Several funds of prominent hedge and mutual fund managers declined in August as the S&P 500 Index fell 6.3%, its worst month in three years, but Bruce Berkowitz (Trades, Portfolio)’s Fairholme Fund (Trades, Portfolio) (FAIRX, Financial) slid only about 2.9% for the month.
Among those with a challenging month, Ray Dalio (Trades, Portfolio)’s Bridgewater All Weather Fund fell 4.2% in August, according to Reuters, while Leon Cooperman (Trades, Portfolio)’s Omega Advisors investment funds, excluding the Credit Opportunity Fund, declined between 9% and 11%, he said an investor letter. Daniel Loeb (Trades, Portfolio) also told investors his Third Point Offshore Fund fell 5.2%, and Reuters reported that that David Einhorn (Trades, Portfolio)’s flagship fund also lost 5% for the month.
“Prior to the August decline in U.S. share prices, we were of the view that our equity market was in a zone of fair to full value and had moderate upside potential to year end. The swift and severe correction in U.S. and global equity markets took us by surprise, as our analysis of the fundamentals did not signal noteworthy equity marks vulnerability,” Cooperman said in a September investor letter.
He attributed the market turmoil in August to an abundance of investors who pay no heed to company fundamentals. “While it is obviously difficult to estimate when these systematic/technical investors will stop roiling the markets, we do believe that the conditions for a further sustained decline in share prices are not in place and that shares should trend higher over the coming year,” he said.
Though none of Cooperman’s 103 long positions reflect more than 5% of his portfolio, his top three holdings – Alergan PLC (AGN, Financial), AerCap Holdings NV (AER, Financial) and SunEdison Inc. (SUNE, Financial) – were each down by double digit percentages over the past month, with Sunedison down almost 47%.
Most of Berkowitz’s holdings also declined during the past month, except for a few unlikely cases. While one month’s performance means little to a long-term investors who often hold companies for decades, it gives some indication of the durability of their investments to withstand market gyrations.
Berkowitz’s third-largest position, Sears Holdings Corp. (SHLD, Financial), rose 31% over the past month to trade around $27.28 Friday afternoon. The price previously dropped almost $17 in June, extending its five-year low of more than 60%, when the company transformed some of its stores into a separately traded REIT, Seritage Growth Properties (SRG, Financial), to generate cash.
Berkowitz held $26,629,173 shares of Sears at second quarter-end, a 14.5% space in his portfolio and almost 25% of shares outstanding. He paid on average $38.39 per share for the company.
On Aug. 20, the retailer announced $6.2 billion in second-quarter revenue, down from $8.01 billion in the same period last year. Net income totaled $208 million, from a net loss of $573 million the same quarter last year. Adjusting for special items, the company had a net loss of $256 million for second quarter 2015 and $293 for second quarter 2014.
Berkowitz’s portfolio also experienced a boost from The St. Joe Co. (JOE, Financial), his fifth largest position at 7.8% of the portfolio. Berkowitz holds 24,624,918 shares, or 26.8% of the company.
Shares of St. Joe, a Florida real estate developer, rose more than 7% in the last month, for a total decline of 33% in the past five years.
Second quarter results announced Aug. 7 precipitated the stock’s rally. St. Joe reported $37.8 million in revenue, up from $24.6 million in the second quarter of 2014. Its net loss for the quarter was $0.2 million, compared to $14.6 million.
“The St. Joe Company (JOE) (6.5%) continues to make steady progress,” Berkowitz said in his shareholder letter from February. “Since our involvement in late 2010, the company has: (i) streamlined real estate and forestry operations by 50%; (ii) reduced corporate expenses by 35%; (iii) increased liquidity by 260%; (iv) cut debt as a percentage of assets to 4.6%; and (v) focused on entitling core assets surrounding one of America’s newest airports and the Gulf of Mexico. St. Joe’s sale of 380,000 acres of non-strategic timberland and rural land for $562 million last year was an important milestone in positioning the company for long-term success.”
Overall, Berkowitz has a highly concentrated portfolio of 16 stocks, of which 72.7% of companies come from the Financial Services Sector. The S&P 50 Financials Index, which traces the financial companies of the S&P 500, declined roughly 10% in August.
Berkowitz has beat several more severe market selloffs in the past. In 2002, he lost 1.58% while the S&P 500 lost 22.1%, and in 2008 he declined 29.7% compared to 37% for the index. Focusing on underpriced and out-of-favor companies, he has underperformed the bull market of the past five years, returning a cumulative 51.8% next to the index’s 105.1%, but has vastly outperformed over the long term, beating the index 424.8% to 86.4%.
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