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Bruce Berkowitz’s Big Bet on AIG Starting to Pay Off

September 18, 2012 | About:

Manager Bruce Berkowitz has not made many changes to the Fairholme Fund in the last year. It continues to be heavily concentrated in several large positions, including American International Group (NYSE:AIG) and Sears Holdings, which account for 38% and 11% of the fund, respectively (as of June 30, 2012). Bank of America (NYSE:BAC) and General Growth Properties (GGP) account for another 9% and 7%, respectively. Most of these stocks suffered severe declines in 2011, causing the fund to significantly underperform the market and its peers. But those same companies have also caused the fund's significant outperformance so far in 2012. Fairholme has gained 30.1% versus 13.5% for the S&P 500 through August. We recently spoke with Berkowitz to get an update on the fund's large bets on certain financial companies and real estate. (The real estate bet covers multiple holdings, including General Growth Properties, Sears and The St. Joe Company.)

Referring generally to the broad portfolio, “We've had two years of improving businesses,” Berkowitz tells us, “with most companies improving book values.” Despite the fund's impressive performance this year, he believes the holdings are still selling at very attractive discounts to their respective liquidation values and so he is “waiting right now for others to agree.” While he says that his companies' share prices had a horrible year in 2011, “If you look at the fundamental business statistics of our companies, they improved dramatically,” he tells us.

AIG, the fund's largest holding, is a good example of this. In 2011, AIG was a major detractor from the fund's performance, as the stock declined nearly 60%. However, for this year through August, this stock has gained nearly 50%. Despite the massive stock price volatility, the company's tangible book value grew more than 30% year-over-year (as of 6/30/12) and Berkowitz notes that all of AIG's businesses are making money.

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