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Sydnee Gatewood
Sydnee Gatewood
Articles (2467) 

Bruce Berkowitz's 2019 Annual Fairholme Fund Shareholder Letter

Discussion of markets and holdings

January 28, 2020

Dear Fellow Shareholders:

The Fairholme Fund (Trades, Portfolio) doubled the performance of the S&P 500 Index in its first twenty years.

The Fairholme Fund (Trades, Portfolio) increased 32.06% versus a 31.49% increase for the S&P 500 Index in 2019. Outstanding performance was achieved by focusing on a few long-term investments. The Fund held 38.5% of assets in cash and cash equivalents at year-end to hedge against market uncertainties. The preceding graph and performance table compare The Fairholme Fund (Trades, Portfolio)’s unaudited performance (after expenses) with that of the S&P 500 Index, with dividends and distributions reinvested, for various periods ending December 31, 2019. The value of a $10,000 investment in The Fairholme Fund (Trades, Portfolio) at its inception was worth $56,894 (assumes reinvestment of distributions into additional Fund shares) compared to $32,550 for the S&P 500 at December 31, 2019. Of the $56,894, the value of reinvested distributions was $37,064.

St. Joe (NYSE:JOE) common stock accounted for 1,390 basis points of 2019 performance. Record numbers of Americans are working and retiring in Florida, which now has more residents than New York. The company, with partners, has ignited residential and hospitality operations to meet accelerating demand. Over nine hundred homesites are under contract – four times more than two years ago. Nearly nine hundred apartments are under construction or leased. Latitude Margaritaville Watersound, a 55 & better community, is on the way with a first phase of three thousand five hundred homes. St. Joe clubs and resorts welcomed thirty thousand guests last year with less than one hundred and thirty rooms. Over five hundred new rooms are in construction under Marriott and Hilton flags. Clubs by Joe exceeded twelve hundred members in its first three years. Watersound Beach Club finished its first expansion. The Camp Creek Golf Club is expanding with a 75 room boutique inn and resort amenities. St. Joe has returned $581 million to shareholders by repurchasing over 35% of outstanding common stock. New projects should accelerate operating profits for years to come. Project videos are updated monthly at www.joe.com.

Fannie Mae (FNMA) and Freddie Mac (FMCC) (“Fannie & Freddie”) preferred stocks accounted for 830 basis points of 2019 performance. Fannie earned $3.9 billion insuring $3.0 trillion of mortgages in the latest three months. Freddie earned $1.8 billion insuring $2.1 trillion of mortgages. Fannie and Freddie are expected to earn and retain billions of dollars each year – charging less than one-half of one percent to guarantee affordable, long-term mortgages. No other institution does it for less or better serves families who want the American dream of home ownership and financial independence. The White House and Treasury Department want Fannie and Freddie released from a perpetual conservatorship. The housing market is a major segment of the U.S. economy. Freeing Fannie and Freddie will accelerate America’s growth and prosperity. In fact, the law mandates their eventual release and recent court decisions (after review of discovery documents) are starting to confirm.

Imperial Metals Corporation (TSX:III) (“Imperial”) debt and common stock accounted for 550 basis points of 2019 performance. Imperial sold seventy percent of Red Chris to Newcrest Mining, which should dramatically improve Red Chris’ potential, production, and profits. Imperial is now debt free and continues to own thirty percent of a world class copper and gold resource.

Fund equity investments have tremendous potential based on underlying assets. Fund liquidity is expected to buffer market volatility and provide the necessary cash for opportunities. I and affiliated entities own 19.8% of the Fund due to a desire to eat one’s own cooking and a belief that the best is yet to come for the Fund.

Respectfully submitted,

Bruce R. Berkowitz

Chief Investment Officer

The Fund’s investment objectives, risks, charges, and expenses should be considered carefully before investing. The prospectus contains this and other important information about the Fund, and it may be obtained by calling Shareholder Services at (866) 202-2263 or visiting our website www.fairholmefunds.com. Read it carefully before investing.

About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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