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Bruce Berkowitz Focused Income Fund Report First Half 2013
Posted by: Holly LaFon (IP Logged)
Date: August 2, 2013 10:04AM

Mutual fund investing involves risks, including loss of principal. The chart below covers the period from inception of The Fairholme Focused Income Fund (December 31, 2009) 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 Focused Income 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. Any questions you may have, including most recent month-end performance, can be answered by calling Shareholder Services at 1.866.202.2263. The Fairholme Focused Income 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 Focused Income Fund to the risk of unanticipated industry conditions and risks particular to a single company or the securities of a single company. The Fairholme Focused Income Fund's performance may differ markedly from the performance of the S&P 500 Index in either up or down market trends. 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 Focused Income Fund's expense ratio is 1.01%, which included acquired fund fees and expenses that are incurred indirectly by The Fairholme Focused Income 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 Focused Income Fund has been suspended to new investors, subject to certain exceptions. July 29, 2013

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 (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 (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.

Respectfully submitted,

Bruce R. Berkowitz
Managing Member
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.

Guru Discussed: Bruce Berkowitz: Current Portfolio, Stock Picks
Stocks Discussed: FNMA, SHLD, JCP, FOCIX,
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