July 10, 2012

Berkowitz’s Fairholme Fund Bounces Back

After a dismal 2011, Fairholme Fund was among the top-performing stock funds in the first half of this year

Good performance, bad performance—it’s all a day (year) in the life of a star money manager, something Bruce Berkowitz knows firsthand.

Bruce BerkowitzBy now you’ve heard the story; referred to as the “megamind of Miami” by Fortune, Berkowitz (left) founded the Fairholme Fund 13 years ago and experienced stratospheric returns for most of the time since. The fund’s performance earned 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 (along with such unknowns as Bill Gross and David Herro).

But the beginning of this decade wasn’t nearly as kind to Berkowitz, who saw returns evaporate in 2011 due mainly to bad real estate investments and a big bet on banks.

“The fund lost 28% this year through yesterday, compared with a drop of 10% for the S&P 500, including reinvested dividends,” Bloomberg reported on August 9 of last year.

That was then, this is now, and Berkowitz and Fairholme appear on the mend. Although it has yet to fully recover from 2011 losses, it was among the top-performing U.S.-stock mutual funds in the first half of this year, with a 24.7% gain, according to The Wall Street Journal.

“This year, some of the fund's biggest losers, including AIG and Bank of America, have rebounded. The fund is 15 percentage points ahead of the S&P 500's return through June,” The Journal reports. “Financial advisors say Fairholme's swings underscore the risks of investing in a concentrated fund (AIG represented 32% of fund assets as of February) and the importance of understanding a fund manager's investment philosophy.”

Berkowitz "tends to own things that have a lot of negativity associated with them," the paper quotes Nick Smith, portfolio manager at Steele Capital Management, as saying. As a result, Fairholme "can be more volatile in the short term."  

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