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Bruce Berkowitz Fairholme Allocation Fund Commentary First Half 2013

August 02, 2013 | About:

Holly LaFon

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Mutual fund investing involves risks including loss of principal. The chart below covers the period from inception of The Fairholme Allocation Fund (December 31, 2010) to June 30, 2013. The past performance information quoted below is unaudited and does not guarantee future results. The investment return and principal value of an investment in The Fairholme Allocation 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 information quoted below. Performance figures assume reinvestment of dividends and capital gains, but do not reflect a 2.00% redemption fee on shares redeemed within 60 days of purchase. Any questions you may have, including most recent month-end performance, can be answered by calling Shareholder Services at 1.866.202.2263. The S&P 500 Index is a broad-based measurement of changes in the stock market, is used for comparative purposes only, and is not meant to be indicative of The Fairholme Allocation Fund's performance, asset composition, or volatility. The Fairholme Allocation Fund maintains a focused portfolio of investments in a limited number of issuers and does not seek to diversify its investments. This exposes The Fairholme Allocation Fund to the risk of unanticipated industry conditions and risks particular to a single company or the securities of a single company. The Fairholme Allocation Fund's performance may differ markedly from the performance of the S&P 500 Index in either up or down market trends. The performance of the S&P 500 Index is shown with all dividends reinvested and does not reflect any reduction in performance for the effects of transaction costs or management fees. The Barclays Capital U.S. Aggregate Bond Index is an unmanaged market-weighted index comprised of investment grade corporate bonds (rated BBB or better), mortgages, and U.S. Treasury and government agency issues with at least one year to maturity. Investors cannot invest directly in an index. As reflected in its current prospectus dated April 1, 2013, The Fairholme Allocation Fund's expense ratio is 1.01%, which included acquired fund fees and expenses that are incurred indirectly by The Fairholme Allocation Fund as a result of investments in securities issued by one or more investment companies. Effective as of the close of business on February 28, 2013, the sale of shares of The Fairholme Allocation Fund has been suspended to new investors, subject to certain exceptions.

July 29, 2013

To The Shareholders and Directors of The Fairholme Allocation Fund:

The Fairholme Allocation Fund (FAAFX)(the "Fund") increased 18.48% versus a decrease of 2.45% for the Barclays Capital U.S. Aggregate Bond Index (the "Barclays Bond Index") and an increase of 13.82% for the S&P 500 Index (the "S&P 500"), respectively, in the six-month period ended June 30, 2013. The following table compares the Fund's unaudited performance (after expenses) with that of the Barclays Bond Index and S&P 500, with dividends and distributions reinvested, for the period ended June 30, 2013.

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The Fund's annualized and cumulative performance returns since inception remain below those of the S&P 500 Index for the same period. We believe that the Fund's portfolio is well-positioned in unique, small-quantity securities of recovering financial institutions to reverse that relative performance difference. Time will tell.

Preferred stocks of Fannie and Freddie (FNMA) are a growing opportunity in credit arbitrage. Millions of families depend on Fannie and Freddie to lower the costs and increase the availability of homeownership. In times of stress, Fannie and Freddie stand to ensure the continued functioning of our housing market. Their twelve thousand employees do yeoman's work helping to preserve a cornerstone of the American dream.

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.

Respectfully submitted,

Bruce R. Berkowitz

Managing Member

Fairholme Capital Management

The Portfolio Manager's Report is not part of The Fairholme Allocation 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 Allocation Fund are as of the latest public filing of The Fairholme Allocation Fund with respect to such holdings at the time of publication, unless specified.


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