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The fund has net assets of $19.27 billion as of March 31. Fairholme lost 9% year to date, says Morningstar. The S&P500 is up more than 7.6% this year.
Fairholme Fund has been any mutual fund manager’s dream. It was started by Bruce Berkowitz in 1999. In May 2003, Fairholme Fund was only a tiny $65 million mutual fund. Total assets passed the $1 billion mark in 2005. By 2008, its assets surpassed $10 billion. As of May 31, 2010, the fund’s assets have grown to $14.7 billion. By Feb. 28, 2011, the fund’s assets reached $20 billion as investors poured a few more billions into the fund before they realized it started underperforming.
The investors that redeemed their shares from Fairholme Fund are probably the ones that put their money in the fund at the peak of Bruce Berkowitz’s recent fame. Both were at exactly wrong times. With stellar performance in the first 10 years of the 2000s, Bruce Berkowitz ranked at the very top of all actively managed mutual fund managers. He was named Fund Manager of the Decade by Morningstar, and also Investment Guru of 2009 by GuruFocus. He was featured by Fortune with a lengthy article which called him “The megamind of Miami.” As anyone can image, more money poured in.
This is actually exactly what happened to Ken Heebner about three years ago. After gaining 80% in 2007 by betting against mortgage bankers, Heebner was “the hottest mutual fund manager on earth,” and he was framed on the cover of Fortune magazine. Money poured in, exactly at the peak of Heebner’s fund. In 2008 he gave up all the gains of 2007, and then some. For the next three years he ranked at the bottom of mutual fund managers.
We questioned the style shift of Bruce Berkowitz (Has a Change of Course Hurt Bruce Berkowitz's Returns?) before. But he is certainly standing by his motto of “Ignore the crowd.” His over-weighted positions in distressed financials such as AIG (AIG), Citi (C), Bank of America (BAC) hurt performance this year. But he is still convinced that these positions will be winners over long term. He is also in a controversial situation with St. Joe (JOE).
Why can’t investors do it differently? Maybe now is a better time to invest in his funds, instead of taking money out.
Appearing on the cover of Fortune magazine seems to be a mutual fund manager’s worst nightmare. Fortunately, Bruce Berkowitz was not on the cover page.
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Too bad investors weren't around to enjoy much of those gains. The typical CGM Focus shareholder lost 11% annually in the 10 years ending Nov. 30, according to investment research firm Morningstar Inc."
Seems investors can't help shooting themselves in the foot by buying high and selling low. One problem is that "investors" focus on the outcome, not on the process. This is a mistake because in activities like investing, that are a mixture of luck and skill, luck often dominates short term, and even intermediate-term, performance. Focusing on the outcome, as I believe the Morningstar research shows, led to very poor outcomes for CGM shareholders in spite of the fund's stellar performance.
I think that investors should study cognitive biases (Munger's misjudgments) and, following Munger, make a checklist that can be run down when making an investment decision.
[gregspeicher.com]