Reading Bruce Berkowitz's 2010 Annual Report

Bruce Berkowitz and his team in Fairholme Funds have published their annual 2010 report. Most of the information covers through November 30, 2010 but some information such as performance data covers through December 31, 2010. Berkowitz penned a letter on January 6, 2010.


There is no reason investors in the stock fund, The Fairholme Fund, will not be happy with the performance. For the year, Fairholme Fund returned 25.5% and since inception of December 29, 1999, the fund returned an accumulative gain of 342.9% vs. a 5.0% gain for the S&P 500.


Even the income fund, The Fairholme Income Fund, had a strong first year: it returned 11.2% in 2010 vs. benchmark Barclays Capital U.S. Aggregate Bond Index’s 6.5% return for the year. The new income fund had about $365 million total asset.


Berkowitz ended his letter is a the following upbeat note:

Government is doing its job. We’ll continue to do ours, looking forward to further potential recovery at AIG, MBIA and others, while helping to remove the financial roadblocks to our country’s economic growth.

A couple of things caught my attention as I read the report and letter:


1. High Liquidity as usual


Liquidity in both funds are high. At November 30, 2010, the Funds’ cash and equivalent represented 22.4% and 24.9% of the Fairholme Fund and Income Fund total net assets, respectively. Berkowitz noted:

It should be noted that since inception, the Funds have held, on average, a significant percentage of assets in liquid low-risk securities or cash without, in the opinion of the Manager, negatively influencing performance, although there is no guarantee that future performance will not be negatively affected by the Funds’ liquidity.

As a matter of fact, in a number of occasions, Berkowitz stated that keeping a high liquidity position is the part of the reason he achieved outstanding returns. Cash is something good to have when you need it.


2. Top ten holdings in the Stock Fund

· General Growth Properties, Inc. 13.2%

· American International Group, Inc. 9.2%

· AIA Group Ltd. 5.2%

· The Goldman Sachs Group, Inc. 5.2%

· Bank of America Corp. 5.0%

· Citigroup, Inc. 5.0%

· Sears Holdings Corp. 5.0%

· Berkshire Hathaway, Inc. 5.0%

· Morgan Stanley 4.9%

· CIT Group, Inc. 4.7%

Together they take up 62.4% of the stock portfolio.


3. Top ten holdings in the Income Fund:

· MBIA, Inc. 17.0%

· American General Finance Corp. 15.5%

· CIT Group, Inc. 9.0%

· General Growth Properties, Inc. 6.6%

· Regions Financial Corp. 4.8%

· Verizon Communications, Inc. 4.8%

· AT&T, Inc. 4.7%

· BP Capital Markets plc 3.5%

· Banco Santander SA 3.0%

· Royal Dutch Shell plc 2.9%

The top ten take up 71.8% of the fund's asset excluding cash.


Mind you that the list in the Income Fund is by issuer and more often than not they are not common shares (so of them are!, see Point 4 below). You can refer to the report for details.


It appears that Berkowitz uses the same concentrated portfolio philosophy in managing the Income Fund. Not just that, he also bought into the debts issued by the same companies that he has common shares in. Why not? If one done so much research into the common shares and finds the debts issue by the same companies also attractive, one might as well buy some of those too.


4. Stocks in the Income Fund


Several common stocks such as Verizon Communications, AT&T, Royal Dutch Shell plc, General Growth Properties, Inc., and Banco Santander SA did find their ways into the Income Fund.


So have the preferred stocks from Wells Fargo and American International Group.


Read the complete annual 2010 report