There are a lot of analogies in the media these days to compare Fairholme Fund’s Bruce Berkowitz with Legg Mason Value Trust’s Bill Miller, as Berkowitz’s Fairholme Fund suffered its worst year of performance after years of tremendous outperformance. Many articles are predicting that Bruce Berkowitz is the next Bill Miller. Investors certainly treated Bruce Berkowitz the same way they treated Bill Miller. At the peak of Miller’s fame, after he had beaten the market average S&P 500 by 15 consecutive years, the size of his fund reached $20 billion in 2006. He suffered a 6.66% loss in 2007, while the market advanced in 2007, and a 55% loss in the market crash of 2008. Investors fled out of his fund. As of July 31, 2011, the fund has only $3.3 billion left, about 16% of the assets under management at its peak.
Similar things are happening to Berkowitz. With his outstanding performance, Fairholme Fund’s assets grew from $65 million in 2003 to $1 billion in 2005, $10 billion in 2008, and $20 billion on Feb. 28, 2011. However, investors quickly pulled out of his fund after just nine months of an ill-fated bet with financials. The fund has only $8.9 billion left now, according to Morningstar.
Bruce Berkowitz’s “all-in” bet with financials is bold. He might still be right over the long term. But the recent macro trend went against him. Facing heavy redemptions, he has lost the luxury of always holding about 30% of his portfolio in cash. He was even forced to sell half of his position in Regions Financial (RF, Financial). His holes with his other top financial holdings are big, too. This is his holding history with AIG.
We estimate that his average cost per share with AIG (AIG, Financial) is $33. At the current price he is losing about 30%. The bigger hole is with Bank of America (BAC, Financial), in which Berkowitz is very confident. This is his holding history with Bank of America:
Fairholme’s cost per share is about $15, according to our estimate. Currently Bank of America is traded at around $6, implying a loss of 60%. If financials recover, it is relatively easy for AIG to climb 50% back to $33 a share. But it seems much harder for Bank of America to climb 150% back to $15 a share.
Regardless, the investors who rushed in Fairholme last year and pulled out this year have lost money, permanently. Talking about chasing hot funds…
Is Bruce Berkowitz really the next Bill Miller?
We don’t think so, because they invest in fundamentally different ways. These differences lie in many aspects:
1. Miller is always fully invested; Berkowitz always tries to hold a large percentage of his portfolio in cash. Throughout the history of Legg Mason Value Trust, the fund is always 100% invested, regardless of market valuations. Berkowitz always tries to have 20% - 30% of his portfolio in cash, waiting for better opportunities, although the recent redemption has left Fairholme Fund fully invested.
2. Miller is always bullish; Berkowitz does not comment much on overall market. Over the years at GuruFocus we have never seen even once from Bill Miller that the market is overvalued. To him the market is always undervalued. Many times he uses simple market P/E ratio to prove that the market is undervalued. The market P/E ratio obviously has its flaws.
3. Bill Miller’s record 15 years of consecutive market-beating performance was built largely during the secular bull market started in 1990. In that bull market, being always fully invested and taking excessive risks made outperformance easier. The first bear market starting from 2000-2002 did not kill his performance. The second one in 2008 did, very badly. Berkowitz’s record was built on a secular bear market. Only a few months after starting Fairholme Fund, Bruce Berkowitz met his first bear market. He then had the second bear market in 2008. Both times he did well, and grew the net asset value of his fund by 300% in 10 years. Even with the recent decline, Fairholme’s net asset value is still more than 100% higher than its value at the beginning of 2000, while Legg Mason Value Trust’s net asset value is about half of what it was at the beginning of 2000.
4. The last aspect we want to point out is probably the most important of all. Miller’s portfolio carries far more risks than Bruce Berkowitz’s. Long before Miller’s market-beating streak ended in 2005, he already had many fatalities in which he had total loss, including losses in the two most infamous bankruptcies of Enron and WorldCom in the first recession of the 2000s. He continued to double down in his positions. His bets on Amazon (AMZN, Financial) and Nextel, etc., saved his streak. He tried the same in the 2008 market crash. He had positions in almost every one of the large fatalities including Lehman, BearSterns, Washington Mutual, Fannie Mae, Freddie Mac, AIG, etc. This time he was not as lucky. His fund lost a whopping 55% in 2008.
