This write-up is ‘pre-Sears’, it is a clear reference to Bruce Berkowitz.

American International Group

Below we illustrate by example. This is a genuine portfolio from a big-name fund manager with a fantastic reputation whom politeness (and bad karma) prevents us from naming.
American International Group 23.20%
AIA Group Ltd 9.70%
Sears Holdings Corp. 7.90%
Berkshire Hathaway 7.90%
Brookfield Asset Management 6.80%
Bank of America 6.10%
Citigroup 5.90%
CIT Group 5.40%
China Pacific Insurance (Group) Co. 5.30%
The St Joe Co. 3.80%

Total* 82.00%
The manager – up until this year – had an enviable record – but that record has gone-to-pot. What went wrong? The bets are essentially all correlated.
1. AIG is a bet on American reflation and global insurance.
2. AIA is a bet on Chinese life insurance (which is correlated with global growth).
3. Sears Holdings, which is a failing retailer with some property assets, is a bet on American reflation.
4. Berkshire Hathaway is a minor bet on American reflation and a big bet on global insurance (as well as Warren Buffett’s mortality).
5. Brookfield is a manager of leveraged mostly North American investment funds – it is thus a bet on American reflation.
6. Bank of America is clearly a bet on American reflation.
7. CIT Group – a struggling post-bankruptcy finance company is a bet on American reflation.
8. China Pacific Insurance is a bet on American reflation.

9. St Joe is a property developer in a remote area of Florida and is hence a bet on American reflation.
Rhetorical question: do you sense a sameness – an internal correlation – to this portfolio?
If you get this bet right you are going to look like a massively successful fund manager. If you get it wrong then you are going to collapse in a screaming heap. The reason is that it is an undiversified bet. And you get no diversification benefit if the economic trends behind the positions are not diversified.
We were wrong too – we have consistently believed in American reflation and it has not happened.
We own and continue to own three stocks on this list (Bank of America, Citigroup and Berkshire Hathaway). But our positions are a little smaller and we have offsetting positions.
We hope readers see the point. We have not been right but we have not been crushed – and the reason we have not been crushed is that we have a fair degree of genuine diversification and we have some offsetting positions. We are a hedge fund – proudly stated as such – which means we like to have modestly hedged positions. It does not mean we won’t lose money (we did this month). But if we get this right – and so far we have – we will keep the losses manageable. (And in the past when we have got our positions right the results have been very good.)

Full document below in scribd:

Bronte Capital