July 26, 2019
To the Shareholders and Directors of The Fairholme Fund (Trades, Portfolio):
The Fairholme Fund (Trades, Portfolio) increased net asset values by 26.42% for the first six months of 2019. Strong absolute and relative returns were based on investments in Fannie Mae, Freddie Mac, St. Joe, and Imperial Metals.
Fannie Mae and Freddie Mac (“Fannie” and “Freddie”)
In 2008, Fannie (FNMA, Financial) and Freddie’s boards of directors agreed to federal conservatorship and U.S. Treasury investments earning 10% of principal, $2 billion in fees, and 80% ownership stakes. Since then, Fannie and Freddie have earned and paid $300 billion to our U.S. Treasury, which is $24 billion more than promised. It is now time for Fannie and Freddie, like all others forced to take U.S. Treasury money during the last financial crisis, to keep what is rightly earned, recapitalize, and exit conservatorship. Such a course would follow established laws, maximize taxpayer safety and returns, and allow a reasonable, risk-adjusted return on the Fund’s Fannie and Freddie junior preferred shares.
St. Joe Company (“JOE”)
By 2021, JOE (JOE, Financial), with project partners, hopes to reach a run rate of 1,000 home and home lot sales per year; rent over 1,300 apartments, 900 hotel rooms, and 1.5 million square feet of commercial space; and register more than 1,400 The Clubs by JOE full-time members. Thirty residential, commercial, and hospitality projects are expected to start this year. Each project is based on pent-up demand, stands on its own, and is expected to increase company operating earnings and asset values. I continue to chair JOE’s board of directors.
Imperial Metals Corporation (“Imperial”)
In March, Imperial (TSX:III, Financial) entered into an agreement to sell 70% of Red Chris, its flagship copper and gold mine, to Newcrest Mining for $807 million. Proceeds will be used to pay down maturing debt, including the senior debt owned by the Fund. The Fund will remain an owner of Imperial’s common stock, which offers further appreciation with such de-leveraging, Newcrest managing Red Chris, and rising copper and gold prices.
Outlook
There is room for further portfolio gains. Fannie and Freddie preferred stocks trade for less than half of stated liquidation prices. JOE is accelerating growth while diversifying risks. Imperial is about to complete the Red Chris transaction. Gold prices are up. The Fund holds cash and investment grade cash equivalents totaling more than 30% of net assets in preparation for expected opportunities.
Respectfully submitted,
Bruce R. Berkowitz
Chief Investment Officer
The Fund’s investment objectives, risks, charges, and expenses should be considered carefully before investing. The prospectus contains this and other important information about the Fund, and it may be obtained by calling Shareholder Services at (866) 202-2263 or visiting our website www.fairholmefunds.com. Read it carefully before investing.