On the other hand, over the years since we started to track Berkowitz, he never had one position that suffered permanent loss of capital. He never had one company that went bankrupt and wiped investors out. The same can be said to Warren Buffett.
Will Bill Miller ever restore his winning streak again? Very unlikely considering the market is still far too overvalued for another secular bull market. Will Bruce Berkowitz’s “all-in” bet on financials work out five years from now? We don’t know, but we won’t bet against it.
Similar things are happening to Berkowitz. With his outstanding performance, Fairholme Fund’s assets grew from $65 million in 2003 to $1 billion in 2005, $10 billion in 2008, and $20 billion on Feb. 28, 2011. However, investors quickly pulled out of his fund after just nine months of an ill-fated bet with financials. The fund has only $8.9 billion left now, according to Morningstar.
Bruce Berkowitz’s “all-in” bet with financials is bold. He might still be right over the long term. But the recent macro trend went against him. Facing heavy redemptions, he has lost the luxury of always holding about 30% of his portfolio in cash. He was even forced to sell half of his position in Regions Financial (RF, Financial). His holes with his other top financial holdings are big, too. This is his holding history with AIG.
We estimate that his average cost per share with AIG (AIG, Financial) is $33. At the current price he is losing about 30%. The bigger hole is with Bank of America (BAC, Financial), in which Berkowitz is very confident. This is his holding history with Bank of America:
Fairholme’s cost per share is about $15, according to our estimate. Currently Bank of America is traded at around $6, implying a loss of 60%. If financials recover, it is relatively easy for AIG to climb 50% back to $33 a share. But it seems much harder for Bank of America to climb 150% back to $15 a share.
Regardless, the investors who rushed in Fairholme last year and pulled out this year have lost money, permanently. Talking about chasing hot funds…
Is Bruce Berkowitz really the next Bill Miller?
We don’t think so, because they invest in fundamentally different ways. These differences lie in many aspects:
1. Miller is always fully invested; Berkowitz always tries to hold a large percentage of his portfolio in cash. Throughout the history of Legg Mason Value Trust, the fund is always 100% invested, regardless of market valuations. Berkowitz always tries to have 20% - 30% of his portfolio in cash, waiting for better opportunities, although the recent redemption has left Fairholme Fund fully invested.
2. Miller is always bullish; Berkowitz does not comment much on overall market. Over the years at GuruFocus we have never seen even once from Bill Miller that the market is overvalued. To him the market is always undervalued. Many times he uses simple market P/E ratio to prove that the market is undervalued. The market P/E ratio obviously has its flaws.
3. Bill Miller’s record 15 years of consecutive market-beating performance was built largely during the secular bull market started in 1990. In that bull market, being always fully invested and taking excessive risks made outperformance easier. The first bear market starting from 2000-2002 did not kill his performance. The second one in 2008 did, very badly. Berkowitz’s record was built on a secular bear market. Only a few months after starting Fairholme Fund, Bruce Berkowitz met his first bear market. He then had the second bear market in 2008. Both times he did well, and grew the net asset value of his fund by 300% in 10 years. Even with the recent decline, Fairholme’s net asset value is still more than 100% higher than its value at the beginning of 2000, while Legg Mason Value Trust’s net asset value is about half of what it was at the beginning of 2000.
4. The last aspect we want to point out is probably the most important of all. Miller’s portfolio carries far more risks than Bruce Berkowitz’s. Long before Miller’s market-beating streak ended in 2005, he already had many fatalities in which he had total loss, including losses in the two most infamous bankruptcies of Enron and WorldCom in the first recession of the 2000s. He continued to double down in his positions. His bets on Amazon (AMZN, Financial) and Nextel, etc., saved his streak. He tried the same in the 2008 market crash. He had positions in almost every one of the large fatalities including Lehman, BearSterns, Washington Mutual, Fannie Mae, Freddie Mac, AIG, etc. This time he was not as lucky. His fund lost a whopping 55% in 2008.
On the other hand, over the years since we started to track Berkowitz, he never had one position that suffered permanent loss of capital. He never had one company that went bankrupt and wiped investors out. The same can be said to Warren Buffett.
Will Bill Miller ever restore his winning streak again? Very unlikely considering the market is still far too overvalued for another secular bull market. Will Bruce Berkowitz’s “all-in” bet on financials work out five years from now? We don’t know, but we won’t bet against it.
