Fortune has a big, long article about Bruce Berkowitz. Bruce Berkowitz runs the Fairholme Fund (FAIRX). Heās Morningstarās Fund Manager of the Decade. Mostly on account of his 11.6% annual returns versus 0.7% for the S&P 500.
Bruce Berkowitz is a value investor. And a contrarian investor. But heās more than that. Berkowitz has reinvented Fairholme. Heās turned into a distressed asset investor:
ā(Berkowitz) believes that dozens of overleveraged companies will need to fix their balance sheets in the next couple of years -- commercial real estate is one industry ripe for it, he says -- and he wants Fairholme to be ready to step in as a Warren Buffett-style lender of last resort, with highly favorable terms for his investors, of course. As Berkowitz puts it, āThere aren't many people in the world you can call who can write a check for $1 billion today.āā
A recent ā wildly successful ā example of one distressed investment is General Growth Properties (GGP, Financial). Bruce Berkowitz teamed up with activist investor slash hedge fund manager Bill Ackman to recapitalize the ruined shopping mall owner:
"āWe set it up so there was room for others, and Bruce was my first call,ā says Ackman, who made a huge return when the stock rose from 50Ā¢ to more than $15. āThe guy is the most stand-up investor I've ever worked with.ā"
The Fortune article includes a scene where Bruce Berkowitz gets a call from Bill Ackman about General Growth emerging from bankruptcy. They talk for a minute. Then Berkowitz asks his Charlie Munger of sorts ā Charlie Fernandez ā how much Fairholmeās making on the investment. Fernandez says $1.4 billion.
Fernandez is a big part of the article. Because heās a big part of Fairholmeās new chapter. The mutual fund started with Berkowitz and two guys he hired: Larry Pitkowsky and Keith Trauner. Trauner and Pitkowsky are both gone now. They left right after Fernandez came on. Right after Fairholme went in a new direction.
That new direction is distressed asset investing. Sometimes itās debt. Thatās how Fairholme got involved in General Growth. But sometimes itās stocks. Fairholme is now a huge investor in some of the worldās biggest bailed out financial companies.
Fairholmeās top stock is American International Group (AIG, Financial). Fairholme owns 30% of AIG. And Berkowitz loves the stock:
āāAll of my most intelligent friends in the insurance world think I'm an idiot,ā he says of his AIG stake. āThese are CEOs of insurance companies. But it's just right thereā¦.The good thing about AIG is that it's just so complex,ā he says. āFor a mere mortal with an average intelligence, it takes a long time to try to put all the pieces together. It's all there to be put together, it's just that you need to have no social life and not too many investments.āā
The article asks some interesting questions. Like why does Bruce Berkowitz run such a concentrated portfolio? Why is he investing in financial stocks? And what is Fairholmeās new direction?
Iām not sure it offers any good answers to these questions. Most of Berkowitz comments are things youāve read before. The most interesting new information is the background about how he got to Fairholme. A lot of folks who think they know Bruce Berkowitz donāt know the full story. Sure, they may have heard the cute anecdotes about his Dad running a bookmaking operation and Bruce having to take it over. But they may not know his whole history as a bond salesman or the clients he gained along the way. They almost certainly donāt know that Berkowitz once had his clients invested in just two stocks: Berkshire Hathaway (BRK.B, Financial) and Firemanās Fund.
Thereās also the neat bits about Bruce Berkowitzās work habits. We learn exactly what weāve always suspected: Berkowitz has no life. I mean none. No hobbies. Doesnāt seem to read much outside the world of stocks and bonds. In fact, he doesnāt seem to do much of anything other than investing. He even listens to a quarterly conference call 10 times. Thatāsā¦dedication?
The part that intrigued me the most was about Charlie Fernandez. Fernandez married Bruce Berkowitzās cousin. Before that, Fernandez was involved in corporate restructurings. Something that interested Berkowitz a great deal. Apparently, Berkowitz had been looking for a guy like Fernandez for a long time.
Itās interesting to see Fernandez come on and the other guys Berkowitiz worked with leave at about the same time. It certainly looks like Fairholme ā and Bruce Berkowitz ā have changed their investing stripes in a big way. Not that Berkowitz isnāt a value investor any longer. He clearly is. But heās also clearly interested in doing some big deals. Part of that may be the times. These are good times for making money in distressed assets. But some of it must also be the swelling of Fairholmeās assets. Itās now a $17 billion mutual fund. A fund that big has to find big companies to invest in. Especially if Berkowitz wants to keep his portfolio concentrated.
It looks like special situations like General Growth will become more common. It looks like Bruce Berkowitz is really intrigued by the possibilities he sees. And he seems fine with the fund getting bigger. He even mentions how heād like to see Fairholme reach $25 billion in assets.
The odd part of all this ā for most investors, not for Bruce Berkowitz ā is that Fairholme has 25% of its portfolio in cash. Thatās $4 billion just sitting there in short-term debt earning next to nothing.
So why let the fund get bigger?
I donāt think the cash is a size issue. Bruce Berkowitz has kept a lot of cash on hand before. The financial crisis probably only encouraged him. The cash seems to be a timing mechanism. He knows heās running a mutual fund. Heās not running Berkshire Hathaway. He has investors who can ā and will ā pull their capital at the first sign of trouble.
If Bruce Berkowitz was fully invested when Fairholmeās shareholder want out, heād have to sell stocks he loves. And heād probably have to do it at the wrong prices. At the wrong time.
The 25% cash cushion keep Bruce Berkowitz from panic selling. It sounds like Berkowitz would have 25% in cash whether he was managing a $5 billion fund or a $50 billion fund.
