Bruce Berkowitz, managing director of Fairholme Capital Management LLC, has started 2012 in the opposite place he finished 2011 — on top. And he's doing it by sticking to the same game plan.
Mr. Berkowitz's $7.4 billion Fairholme Fund (FAIRX) had a return of 17% through year-to-date through Friday, almost double that of the S&P 500, making it the top-performing large-cap value fund of the year so far.
Though Fairholme Fund's performance has topped the charts so far, it's still a far way from undoing the damage of 2011, when it lost 32%. Since Jan. 1, 2011, the Fairholme Fund has lost 19%; the average large-cap value fund was up 5.8% over the same time period, according to Morningstar Inc.
“What a horrible year for performance!” Mr. Berkowitz wrote in a letter to shareholders last week. “The fund's performance last year makes little sense in light of such positive trends and we can only hypothesize from public comments that investors did not fathom our financials' assets.”
Thus far, the financial stocks that sunk the fund in 2011 are the ones that have led to this year's performance.
“So far, this has been the mirror image of last year,” said Kevin McDevitt, a mutual fund analyst at Morningstar. “Everything that lagged is doing really well.”
Insurer American International Group Inc., which makes up about a quarter of the Fairholme Fund's assets, lost 51% in 2011, but is up 17% this year. Sears Holding Corp. and Bank of America Corp., two other top five holdings, have had similar dramatic reversals of fortune.
The positive trends in employment and gross domestic product growth have helped ease fears of another recession and caused the financials to rally, Mr. McDevitt said.
The turnaround is also showing up in the slowing of outflows. Investors rushed to the exits last year, pulling out almost $7 billion, and Charlie Fernandez, co-manager of the fund since 2008, unexpectedly resigned in October.
Outflows have slowed though. Investors only pulled out $300 million, or 5% of assets in January, after pulling out $720 million in December, according to Morningstar. Fairholme in October beefed up its staff with the
addition of Fred Fraenkel as chief research officer, though it hasn't hired a replacement for Mr. Fernandez.
Given that the new year is barely six weeks old, it's too soon to tell if the Fairholme Fund is going to re-establish its past success, but Mr. Berkowitz sees some encouraging signs.
“We remain optimistic, given our performance since inception and a belief that while history does not exactly repeat, it does rhyme,” he wrote in his letter to shareholders. “Unemployment is coming down and elections are near. Our favorite economist, Warren E. Buffett, is bullish on America. Year-end reports show continuing, positive trends. Our companies are strong and cheap. Fairholme has kept its word to focus on value-based, long-term investments. We will stay the course.”
