Every once in a while, there’s a saga on Wall Street that captures everyone’s attention. The fight over Florida real estate development company St. Joe (JOE, Financial) earlier this year was that kind of saga.
On one side was Bruce Berkowitz, founder of Miami-based mutual fund manager Fairholme Capital Management, St. Joe’s largest shareholder, with a nearly 30 percent stake, who believed that the company’s future would be bright once the real estate market recovered and poor management was out of the way. On the other was David Einhorn of Greenlight Capital, a New York–based hedge fund manager who had presciently shorted Lehman Brothers Holdings before it collapsed and was equally outspoken in betting against St. Joe.
In the fall and winter, the two publicly battled under the glare of the media spotlight. Fortune magazine dubbed Berkowitz “the megamind of Miami,” while the Atlantic, not known for its business coverage, sent a writer to the Florida Panhandle to track down a development at the heart of the Berkowitz-Einhorn showdown. In March, in a battle so short you might have missed it if you blinked, Berkowitz and Fairholme won control of St. Joe, gaining four seats on its board of directors and forcing the departure of its CEO. The mutual fund manager had beaten the hedge fund manager at the game.
St. Joe may not seem like a major prize in the big scheme of things, with a market value of just $2.4 billion, but Berkowitz and Charles Fernandez, his No. 2 at Fairholme for the past three and a half years, saw a huge opportunity. Not only did they think that the company’s real estate operations could be worth a lot more in the future, they saw St. Joe as a way to buy assets that a regulated mutual fund would be prohibited from owning directly. In essence, if successful, they could transform their flagship Fairholme Fund into something akin to a hedge fund or an investment vehicle like Warren Buffett’s Berkshire Hathaway.
“We’re trying to go in a direction we think most mutual funds will be going — where we have the flexibility to do private transactions and public transactions, and the ability to do what makes sense for our shareholders,” Berkowitz says.
Given the financial uncertainty of the postcrash world, where pockets of opportunity may be found in all kinds of places, flexibility is essential. Hedge fund managers like Einhorn have long known this. But Berkowitz has learned it too, growing Fairholme to more than $20 billion in assets since founding the firm nearly a dozen years ago.
In many ways, Berkowitz (who along with Fernandez and other insiders has some $300 million invested in Fairholme) is a traditional value investor who plows through piles of paperwork and reams of financial data to find unappreciated companies. Like Buffett, he follows the principles of Benjamin Graham, the legendary value investor who focused on a company’s assets and ability to generate cash. But his strategy stands apart, marked by extremely concentrated holdings and a willingness to go where others fear to tread, and then to wait, often doubling down as stocks fall in the short term.
Fairholme is the largest investor in American International Group (AIG), after the U.S. government. The reviled insurer represents 7.5 percent of ”ŠFairholme Fund’s portfolio, which is loaded up with financials and other loathed sectors. Additional big holdings include Bank of America Corp. (BAC, Financial), CIT Group (CITI, Financial), Citigroup (C, Financial), Goldman Sachs Group (GS, Financial), Morgan Stanley (MS, Financial) and Regions Financial Corp. (RF, Financial). Consumer names are sparse, and the one that is there is the retailer almost no one wants: Sears Holdings Corp. (SHLD, Financial). “I’m a premature accumulator,” Berkowitz says, laughing. To counter any risk that the portfolio might crater, and to take advantage of opportunities fast, Berkowitz keeps massive amounts of cash on hand — 23 percent of ”ŠFairholme’s assets as of March 31.
“Bruce is very bright, very hardworking, and he marches to his own drummer,” says hedge fund billionaire Leon Cooperman, who has known Berkowitz for more than a decade. “He’s a guy whose investing views I respect.”
“He comes from a very modest background, and he loves to invest,” adds Michael van Biema, a former Columbia Business School professor who now runs Van Biema Value Partners, a New York–based fund-of-hedge-funds firm that invests with small, deep-value-oriented managers. “To us, the single most important characteristic for a manager is this absolute passion for investing.”
The returns of Berkowitz’s strategy have been terrific. Since the Fairholme Fund launched in December 1999, it has beaten the market every year except one; from inception through the end of last year, the fund had an annualized return of 14.47 percent, versus just 0.45 percent for the Standard & Poor’s 500 index. By comparison, Hedge Fund Research’s HFRI fund-weighted composite index returned 6.75 percent annualized over that period. An investor who’d put $1 million in Fairholme at the start would have ended 2010 with $4.4 million. That success earned Berkowitz the title of “domestic stock fund manager of the decade” last year from fund tracker Morningstar.
