Fairholme Funds (NASDAQ: FAAFX) is a valued oriented fund headed by Bruce R. Berkowitz that focuses primarily on equity and fixed income securities. Its manager, Bruce Berkowitz, earned his BA in Economics from the University of Massachusetts Amherst. His career can be characterized as nothing less than successful, named both the domestic stock fund manager of the year in 2009 and of the decade in 2010 by Morningstar. Inherently a follower of the Graham methodology of value investing, his success has entitled him into the annals of the timely classic, Security Analysis. As such, it should come as no surprise that he strives to follow a rule that fellow legendary value investor, Warren Buffet derived. That is, "The first rule is: Don't lose money. The second rule is: Follow the first rule."
Since its inception in 1999, Fairholme Funds utilizes in-depth fundamental analysis to identify key drivers in equities that historically, were elements of success for others. The cited reasons of its success lie in its strategy of a focused core of 20-30 equities (non-diversified classification) with a recent specialization in the financial sector. This method differentiates from most other managers, who prefer to diversify among more stocks in order to reduce overall risk. He recently shifted his portfolio from defensive stocks such as Pfizer to financials because, as stated in 2009, “Financials tend to lead markets into and out of recessions”. This belief remains undeterred as recently, when speaking upon key financial stocks found in Fairholme Funds, "We're going to make more on these names (C/GS/MS/BAC) than we have on anything”. As a whole, his belief is that financials are not only instrumental in the recovery, but they are insulated from complete melt-down with the explicit and implicit support of the government.
His management style and rebalancing throughout the years boasts of a 342.88% cumulative return since its inception vs. the S&P’s gain of 5%. More recently, Fairholme Funds yielded a return of 25.47% vs. the benchmark 15.1%. The overall composition of the portfolio is as followed:
Fairholme Funds manages a $22 billion fund with 37.8% of his holdings in the following 5 core stocks. A comparison of the top 5 holdings of 2010 and 2009 can be seen in the following tables. A key observation to be noted is the dramatic increase in Fairholme’s holding of financial stocks.
General Growth Properties (GGP, Financial)
GGP is a real estate investment trust (REIT) that has a market capitalization of $4.9 Billion. Their shares trade around $15.38, with a P/E ratio of 6.9, and a P/S ratio of 1.5. GGP has an annual revenue growth rate of 14.4% and free cash flow of 12.6% annually over the last 10 years. GPP reported revenues at $750.04 million for their most recent quarter and declared a dividend at 38 cents per share.
It is the largest holding of Fairholme Funds because “we do believe that the bonds and bank debt are money good, and we built a significant position, which I believe will eventually allow the shareholders of the fund to be at the negotiating table”. Fairholme Funds holds a mix of warrants, debt and equity in this REIT, which it hopes to be able to capitalize upon once the markets recover.
Gurufocus rated GGP with the business predictability rank of 1-star.
American International Group (AIG, Financial)/ AIA Group
AIG is an international insurance and financial services organization with a market capitalization of $28.75 Billion. Their shares trade around $41.68, with a P/S ratio of .1, and a P/B ratio of .2. AIA is the wealth management and life insurance spinoff of AIG operating in Asia. Fairholme Funds is the second largest stakeholder of AIG behind the United States government.
AIG is the second largest holding of Fairholme Funds, because as Bruce Berkowitz stated in an interview with CNN, "At Fairholme we are up to about $22 billion assets and we have to be long term investors now ... we need to find companies that we can have a very long time span with and let time be our friend. I think AIG is gonna be one of those companies given what we've just been through.”
In addition, he states that, “At its core, AIG’s intact franchises make money. The good thing about AIG is that it's just so complex. For 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.”
Gurufocus rated AIG with the business predictability rank of 1-star.
The Goldman Sachs Group (GS, Financial)
Goldman Sachs is full service global investment banking and securities firm with a market capitalization of $85.18 billion. Their shares trade around 167.06, with a P/E ratio of 10.8, P/S ratio of 2.1, and a P/B ratio of 1.2. It has an annual 10 yr revenue growth rate of 13% per share, and an earnings growth rate of 18.1% over the last 10 years. For the most recent quarter of 2010, Goldman Sachs reported earnings at $3.79 per share.
Berkowitz simply stated of Goldman Sachs, “Good firm, great people, that’s it”. Berkowitz mentioned that by law, he is forbidden to own more then his current holdings and as such, is limited in the fund’s holdings.
Gurufocus rated GS with the business predictability rank of 1-star.
Bank of America (BAC, Financial)
Bank of America is the largest bank holding company providing financial services in the United States with a market capitalization of $148.45B billion. Their shares trade around $14.72, with a P/B ratio of .7, and a P/S ratio of 1. BAC has an annual revenue growth rate of 4% over the last 10 years.
Berkowitz stated that “Bank of America also has been under intense scrutiny, but now, it is time to start to appreciate the asset side of the ledger a bit more. And I don't see how we get hurt from here, given that there is good potential for returns.”
Gurufocus rated BAC with the business predictability rank of 1-star.
For a more detailed look at the Fairholme Fund, including the fund’s current stock picks and overall portfolio, please go to: http://www.gurufocus.com/holdings.php?GuruName=Fairholme+Fund.
