Bruce Berkowitz 2013 report on holdings, below is the text and full PDF (with charts) can be found at the bottom.
Fairholme Capital Management, L.L.C.
PORTFOLIO MANAGER’S REPORT
For the Year Ended December 31, 2013
January 29, 2014
To the Shareholders and the Directors of The Fairholme Fund:
The Fairholme Fund (the “Fund” or “FAIRX” or “Fairholme”) gained 35.54% versus 32.39% for the S&P 500 Index (the “S&P 500”) in 2013. The following table compares the Fund’s performance (after expenses) with that of the S&P 500, with dividends and distributions reinvested, for various periods ending December 31, 2013.
ONE YEAR Five Years Ten Years Inception
This page is not part of The Fairholme Fund 2013 Annual Report. i
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 on a $10.00 investment over 14 years. 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.
The advantages of our long-term focused investment approach are most evident when evaluating our performance over any 5-year period since the inception of FAIRX. Fairholme has achieved 105 positive 5-year return periods and only 4 negative 5-year return periods, compared with 82 positive 5-year return periods and 27 negative 5-year return periods for the S&P 500. The Fund’s average rolling 5-year return was 69.15% versus 20.57% for the S&P 500. The Fund has outperformed the S&P 500 in 95 of 109 5-year periods, calculated after each month’s end. The Fund’s worst 5-year-period return was (6.89)% versus (29.05)% for the S&P 500. In its best 5-year period, the Fund’s return was 163.08% versus the S&P 500’s best return of 128.19%.
60-Month Forward Rolling Periods
Fund’s Rolling 5-Year-Period Returns*
(3/2000 – 2/2005)
(1/2009 – 12/2013)
(1/2007 – 12/2011)
(3/2004 – 2/2009)
|Positive Performance Periods|
|Negative Performance Periods|
Monthly Rolling 5-Year FAIRX Performance Frequency Distributions*
*Represents the cumulative percentage total returns over a five-year rolling period (calculated after each month’s end) since inception through December 31, 2013. Monthly rolling 5-year performanceis a period of 60 consecutive months determined on a rolling basis, with a new 60-month period beginning on the first day of each calendar month since the inception of the Fund.
Our largest issuer position, at nearly 50% of assets, is in AIG common and warrants. Our second largest, at 15%, is in Bank of America common stock. Both are designated Global Systemically Important Financial Institutions.1 In other words, they are too important to fail, have significant value beyond their fortress-like balance sheets, and are capable of distributing healthy earnings to owners through dividends and/or buybacks of common stock. Yet, both trade at discounts to book value.
Headlines shout of Sears’ disastrous 2013 loss of $12 per share. A longer history shows that since the merger of Sears with Kmart, about 9 years ago, Sears has distributed over $66 of cash per share via buybacks and spin-offs and has paid down $27 per share of a pension liability that is no different, in our view, from debt. 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.
Two of our best performers during the period were Fannie Mae and Freddie Mac. 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. In 2008, both companies agreed to U.S. conservatorship and extraordinarily harsh terms and conditions during a time of global crisis. The plan worked. Fannie and Freddie saved the day, repaid nearly every penny of cash received from the U.S. Treasury, and can look forward to resuming a prosperous future based just on the aging of assets held. However, many believe Fannie and Freddie will be victims of a government-sponsored expropriation that brings our country closer to a future conceived by George Orwell in his novel, 1984. We disagree.
On the macroeconomic front, U.S. fiscal responsibility and U.S. energy independence are on the horizon! Economic progress will eventually lift interest rates, which will depress asset valuations. However, our banks and insurers should more than counter this weight with a lifting of margins between earning assets and paying liabilities. Overall – a net positive.
The Fund’s portfolio prices remain a third below our growing estimates of intrinsic value… If history is any guide, expect these two measures to converge one day. For now, we believe, the difference between them to be a large margin of safety.
Onward and upward,
Bruce R. Berkowitz
Fairholme Capital Management