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The Return of a Star Fund Manager (Berkowitz/Fairholme)


  • edited November 2012
    Good to see. A saw also that MBIA was up another 8% this morning. Believe the 20% drop from a couple weeks ago now completely reversed, and then some.
  • edited November 2012
    I am one of those who have held this fund as it plunged down and clawed back up. When I bought into it, it was pretty concentrated, but at that time it was very concentrated in Berkshire Hathaway -- as if Berkowitz had judged "if I don't have a better idea, I hand your money to Warren to take care of when his company's shares are undervalued". That was a deal I could make sense of.

    Now, however, FAIRX is so concentrated (40% in Bank of America) that I do not quite understand how to frame my deal with Bruce. It's like I've hired him to invest a chunk of money for me in a tiny handful of individual stocks he claims to know more about than anyone else.

    So I have a question for anyone who is still holding FAIRX? How do you think of it in your portfolio? Is it an alternative to owning a few individual stocks you select? Is it Bruce Berkowitz' go anywhere sleeve? Or do you see it fitting a more traditional role in your portfolios?

  • edited November 2012
    Reply to @GregFromBoston: From the article: "Your portfolio is concentrated [see chart, above]. If you get new money to invest, will you buy different stocks?
    Are there other investments out there? Yes. Better than what's in the fund today? No."

    "Now, however, FAIRX is so concentrated (40% in Bank of America) that I do not quite understand how to frame my deal with Bruce. It's like I've hired him to invest a chunk of money for me in a tiny handful of individual stocks he claims to know more about than anyone else."

    That's pretty much it, it would seem.

    It's a Berkowitz world and you go along with it or you don't. I've offered my views (FAAFX is concentrated to a very concerning degree, praising Lampert for getting money out of Sears after what he did to it and how much he had to prop the thing up - it was taken out of the S & P 500 after not enough shares were public - is irritating as hell.)

    Lampert may be a tremendous hedge fund manager, but he has been a disaster as a retailer and to praise him for starting to dismantle a business that's been around since the 1800's - it may have been getting irrelevant by the time he got there, but he did it absolutely no favors - is ridiculous.

    To trust him to successfully - to the degree being discussed - dismantle the company after what he's done to it shouldn't be viewed as a "sure thing". On FA, I asked who would want to own SHLD when it was over $100. Will Lampert be able to unlock the much-discussed value? Maybe, but I would view the possibility with skepticism after what Lampert has done while at Sears (and really, he deserves no praise for his association with Sears.)

    Brands like Kenmore, real estate and other aspects of Sears have value, but as for the inventory, if it ain't selling at Sears, how desirable is it going to be if it were to be sold off?

    Also, while this isn't a great indicator, while Lampert has been buying (and I'd be very curious where those buys have been over the last few years), there has been a fair amount of insider selling, even at recent levels. Why does it seem like Lampert has been the primary executive at Sears doing the buying of shares in recent times?

    Finally, this article is a tremendous look at the rise and fall of Sears.

    I don't know if I view Fairholme as being "large blend" or any particular style. It's Berkowitz, and whatever his views are during the period. In 3-5 years, the fund may look completely different. I suppose in a way it's not entirely different from the hedge fund managers that were short subprime or anything in particular. Berkowitz is currently making a huge bet on financials, and it may pay off or it may not - and it may take a difficult while before it does.

    John Paulson made the biggest win ever betting on subprime - then proceeded to do largely terribly after. Heebner. There are plenty of others. In other words, Berkowitz is highly talented, but he is not without potential flaw and potentially, a drawn-out period of underperformance after a long period of outperformance.

    Combining the fact that Berkowitz is capable of underperforming and flaws, the concentrated nature can potentially make underperformance that much more severe - especially in the case of the uber-concentrated nature of the Allocation fund. That requires an unusual degree - I think, for a mutual fund - level of trust in the manager.

    I said that I don't think there's a manager on this planet that I would trust enough to have more than 50% of a portfolio in 3 names (as FAAFX is) - but that's just me.

    It's not a "go anywhere" fund as much as it's a "go anywhere Berkowitz pleases fund." I don't think anyone is necessarily wrong to sell and not agree with the direction of the fund (as the concentrated bets could stay around for years, and/or be difficult to unwind), but people have to know that they're making an investment in Berkowitz.

    I don't quite get the Allocation fund, personally, as it seems like a place to store more of many of the same bets.

    However, there are a lot of very nice people on this site that own the funds - I hope for them that the funds continue to rebound.

  • Another hot fund manager from the 90's was Oelschlager of White Oak WOGSX. The fund had several billion at one time. He never got back to having a respectable fund. Still concentrated in 24 stocks and down to a total couple hundred million. He certainly reminds me of Berkowitz.
  • I got caught up with Oak Associates at the time, with both White Oak and Pin was a good lesson, and one that has crossed my mind as I continue to hold a good amount of FAIRX.

