September 26, 2014

This show is a WealthTrack exclusive interview with Bruce Berkowitz of The Fairholme Fund. Launched at the height of the tech bubble in late 1999, The Fairholme Fund has been the top performer in Morningstar’s Large Value category since inception, delivering 13% annualized returns and beating its nearest competitor by a margin of 2.4% points a year. Berkowitz believes in “ignoring the crowd”. He’ll explain why nearly 80% of his portfolio is in four financial stocks shunned by most investors.

This week on WealthTrack, a Great Investor who dives to extreme depths to find value. The Fairholme Fund’s Bruce Berkowitz explains his investments in companies that other investors abandoned at the bottom. A rare interview with Fairholme Fund’s Bruce Berkowtiz is next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack. This week we have a rare interview with a great investor who has generated a fair amount of controversy, admiration, fear and envy among the investment community because of his deep value and concentrated investment approach. He is the Fairholme Fund’s Bruce Berkowitz. At the peak of his flagship fund’s popularity in 2011 it had over 20 billion dollars in assets. By 2012 those assets had plummetted by 70% to $7 billion.

The reason? A 32% drop in the fund’s value in 2011 due to his early and large investments in financial stocks and massive shareholder redemptions because of them.

True to form Berkowitz has stuck to his guns, upped the ante in financial stocks and made a ton of money with two back to back 36% gains in 2012 and 2013.

His largest holding is insurer AIG, which makes up about half of the fund’s portfolio, his second largest is Bank of America at 14.5%. Next are the two so called government sponsored entities, GSE’s known as Fannie Mae and Freddie Mac which he started purchasing over the last year. Combined they add up to 15% of the portfolio.

Today the Fairholme Fund’s assets stand at over $8 billion, mostly due to spectacular gains in AIG, which is still shunned by many on Wall Street.

Now his most controversial holdings are Fannie Mae and Freddie Mac which underwrite nearly 90% of the U.S. residential mortgage market and are 80% owned by the U.S. government since being placed into conservatorship by the government in 2008.

At the time the U.S. Treasury invested nearly $190 billion dollars in them. Since then Fannie and Freddie have returned that and more, a total of almost $219 billion to the government. It’s been a great investment for U.S. taxpayers, but the private shareholders including the Fairholme Fund, activist investors such as Carl Icahn and Bill Ackman haven’t seen a penny of profits. As a result they are suing the government to uphold their rights as shareholders. Even consumer advocate Ralph Nader has joined their side.

I have been interviewing Berkowitz on WealthTrack since 2007. In the past year his family foundation, the Fairholme Foundation, which supports educational and cultural causes has become a supporter of public television and specifically WealthTrack. He has always generated a great deal of interest.

When Morningstar initiated its fund manager of the decade award in 2010, he was the first winner in the Domestic Equity category. He also was the Domestic Stock Fund Manager of the Year winner in 2009. The Fairholme Fund, which he launched at the height of the tech bubble in late 1999 has been the top performer in its large value category since inception, delivering 13% annualized returns & beating its nearest competitor by a margin of 2.4% points a year. It has an excellent market and category beating 10 year track record as well, although it has lagged during the last 5 years. I began the interview by asking him why, with all the battered down sectors available to him after the financial crisis he was once again drawn to financial stocks.

BRUCE BERKOWITZ: It’s investment process. It’s you’re comparing what you pay, what you give to what you get and the price you pay. So you want a cheap price with a big margin of safety, but then of course you have to understand what you’re getting, and the financials, that’s my industry. That’s my company within that industry. It’s my experience, so the financials are within my circle of competence, and because the ones that we bought are so essential to the country, hence, their significant SIFI status that they have and the G-SIFI status. I mean, Bank of America is part of the banking system. AIG is part of the financial system of the country. The country doesn’t work with those institutions. The mortgage business doesn’t work without Fannie and Freddie, so they’re essential businesses that really have no substitutes in terms of if they disappeared tomorrow, there would be real problems, and there’s no one of size or scale that could take over exactly what they do. So once you’ve determined that this is a franchise, a moat, important institutions that help the country and help people, and then once you’ve determined that, the price is very cheap as if you could buy them, and even if they stopped doing business and they just ran off their existing business, you would make a lot of money. You didn’t even have to think about the future. You just had to count the cash. Then all you had to do is say, how can they die? And once you determine that they could not die based upon their capitalization …we went into all these institutions after they were recapitalized and restructured through the TARP program and so on, and they were better capitalized than any time in history, and they were making money again, and they were priced for total failure. It became obviously that these were good investments.

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