Bruce Berkowitz is the founder and managing member of the Fairholme Fund, which has $18.3 billion in assets. He was named Domestic-Stock Fund Manager of the Decade by Morningstar and Guru of the Year by GuruFocus in 2009. Though over the last 10 years Berkowitz’s mutual fund has beaten the S&P 500 by 8.3% on average per year, he has fallen short of it by 9.47% year to date. The performance of his top holdings may have negatively impacted the performance of his fund – nearly 80% lie in the financial sector, and large portions are tied to troubled companies. The majority of the worst performing stocks in the first quarter were from the financial sector.
Berkowitz focuses on distressed assets, which helped him in 2010, but may have hurt him in 2011. In the first quarter, he raised his stake in distressed insurance corporation American International Group Inc. (AIG, Financial) by 34.6% to 44,285,986 shares for $2.5 billion. AIG comprises 16.2% of Fairholme’s portfolio as of Dec. 31, 2010.
He acknowledged that many people questioned his AIG investment: “All of my most intelligent friends in the insurance world think I'm an idiot; these are CEOs of insurance companies. But it's just right there …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.”
In 2008, AIG was severely distressed, reporting a net loss of $99.3 billion in 2008 and $10.9 billion 2009. Berkowitz acquired securities in 2009 as earnings began to rise.
In 2009, AIG’s shares sunk to the single digits, but things with the company began to appear to be improving. In the fourth quarter of 2010, the stock increased 47%. However, the spike was short-lived, and the stock declined 45% from a high of $58 per share at the beginning of 2011, making it the second worst performing stock in the S&P 500. Experts attribute the decline to warrants the company issued early in 2011.
In March, Berkowitz defended his AIG position in Bloomberg, saying it was “still a good company with a global brand,” but that it would “take some time for AIG to fully recover.”
In January 2011, Berkowitz sold his huge stake in General Growth Properties (GGP), selling 113.3 million shares to Brookfield Asset Management in a $1.7 billion transaction that reduced his stake to 600,245 shares. GGP owns, develops and operates major shopping malls across the United States. Berkowitz bought shares and debt of General Growth Properties while it was involved in the largest real estate bankruptcy in history in April 2009, and made a fortune when the company rebounded from 50 cents to over $15. Since then, the stock has rarely improved and ended the quarter in approximately the same place that it began.
Bank of America (BAC, Financial), the third largest holding in the Fairholme portfolio as of Dec. 31, 2010, has not fared well either. Berkowitz increased his stake in the company over 30% in the fourth quarter. Year to date, it dropped 6%. Citigroup (C, Financial), a bank in which he decreased his stake 1.8% in the fourth quarter, earned $3.0 billion, or 10 cents per share, in the first quarter. It beat analysts’ forecast of 9 cents per share, according to Thomson Reuters. Year to date, its stock was also down 6%. CEO Vikram Pandit told investors on a conference call that the bank was focusing on building its investment banking franchise. The bank makes up 6.87% of Fairholme’s portfolio.
Another company that performed poorly was Goldman Sachs (GS, Financial), down from approximately $170 to open the quarter, to approximately $160 at the close. Berkowitz reduced his stake in Goldman Sachs by 2% in the fourth quarter, but still owned 5,578,900 shares comprising 7.07% of his portfolio as of Dec. 31, 2010. Year to date, it was down 8%. One of his worst bets, CIT Group (CIT, Financial), which he increased 29.5% to make it his eighth largest holding in the fourth quarter, dove over 15% year to date.
Berkowitz focuses on distressed assets, which helped him in 2010, but may have hurt him in 2011. In the first quarter, he raised his stake in distressed insurance corporation American International Group Inc. (AIG, Financial) by 34.6% to 44,285,986 shares for $2.5 billion. AIG comprises 16.2% of Fairholme’s portfolio as of Dec. 31, 2010.
He acknowledged that many people questioned his AIG investment: “All of my most intelligent friends in the insurance world think I'm an idiot; these are CEOs of insurance companies. But it's just right there …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.”
In 2008, AIG was severely distressed, reporting a net loss of $99.3 billion in 2008 and $10.9 billion 2009. Berkowitz acquired securities in 2009 as earnings began to rise.
In 2009, AIG’s shares sunk to the single digits, but things with the company began to appear to be improving. In the fourth quarter of 2010, the stock increased 47%. However, the spike was short-lived, and the stock declined 45% from a high of $58 per share at the beginning of 2011, making it the second worst performing stock in the S&P 500. Experts attribute the decline to warrants the company issued early in 2011.
In March, Berkowitz defended his AIG position in Bloomberg, saying it was “still a good company with a global brand,” but that it would “take some time for AIG to fully recover.”
In January 2011, Berkowitz sold his huge stake in General Growth Properties (GGP), selling 113.3 million shares to Brookfield Asset Management in a $1.7 billion transaction that reduced his stake to 600,245 shares. GGP owns, develops and operates major shopping malls across the United States. Berkowitz bought shares and debt of General Growth Properties while it was involved in the largest real estate bankruptcy in history in April 2009, and made a fortune when the company rebounded from 50 cents to over $15. Since then, the stock has rarely improved and ended the quarter in approximately the same place that it began.
Bank of America (BAC, Financial), the third largest holding in the Fairholme portfolio as of Dec. 31, 2010, has not fared well either. Berkowitz increased his stake in the company over 30% in the fourth quarter. Year to date, it dropped 6%. Citigroup (C, Financial), a bank in which he decreased his stake 1.8% in the fourth quarter, earned $3.0 billion, or 10 cents per share, in the first quarter. It beat analysts’ forecast of 9 cents per share, according to Thomson Reuters. Year to date, its stock was also down 6%. CEO Vikram Pandit told investors on a conference call that the bank was focusing on building its investment banking franchise. The bank makes up 6.87% of Fairholme’s portfolio.
Another company that performed poorly was Goldman Sachs (GS, Financial), down from approximately $170 to open the quarter, to approximately $160 at the close. Berkowitz reduced his stake in Goldman Sachs by 2% in the fourth quarter, but still owned 5,578,900 shares comprising 7.07% of his portfolio as of Dec. 31, 2010. Year to date, it was down 8%. One of his worst bets, CIT Group (CIT, Financial), which he increased 29.5% to make it his eighth largest holding in the fourth quarter, dove over 15% year to date.
