Investment craftsman Berkowitz loading up on Sears' debt

Following stellar 2012 performance, Fairholme fund boss places big bet on struggling retailer's debt
MAY 12, 2013
By  John Goff
Bruce Berkowitz, the investment manager who's turning away new customers from his mutual funds, expects a “watershed” 2013 for Fairholme Capital Management LLC's Focused Income Fund as he bets the majority of its assets on junk-rated Sears Holdings Corp. (SHLD) and MBIA Inc. (MBI) More than 55 percent of the fund's assets are concentrated on the debt of Sears and MBIA, Berkowitz said in a letter to shareholders and directors posted on its website yesterday. MBIA debt comprises more than 38 percent and Sears almost 17 percent, with almost 40 percent in cash and Treasury bills. Berkowitz is loading up on debt in some of the same companies whose common stock propelled his flagship Fairholme Fund to the best performance in a decade during 2012. The mutual fund posted a 36 percent annual gain, beating 99 percent of its peers, with American International Group Inc., Sears and Bank of America Corp. (BAC) currently ranked as the three biggest holdings and MBIA among the top 10. While a negative outcome is already priced into the market, Fairholme expects MBIA to settle its lawsuits against Bank of America, which “should lift MBIA bonds,” Berkowitz said in the letter. “Sears will continue to pay all scheduled interest and principal on its debt obligations,” while the debt trades below par value. During a question-and-answer session at the Columbia Student Investment Management Association Conference in New York yesterday, Berkowitz said he loaded up on financial firms such as Bank of America when they were “priced to die” after the credit crunch destroyed some of its biggest peers. The purchase of Countrywide Financial Corp., derided by investors and analysts for causing billions of dollars of losses on faulty mortgages, is a “fixable problem,” he said. Price Leader As for AIG, which has repaid a $182.3 billion U.S. bailout, the New York-based insurer is now “leading the entire property and casualty industry to higher prices, better underwriting profits,” Berkowitz said. Berkowitz is closing the $7 billion Fairholme Fund (FAIRX) to new investors Feb. 28, along with the Focused Income Fund and Fairholme Allocation Fund. Current holders can continue putting money into all three. Managers typically close a fund after a good performance attracts more money than they can invest effectively, putting a drag on future returns. Track Record Berkowitz is the managing member of Miami-based Fairholme Capital and he was named by Morningstar Inc. as the domestic stock-fund manager of the decade in January 2010. He has said he likes to “embrace the hated” and bet on the recovery of companies that fall out of favor, and prefers to put assets into his best ideas rather than spread the money to weaker ones. His stakes are sometimes so large that they rank Fairholme among a company's biggest shareholders. Fairholme owns about 16 percent of Sears and 23 percent of MBIA, according to data compiled by Bloomberg. Sears, whose debt is rated B3 at Moody's Investors Service and CCC+ at Standard & Poor's, surged 45 percent last year in New York stock trading as the Hoffman Estates, Illinois-based retailer sought to cut costs, stores, assets and inventory. The company's $987 million of 6.625 percent bonds due in 2018 rallied to more than 97 cents on the dollar during the past week, from as low as 76 cents last year, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Fairholme owns 6.1 percent of those bonds, according to data compiled by Bloomberg. MBIA Debt Shares of MBIA, which is rated Caa1 at Moody's and B- at S&P, fell 32 percent last year as the insurer continued its legal wrangle with Bank of America. The Charlotte, North Carolina-based lender, ranked second by assets in the U.S., bought products from MBIA Insurance protecting it from losses on more than $6 billion of debt. The bank then sued MBIA over a 2009 restructuring that it claims was based on misleading information. Armonk, New York- based MBIA separately is suing the bank, seeking to force it to buy back faulty loans included in insured mortgage-backed securities, and claims Bank of America is delaying that case to starve the insurer of cash. MBIA's $159.1 million of 5.7 percent bonds due in 2034, of which Fairholme owns 7.3 percent according to Bloomberg data, surged to 100.05 cents on the dollar in November from 57 cents in May. --Bloomberg News--

Latest News

The 2025 InvestmentNews Awards Excellence Awardees revealed
The 2025 InvestmentNews Awards Excellence Awardees revealed

From outstanding individuals to innovative organizations, find out who made the final shortlist for top honors at the IN awards, now in its second year.

Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty
Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty

Cresset's Susie Cranston is expecting an economic recession, but says her $65 billion RIA sees "great opportunity" to keep investing in a down market.

Edward Jones joins the crowd to sell more alternative investments
Edward Jones joins the crowd to sell more alternative investments

“There’s a big pull to alternative investments right now because of volatility of the stock market,” Kevin Gannon, CEO of Robert A. Stanger & Co., said.

Record RIA M&A activity marks strong start to 2025
Record RIA M&A activity marks strong start to 2025

Sellers shift focus: It's not about succession anymore.

IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients
IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients

Platform being adopted by independent-minded advisors who see insurance as a core pillar of their business.

SPONSORED Compliance in real time: Technology's expanding role in RIA oversight

RIAs face rising regulatory pressure in 2025. Forward-looking firms are responding with embedded technology, not more paperwork.

SPONSORED Advisory firms confront crossroads amid historic wealth transfer

As inheritances are set to reshape client portfolios and next-gen heirs demand digital-first experiences, firms are retooling their wealth tech stacks and succession models in real time.