GoodHaven Fund Managers Barron’s Interview on Value Investing

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Spend a few minutes talking with GoodHaven managers Larry Pitkowsky and Keith Trauner, and it’s quickly apparent that these two have been working together closely for a while. “It’s a bit like a marriage,” says Trauner. “After 10 years, your partner raises an eyebrow and you know exactly what they mean.”

The duo launched their $382 million GoodHaven fund (ticker: GOODX) nearly two years ago, and so far with good results: Over the past year, the fund is up 17.7%, better than 90% of its mid-cap value peers. While this is Pitkowsky and Trauner’s debut as lead managers, it’s hardly their first act. They initially teamed up in 1999 at Fairholme Capital Management, where they worked alongside Bruce Berkowitz on the $7.7 billion Fairholme fund (FAIRX). During their nine-year tenure there, the fund posted a total return of 118%, while the Standard & Poor’s 500 fell 28% in the same period. They each stepped down from their active roles at different points in 2008.

Longtime investing partners Keith Trauner, left, and Larry Pitkowsky love a good catch.

Questions about their former employer have become trite for the GoodHaven managers, who are quick to point out that Fairholme was just one chapter in their careers. Still, one can’t help comparing the two funds. Both adhere to a deep-value contrarian style, and both are extremely concentrated. (Even the names are similar: Fair versus Good, Holme versus Haven.) GoodHaven aims to hold 15 to 25 stocks and with half of its assets in the top 10 holdings. “We want more money in the things we like the most,” says Trauner, “but we’re never going to be imprudent in our concentrations.” What goes unsaid: They would never have more than 50% of the fund’s assets in one or two risky bets like AIG and Bank of America, as Fairholme did as of late last year, contributing to its 32% fall in 2011.

Dane Czaplicki, director of research at Philadelphia-based West Capital Management, was an early investor in GoodHaven, whose managers, he says, have a knack for allocating capital. “Even though they have about 20 names, they’re arguably one of the more diversified funds we own,” by industry, market cap, and opportunity, he says. The fund has a broad mandate to buy virtually any kind of equity, debt, or other security.

Working from their offices in New Jersey and Florida, respectively, Pitkowsky and Trauner are in contact dozens of times a day, with most discussions revolving around investment decisions. “We’re ‘bottoms-down’ managers,” quips Trauner. “We start at the bottom and just keep digging.” They’ll go to extreme lengths to understand the companies on their short list, whether that means sizing up shelf space for Rayovac batteries or interviewing Madison Avenue executives about their ad-buy decisions. These extremes, they say, are a prerequisite for buying discounted stock. “We like stress, but it’s very hard to behave the way you want to behave unless you have significant knowledge,” says Trauner, adding that they tend to avoid companies whose businesses are difficult to grasp, and they generally don’t bother trying to make macroeconomic predictions.

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