The problem isnāt size. Itās psychology.
Read the full Fortune article about Bruce Berkowitz
Bruce Berkowitz is a value investor. And a contrarian investor. But heās more than that. Berkowitz has reinvented Fairholme. Heās turned into a distressed asset investor:
ā(Berkowitz) believes that dozens of overleveraged companies will need to fix their balance sheets in the next couple of years -- commercial real estate is one industry ripe for it, he says -- and he wants Fairholme to be ready to step in as a Warren Buffett-style lender of last resort, with highly favorable terms for his investors, of course. As Berkowitz puts it, āThere aren't many people in the world you can call who can write a check for $1 billion today.āā
A recent ā wildly successful ā example of one distressed investment is General Growth Properties (GGP, Financial). Bruce Berkowitz teamed up with activist investor slash hedge fund manager Bill Ackman to recapitalize the ruined shopping mall owner:
"āWe set it up so there was room for others, and Bruce was my first call,ā says Ackman, who made a huge return when the stock rose from 50Ā¢ to more than $15. āThe guy is the most stand-up investor I've ever worked with.ā"
The Fortune article includes a scene where Bruce Berkowitz gets a call from Bill Ackman about General Growth emerging from bankruptcy. They talk for a minute. Then Berkowitz asks his Charlie Munger of sorts ā Charlie Fernandez ā how much Fairholmeās making on the investment. Fernandez says $1.4 billion.
Fernandez is a big part of the article. Because heās a big part of Fairholmeās new chapter. The mutual fund started with Berkowitz and two guys he hired: Larry Pitkowsky and Keith Trauner. Trauner and Pitkowsky are both gone now. They left right after Fernandez came on. Right after Fairholme went in a new direction.
That new direction is distressed asset investing. Sometimes itās debt. Thatās how Fairholme got involved in General Growth. But sometimes itās stocks. Fairholme is now a huge investor in some of the worldās biggest bailed out financial companies.
Fairholmeās top stock is American International Group (AIG, Financial). Fairholme owns 30% of AIG. And Berkowitz loves the stock:
āāAll of my most intelligent friends in the insurance world think I'm an idiot,ā he says of his AIG stake. āThese are CEOs of insurance companies. But it's just right thereā¦.The good thing about AIG is that it's just so complex,ā he says. āFor a mere mortal with an average intelligence, it takes a long time to try to put all the pieces together. It's all there to be put together, it's just that you need to have no social life and not too many investments.āā
The article asks some interesting questions. Like why does Bruce Berkowitz run such a concentrated portfolio? Why is he investing in financial stocks? And what is Fairholmeās new direction?
Iām not sure it offers any good answers to these questions. Most of Berkowitz comments are things youāve read before. The most interesting new information is the background about how he got to Fairholme. A lot of folks who think they know Bruce Berkowitz donāt know the full story. Sure, they may have heard the cute anecdotes about his Dad running a bookmaking operation and Bruce having to take it over. But they may not know his whole history as a bond salesman or the clients he gained along the way. They almost certainly donāt know that Berkowitz once had his clients invested in just two stocks: Berkshire Hathaway (BRK.B, Financial) and Firemanās Fund.
Thereās also the neat bits about Bruce Berkowitzās work habits. We learn exactly what weāve always suspected: Berkowitz has no life. I mean none. No hobbies. Doesnāt seem to read much outside the world of stocks and bonds. In fact, he doesnāt seem to do much of anything other than investing. He even listens to a quarterly conference call 10 times. Thatāsā¦dedication?
The part that intrigued me the most was about Charlie Fernandez. Fernandez married Bruce Berkowitzās cousin. Before that, Fernandez was involved in corporate restructurings. Something that interested Berkowitz a great deal. Apparently, Berkowitz had been looking for a guy like Fernandez for a long time.
Itās interesting to see Fernandez come on and the other guys Berkowitiz worked with leave at about the same time. It certainly looks like Fairholme ā and Bruce Berkowitz ā have changed their investing stripes in a big way. Not that Berkowitz isnāt a value investor any longer. He clearly is. But heās also clearly interested in doing some big deals. Part of that may be the times. These are good times for making money in distressed assets. But some of it must also be the swelling of Fairholmeās assets. Itās now a $17 billion mutual fund. A fund that big has to find big companies to invest in. Especially if Berkowitz wants to keep his portfolio concentrated.
It looks like special situations like General Growth will become more common. It looks like Bruce Berkowitz is really intrigued by the possibilities he sees. And he seems fine with the fund getting bigger. He even mentions how heād like to see Fairholme reach $25 billion in assets.
The odd part of all this ā for most investors, not for Bruce Berkowitz ā is that Fairholme has 25% of its portfolio in cash. Thatās $4 billion just sitting there in short-term debt earning next to nothing.
So why let the fund get bigger?
I donāt think the cash is a size issue. Bruce Berkowitz has kept a lot of cash on hand before. The financial crisis probably only encouraged him. The cash seems to be a timing mechanism. He knows heās running a mutual fund. Heās not running Berkshire Hathaway. He has investors who can ā and will ā pull their capital at the first sign of trouble.
If Bruce Berkowitz was fully invested when Fairholmeās shareholder want out, heād have to sell stocks he loves. And heād probably have to do it at the wrong prices. At the wrong time.
The 25% cash cushion keep Bruce Berkowitz from panic selling. It sounds like Berkowitz would have 25% in cash whether he was managing a $5 billion fund or a $50 billion fund.
The problem isnāt size. Itās psychology.
Read the full Fortune article about Bruce Berkowitz
