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Fairholme Fund Sees $3.5 Billion in Redemptions in the Last 4 Months

July 08, 2011 | About:
Bruce Berkowitz’s Fairholme Fund had redemptions of $3.5 billion from shareholders over the past four months. The trend is accelerating; $1 billion in redemptions took place June alone, according to a report by Morningstar.

The fund has net assets of $19.27 billion as of March 31. Fairholme lost 9% year to date, says Morningstar. The S&P500 is up more than 7.6% this year.

Fairholme Fund has been any mutual fund manager’s dream. It was started by Bruce Berkowitz in 1999. In May 2003, Fairholme Fund was only a tiny $65 million mutual fund. Total assets passed the $1 billion mark in 2005. By 2008, its assets surpassed $10 billion. As of May 31, 2010, the fund’s assets have grown to $14.7 billion. By Feb. 28, 2011, the fund’s assets reached $20 billion as investors poured a few more billions into the fund before they realized it started underperforming.

The investors that redeemed their shares from Fairholme Fund are probably the ones that put their money in the fund at the peak of Bruce Berkowitz’s recent fame. Both were at exactly wrong times. With stellar performance in the first 10 years of the 2000s, Bruce Berkowitz ranked at the very top of all actively managed mutual fund managers. He was named Fund Manager of the Decade by Morningstar, and also Investment Guru of 2009 by GuruFocus. He was featured by Fortune with a lengthy article which called him “The megamind of Miami.” As anyone can image, more money poured in.

This is actually exactly what happened to Ken Heebner about three years ago. After gaining 80% in 2007 by betting against mortgage bankers, Heebner was “the hottest mutual fund manager on earth,” and he was framed on the cover of Fortune magazine. Money poured in, exactly at the peak of Heebner’s fund. In 2008 he gave up all the gains of 2007, and then some. For the next three years he ranked at the bottom of mutual fund managers.

We questioned the style shift of Bruce Berkowitz (Has a Change of Course Hurt Bruce Berkowitz's Returns?) before. But he is certainly standing by his motto of “Ignore the crowd.” His over-weighted positions in distressed financials such as AIG (NYSE:AIG), Citi (NYSE:C), Bank of America (NYSE:BAC) hurt performance this year. But he is still convinced that these positions will be winners over long term. He is also in a controversial situation with St. Joe (NYSE:JOE).

Why can’t investors do it differently? Maybe now is a better time to invest in his funds, instead of taking money out.

Appearing on the cover of Fortune magazine seems to be a mutual fund manager’s worst nightmare. Fortunately, Bruce Berkowitz was not on the cover page.

About the author:

Charlie Tian, Ph.D., is the founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.9/5 (14 votes)


Greg Speicher
Greg Speicher - 9 years ago    Report SPAM
From the WSJ on December 31, 2009, "The decade's best-performing U.S. diversified stock mutual fund: Ken Heebner's $3.7 billion CGM Focus Fund, which rose more than 18% annually and outpaced its closest rival by more than three percentage points.

Too bad investors weren't around to enjoy much of those gains. The typical CGM Focus shareholder lost 11% annually in the 10 years ending Nov. 30, according to investment research firm Morningstar Inc."

Seems investors can't help shooting themselves in the foot by buying high and selling low. One problem is that "investors" focus on the outcome, not on the process. This is a mistake because in activities like investing, that are a mixture of luck and skill, luck often dominates short term, and even intermediate-term, performance. Focusing on the outcome, as I believe the Morningstar research shows, led to very poor outcomes for CGM shareholders in spite of the fund's stellar performance.

I think that investors should study cognitive biases (Munger's misjudgments) and, following Munger, make a checklist that can be run down when making an investment decision.


Rjstcr - 9 years ago    Report SPAM
Greg; From Morningstar. Not for queasy stomachs. CGM

The fund has delivered over time, but it hasn't been easy. Its 13% annualized return over the past decade through May 5, 2011, crushes the 2.8% and 2.1% gains of the S&P 500 Index and its typical peer, respectively, but its results over the trailing three- and five-year periods fall in the bottom quartile. It has been one of the most volatile funds around, regularly outperforming peers on the upside but losing a lot more in down markets. Investors don't tend to own volatile funds effectively. This fund requires a willingness to take some money off the table when it posts thrilling gains, and an ability to stay put (or double down) during its periodic, stomach-turning losses.

So do you think most of the FAIRX selling is from return chasers that bought late?

Greg Speicher
Greg Speicher - 9 years ago    Report SPAM
Rjstcr, although it is impossible to know for sure, this type of behavior is highly suggestive of investors leaving the fund because Berkowitz is going through a highly publicized rough patch. My main point is that what leads to this counter-productive behavior is selecting a manager based on a good track record alone without educating yourself. First, an investor must understand and expect both volatility and periods of under performance. This is a door through which all must pass if they want long term outperformance. No exceptions.

Berkowitz has a good process and is a proven value investor. I have some concerns about the fund's size although Berkowitz is on record as saying this is not a problem. Berkowitz has a lot of money invested in the fund and is holding a focused portfolio of undervalued stocks within his circle of competence. Chances are he will do well over the next five years.

If investors bought in for the right reasons, why are they leaving now? A conclusion that Berkowitz just got stupid is not rational. Time will tell if he has made some mistakes with his current holdings, but chances are good they were made using a good process and over the long pull that's the type of manager you want. _http://gregspeicher.com/
Rjstcr - 9 years ago    Report SPAM
Greg; Thanks for the reply. Also I read what you put out on your web site and really enjoy. Thanks for that too. Ron
Cowboy77 - 9 years ago    Report SPAM
My concern was that the fund was simply too big. Problem solved.
Superguru - 9 years ago    Report SPAM
I agree with Cowboy77. I am actually happy to see redemptions. I was also concerned that too much money in Fairx and Bruce managing 3 funds now can lead to sub par performance. (I have no data to actually support my statement. and Obviously Bruce disagrees.)
Fareastwarriors - 9 years ago    Report SPAM
I'm adding to my holding.
Fareastwarriors - 9 years ago    Report SPAM
I also adding to Ken Heebner's CGM Realty fund.
nick marchiando
Nick marchiando - 9 years ago    Report SPAM
Any info on Ken Fisher Purisma fund ie. additions or deletions?

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