Bruce Berkowitz goes Old School with new fund

Bruce Berkowitz, named U.S. stock manager of the decade in January by Morningstar Inc., is starting a mutual fund that will spread investments between stocks, bonds and cash-like financial instruments.

Fairholme Funds Inc. filed with the U.S. Securities and Exchange Commission today to sell shares in the Fairholme Allocation Fund. Berkowitz will run the fund with Charles Fernandez, president of Miami-based Fairholme Capital Management LLC.

The new allocation fund will give Berkowitz further room to delve into bonds, an asset class he increasingly invested in when the 2008 financial crisis began. As of June 30, Berkowitz’s stock-picking prowess has helped his Fairholme Fund generate an average annual return of almost 13 percent since starting up in December 1999, compared with a yearly decline of about 1.5 percent in the benchmark Standard & Poor’s 500 Index, according to the filing.

“It’s like going back to the days of old with a mutual fund that will make you money by going anywhere,” said Geoff Bobroff, a money-manager consultant based in East Greenwich, Rhode Island.

Berkowitz, 52, didn’t return a telephone call seeking comment. As of Sept. 30, Fairholme Capital Management oversaw $18.2 billion, according to the filing, including $16.3 billion in its two existing mutual funds and another $1.9 billion in separate client accounts.

The Fairholme Allocation Fund will seek returns by “investing opportunistically” in a “focused portfolio” of equity, fixed income, and cash-equivalent instruments, according to today’s filing. The fund will have the leeway to invest any, all or none of its assets in each class and will be able to invest in a wide array of securities, including junk bonds, convertible debt, partnerships and real estate investment trusts.

Value Approach

“The fund seeks to capitalize on anticipated fluctuations in the financial markets by changing the mix” of its holdings in the three target asset classes, Fairholme said in the filing.

Berkowitz takes a value approach to investing, looking for companies that are cheap based on the amount of cash they generate, according to Chris Sizemore, a portfolio manager with Vision Capital Management Inc., a Portland, Oregon, investment adviser whose $250 million in assets include a $4 million stake in the Fairholme Fund.

As of May 31, the fund’s top 10 holdings, including General Growth Properties Inc. and American International Group Inc., equaled 63 percent of assets.

The Fairholme Fund disclosed in January 2009 that its principal strategy had been revised to include fixed-income securities as well as equities. During the quarter ended Nov. 30, 2009, Berkowitz began buying the convertible bonds and bank debt of General Growth Properties, the Chicago-based mall owner that won court approval this month for the final stage of its bankruptcy reorganization.

Additional Leeway

As of May 31, the Fairholme Fund had 16.8 percent of its holdings in corporate and asset-backed debt as well as bank loans, up from none at Nov. 30, 2007. In December 2009, Berkowitz started up a second mutual fund, Fairholme Focused Income, to invest in “cash-distributing” securities such as bonds and bank loans.

Berkowitz is starting the allocation fund to give himself additional leeway to invest in special situations, according to Michael Breen, an analyst at Chicago-based Morningstar. In December 2008, Fairholme Fund swapped AmeriCredit Corp. bonds it had purchased for shares of the auto financing company, helping to reduce its debt.

“The Fairholme Fund is pretty big and it will limit itself on some of the more creative financing deals,” such as AmeriCredit, Breen said. “They might have a little more flexibility with a smaller vehicle.”