For remainder of article:
http://www.institutionalinvestor.com/Article/2824162/Fairholmes-Bruce-Berkowitz-Is-Beating-Hedge-Fund-Managers-At-Their-Own-Game.html?ArticleId=2824162&p=1
On one side was Bruce Berkowitz, founder of Miami-based mutual fund manager Fairholme Capital Management, St. Joe’s largest shareholder, with a nearly 30 percent stake, who believed that the company’s future would be bright once the real estate market recovered and poor management was out of the way. On the other was David Einhorn of Greenlight Capital, a New York–based hedge fund manager who had presciently shorted Lehman Brothers Holdings before it collapsed and was equally outspoken in betting against St. Joe.
In the fall and winter, the two publicly battled under the glare of the media spotlight. Fortune magazine dubbed Berkowitz “the megamind of Miami,” while the Atlantic, not known for its business coverage, sent a writer to the Florida Panhandle to track down a development at the heart of the Berkowitz-Einhorn showdown. In March, in a battle so short you might have missed it if you blinked, Berkowitz and Fairholme won control of St. Joe, gaining four seats on its board of directors and forcing the departure of its CEO. The mutual fund manager had beaten the hedge fund manager at the game.
St. Joe may not seem like a major prize in the big scheme of things, with a market value of just $2.4 billion, but Berkowitz and Charles Fernandez, his No. 2 at Fairholme for the past three and a half years, saw a huge opportunity. Not only did they think that the company’s real estate operations could be worth a lot more in the future, they saw St. Joe as a way to buy assets that a regulated mutual fund would be prohibited from owning directly. In essence, if successful, they could transform their flagship Fairholme Fund into something akin to a hedge fund or an investment vehicle like Warren Buffett’s Berkshire Hathaway.
“We’re trying to go in a direction we think most mutual funds will be going — where we have the flexibility to do private transactions and public transactions, and the ability to do what makes sense for our shareholders,” Berkowitz says.
Given the financial uncertainty of the postcrash world, where pockets of opportunity may be found in all kinds of places, flexibility is essential. Hedge fund managers like Einhorn have long known this. But Berkowitz has learned it too, growing Fairholme to more than $20 billion in assets since founding the firm nearly a dozen years ago.
In many ways, Berkowitz (who along with Fernandez and other insiders has some $300 million invested in Fairholme) is a traditional value investor who plows through piles of paperwork and reams of financial data to find unappreciated companies. Like Buffett, he follows the principles of Benjamin Graham, the legendary value investor who focused on a company’s assets and ability to generate cash. But his strategy stands apart, marked by extremely concentrated holdings and a willingness to go where others fear to tread, and then to wait, often doubling down as stocks fall in the short term.
Fairholme is the largest investor in American International Group (AIG), after the U.S. government. The reviled insurer represents 7.5 percent of ”ŠFairholme Fund’s portfolio, which is loaded up with financials and other loathed sectors. Additional big holdings include Bank of America Corp. (BAC, Financial), CIT Group (CITI, Financial), Citigroup (C, Financial), Goldman Sachs Group (GS, Financial), Morgan Stanley (MS, Financial) and Regions Financial Corp. (RF, Financial). Consumer names are sparse, and the one that is there is the retailer almost no one wants: Sears Holdings Corp. (SHLD, Financial). “I’m a premature accumulator,” Berkowitz says, laughing. To counter any risk that the portfolio might crater, and to take advantage of opportunities fast, Berkowitz keeps massive amounts of cash on hand — 23 percent of ”ŠFairholme’s assets as of March 31.
“Bruce is very bright, very hardworking, and he marches to his own drummer,” says hedge fund billionaire Leon Cooperman, who has known Berkowitz for more than a decade. “He’s a guy whose investing views I respect.”
“He comes from a very modest background, and he loves to invest,” adds Michael van Biema, a former Columbia Business School professor who now runs Van Biema Value Partners, a New York–based fund-of-hedge-funds firm that invests with small, deep-value-oriented managers. “To us, the single most important characteristic for a manager is this absolute passion for investing.”
The returns of Berkowitz’s strategy have been terrific. Since the Fairholme Fund launched in December 1999, it has beaten the market every year except one; from inception through the end of last year, the fund had an annualized return of 14.47 percent, versus just 0.45 percent for the Standard & Poor’s 500 index. By comparison, Hedge Fund Research’s HFRI fund-weighted composite index returned 6.75 percent annualized over that period. An investor who’d put $1 million in Fairholme at the start would have ended 2010 with $4.4 million. That success earned Berkowitz the title of “domestic stock fund manager of the decade” last year from fund tracker Morningstar.
For remainder of article:
http://www.institutionalinvestor.com/Article/2824162/Fairholmes-Bruce-Berkowitz-Is-Beating-Hedge-Fund-Managers-At-Their-Own-Game.html?ArticleId=2824162&p=1
