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Sydnee Gatewood
Sydnee Gatewood
Articles (2608) 

Bruce Berkowitz's 2020 Semiannual Fairholme Fund Shareholder Letter

Discussion of markets and holdings

July 27, 2020

Dear Fellow Shareholders:

The Fairholme Fund (Trades, Portfolio) decreased 8.42% versus a 3.08% decrease for the S&P 500 for the six-month period that ended June 30, 2020. The preceding graph and performance table compare The Fairholme Fund (Trades, Portfolio)’s unaudited performance (after expenses) with that of the S&P 500, with dividends and distributions reinvested, for various periods ending June 30, 2020. The value of a $10,000 investment in The Fairholme Fund (Trades, Portfolio) at its inception was worth $52,103 (assumes reinvestment of distributions into additional Fund shares) compared to $31,547 for the S&P 500 at June 30, 2020. Of the $52,103, the value of reinvested distributions was $33,943.

Of the 8.42% performance loss, St. Joe (NYSE:JOE) common stock accounted for 90 basis, Fannie Mae (FNMA) and Freddie Mac (FMCC) preferred stock accounted for 760 basis points, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) common accounted for 90 basis points, and Imperial Metals (TSX:III) common accounted for 10 basis points.

There are significant uncertainties surrounding the global outbreak of the respiratory disease caused by a novel coronavirus known as Covid-19. This pandemic is changing the demand and supply for goods and services, and forcing families and businesses to adapt to what I believe will be a new normal.

Covid-19 is accelerating work, education, and entertainment at home. There is a growing desire for single family homes and for less-dense, urban life. Flight from cities and early retirement are boosting home sales in St. Joe communities. Homes are selling before they are finished. Builder demand is at a record high. Latitude Margaritaville WaterSound is scheduled to open in April. A first phase of 3,500 homes has golf cart access to a marina, commercial village, and, eventually, to beaches, resorts, and airport. Apartments are leasing upon completion. Joe’s top-rated beach resorts are near full. The Camp Creek Golf Club is transforming into a private resort and residential community. Boutique inns, hotels, and marinas are rising. You can view Joe’s latest progress at https://www.youtube.com/watch?v=Od6FMshu3wk.

Interest rates at 50-year lows are creating record demand for conventional mortgages insured by Fannie Mae and Freddie Mac. Delinquencies are also rising with Covid-19, but remain manageable given conservative underwriting; pre-tax, pre-reserve earnings; and reinsurance. To assure safety and soundness, The Federal Housing Finance Agency (FHFA) is following Congress’ direction in the Housing and Economic Recovery Act to recapitalize and release Fannie and Freddie from conservatorships. Legal advisers and investment bankers are working toward their reprivatizations. Taxpayers have been paid in full and received 80% ownership in each company for Government loans. The “Net Worth Sweep” third amendment to the U.S. Treasury’s Preferred Stock Purchase Agreement should be terminated as quickly as it was executed with FHFA. If not, the U.S. Supreme Court will hear the matter in December or January.

Berkshire Hathaway is trading near book value, which Warren Buffett (Trades, Portfolio) believes greatly underestimates fair market values. Berkshire is the 800-pound gorilla in insurance. Market participants perceive Covid-19 claims may bankrupt insurers. There will be significant costs and hits to portfolio companies. But, most insurance policies exclude pandemics and premiums are rising faster than risks. Meanwhile, Berkshire continues to invest no-cost insurance “float” in guaranteed cost-plus utilities and other critical enterprises. This makes sense when the Federal Reserve pays 0.25% and European Central Bank charges 0.50% to hold bank cash.

Imperial Metals owns 30% of Red Chris, all of Mt. Polley and Huckleberry, and more. Copper may be entering a new bull market with economies rebooting and green energy initiatives. Gold prices are up 50% from lows with increases in deficit spending by governments fighting Covid-19. Gold, like many tangible assets with limited supply, is a hedge against cheapening currencies. Majority owner and operator, Newcrest Mining, believes Red Chris is a world-class gold and copper resource and similar in composition to 100%-owned Cadia in Australia. The latest exploration results confirm one gold pod at Red Chris may be worth $2 billion at today’s prices.

Cash and cash equivalents compose 33.9% of assets at June 30, 2020 and are invested in U.S. Treasury Bills and Treasury money markets yielding de minimis income to assure instant liquidity and maximum safety. Great opportunities present themselves in tough times when few have ready cash. I and affiliates own 23.8% of The Fairholme Fund (Trades, Portfolio) and remain optimistic about the future.

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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