What an awful year for Berkowitz. Not just was performance horrible, down 32.42%, but his investors have also been abandoning him like rats on a sinking ship with his assets decreasing from $21 billion at the start of 2011 to under $7 billion by year end.
Isn’t it amazing that in one year Berkowitz has gone from being crowned the manager of the decade by Morningstar in 2010, to someone you are afraid to entrust your money to?
I just don’t buy that Berkowitz has lost it. The mistake that Berkowitz has made in my opinion is that he has invested the fund's money the way he would invest his own money. He is taking a concentrated portfolio approach and trying to make as much money as he can, without risking permanent impairment of capital.
In doing this he has ignored the impact that volatility will have on the loyalty of his investors. Unlike Berkowitz, most investors can’t handle paper losses.
I think there are going to be a lot of people regretting giving up on Berkowitz at exactly the wrong time.
Because the Berkowitz's portfolio has been beaten down there could be some very attractive opportunities. And the one that I just can’t ignore is AIG (AIG). Berkowitz has an astonishing 26% of the Fairholme Fund in AIG. To me that says either he thinks this is one of the greatest opportunities he has ever been presented with or he has gone completely off the deep end.
So when I saw the video below which is a discussion with the AIG chairman I sat up and paid attention. If there is any company that has more stink on it than AIG I don’t know what it is. As the poster boy for the financial panic in 2008, AIG has been left for dead, and may very well present a great opportunity.
Some key points:
- Taxpayers still own 70% of AIG
- AIG is ready to grow and return capital
- AIG is done playing defense and is ready to go on the offensive
- AIG has excess capital and is repurchasing shares
- AIG is going to pay back shareholders by growing the business and may make acquisitions
- AIA may well become one of those acquisitions
- AIG is not rolling over and dying in a liquidation, the future is growth
Now here is what Berkowitz most recently had to say about AIG:
AIG common stock and warrants are by far the largest issuer holding of The Fairholme Fund and the company is worthy of a Dickens novel. Started in Singapore by U.S. citizen C.V. Starr in the 1930’s, built into a shining example of how America can compete and win around the world by an imperial M.R. Greenberg, torn apart by a ruthlessAG Spitzer, and now rising from the ashes of a great tragedy. The company’s book value of $45 per share is heading to $55 in the near future and yearly earnings power of $4 per share will further propel shareholder value. Yet, AIG’s market price plummeted to less than half of book value due to what we can only surmise as a belief that the United States Treasury will sell its 77% ownership stake below the Department’s $29 cost. Why this is negative for long-term investors we do not know.
My problem with AIG is that it is far too complex for me to fully understand it. I owned it for most of the month of October and sold with a very quick and lucky gain. I’m considering buying again, but am aware that if I do I’ll be doing so more because of Berkowitz and his conviction than anything I know.