“At December 31, 2013, the value of a $10.00 investment in the Fund at its inception was worth $55.09 (calculated by assuming reinvestment of distributions into additional fund shares) compared to $16.47 for the S&P 500. FAIRX returned almost seven times more than the S&P 500 (INDEXSP:.INX) on a $10.00 investment over 14 years,” says Bruce Berkowitz in his annual report on the Fairholme Fund (MUTF:FAIRX) for the year ended December 31, 2013.
“Of the $55.09, the year-end share price (net asset value per share) was $39.20 and the value of distributions reinvested was $15.89. This difference, more than anything, demonstrates how the Fund has outperformed the market (as represented by the S&P 500) over the long run,” he adds.
The graph above says it all. How does Berkowitz do it?
The Fairholme Fund maintains a focused portfolio of investments in a limited number of issuers and does not seek to diversify its investments, says the annual report.
According to ValueWalk’s Resource Page on Berkowitz, he is inspired by Benjamin Graham’s seminal book The Intelligent Investor, and seeks to invest in companies that have good free cash flow, are available on the cheap and are run by good management.
Berkowitz Fairholme’s investments
The fund had nearly half of its assets in stock and warrants of American International Group Inc (NYSE:AIG), and about 15% in Bank of America Corp (NYSE:BAC). Berkowitz points out that the companies are available at a discount to book value, though they “have significant value beyond their fortress-like balance sheets.”
Fairholme Fund (MUTF:FAIRX) also had significant exposure in Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).
In November, Fairholme proposed to purchase the insurance businesses of the two GSEs, a proposal that was turned down by the White House. Banking analyst Dick Bove said last month that FNMA “is a high risk investment. The risk reward is now moving more to reward than risk.”
Freddie Mac and Fannie Mae best performers
In his report Berkowitz says Freddie Mac and Fannie Mae were two of the fund’s best performers. “Both are absolutely essential for uniquely-American, affordable mortgages. If you disagree, try getting a 30-year, sub-5% mortgage outside of the United States.”
Sears Holdings Corp (NASDAQ:SHLD) has long been one of Berkowitz’ conviction investments.
Here is a slide that demonstrates the investment philosophy in Sears Holdings Corp (NASDAQ:SHLD). It is taken from a Berkowitz presentation on the Sears case study.
In the annual report Berkowitz brushes off recent worries on Sears Holdings Corp (NASDAQ:SHLD) after the company forecast a loss in the fourth quarter and revealed that holiday sales had declined.
“Fairholme research estimates that the fair value of Sears’ net assets exceeds $150 per share. If our research is accurate, we expect Sears’ market price of $38 to increase to this value over time,” claims Berkowitz.
Fairhome Fund – a solid value proposition
The report claims that the fund offers a large margin of safety to investors because its portfolio price is lower than its intrinsic value by a third.