Bruce berkowitzBruce Berkowtz’s Fairholme Capital had a great 2012 with the Fairholme fund up 36%. The value investor’s fund AUM is still only at approximately 7.5B. Cash now makes up 20% of the flagship fund. Below is an excerpt from Berkowitz about the strong 2012 following  tough 2011.

To recite an old Merrill Lynch advertisement, “We’re bullish on America.” Our companies are capable of generating reasonable returns on equity and the companies sell for significantly less than our estimate of current equity values. In each case, earnings potential continues to be obfuscated by costs to fix past problems. Company equity values within the Fund were up 32% last year, but related market prices remain far below.

We had a great 2012, after a horrible 2011, and expect the Fund to reach new highs in the not too distant future. The U.S. is in its fourth year of recovery, housing prices are increasing but have yet to reach replacement values, unemployment is starting to decline, and interest rates remain at record lows. Our holdings are cheap relative to underlying equity values – as cheap as in the beginning of 2012. The Fund is highly focused on 5 companies representing nearly 80% of its net assets, with the knowledge that it is better to own more of your best ideas than your 10th best. Today, cash and equivalents stand at $1.49 billion, about 19.7% of the Fund. Given current liquidity and the potential for performance dilution to shareholders, the Fund has determined to suspend the sale of shares to new investors after the last day of this February. The Fund will remain available for purchase to existing shareholders, may make exceptions to this suspension, and reserves the right to recommence sales to new investors in the future.

Fred Fraenkel and I now oversee risk analysis on a day-to-day basis utilizing a multi-path, independent process. For those who do not know Fred, we first worked together in 1990 at Lehman Brothers when he led 110 analysts around the globe to the #1 rank and where a younger portfolio manager used him to critique work on the resurgence of financials after the commercial real estate collapse of that time. Two decades later, it’s déjà vu all over again.

bruce berkowitz FAIRX January 2013 Letter by