July 29, 2023
Dear Fellow Shareholders:
Since the inception of The Fairholme Fund (Trades, Portfolio), cumulative performance with dividends reinvested and after expenses was more than twice the cumulative performance of the S&P 500 Index. Fund assets totaled $1.2 billion. Cash and equivalents are 12% of assets. I and affiliates own 33% of Fund shares.
Mark Twain was right when he said “buy land, they’re not making it anymore.” St. Joe’s (JOE, Financial) land and entitlements are about or surround one of the hottest residential markets in Florida, Scenic Highway 30A on the Gulf of Mexico.1 The company’s earnings per share in the first half of this year increased by 48% from the first half of last year - with no extraordinary profits and while finishing five new hotel complexes.2
Vaclav Smil’s How the World Really Works3 discusses the four pillars of modern civilization: fertilizer, steel, cement, plastics and petrochemicals, and how each depends on crude oil, natural gas, and/or natural gas liquids. Enterprise Product Partners (EPD, Financial) supplies midstream energy services that link domestic drillers to global consumers of these critical building blocks. Their system of pipes, tanks, and process facilities is irreplaceable in today’s world.
I recommend reading the news releases and shareholder reports of St. Joe4 and Enterprise Products Partners, L.P.5 to better understand their progress and prospects.
Respectfully submitted,
Bruce R. Berkowitz, Chief Investment Officer
1 How a Once Unpaved Stretch of Highway Became One of Florida’s Hottest Rental Markets, Wall Street Journal, July 19, 2023
3 How the World Really Works, Vaclav Smil, Viking, 2022
4 https://ir.joe.com/press-releases
5 https://ir.enterpriseproducts.com/press-releases
The Fairholme Fund (Trades, Portfolio) (the “Fund”) commenced operations on December 29, 1999. The chart above presents the performance of a hypothetical $10,000 investment for up to ten years to the latest semi-annual period ended May 31, 2023.
The following notes pertain to the chart above as well as to the performance table included in the Management Discussion & Analysis Report. Performance information in this report represents past performance and is not a guarantee of future results. The investment return and principal value of an investment in the Fund will fluctuate, so that an investor’s shares when redeemed may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted within. The performance information does not reflect the taxes an investor would pay on distributions from the Fund or upon redemption of shares of the Fund. Most recent month-end performance and answers to any questions you may have can be obtained by calling Shareholder Services at 1-866-202-2263.
Data for both the S&P 500 Index and the Fund are presented assuming all dividends and distributions have been reinvested and do not reflect any taxes that might have been incurred by a shareholder as a result of Fund distributions. The S&P 500 Index is a widely recognized, unmanaged index of 500 of the largest companies in the United States as measured by market capitalization and does not reflect any investment management fees or transaction expenses, nor the effects of taxes, fees or other charges. It is not possible to invest directly in an index.
The Fairholme Fund (Trades, Portfolio) (the “Fund”) shares outstanding and unaudited net asset value per share (“NAV”) at May 31, 2023, the end of the Fund’s semi-annual period, and NAVs at other pertinent dates, were as follows:
5/31/2023 | 05/31/2023 | 11/30/2022 | 05/31/2022 | |||
Shares | NAV | NAV | NAV | |||
Outstanding | (unaudited) | (audited) | (unaudited) | |||
| 40,726,726 | $ 28.83 | $ 24.75 | $ 30.82 | |||
At June 30, 2023, the unaudited NAV of the Fund was $29.94.
Performance figures below are shown for the Fund’s semi-annual period ended May 31, 2023, and do not match calendar year figures for the period ended June 30, 2023, cited in the Portfolio Manager’s report.
Since | ||||||||||||
Performance to | Six | One | Five | Ten | Fifteen | Inception | ||||||
5/31/2023 (Unaudited) | Months | Year | Years | Years | Years | 12/29/1999 | ||||||
Cumulative: | ||||||||||||
| Fund | 16.49% | -6.46% | 58.28% | 69.12% | 117.55% | 727.16% | ||||||
| S&P 500 Index | 3.33% | 2.92% | 68.62% | 210.34% | 304.20% | 345.38% | ||||||
Annualized: | ||||||||||||
| Fund | -6.46% | 9.62% | 5.39% | 5.32% | 9.44% | |||||||
| S&P 500 Index | 2.92% | 11.01% | 11.99% | 9.76% | 6.59% | |||||||
For the six months ended May 31, 2023, the Fund outperformed the S&P 500 Index (“S&P 500”) by 13.16 percentage points. Over the last fiscal year, the Fund was outperformed by the S&P 500 by 9.38 percentage points. From inception, the Fund outperformed the S&P 500 by 2.85 percentage points per annum, or on a cumulative basis, 381.78 percentage points.