    To gfb's question, the only reason I am holding is because I am betting on the manager.
    Berkowitz is not Oelschlager...or at least the track record would suggest that.

    Of course, I wonder what Bill Miller's up to?

  • Reply to @scott: Hear, hear!
  • Yes, it's a bet on the manager, the deep value philosophy he employs, his courage of conviction in execution, the integrity of his firm, its track record. Set your position aside and let's revisit in 3 years. Cyber Monday, 2015.
  • I think there is a significant difference between Berkowitz and the other previously-hot but ultimately-failed fund managers that come to mind and that others have noted, like Oelschlager, Heebner, Miller, etc.: Berkowitz is the only truly deep-value manager among them. (Miller does purportedly use value concepts, but "interprets" them in different ways, e.g. with Amazon, that to my mind, and history has shown, are far riskier.) [Yacktman is also a true deep-value manager, but he's certainly not failed - although like Berkowitz he has had periods of severe underperformance through which he completely stuck to his guns.]

    Berkowitz does run an extremely concentrated portfolio, but I admire him for that. He concentrates only on his very best ideas, of which he's made himself as sure as he can, and he ignores criticism of this, accepts even extreme shorter-term fluctuations (and ignores the intense and widespread press coverage/criticism in such periods), and accepts the huge money outflows from his fund that occur when it performs poorly short-term. His advice to potential investors is to commit to a minimum 5-year investment with him, and be prepared for big swings over shorter periods than that. I personally can stomach that to invest with someone I regard as one of the true (and very few) real talents in the mutual fund business who has utterly refused to sell out (by modifying in any way the investing approach he believes best, e.g. to garner more favorable press coverage or a larger asset base). He also has amassed by now quite a lengthy record of very impressive and consistent outperformance (for 13 years at Fairholme and also the period prior to the formation of Fairholme, as has been commented on e.g. by Morningstar and the No Load Fund Analyst); yes 2011 was a very bad year, but only in it and in 2003 did he underperform the S&P 500 for the calendar year since and including 2001 and 2012 YTD, and in every other year (except 2006, when it was "only" by 1%) FAIRX's outperformance vs. the S&P 500 has been very substantial (double-digits in 6 of those 12 years).

    Finally, he's one of the very few in the mutual fund business (I can't think of another in his class at the moment) who personifies the great Warren Buffett quote "Diversification is for those who don't know what they're doing."

    Of course all of this is just my humble opinion, and of course the future could prove me wrong; just wanted to say that IMHO there is a strong case to be made for Berkowitz - if one truly has the ability to invest for minimum 5-year periods regardless of what happens in the interim.
  • At this stage of my life, 79, I have no interest in managers like Berkowitz, Heebner, etc.
    He is more speculatuion than value, imho.
  • edited November 2012
    Reply to @ron: Ouch, on the speculation part, and a bit unfair I think, based on the case studies Berkowitz presents when taking his positions. Even the implied Heebner comparison is a stretch...who trades at frenetic speeds, if I remember correctly.

    WaltJ paints the right picture.

    But I certainly understand that selecting a more volatile fund, like FAIRX or FAAFX or even FOCIX, which has extraordinary yield, depends on desired investment horizon. About 6-7 years ago, I had more than 50% of my portfolio in FAIRX. Today, that honor is held by the much more steady-eddy (I trust) RNSIX, since retirement is imminent.

    But I still hold Fairholme.

    BTW, over the last 10 years, a solid, if not perfect, equity fund like DODGX managed to perform comparable to market. Both FAIRX and CGMFX beat, but the former did so with much less volatility and a tenth the turnover. The data:

    And, if we dare go back a little further, say to 1999 (just prior to tech bubble pop), Heebner beats Berkowitz who beats Gunn...but these three active traders beat the market, as shown below. If past trends at all predict the future, I pick the blue line.

  • Scott, Walt, Charles et al:

    Interesting comments that I find useful for my own thought process. Scott -- good linkage to, and on point comments, as always. Walt, thanks for a cogently formulated favorable case. Charles - nice graphical long-term view reinforcing Walt's case.

    FWIW, in case it helps anyone else's ruminations: FAIRX was a fund I decided to continue to hold several years back when I winnowed the managed funds in my portfolio down to a few high conviction funds. For a good long while I had an affinity to self-identified deep value managers because what the approach appealed to me, as it were, ideologically. It is the approach that I fantasized I would take if I had the time and skill to pick individual securities.

    It seems to me, though, that once these guys have huge assets at their disposal, they at least believe they are able to do much more than just analyze value and pick securities. They now look at ways to move prices with their actions. When Buffett does it, we tend to give him credit for doing what he claims to be doing in, essentially, getting discounts of various types in order to get profit from investing in good, well-run companies. But it does seem to be important that he is able to negotiate deals where Berkshire is either first-in-line if things go south, or simply gets whole ownership. And he has a fairly strong track record at doing this kind of thing in recent years, since Berkshire Hathaway has been a behemoth for a while.

