August 9, 2011

Berkowitz’s Big Bets on Banks Go Bad

Fairholme manager joins Bill Miller in racking some of the steepest losses on Wall Street

Two legendary fund managers who continue to bet on a U.S. recovery suffered some of the largest losses on Wall Street on Monday.

bruce berkowitzBruce Berkowitz (left) and Bill Miller saw returns evaporate for financial stocks at the greatest rate so far in 2011, according to Bloomberg, which added to steep losses both managers were already facing on the year.

“Berkowitz’s $14.7 billion Fairholme Fund and Miller’s $1.2 billion Legg Mason Capital Management Opportunity Trust fell 8.8% and 11%, respectively,” according to Bloomberg. “The funds lost 28% and 36% this year through yesterday, compared with a drop of 10% for the S&P 500, including reinvested dividends.”

At Morningstar’s Investment Conference in June, Berkowitz said he didn’t know if he was "sane or insane" for having such a large exposure to the financial sector.

Discussing Bank of America, one of his largest holdings, Berkowitz said the company is currently hated by the general public and thought to be solely responsible for the real estate decline. The reality, he said, is that everyone pushed universal home ownership as something good “until it was not.” He noted Bank of America was the first bank to lower its fees. Referring to the real estate crisis in particular, he said the bank has 30,000 extra people working on the issue.

Referred to as the “megamind of Miami” by Fortune, and an avid speed walker, Berkowitz founded the Fairholme Fund 11 years ago. Now with $17 billion in assets under management, its performance earned the fund five stars and Berkowitz the title not just of 2009 U.S. stock-fund manager of the year from Morningstar, but also domestic stock fund manager of the decade.

However, despite the accolades, Berkowitz’s has struggled recently.

“This year, his performance is actually at the bottom of his peer group,” Morningstar analyst Kevin McDevitt told AdvisorOne in May. “And actually his overall performance has significantly lagged over the past 12 months.”

But McDevitt was quick to note that Berkowitz’s contrarian view and unconventional approach means he will have periods of underperformance. Indeed, McDevitt is surprised it hasn’t happened sooner.

“When you look at his calendar returns, his underperformance has been so rare,” he said. “The last time it happened was in 2003.”

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