Bruce Berkowitz's fairholme fund has appreciated roughly 18.37% per annum compared to a loss of 1.07% per annum for the S&P 500 Index since inception in 1999. He has about 30% of fund assets in cash "due to defensiveness regarding high valuations in most asset classes and a conviction that having mountains of risk-free ammunition since inception has materially helped, not hurt, performance." "... At year-end, the Fund's top six holdings, including cash, comprised 80% of the Fund's assets. Having the ability to focus on our best ideas is a key reason for past success. Concentration, combined with the Fund's growing heft, has also allowed us an activist role to improve shareholder value."
He wrote:
Management is more likely to listen to large owners, as shown by our profitable efforts this year to gain a higher price for MCI in the takeover battle between Verizon and Qwest. Our study of telecommunications has now led to satellite television. Verizon is about to swallow MCI and SBC has acquired AT&T, with both pushing hard to offer voice, internet, and entertainment in one bundle. Planning to spend tens of billions with unproven economics, both are rushing to entertain via fiber to the home. In return, cable companies are grabbing phone customers. The stock market seems to believe that satellite broadcasters are holding the short straw. However, unlike most cable and telephone companies, EchoStar’s DISH Network continues to add profitable subscribers with a value proposition.
The Fund has also built sizeable investments in energy developers Canadian Natural and Penn West. Both companies have successfully navigated booms and busts resulting in large owned resources and retained earnings. Absent extreme price declines for oil and gas, they will continue to gush with cash in a world where energy demand seems to be clearly outstripping supply. Berkshire Hathaway remains the Fund’s largest equity investment. While the company has had an outstanding multi-decade record, its stock market value has not kept pace in recent years with our estimate of business value.
The past year’s higher short-term interest rates, this year’s increasing property and casualty insurance rates from record hurricane losses, and the prospect of another large acquisition will further this gap, which should narrow over time. The Fund has made a number of new investments that have the potential to become meaningful. Occasionally, we will err in our initial analysis, and upon discovery, eliminate a position. But we work hard to ensure that no holding becomes large without a conviction that the risk of permanent loss is small and the promise of gain substantial. Learning from mistakes, taking advantage of excessive share price volatility, and having the size to fully utilize today’s vast information resources helps us with this quest.
The true test of any investment adviser is consistently applying an investment strategy leading to superior longterm performance. Past letters and reports from Fairholme show that we have met this test to date despite inevitable periods when our approach seemed out of sync.
http://www.fairholmefunds.com/2005letter.pdf
He wrote:
Management is more likely to listen to large owners, as shown by our profitable efforts this year to gain a higher price for MCI in the takeover battle between Verizon and Qwest. Our study of telecommunications has now led to satellite television. Verizon is about to swallow MCI and SBC has acquired AT&T, with both pushing hard to offer voice, internet, and entertainment in one bundle. Planning to spend tens of billions with unproven economics, both are rushing to entertain via fiber to the home. In return, cable companies are grabbing phone customers. The stock market seems to believe that satellite broadcasters are holding the short straw. However, unlike most cable and telephone companies, EchoStar’s DISH Network continues to add profitable subscribers with a value proposition.
The Fund has also built sizeable investments in energy developers Canadian Natural and Penn West. Both companies have successfully navigated booms and busts resulting in large owned resources and retained earnings. Absent extreme price declines for oil and gas, they will continue to gush with cash in a world where energy demand seems to be clearly outstripping supply. Berkshire Hathaway remains the Fund’s largest equity investment. While the company has had an outstanding multi-decade record, its stock market value has not kept pace in recent years with our estimate of business value.
The past year’s higher short-term interest rates, this year’s increasing property and casualty insurance rates from record hurricane losses, and the prospect of another large acquisition will further this gap, which should narrow over time. The Fund has made a number of new investments that have the potential to become meaningful. Occasionally, we will err in our initial analysis, and upon discovery, eliminate a position. But we work hard to ensure that no holding becomes large without a conviction that the risk of permanent loss is small and the promise of gain substantial. Learning from mistakes, taking advantage of excessive share price volatility, and having the size to fully utilize today’s vast information resources helps us with this quest.
The true test of any investment adviser is consistently applying an investment strategy leading to superior longterm performance. Past letters and reports from Fairholme show that we have met this test to date despite inevitable periods when our approach seemed out of sync.
http://www.fairholmefunds.com/2005letter.pdf
