Performance of Fairholme Fund
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Berkowitz practices focused investing. He put his eggs in few baskets – $10.5 billion in 21 stocks as of March 31, 2010, according to GuruFocus data. Top 5 positions take up 46.2% of the $10.5 billion and top 10 positions? 74%. Like Warren Buffett, he believes in over diversification is for people who do not know what they are doing.
Berkowitz’s focused portfolio does not necessarily make his portfolio more volatile. In 2008 when the stuff hit the fan, Berkowitz’s fund lost 29.7%, about 7.3% ahead of the general market. On the other hand, during the same year, among the Investment Gurus we track at GuruFocus, David Dreman’s fund lost 45% and he typically own over 300 stocks; Ken Heebner lost more than 48% of his money and he owned 70 some stocks. Both Dreman and Heebner were deeply involved in financials during the disastrous year.
But financials is exactly where Berkowitz is getting into now. At the end of 1Q10, Berkowitz reported over 57% of his holdings are in financials. We are going to review his financial stocks in a separate article. As a preview, here is his 1Q10 quarterly asset allocation
Berkowitz reports his entire domestic stock and option holdings 45 days after the end of each quarter. However, when he holds more than 5% of a company’s stock, by law he needs to disclose the transaction days after the transaction. This is the main source of “Real-Time Trade” data for GuruFocus. Premium member has full access to such data.
Because of the concentrated nature of Berkowitz’s portfolio, he invokes the 5% rule quite often. Since the end of 1Q10, these are the companies and transactions that he reported on:
A brief review of the companies together with Berkowitz’s holding history:
1. Sells TAL International Group Inc. (TAL)
TAL International Group, Inc. is a lessor of intermodal containers and chassis. TAL International Group Inc. has a market cap of $759.7 million; its shares were traded at around $24.74 with a P/E ratio of 20.6 and P/S ratio of 2.1. The dividend yield of Tal International Group Inc. stocks is 4.8%. Tal International Group Inc. had an annual average earning growth of 4.3% over the past 5 years.
Berkowitz owns 2,095,876 shares as of 03/31/2010, which accounts for 0.38% of the $10.5 billion portfolio of Fairholme Capital Management. He has since sold down to 1,868,653 shares in two transactions after the close of the quarter. Berkowitz still owns 6.1% of the company after the sale.
2. Sells Hertz Global Holdings Inc. (HTZ)
Hertz Global Holdings Inc. is the worlds largest general use car rental brand, operating from approximately 8,100 locations in 147 countries worldwide. Hertz Global Holdings Inc. has a market cap of $4.08 billion; its shares were traded at around $9.91 with a P/E ratio of 29.1 and P/S ratio of 0.6.
Berkowitz owns 56,179,189 shares as of 03/31/2010, which accounts for 5.35% of the $10.5 billion portfolio of Fairholme Capital Management. On May 31, he sold 37.82% of his holdings down to 34.9 million shares.
He still owns 8.5% of the company after sale.
3. Sells AmeriCredit Corp. (ACF)
AmeriCredit Corp. is a independent automobile finance company that provides financing solutions indirectly through auto dealers and directly to consumers in the United States and Canada. Americredit Corp. has a market cap of $2.66 billion; its shares were traded at around $19.79 with a P/E ratio of 16.4 and P/S ratio of 1.3.
Berkowitz owns 30,673,922 shares as of 03/31/2010, which accounts for 6.94% of the $10.5 billion portfolio of Fairholme Capital Management. On May 10, 2010, he sold 8.42% of his shares to 28.09 million shares.
He still owns 20.9% of this stock.
4. Buys American International Group Inc. (AIG)
American International Group, Inc., an insurance and financial services comapny, operates in more than one hundred thirty countries and jurisdictions. American International Group Inc. has a market cap of $5.17 billion; its shares were traded at around $38.27 with and P/S ratio of 0.1. The US government injected about $100 billion into the company.
Bruce Berkowitz bought 15,038,100 shares in the quarter that ended on 03/31/2010, which is 4.89% of the $10.5 billion portfolio of Fairholme Capital Management. Then around May 10, 2010, he reported he bought another more than 10 million shares.
Berkowitz now owns about 18.9% of AIG common shares.
Here are some notes taken by GuruFocus columnist Ben Claremon during the 2010 value investing congress. In the meeting, Berkowitz talked about his thoughts on AIG:
Question: Can you walk us through the AIG valuation?
The main analyst on this position is the Government Accountability Office (GAO). They have been studying AIG every 2 months and Fairholme is going by what the GAO reports. The GAO thinks AIG is going to make a profit on selling subsidiaries. The Chartis (P&C business) is intact. The Old Sun America is still in existence. Other assets are worth more than what is on the books. Financial products may be up as Maiden Lane 2 asset prices are up [with those assets being used as a barometer to value similar AIG assets]. Is there one insurance company that is doing in business in the US that is owned by a foreign government? This is a regulated business so he assumes that the government is the 80% owner but how are they going to perform? Can the company die? He doesn’t think so. At the price they bought it at, they are probably not going to get hurt. They are a major owner of the convertible preferred. They are up and down in the capital structure. AIG is a great insurance company. He likes being a partner with the government. In fact, he thinks the government has saved us. But the government doesn’t want to be in the insurance business. They want to make a few bucks and pay taxpayers back.
5. Buys The Goldman Sachs Group Inc. (GS)
Goldman Sachs is a global investment banking and securities firm. Goldman Sachs Group Inc. The has a market cap of $69.39 billion; its shares were traded at around $134.79 with a P/E ratio of 5.6 and P/S ratio of 1.4. The dividend yield of Goldman Sachs Group Inc. The stocks is 1%. Goldman Sachs Group Inc. The had an annual average earning growth of 12.7% over the past 10 years.
Berkowitz did not report to SEC how many shares he actually bought. He disclosed his holdings in the stock during the Value Investing Congress and here is Ben Claremon’s notes:
Question: Why did he buy Goldman Sachs (GS)?
He just doesn’t get the case-- the SEC’s case. Everybody knew everything and knew what was going to go where and when. It was a pretty common transaction. It will be a painful process. But they don’t seem to have done anything different than anyone else was doing. The main question is whether these synthetic CDOs have any merit to society. Thinks GS is a great firm with great people whose franchise is still intact. But this is a case of the few versus the many. Why should so many suffer because a mistake is made by a few? He thinks GS has a level of behavior and ethics that is quite good. He told us to go to the website and see what requirements and standards they have for interns. They tell people how to they should behave. You may think it is BS but he has never seen anything like it at another firm.
After the close of 1Q10, Berkowitz reported that he bought AIG and GS, and he sold TAL, HTZ, and ACF.
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