The Fairholme Fund’s investment objective is to provide long-term growth of capital. Under normal circumstances the Fairholme Fund seeks to achieve its investment objective by investing in a focused portfolio of equity and fixed-income securities. The proportion of the Fairholme Fund’s assets invested in each type of asset class will vary from time to time based upon Fairholme Capital Management, L.L.C.’s assessment of general market and economic conditions. In 2010, The Fairholme Fund earned 25.5% versus a gain of 15.1% for the S&P 500 Index . Since inception on December 29, 1999 and through December 31, 2010, The Fairholme Fund earned 342.9% versus a 5.0% gain for the S&P 500. Recently, Fairholme Funds has launched a third investment fund, apart from its equity centric fund and its fixed-income fund. This third fund, according to Berkowitz, will fall somewhere in between these two previous options.
Bruce Berkowitz concentrates his investments in a relatively small number of companies, diversifying his portfolio to increase the likelihood that poor performance of a particular industry will be mitigated. He looks for companies with deeply undervalued stocks that present unique investment opportunities. Berkowitz focuses investments on companies that have exceptional management, that generate free cash, and that are cheaply priced. Benjamin Graham’s The Intelligent Investor serves as the inspiration for Berkowitz’s investment strategy. Berkowitz will also invest in mediocre companies that are trading at a significant discount to intrinsic value, attempting to predict and observe catalysts that correspond to undervalued markets.
[ Enlarge Image ]
|Top Five Holdings in 2010||Ticker||Percent Composition||Number of Shares|
|American International Group||AIG||16.16%||44,285,986|
|General Growth Properties||GGP||11.14%||113,600,256|
|Bank of America||BAC||7.79%||92,139,515|
|Sears Holdings Corp.||SHLD||6.97%||14,917,873|
American International Group (AIG)
American International Group, Inc. is an international insurance organization, serving customers in more than 130 countries. AIG companies are providers of life insurance and retirement services in the United States. AIG operates in three segments: Chartis, SunAmerica Financial Group and Financial Services. Its property and casualty operations are conducted through multiple line companies writing all commercial and consumer lines both domestically and abroad.
Their shares trade around $35.58, with a P/E ratio of 2.52an EPS of -$14.11. In 2010, American International Group reported revenue of $21 billion but a net income of $14 billion. The insurer earned $6.2 billion in 2007; but during the financial slump, AIG returned a net loss of $99.3 billion in 2008 which narrowed to $10.9 billion for 2009. Fairholme acquired the securities in 2009 “as we started to see cash flows of AIG turn positive,” Berkowitz said. The insurer has climbed about 14 percent in 2010 after plunging more than 95 percent in the three years ended Dec. 31. Berkowitz said he expects to be a long-term shareholder because “it is going to take some time for AIG to fully recover” after the recent financial crisis.
General Group Properties (GGP)
General Growth Properties, Inc. is a self-managed real estate investment trust. The Company has ownership, interest in, or management responsibility for over 200 regional shopping malls in 43 states, as well as ownership in master planned communities and commercial office buildings. GGP’s business is focused in two main areas: Retail and Other, which includes the operation, development and management of retail and other rental property, and Master Planned Communities, which includes the development and sale of land, primarily in large-scale, long-term community development projects.
Their shares trade around $14.58, with an EPS of -$0.34. In 2010, General Group Properties reported revenue of $726 million but a net income of -$548 million. Berkowitz purchases a large portion of shares while the company was in bankruptcy, and profited from the company's emergence from Chapter 11 as shares rebounded from the low single digits to now over $14. After this re-evaluation of value, Berkowitz has recently sold a significant portion of his investments at a significant profit.
Bank of America (BAC)
Bank of America Corporation is a bank holding company, and a financial holding company. The company serves individual consumers, small and middle market businesses, large corporations and governments with a range of banking, investing, asset management and other financial and risk management products and services. Bank of America provides a range of banking and nonbanking financial services.
Their shares trade around $14.81, with an EPS of -$0.33. In 2010, Bank of America reported revenue of $135 billion but a net income of -$3.27 billion. Shares of Bank of America recently hit a 52-week low. Berkowitz took this opportunity to increase his holdings in Bank of America, anticipating significant economic recovery.
Citigroup is a New York based financial services holding company. Citigroup Inc. has the world's largest financial services network. As of December 31, 2009, Citigroup had approximately 200 million customer accounts and did business in more than 140 countries. Citigroup operates through two primary business segments: Citicorp and Citi Holdings.
Their shares trade around $4.91, with a P/E ratio of 14.03 and an EPS of $0.36. In the 3rd quarter of 2010, Citi reported net income of $2.2 billion, marking its third consecutive quarterly operating profit. 3rd quarter net income was down $529 million or 20% from the 2nd quarter. Berkowitz added almost 10 million additional shares of Citigroup during the second quarter of 2010, betting on strength in the stock as the United States Treasury comes closer to unwinding its ownership of the once-beleaguered financial giant.
Sears Holding Corporation (SHLD)
Sears Holdings Corporation is the parent company of Kmart Holding Corporation and Sears, Roebuck and Co. The Company is a broad line retailer with 2,235 full-line and 1,284 specialty retail stores in the United States operating through Kmart and Sears, and 402 full-line and specialty retail stores in Canada operating through Sears Canada Inc., a 73%-owned subsidiary. During the fiscal year ended January 1, 2009, it operated three reportable segments: Kmart, Sears Domestic and Sears Canada.
Their shares trade around $81.93. In 2010, Sears Holding Corp. reported revenue of $13 billion but a net income of $569 million. Berkowitz decreased his position size slightly in this retail and real estate play in the second quarter of 2010. This does not necessarily mean he has a less favorable view of the stock, as it still represents more than 8% of Fairholme's portfolio. However, Berkowitz has put some of this capital to work in his favorite financial names and the fund's primary energy play, BP.