    I don't recall that Berkowitz' attempted manipulations with St. Joe's worked so well. So I start to think that deep value guys who get huge assets and start trying to demonstrate skill at being active shareholders (a la David Winters at Wintergreen) need to be evaluated a bit differently. I also wonder how valid the deep value concept can be with large, opaque, deliberately obfuscatory, highly regulated companies like Bank of America.

    I find my taste in fund managers has evolved over the past 10 years. I am now much more aware of manager risk. It seems that no manager can have a long enough run for a quantitative evaluation to give a truly valid quantitative basis for selection (especially since there is a certain amount of luck and a certain amount of gaming in choosing the starting lines, which are not at all randomly chosen in comparisons of managers). So you have to supplement any backward look at past results with a qualitative evaluation, by reading fund reports, and looking at the history of the portfolio. Then you have to consider to how deep the bench is at the fund, and assess whether or not you are betting on one leader of an investment team, or on the team as a whole.

    Nowadays, I think I find more sense (and more humility) in Steve Romick's reports than I do in BB's. And team approaches, such as those used at Manning & Napier, Dodge & Cox and PIMCO, seem more robust.

    Perhaps this is just the conservatism that comes with aging. Though I like to think of it as learning from experience.

    Seeing Ted's recent link to an Investment News article about how many investors sold low on FAIRX (and how many are now likely to buy high), I find I am likely to invert the reasoning and conclude this is the time for me, with my change in taste/loss of faith to sell high and move on. In no way do I pretend that this is a refutation of anything Walt and Charles have said. It just indicates a change in my own stance, which others may or may not find illuminating to hear about.


  • edited November 2012
    A few points:

    I like the fact that the Fairholme website now has some case studies on a few of the larger positions. They don't really move my views (especially Sears, which I think is unfortunate, given the history of the company, but I detailed that above), but in a way I appreciate that Berkowitz is making some sort of effort to make his case for some of these things in a way that's more informative than a few CNBC soundbites.

    I definitely get the idea of a long-term time horizon. I have a particular stock that I think is a really exciting and relevant company that is a way to take part in a number of trends that I think have years to play out. I could be wrong, but really believe that this particular story hasn't really played out. It's a particular investment journey that I've evaluated and am choosing to go on.

    Berkowitz is in financials. Possibly for years, and the positions are such that they are not likely easily unwound. My view is this: I don't mind if a manager is venturing into something that I don't agree with for a part of the portfolio, but when it's the majority of the portfolio, I'm making the choice not to go on that investment journey and give it the time that the manager thinks it needs.

    Greg put it superbly (and thank you Greg, for your post): "I also wonder how valid the deep value concept can be with large, opaque, deliberately obfuscatory, highly regulated companies like Bank of America. " I still am negative on the financials for a number of reasons, but that's a pretty good summary.

    People talk about putting their trust in management and I think that's fine, but I think people can't just put their entire faith in management and need to bring their own views to the table to some degree, especially when a fund has half its holdings in three names, like FAAFX. When a fund is concentrated and more reliant upon the manager, it's really an evaluation of whether one wants to go on that journey.

    Nothing is a sure thing when it comes to investing, whether it comes to a manager comeback (see Heebner, see CGMFX holders still waiting) or a stock. I think it's fine to give a manager a reasonable amount of time if they want to join them on an all-in thesis, but people need to bring their opinion to some degree and evaluate progress (if any.) Additionally, given the nature of a fund like Fairholme, whether or not someone wants to have it as a core holding or supporting player comes into question, given the nature of the fund. I can see a case where Fairholme is a better supporting player than a core holding (especially to a huge degree) if someone is going to have a long-term view on it.

    St Joe has rebounded somewhat, but I think it's another instance where Berkowitz got into it too early. Additionally, I believe there was some discussion at some point of turning it into a holding company, a la Berkshire - I wouldn't get my hopes up. I've said before they should have gotten Asian company Genting to put one of what I call their "resort cities" on the land.

    Additionally, I think the $10K (FAIRX) or $25K (FAAFX) minimums are ridiculous. It's supposedly meant to attract more serious investors who will not flee quickly. It totally doesn't matter what the minimum is - investors are going to flee from a bad year if it's a $1,000 minimum or a $1M minimum hedge fund. It played out like that with Fairholme.

    If they didn't want money to flee from mutual funds, they should create "enhanced" mutual funds that have lock-ups, but are also less restricted than mutual funds. Maybe when you invest, you have to read and agree to a terms statement. Who knows what the details would be, but raising the minimum isn't going to result in getting people who won't flee when a fund performs like Fairholme did.

    Additionally, with all the discussion of FAAFX and FAIRX, I totally forgot about the existence of Fairholme Focused Income (FOICX.)

  • Reply to @WaltJ:
    Good points, Walt. The long-term record is telling.
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