Bruce Berkowitz is Sticking With Financials
One the most renowned and successful mutual fund managers of the past 10-15 years, Bruce Berkowitz, founder of the Fairholme Fund, was interviewed by Consuelo Mack recently. Berkowitz was named Morningstar’s Domestic Mutual Fund Manager of the Decade ending in 2010 for achieving annualized returns of 13.2%. Berkowitz’s fund fell on hard times after the financial crisis due to a misguided over-allocation to financial firms. Assets under management dropped from over $20 billion to around $7 billion currently.
Berkowitz continues to hold an extreme position in AIG which amounted to 36.2% of Fairholme’s portfolio as of September 30, 2012. A mind-boggling 56% of the fund is concentrated in three holdings (AIG, Sears Holding, and Bank of America).
Despite the difficulties experienced over the past several years, the Fairholme Fund has achieved a 10.7% annual return for the 10-year period ending October 5, 2012 and ranks in the top 1% of the large value mutual fund category.
When asked by Mack why the fund had such a heavy concentration in few names, Berkowitz replied that this strategy had a history of success. He questioned why an investor would buy more of their 10th best idea when they could concentrate on the best idea. If you’re ignorant about what you’re doing it is understandable why an investor would have a lot of positions, he added. Berkowitz said you only need a few good ideas to do unbelievably well and that’s what they are trying to achieve.
Mack asked Berkowitz about his big investment in financials to which he responded this was his area of competence. He said he invested heavily in financials in the 80’s and early 90’s and it was a rocky road followed by a decade of great performance in which they made seven times their money in Wells Fargo. He said to himself that if financials ever collapsed he hoped he would have enough money to take advantage of it. Berkowitz said they have done that in systemically important companies at less than half of their liquidation values.
The interview (below) continued with Berkowitz commenting on why investors are shunning financials, the performance of his fund versus the S&P 500, his rationale for investing in AIG and Bank of America, and why he’s the second largest holder of Sears.
A year ago, Berkowitz had a significant investment in AIG, although it was much smaller than now (link).