Bruce Berkowitz’s Fairholme Fund, once considered the best mutual fund of the decade, will record more than a 32 percent loss for 2011. The preponderance of wounded financials in the fund contributed most to the poor performance, along with a few other stocks beset by some unfortunate events. Though Berkowitz has had a terrible year, his contrarian thesis may still prove extremely profitable if given more time, particularly as new, positive economic emerges.
To break even from his 2011 loss of 32 percent, Berkowitz would need to make a return of 47 percent in 2012. While a high aspiration, Berkowitz does not seem inferior to the task. In 2000, the fund’s first year, he made a 46.5% while the S&P lost 9.1%. Back then, the fund had only $650 million under management, but had the same value-oriented approach and concentrated portfolio. The only descriptor it might not use anymore is “risk-averse.” The next closest he came was in 2009, when he returned 39%.
There is also the chance that Berkowitz could exceed his break-even point and make a sizable profit. For instance, Berkowitz has paid for his 105,012,095 shares of Bank of America an average of $14 per share. At the $5.50 share price it trades for today, he has lost approximately $893 million, and his holding would now be worth $578 approximately. If the stock merely doubled, he would have almost made back his investment, with approximately $1 billion. The last time Bank of America traded for $11 was just May of 2011. In January, it traded for triple the current stock price.
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The Financial Select Sector SPDR Fund fell 18.5% for the year, compared to the S&P 500 which ended the year flat. What could happen next year to promote an upswing? According to the FDIC’s third-quarter banking profile (posted on Fairholme’s website), net income rose to $35.3 billion in the third quarter, a 48.6 percent increase from the third quarter 2010, making it the highest level for industry profits since second quarter 2007. It was also the ninth consecutive quarter of earnings improvements as bank’s see lower expenses for loan-loss provisions, which declined 47 percent from third quarter 2010, and 2.6 percent less than the previous quarter. Loan losses declined for the fifth straight quarter, and 39% year over year.