The transcript from the Fairholme Capital Management Public Conference Call held on June 29, 2017, is available

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FAIRHOLME CAPITAL MANAGEMENT, L.L.C.
Fairholme Capital Management Public Conference Call
Bruce Berkowitz
Moderator: Daniel Schmerin
June 29, 2017
EDITED FOR CLARITY AND ACCURACY
Operator: Good morning. My name is Kristy and I will be your conference operator today. At this time, I would like to welcome everyone to the Fairholme Capital Management (“Fairholme” or the “Firm”) June 2017 Public Conference Call.
Bruce Berkowitz, the Firm’s Founder and Chief Investment Officer, will be answering questions submitted in advance by callers. Moderating the call today is Daniel Schmerin, Fairholme’s Director of Investment Research. Also joining them on the call is David Thompson, Managing Partner at Cooper and Kirk and one of the lead attorneys representing Fairholme with respect to his clients’ investments in Fannie Mae and Freddie Mac.
After the call, a transcript will be made available on www.fairholmefunds.com.
Daniel Schmerin: Good morning. I’m Daniel Schmerin, and I’d like to welcome shareholders of The Fairholme Fund, The Fairholme Focused Income Fund (the “Income Fund”), and The Fairholme Allocation Fund (the “Allocation Fund” and, collectively, the “Funds”) and other listeners to our June 2017 conference call. A special thanks to all those who took the time to submit questions for our call today.
Without further ado, I’d like to introduce Bruce Berkowitz, our Founder and Chief Investment Officer and dive into our first set of questions.
Please see the last page of this transcript for important disclaimers.
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Bruce Berkowitz: All right, thanks, Dan. Good morning to everyone. I want everyone to know that I recently appeared on Bloomberg Television and discussed a number of our key positions for over 40 minutes.1 You can find a link to this interview in the “Press” section of www.FairholmeFunds.com to watch it yourself.
I want to also let everybody know that we are actually pre-recording this call one day early from Washington, D.C., because I will be attending some events tomorrow that happen to be taking place at exactly the time that we scheduled this call.
That being said, I look forward to answering as many shareholder questions as possible. Let’s begin.
Daniel Schmerin: Great, I’d like to start by addressing some general questions that we received before tackling individual positions. What is management and employee ownership of the Fairholme Fund, and has there been any notable turnover among analysts and other important employees?
Bruce Berkowitz: Dan, Fairholme employees collectively own over 5% of the Fairholme Fund, 45.5% of the Allocation Fund, and about 8.5% of the Income Fund.2
Regarding the second question, no, we haven’t had any recent turnover of analysts or key employees.
Daniel Schmerin: The vast majority of the Fairholme Fund is invested in roughly seven ideas. How can an investor feel comfortable that the current portfolio represents your very best ideas and is not merely the result of selling out of more liquid positions to meet redemptions?
Bruce Berkowitz: The Funds have had the same strategy since inception. We focus on best ideas and we’re long-term value oriented. That has not changed, and
1 Bloomberg TV, “Why Bruce Berkowitz Still Likes Stocks Others Hate, June 19, 2017,” https://www.bloomberg.com/news/videos/2017-06-19/why-bruce-berkowitz-still-likes-stocks-others-hate-video.
2 Figures provided are as of June 26, 2017.
Please see the last page of this transcript for important disclaimers.
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redemptions have not been an issue. We’ve had no issues selling large or less liquid positions – such as AIG and Chesapeake Energy – over time.
The Fairholme Fund has plenty of liquidity, with over 20% in cash and cash equivalents. This large cash allocation that we have, not just in the Fairholme Fund but in all the Funds, is prudent given what I believe is a limited opportunity set with lots of lofty valuations and an overall expensive market.
Our cash is invested in very short duration commercial paper, roughly about five days, and earning over 1.5%, which helps boost current income. And, look at our recent investments in high-yield credit. They’ve been quite successful. Chesapeake worked out well, Intelsat worked out well, and most recently, our Atwood Oceanics, Inc. (“Atwood”) bonds worked out well as Ensco PLC announced that it’s going to acquire Atwood.
Daniel Schmerin: Is your level of concentration more a reflection of the attractiveness of those holdings or of a relative lack of confidence in your next five best ideas?
Bruce Berkowitz: The current focus is based upon both factors. It is a reflection of the attractiveness of the holdings that we have and the relative lack of confidence in other ideas or lesser ideas. I like where the portfolio is.
Daniel Schmerin: Would investors be better served by spreading some of the issuer specific risks among the next few best ideas?
Bruce Berkowitz: Well, I’ve got to tell you: In hindsight, probably yes. Today, I don’t think so. But the most important point I want to focus on today is the cash element, which is very large. Cash is quite valuable in tough times.
Daniel Schmerin: For new and existing clients, what would you say is your competitive edge?
Bruce Berkowitz: I think we’ve continually proven since day one of Fairholme that I’m willing to look wrong for years. But only as long as the facts tell us that
Please see the last page of this transcript for important disclaimers.
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we’ll eventually be right. We have been able to avoid denial. We constantly question our ideas. We constantly try to kill them.
I don’t think we have a history of being in denial, and the other major factor, of course, is that we eat our own cooking. My family is definitely the largest shareholder in each fund. Daniel Schmerin: You say that you invest for the long term. How is that defined?
Bruce Berkowitz: I look at long term as decades. I look at long term investing the way that you would look at long term for a marriage. I think such long term investing creates the least amount of friction and the lowest possible taxes, and I think it’s the best way to build upon the experience. You’re getting huge economies of scale and the least amount of friction and cost. So my definition of “long term” is as long as possible.
Daniel Schmerin: Can you talk a bit about the Allocation Fund? Given underperformance in that smaller fund, what should current and potential new investors in the Allocation Fund know in order to maintain conviction?
Bruce Berkowitz: At

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