history.  A fun read.

No position

This is a guest post written by Trader Mark who runs the blog Fund My Mutual Fund.

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