Value Investing

Berkowitz Calls Best Performers FNMA, FMCC ‘Absolutely Essential’

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.

Berkowitz Calls Best Performers FNMA, FMCC 'Absolutely Essential'

 

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.

 

 

Since

ONE YEAR       Five Years        Ten Years          Inception

 

(12/29/1999)

Cumulative

FAIRX

Fairholme

35.54%

116.98%

184.24%

450.94%

TOTAL

RETURN

S&P 500

32.39%

128.19%

104.30%

64.68%

$55.09

$50

Annualized
Fairholme

35.54%

16.76%

11.01%

12.95%

S&P 500

32.39%

17.94%

7.41%

3.62%

FAIRX

PRICE

$40

$39.20

$30

$20

S&P 500

TOTAL

RETURN

$16.47

$10

$0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

 

 

 

 

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*

 

FAIRX

S&P 500

RElative

Advantage

Best

+163.08%

+128.19%

+34.89%

(3/2000 – 2/2005)

(1/2009 – 12/2013)

Worst

(6.89)%

(29.05)%

+22.16%

(1/2007 – 12/2011)

(3/2004 – 2/2009)

Average

+69.15%

+20.57%

+48.58%

Positive Performance Periods

105 (96.3%)

82 (75.2%)

Negative Performance Periods

4

27

 

Monthly Rolling 5-Year FAIRX Performance Frequency Distributions*

 

$30

FAIRX

$25

S&P 500
PERIODS

$20

S&P AVERAGE

FAIRX AVERAGE

(+20.57%)

(+69.15%)
OF

$15

NUMBER

$10

$5

$0

-29%

-19%

-9%

1%

11%

21%

31%

41%

51%

61%

71%

81%

91%

101%

111%

121%

131%

141%

151%

161%

to

to

to

to

to

to

to

to

to

to

to

to

to

to

to

to

to

to

to

to

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

170%

 

*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

 

Managing Member

 

Fairholme Capital Management

 

 

 

FAIRX+Letter (source here)