We just posted commentary from Bruce Berkowitz on his equity holdings in the Fairholme Fund (MUTF:FAIRX); we just noticed some jaw dropping returns generated by the Fairholme Focused Income (MUTF:FOCIX). Here is some commentary and notes from Bruce Berkowitz’s investments in the bond market.

Fairholme Capital

Note its hard to believe, but this is return in fact no type. Also we included the pdf for all three reports below.

First chart and note from semi annual report

The following charts show the top holdings by issuer and sector in descending order of net assets as of May 31, 2013.

To The Shareholders and Directors of The Fairholme Focused Income Fund:
The Fairholme Focused Income Fund (the “Fund”) increased 24.46% versus a decrease of 2.45% for the Barclays Capital U.S. Aggregate Bond Index (the “Barclays Bond Index”), for the six-month period ended June 30, 2013. Since inception, the Fund increased 44.47% versus 16.81% for the Barclays Bond Index.

Our focused income strategy is proving successful.

Today, 62% of the Fund’s net assets are in cash and cash equivalents. Sears Holdings Corp (NASDAQ:SHLD) bonds maturing in 2018 are the Fund’s largest non-cash holding, at 23% of net assets, followed by the preferred stock of Federal National Mortgage Association (OTCBB:FNMA) / Fannie Mae and Federal Home Loan Mortgage Corp (OTCBB:FMCC) / Freddie Mac, at 6% of net assets, and J.C. Penney Company, Inc. (NYSE:JCP) bonds maturing between 2015 and 2017, at 4% of net assets. MBIA Inc. (NYSE:MBIA) bonds were sold in the period, resulting in an above average return.

The Fund was able to purchase the preferred stocks of Fannie and Freddie near one-fifth of liquidation values – a significant bargain thanks to market predictions of U.S. Government agencies expropriating their assets. We see them differently. Fannie and Freddie are successful, publicly traded, shareholder-owned companies. Shifting political winds can change their futures, but not alter their pasts.

Also see Fairholme Fund Sues For Fannie Mae, Freddie Mac Investor Rights

In general, we fear that current yields will be more than offset by capital degradation due to rising rates. However, we continue to search for unique possibilities of yield and maturity that counter such risk and balance a portfolio mostly of liquid, safe T-Bills that earn almost nothing.

Faafx July 2013

Fairholme Fixed income fund

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