Bruce Berkowitz Fairholme Allocation Fund Commentary First Half 2013
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.
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.
Bruce R. Berkowitz
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.