Bruce Berkowitz, the famed fund manager of Fairholme Fund, was adjudged Morningstar’s fund manager of the decade in 2010. However, his fund has lost nearly 89 per cent of its assets in the last six years because Berkowitz didn’t adhere to the basic rule of investment, ‘diversification’. However, Berkowitz still maintains that he offered his investors extremely concentrated and often contrarian bets and that he is not apologetic for the poor returns on such bets.
Over the past five years, Fairholme Fund has returned 7.6 per cent to investors while those who invested in the S&P 500 took home 15.1 per cent. The fund has lost almost 12.9 per cent in 2017 alone, whereas the benchmark S&P 500 index is up 9 per cent.
The poor performance of the fund coupled with redemptions has taken a toll on the assets under management. At its peak in 2011, Fairholme Fund had assets of nearly $20 billion, however, now the flagship fund has lost 89 per cent of its assets under management and has been reduced to $2.2 billion. That’s $ 17.8 billion lost in six years.
Many investors, who once enjoyed the ultra-concentrated bets by Berkowitz, have now moved on to different investment avenues. Such has been the quantum of customer withdrawals at Fairholme Fund that Berkowitz is now the largest customer of the fund.
“The people who had the smoothest ride were those in Bernie Madoff. Life is not smooth,” Berkowitz said to the Wall Street Journal.
Berkowitz is now betting big on mortgage financiers Fannie Mae and Freddie Mac. Fairholme Fund is one of the largest holders of preferred shares in government-sponsored housing agencies Fannie Mae and Freddie Mac, betting that both companies will eventually exit conservatorship and be able to use their profits to redeem bargain-priced preferreds.
“Fannie and Freddie are two of the best businesses ever owned by the Funds,” Berkowitz had said in his mid-year letter to investors in 2016.
Since both Fannie Mae and Freddie Mac repaid their bailout funds to the US government in 2013, the billions of dollars of their quarterly profits have been kept by the U.S. Treasury on the argument that taxpayer risk still hasn’t been fully repaid.
Investors in the two companies, including Fairholme and Pershing Square’s Bill Ackman have sued the government challenging this argument and demanding that Fannie and Freddie should exit government conservatorship and use their profits to become well-capitalized private entities. This prospective privatisation would include resuming dividends on preferred stock that Berkowitz owns, and eventually repaying it entirely at par values of between $25 and $50 a share.