Bruce Berkowitz and Larry Pitkowsky of the Fairholme Fund

The fund’s top two holdings are Berkshire Hathaway`A` (BRK.A) (it also owns the company’s B shares), and Leucadia National (LUK).

Berkshire, a holding company whose primary subsidiaries are insurers, is led by well-known investor Warren Buffett, whom Berkowitz admires because he “protects shareholders during difficult times, and does well in good times.”

Berkowitz maintains, too, that Berkshire recently posted comprehensive earnings of $8,700 per A share, and based on that, the stock’s valuation is “quite reasonable.” (Comprehensive earnings take into account realized and unrealized gains on investment portfolios.)

Like Berkshire, Leucadia is a holding company with operations in telecommunications, banking and real estate, among other things. Berkowitz, who likes Leucadia’s president, Joseph Steinberg, says the company also stands out because it performs “extremely well in difficult environments.” Leucadia moved up in rank in the portfolio after it acquired WilTel Communications, a telecommunications firm, in 2002.

Berkowitz cites Berkshire and Leucadia as two of his top performers in the quarter that ended last month. Fairholme also got a boost from White Mountains Insurance Grp (WTM), a property and casualty insurer that has been in the fund since its inception in 1999, the fund manager said.

The fund also got a strong contribution from HomeFed Corp., a home builder in southern California that Berkowitz says has benefitted from a shortage of housing in that part of the state, coupled with strong demand.

Over the last year or so, the managers’ willingness to buy troubled businesses that they expected to turnaround has led them to move into telecommunications companies, whose securities now account for about 15% of the fund’s assets, Berkowitz says.

That includes Leucadia’s telecom operations, as well as bonds of WorldCom Inc., which made up 4.2% of the portfolio as of Nov. 30, according to the fund’s annual report.

Although WorldCom is reorganizing in bankruptcy court, Berkowitz believes its basic businesses are sound. He points out that its MCI unit is one of the two leading providers of long-distance telephone service to large corporations and the federal government.

Outside the telecom sector, a recent addition the fund is Gladstone Capital (GLAD), a specialty finance company that the managers say they began buying about six months ago. Gladstone invests in debt securities backed by leveraged buyout, venture capital, or other funds. The company stands to prosper, Pitkowsky says, because it finances mid-sized companies that tend to be shunned by traditional commercial banks, which he says have been exiting that market.

When it comes to selling, the managers will trim a holding or sell it outright if the stock’s valuation becomes excessive, or a company’s financial fundamentals start to erode. But they don’t unload investments often. The fund sported a turnover rate of 12.7% last year, compared to 71.9% for its mid-cap value fund peers.

In holding investments for a long time, the managers, who also have stakes in the fund, aim to keep capital gains distributions to a minimum for shareholders, Berkowitz says. “We want the maximum possible after-tax total return,” he says.