InvestmentNews INsider

The INsiderblog

InvestmentNews reporters offer their take on intriguing or controversial articles from around the web.

INsider: Follow Berkowitz's lead, don't buy his fund

Fairholme Fund top performer in large-cap value funds, but now's a bad time to jump on board

Nov 28, 2012 @ 3:21 pm

By Jason Kephart

Bruce Berkowitz's journey from worst to first is nearly complete, but what got him there is exactly why advisers should keep away.

One year after finishing in the bottom percentile of large-cap funds, his flagship Fairholme Fund ticker:(FAIRX) is set to finish in the top percentile of funds in 2012 with a return of nearly 30%.

The turnaround has been fueled by a strategy Mr. Berkowitz has described as “embrace the hated,” according to Bloomberg. Boiled down, it means buying stocks that no one else wants. So while top holdings like American International Group Inc. ticker:(AIG), Bank of America Corp. ticker:(BAC) and Sears Holdings Corp. ticker:(SHLD) were dragging Fairholme Fund to a jaw-dropping 32% loss in a year when the S&P 500 was flat, Mr. Berkowitz held steady.

The patience paid off big-time, as all three have posted stirring returns. The fund's largest holding, AIG, is up 42%, while both Bank of America and Sears are up more than 50%.

Unfortunately, investors in the Fairholme Fund didn't show the same resolve as Mr. Berkowitz. As the fund showed signs of struggling early last year, investors began to bail.

The fund has had 20 straight months of net withdrawals since February 2011. In total, investors have pulled out more than $9.8 billion over that time, according to Lipper Inc.

With the Fairholme Fund back on top of the investment world, now may seem like the time to get back in. Sadly, that's the opposite of the buy-low, sell-high mentality that led to its turnaround.

Mr. Berkowitz's “embrace the hated” approach shouldn't be limited to picking stocks but also used when picking mutual funds, some investment pros say.

Cliff Asness, founder of AQR Capital Management, spoke to advisers about the strategy's benefits at the Schwab Impact Conference in Chicago in November — whether he knew it or not.

Mr. Asness told his audience that the best way to pick funds was to find the best managers, then to wait until they were out of favor to buy them.

Of cource, embracing the hated is a lot easier said than done. It takes conviction and a strong stomach. But as Mr. Berkowitz has shown, it can lead to major rewards.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

Events

What's the first thing advisers should do when they get home from a conference?

After attending a financial services conference, advisers can be overwhelmed by options, choices and tools. What's the first thing they should do when they get back to their office?

Latest news & opinion

Is Fidelity competing with retirement plan advisers?

As the Boston-based mutual fund giant expands the products and services it brings to the retirement market, some financial advisers say the firm is encroaching on their turf.

Gun violence hits investment strategies, sparks political debates with advisers

Screening out weapons companies has limited downside.

Whistleblower said to collect $30 million in JPMorgan case

The bank did not properly disclose that it was steering asset-management customers into investments that would be profitable for JPMorgan Chase.

Social Security underpaid 82% of dually entitled widows and widowers

Agency failed to tell survivors that they could switch to a higher retirement benefit later.

If Finra eases firm oversight of outside business activities, broker-dealers could lose revenue

Brokerage firms would no longer be able to charge reps for supervising nonaffiliated RIAs.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print