One thing is certain: Bruce Berkowitz is never going to be accused of being a “closet index” investor.
In fact, Berkowitz has taken on a great deal of career risk because of his willingness to run a concentrated portfolio.
And when I say concentrated, I’m not joking.
Have a look at the concentrated nature of the Fairholme Fund as detailed in its Nov. 30 annual report:
|Company||Ticker||% of Fund|
|American International Group||(NYSE:AIG)||42.30%|
|Bank of America||(NYSE:BAC)||11.50%|
|General Growth Properties||(GGP)||7.20%|
I bet you haven't ever come across a mutual fund with 42% of its assets in one position. I know I haven't.
Berkowitz and his Fairholme fund on are now on the rebound, but in 2011 when virtually every position in his fund was underperforming his investors fled the fund in the billions of dollars.
Bruce’s top holdings AIG and Bank of America have led his return to glory.
AIG has bounced from a low of $20 to almost $40 today.
Bank of America has bounced from $5 to over $12 per share.
Can We Still Jump on Board the Berkowitz Express?
The question that bears are asking now is whether there is much upside left in Berkowitz's top holdings given the solid run they have had over that past 18 months. For an answer to that I looked to Berkowitz himself.
During this recent interview with Bloomberg, Berkowitz indicated that he expects his top holdings to increase fourfold over the next five to seven years. The increase will be driven by two things:
- The core Fairholme holdings are very cheap today, so Berkowitz expects that the multiple attached to the companies will increase.
- While the valuation multiples assigned by Mr. Market increase the earnings and book value of this, companies will also be growing.
If I had to pick one Berkowitz holding to own I'd still go with AIG. Berkowitz has a staggering 42% of his fund in AIG, and the company performance seems to support his conviction.
The Berkowitz recipe for success on AIG is simple. If you buy a world class company at half of book value and that book value grows at 10% per year ,an investor can expect a 20% annualized rate of return as that discount to book value is eliminated.
I'd nominate Bank of America as a close second for my investment dollars though, as that same recipe for success (buying at a discount to book value and growing earnings) seems just as applicable.
I think Bank of America and AIG are no-brainers as long-term investment opportunities. If Berkowitz is right, an investor buying these companies today will make four times his money over five to seven years. All that is required is some patience and discipline — the patience and discipline to buy today and leave your investment alone long enough to let time be your friend.
Berkowitz again gives us the lead; all we have to do is follow. We should have been doing that 18 months ago, but over the long term following him now is still a good idea.