Famed fund managers heavily invested in financials; right now, not so good
Bruce Berkowitz and Bill Miller, two money managers betting on a rebound in financial stocks, suffered their biggest declines of 2011 yesterday in a slide that worsened this year's losses at their mutual funds.
Berkowitz's $14.7 billion Fairholme Fund, and Miller's $1.2 billion Legg Mason Capital Management Opportunity Trust fell 8.8 percent and 11 percent, respectively, as the Standard & Poor's 500 Index lost 6.7 percent, according to data compiled by Bloomberg. The funds lost 28 percent and 36 percent this year through yesterday, compared with a drop of 10 percent for the S&P 500, including reinvested dividends.
“The banks haven't dealt with their problems from the bear market” of 2008, Geoff Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island, said in a telephone interview. “The old model of buying them when they are down isn't working for value investors.”
The KBW Bank Index sank 11 percent yesterday, the worst showing for the 24-company benchmark since April 2009, and Bank of America Corp. plunged 20 percent as the government's loss of its AAA credit rating roiled markets. Financial stocks have been driven lower by concern that the U.S. may be sliding back into recession amid a weak housing market and low interest rates that have cut the returns on securities the banks own, sending the bank index down 28 percent this year.
Standard & Poor's lowered the U.S. long-term rating one level to AA+ after markets closed on Aug. 5, while keeping the outlook at “negative” as the company becomes less confident that Congress will end Bush-era tax cuts or tackle entitlements.
AIG, Citigroup
Tom Pinto, a spokesman for Miami-based fund parent Fairholme Capital Management LLC, didn't respond to an e-mail request for comment after regular business hours, and Mary Athridge, a spokeswoman for Baltimore-based Legg Mason Inc., said the firm didn't have any immediate comment.
Berkowitz, 53, who was named Morningstar Inc.'s domestic stock manager of the decade in January 2010, had about 74 percent of his fund's equity holdings in financial companies as of Feb. 28, according to Morningstar.
His top 10 holdings included New York-based insurer American International Group Inc., New York bank Citigroup Inc. and Bank of America in Charlotte, North Carolina, which reached 52-week lows yesterday.
“Our intention remains to run from the popular and embrace the hated where prices tend to reflect such mistrust,” Berkowitz wrote in a report last week to investors, defending his investments in financial stocks.
Berkowitz is scheduled to hold a conference call tomorrow with Bank of America Chief Executive Officer Brian T. Moynihan. “Skeptics are invited to participate,” Berkowitz said last week in a statement announcing the event.
32% Weighting
Miller, 61, is best known for beating the S&P 500 Index for a record 15 consecutive years through 2005 with his $3.1 billion Legg Mason Capital Management Value Trust, before trailing the U.S. benchmark in four of the next five years.
The smaller Legg Mason Capital Management Opportunity Trust had 32 percent of its equity assets in financial stocks as of June 30, Morningstar data show. Financials make up 15 percent of the S&P 500 Index, according to Bloomberg data.
Top holdings at Capital Management Opportunity included Hamilton, Bermuda-based insurer Assured Guaranty Ltd., which is down 42 percent this year, and Richmond, Virginia-based Genworth Financial Inc., off 57 percent.
In an April letter to shareholders, Miller wrote that financial, health-care and technology stocks were selling more cheaply relative to earnings than they have more than 90 percent of the time in the past 60 years.
“As we enter the second quarter of 2011, we believe it is a good idea to buy what's on sale,” Miller wrote.
Miller's larger fund, which had 22 percent of assets in financial stocks as of June 30, lost 6.8 percent yesterday.
--Bloomberg News--
