Fairholme Fund is back in business

Six months after closing of $8 billion Fairholme Fund, Bruce Berkowitz will re-open to new investors next week.

Aug 16, 2013 @ 2:47 pm

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Bruce Berkowitz is opening his arms to new investors again.

Six months after closing his flagship $8 billion Fairholme Fund (FAIRX) to new investors because of outflows, the superstar manager announced he will be re-opening the fund to new investors on Monday.

Mr. Berkowitz, best known for his willingness to make big bets, said the re-opening could lead to him making even bigger bets on long-suffering housing lenders Fannie Mae and Freddie Mac, in an interview with the Wall Street Journal.

About 7% of the Fairholme Fund was invested in preferred shares of the two lenders as of the end of June 30, according to a filing with the Securities and Exchange Commission.

In July, the Fairholme Funds Inc., on behalf of itself and nine insurance companies, filed two complaints against the Federal Housing Finance Agency, the acting director of the agency and the Treasury Department, essentially demanding a reinstatement of dividends on the companies' preferred shares.

“Once the government has recouped its investment, The Fairholme Fund — on behalf of our shareholders, who are predominantly individual Americans with an average investment in the fund of $43,000 — is owed a contractually specified, noncumulative dividend for its investment in these companies. As solvent, highly profitable companies, Fannie and Freddie should honor all outstanding obligations to their investors,” the company said in a statement.

Mr. Berkowitz is no stranger to making bets on companies that have been bailed out by U.S. taxpayers, American International Group Inc. is Fairholme's largest holding with 44% of the fund's assets, but this bet might have longer odds than most. A group of lawmakers, including President Obama, have recently been pushing forth efforts to wind down Fannie and Freddie, a move which would likely leave investors with little to show for themselves.

That's the kind of risk that's led to big rewards, and big losses, for Fairholme shareholders over the past decade. Over the trailing 10-years, the fund's 11% annualized returns beat the S&P 500 by about 400 basis points a year, according to Morningstar Inc.

A disastrous 2011, which saw the fund lose 32%, a worse showing than it had in the financial crisis, has left a blemish on its more recent returns though. Despite leading all large-cap blend funds with a 35% return last year, Fairholme's three-year annualized returns of 9% rank dead last in the category.

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