Also check out:
Since its inception in 1999, Fairholme Funds utilizes in-depth fundamental analysis to identify key drivers in equities that historically, were elements of success for others. The cited reasons of its success lie in its strategy of a focused core of 20-30 equities (non-diversified classification) with a recent specialization in the financial sector. This method differentiates from most other managers, who prefer to diversify among more stocks in order to reduce overall risk. He recently shifted his portfolio from defensive stocks such as Pfizer to financials because, as stated in 2009, “Financials tend to lead markets into and out of recessions”. This belief remains undeterred as recently, when speaking upon key financial stocks found in Fairholme Funds, "We're going to make more on these names (C/GS/MS/BAC) than we have on anything”. As a whole, his belief is that financials are not only instrumental in the recovery, but they are insulated from complete melt-down with the explicit and implicit support of the government.
His management style and rebalancing throughout the years boasts of a 342.88% cumulative return since its inception vs. the S&P’s gain of 5%. More recently, Fairholme Funds yielded a return of 25.47% vs. the benchmark 15.1%. The overall composition of the portfolio is as followed:
| Overall Portfolio Composition | Composition% |
| Cash and Equivalent | 22.40% |
| REITS | 13.40% |
| Multi-Line Insurance | 11.00% |
| Capital Markets | 10.10% |
| Diversified Banks | 10.00% |
| Diversified Holding Companies | 8.30% |
| Insurance | 5.20% |
| Retail Department Stores | 5.00% |
| Commercial Finance | 4.70% |
| Regional Banks | 3.30% |
Fairholme Funds manages a $22 billion fund with 37.8% of his holdings in the following 5 core stocks. A comparison of the top 5 holdings of 2010 and 2009 can be seen in the following tables. A key observation to be noted is the dramatic increase in Fairholme’s holding of financial stocks.
| Top Five Holdings in 2010 | Symbol | Composition% | Shares |
| General Growth Properties | GGP | 13.20% | 113,869,556 |
| American International Group | AIG | 9.20% | 37,542,817 |
| AIA Group LTD. | AAIGF.PK | 5.20% | 302,221,000 |
| The Goldman Sachs Group | GS | 5.20% | 5,578,900 |
| Bank of America | BAC | 5.00% | 77,317,115 |
| Top Five Holdings in 2009 | Symbol | Composition% | Shares |
| Sears Holding Corp | SHLD | 10.60% | 13,587,371 |
| Berkshire Hathaway (Class A/B) | Brk.A/Brk.B | 10.10% | 3,913/201,503 |
| AmeriCredit Corp | ACF | 7.00% | 31,814,670 |
| The St. Joe Company | JOE | 5.40% | 23,036,502 |
| Humana Inc. | HUM | 5.40% | 13,621,400 |
General Growth Properties (GGP, Financial)
GGP is a real estate investment trust (REIT) that has a market capitalization of $4.9 Billion. Their shares trade around $15.38, with a P/E ratio of 6.9, and a P/S ratio of 1.5. GGP has an annual revenue growth rate of 14.4% and free cash flow of 12.6% annually over the last 10 years. GPP reported revenues at $750.04 million for their most recent quarter and declared a dividend at 38 cents per share.
It is the largest holding of Fairholme Funds because “we do believe that the bonds and bank debt are money good, and we built a significant position, which I believe will eventually allow the shareholders of the fund to be at the negotiating table”. Fairholme Funds holds a mix of warrants, debt and equity in this REIT, which it hopes to be able to capitalize upon once the markets recover.
Gurufocus rated GGP with the business predictability rank of 1-star.
American International Group (AIG, Financial)/ AIA Group
AIG is an international insurance and financial services organization with a market capitalization of $28.75 Billion. Their shares trade around $41.68, with a P/S ratio of .1, and a P/B ratio of .2. AIA is the wealth management and life insurance spinoff of AIG operating in Asia. Fairholme Funds is the second largest stakeholder of AIG behind the United States government.
AIG is the second largest holding of Fairholme Funds, because as Bruce Berkowitz stated in an interview with CNN, "At Fairholme we are up to about $22 billion assets and we have to be long term investors now ... we need to find companies that we can have a very long time span with and let time be our friend. I think AIG is gonna be one of those companies given what we've just been through.”
In addition, he states that, “At its core, AIG’s intact franchises make money. The good thing about AIG is that it's just so complex. For 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.”
Gurufocus rated AIG with the business predictability rank of 1-star.
The Goldman Sachs Group (GS, Financial)
Goldman Sachs is full service global investment banking and securities firm with a market capitalization of $85.18 billion. Their shares trade around 167.06, with a P/E ratio of 10.8, P/S ratio of 2.1, and a P/B ratio of 1.2. It has an annual 10 yr revenue growth rate of 13% per share, and an earnings growth rate of 18.1% over the last 10 years. For the most recent quarter of 2010, Goldman Sachs reported earnings at $3.79 per share.
Berkowitz simply stated of Goldman Sachs, “Good firm, great people, that’s it”. Berkowitz mentioned that by law, he is forbidden to own more then his current holdings and as such, is limited in the fund’s holdings.
Gurufocus rated GS with the business predictability rank of 1-star.
Bank of America (BAC, Financial)
Bank of America is the largest bank holding company providing financial services in the United States with a market capitalization of $148.45B billion. Their shares trade around $14.72, with a P/B ratio of .7, and a P/S ratio of 1. BAC has an annual revenue growth rate of 4% over the last 10 years.
Berkowitz stated that “Bank of America also has been under intense scrutiny, but now, it is time to start to appreciate the asset side of the ledger a bit more. And I don't see how we get hurt from here, given that there is good potential for returns.”
Gurufocus rated BAC with the business predictability rank of 1-star.
For a more detailed look at the Fairholme Fund, including the fund’s current stock picks and overall portfolio, please go to: http://www.gurufocus.com/holdings.php?GuruName=Fairholme+Fund.
Also check out:
