Berkowitz, Heebner and Miller in tight battle - for last place

Bruce Berkowitz, Kenneth Heebner and Bill Miller, three of the best-known U.S. stock pickers, are competing for last place this year after their bets on an economic expansion backfired. Funds run by Mr. Berkowitz of Fairholme Capital Management LLC, Mr. Heebner of Capital Growth Management LP and Mr. Miller of Legg Mason Inc. are the three worst performers among large, diversified U.S. mutual funds in 2011, according to data from Morningstar Inc. The funds lost 11% to 12% through June 9, compared with a gain of 3.4% for the S&P 500. “People assume because certain managers have had good streaks that they are always going to be a step ahead of the market,” said Russel Kinnel, director of mutual fund research at Morningstar. The three managers tend to concentrate money in a small number of industries, a strategy that can produce market-beating gains when the investments work out and large losses when they fail, Mr. Kinnel said. Mr. Berkowitz and Mr. Miller are wagering on a rebound in financial stocks. Mr. Heebner had bet on automakers. The two industries are the worst performers this year in the S&P 500 out of 24 groups. Bank stocks, as measured by the KBW Bank Index Ticker:(BKX), fell 10% on concerns that the housing slump, litigation over mortgage bonds, foreclosures and fee-crimping new rules would depress bank earnings.

BETTING ON BANKS

Mr. Berkowitz's $14.8 billion Fairholme Fund Ticker(FAIRX) had 74% of its equity holdings in financial stocks as of Feb. 28, Morningstar data show. The fund fell 12% through June 9, ranking it last among 870 diversified U.S. stock funds with at least $500 million in assets. Mr. Berkowitz, 53, didn't respond to a request for comment. In a June 9 interview with Bloomberg Television, he said that he was “more certain” than ever that his investments in financials made sense. “The balance sheets are getting better, and the cash flow is there to take care of the problems,” Mr. Berkowitz said. He said that Brian Moynihan, chief executive of Bank of America Corp., was doing “a good job” and that the bank “was making all the right moves.” BofA's stock has fallen about 19% this year, including dividends.

SHIFTING GEARS

Shares of American International Group Inc. Ticker:(AIG), the insurer that is Mr. Berkowitz's largest holding, have lost about 40% this year, according to data compiled by Bloomberg. Shares of The Goldman Sachs Group Inc. Ticker:(GS) have fallen about 19%. Mr. Heebner, manager of the $2.5 billion CGM Focus Fund Ticker:(CGMFX), fared no better, losing 12% through June 9, second-worst among large funds, according to Morningstar. His fund had 36% in auto stocks at the end of last year, according to a regulatory filing. Mr. Heebner, 70, is known for making concentrated bets in industries from homebuilding to commodities and for his willingness to shift gears quickly. The CGM Focus Fund, which gained 80% in 2007, has returned 12% a year on average for the past 10 years, better than 99% of rivals. “We anticipate a better domestic economic environment in the year ahead,” Mr. Heebner wrote in a Jan. 3 letter included in the fund's annual report.

SIGNS OF SLOWDOWN

Those expectations were dampened when the U.S. economy slowed to a 1.8% annual rate of growth in the first quarter, from a 3.1% gain in the fourth quarter last year. More recent reports suggest that the world's largest economy is slowing further. Manufacturing grew last month at its slowest pace in more than a year, consumer spending rose less than forecast in April and the unemployment rate unexpectedly climbed to 9.1% in May. Mr. Heebner declined to comment, spokeswoman Martha Maguire wrote in an e-mail. Ford Motor Co. (F), his largest holding at year-end, fell 11% in the first quarter. His third-largest position, Freeport-McMoRan Copper & Gold Inc. Ticker:(FCX), the world's largest publicly traded copper producer, fell 7.1%. Mr. Heebner sold all his shares in both companies in the first quarter, according to a regulatory filing. He dumped other automotive stocks, including Magna International Inc., Ticker:(MG) and BorgWarner Inc. Ticker:(BWA). Mr. Heebner ran the best-performing diversified U.S. stock fund over a 10-year period for 11 straight quarters before he was unseated in the first quarter this year by Thomas Soviero, manager of the $4.2 billion Fidelity Advisor Leveraged Company Stock Fund Ticker:(FLSAX). Investors make a mistake when they judge stock pickers only by short-term performance, Mr. Kinnel said. “Managers don't go from geniuses to idiots overnight,” he said. Mr. Berkowitz's fund, which opened in December 1999, has beaten the S&P 500 every year but 2003, according to data compiled by Bloomberg. Ronald Sugameli, manager of the $126 million New Century Alternative Strategies Portfolio Ticker:(NCHPX), a mutual fund that invests in other mutual funds, cut his stake in Mr. Berkowitz's fund over the past few months. “Berkowitz may be right, but I thought it was prudent to reduce our concentration in the distressed financial sector,” he said. Investors pulled $2.3 billion from the Fairholme Fund in April and May, according to Lipper. The fund attracted deposits of $11 billion in the four years through Dec. 31. Mr. Miller's $1.5 billion Legg Mason Capital Management Opportunity Fund lost 11% through June 9, third-worst among large funds, Morningstar data show. The fund had 36% in financial shares March 31. In an April letter to shareholders, Mr. Miller wrote that the first quarter was a good one “for almost everyone except us.” He wrote that technology, health care and financial stocks were attractive. Mr. Miller, 61, declined to comment, Legg Mason spokeswoman Maria Rosati wrote in an e-mail. The fund's largest holding as of March 31, insurer Assured Guaranty Ltd. Ticker:(AGO), has lost about 19% this year. Other financials in the portfolio that have suffered include Genworth Financial Inc. Ticker:(GNW), down 23%, and Citigroup Inc. Ticker:(C), down 20%. Mr. Miller is best known for beating the S&P 500 for a record 15 straight years through 2005 with his larger Legg Mason Capital Management Value Trust Ticker:(LMVTX). The fund trailed the U.S. benchmark for the next three years as he underestimated the severity of the financial crisis, and his bets on banks and real estate companies backfired. The $3.6 billion Value Trust fell 0.5% through June 9, trailing 94% of rivals, Bloomberg data show.