Fairholme Capital Management, L.L.C. (the “Manager”) believes performance over shorter periods is likely to be less meaningful than performance over longer periods. Investors are cautioned not to rely on short-term results. The fact that securities increase or decline in value does not always indicate that the Manager believes these securities to be more or less attractive — in fact, the Manager believes that some price increases present selling opportunities and some price declines present buying opportunities.
Further, shareholders should note that the S&P 500 is unmanaged indices incurring no fees, expenses, or tax effects and are shown solely to compare the Fund’s performance to that of unmanaged and diversified indices of securities. As of the prospectus dated March 30, 2023, the gross expense ratio for the Fund is 1.00%. Shareholders are also cautioned that it is possible that some securities mentioned in this discussion may no longer be held by the Fund subsequent to the end of the fiscal period, and that the Fund may have made new investments that are not yet required to be disclosed. It is the Fund’s general policy not to disclose portfolio holdings other than when required by relevant law or regulation. Portfolio holdings are subject to change without notice and are not a recommendation to buy or sell any security.
Not all the Fund portfolio dispositions or additions are material, and, while the Fund and the Manager have long-term objectives, it is possible that a security sold or purchased in one period will be purchased or sold in a subsequent period. Generally, the Manager determines to buy and sell based on its estimates of the, respectively, relative intrinsic values and the Manager’s assessment of certain attractive characteristics of a company, general market conditions and expected future returns of an investment.
The Manager invests the Fund’s assets in securities to the extent the Manager finds reasonable investment opportunities in accordance with the Fund’s investment strategies, policies and restrictions, as stated in the Fund’s Prospectus and may invest a significant portion of the Fund’s assets in cash and cash equivalents. The Manager views liquidity as a strategic advantage. At May 31, 2023, cash and cash equivalents (consisting of cash, deposit accounts, U.S. Treasury Bills, and Treasury money-market funds) represented 9.5% of the Fund’s total assets. Since inception, the Fund has held varying levels of cash and cash equivalents for periods without, in the Manager’s view, negatively influencing performance.
The Fund is considered to be “non-diversified” under the Investment Company Act of 1940. Accordingly, the Fund can invest a greater percentage of its assets in fewer securities than a diversified fund, and can invest a significant portion of cash and liquid assets held by the Fund in one or more higher-risk securities at any time, including periods when a market is weak or a particular security declines sharply. The Fund may also have a greater percentage of assets invested in a particular sector than a diversified fund, exposing the Fund to the risk of an unanticipated event or condition and risks affecting a single company, sector or security.
The commentary below provides details of the Fund’s portfolio holdings by issuer and sector, as well as reporting the most significant positive and negative performance by investment for the six months ended May 31, 2023.
The most significant increases in the value of the Fund’s portfolio during the period were related to positive developments in the Real Estate Management & Development and Oil & Gas Storage & Transportation sectors. The Fund’s investments in the Mortgage Finance and Metals & Mining sectors saw some decreases in value during the period.
The Manager made no changes to the core investment strategies and techniques it employed during the six months ended May 31, 2023.
For the six months ended May 31, 2023, the Fund investments that contributed to performance were securities of The St. Joe Co. and Enterprise Products Partners, LP. The detractors to performance during the period were securities of Federal Home Loan Mortgage Corp. (FMCC, Financial), Imperial Metals Corp. (TSX:III, Financial), and Federal National Mortgage Association (FNMA, Financial). The following tables show the top holdings by issuer and sector in descending order of percentage of net assets as of May 31, 2023.
The Manager views the ability to focus on fewer investments than a diversified fund as a strategic advantage. However, such a strategy may negatively influence long-term performance.
A more complete discussion and description of the principal risks of investing in the Fund can be found in its Prospectus and Statement of Additional Information.
Large cash inflows or outflows may adversely affect the Fund’s performance. Such flows are monitored and actions deemed appropriate by the Manager are contemplated for when such flows could negatively impact performance.
Since inception, the Fund has been advised by the Manager. Bruce Berkowitz (Trades, Portfolio), is the Chief Investment Officer of the Manager and Chairman of the Fund’s Board of Directors (the “Board” or the “Directors”). As of May 31, 2023, Mr. Berkowitz and his affiliates owned an aggregate 13,309,401 shares of the Fund. While there is no requirement that Mr. Berkowitz own shares of the Fund, such holdings are believed to help align the interests of the Manager with the interests of the shareholders.
The Board, including the Independent Directors, continues to believe that it is in the best interests of the Fund to have Mr. Berkowitz serve as Chairman of the Board given: his long-term relative performance; his experience, commitment, and significant personal investments in series of the Company; the present composition of the Board; and current rules and regulations. A Director and Officers of the Fund are also Officers of the Manager. Nevertheless, at May 31, 2023, a majority of Directors were independent of the Manager, no stock option or restricted stock plans exist, Officers received no direct compensation from the Fund, and the Director affiliated with the Manager received no compensation for being a Director.
For more complete information about the Fund, or to obtain a current Prospectus, please visit www.fairholmefunds.com or call Shareholder Services at (866) 202-2263.
