To The Shareholders and Directors of The Fairholme Focused Income Fund:
The Fairholme Focused Income Fund (FOCIX)(the "Fund") increased 24.46% versus a decrease of 2.45% for the Barclays Capital U.S. Aggregate Bond Index (the "Barclays Bond Index"), for the six-month period ended June 30, 2013. Since inception, the Fund increased 44.47% versus 16.81% for the Barclays Bond Index. The following table compares the Fund's unaudited performance (after expenses) with that of the Barclays Bond Index, with dividends and distributions reinvested, for the period ended June 30, 2013.
Our focused income strategy is proving successful. Today, 62% of the Fund's net assets are in cash and cash equivalents. Sears (NASDAQ:SHLD) bonds maturing in 2018 are the Fund's largest non-cash holding, at 23% of net assets, followed by the preferred stock of Fannie Mae (FNMA) and Freddie Mac, at 6% of net assets, and J.C. Penney (NYSE:JCP) bonds maturing between 2015 and 2017, at 4% of net assets. MBIA bonds were sold in the period, resulting in an above average return.
The Fund was able to purchase the preferred stocks of Fannie and Freddie near one-fifth of liquidation values – a significant bargain thanks to market predictions of U.S. Government agencies expropriating their assets. We see them differently. Fannie and Freddie are successful, publicly traded, shareholder-owned companies. Shifting political winds can change their futures, but not alter their pasts.
In general, we fear that current yields will be more than offset by capital degradation due to rising rates. However, we continue to search for unique possibilities of yield and maturity that counter such risk and balance a portfolio mostly of liquid, safe T-Bills that earn almost nothing.
Bruce R. Berkowitz
Fairholme Capital Management
The Portfolio Manager's Report is not part of The Fairholme Focused Income Fund's Semi-Annual Report due to forward-looking statements that, by their nature, cannot be attested to, as required by regulation. The Portfolio Manager's Report is based on calendar year performance and precedes a more formal Management Discussion and Analysis. Opinions of the Portfolio Manager are intended as such, and not as statements of fact requiring attestation. All references to portfolio investments of The Fairholme Focused Income Fund are as of the latest public filing of The Fairholme Focused Income Fund with respect to such holdings at the time of publication, unless specified.