Bruce Berkowitz is an icon in the fund management world. His flagship Fairholme Fund led its category for ten-year peformance. But things haven't gone so well of late for fund manager or fund, which is hemorrhaging assets. A newly announced SEC investigation of St. Joe, a company Berkowitz runs, isn't going to help matters.
News last week that the Securities and Exchange Commission is investigating real estate developer St. Joe has prompted new concerns about what the company's problems may do for its biggest investor, The Fairholme Fund.
On Friday night, The St. Joe Co. disclosed that the SEC is investigating the company, looking at a number of issues, including how the property company values its land. The probe also names Bruce Berkowitz, founder of Fairholme Capital Management LLC, who became chairman of St. Joe in March.
Fairholme, which owns slightly less than 30% of St. Joe, has not been contacted by the SEC directly, Mr. Berkowitz said in an interview with Bloomberg. “Fairholme has a strong relationship with the SEC,” he said. “We believe in transparency with our regulators.”
He declined to comment to Bloomberg on the discussions between St. Joe and the SEC. Hedda Nadler, a spokeswoman for Mr. Berkowitz, told InvestmentNews on Tuesday that the Fairholme boss was not immediately available for comment.
The disclosure of the SEC probe is the latest in a number of headaches for Mr. Berkowitz, who made headlines last year when he bought more of St. Joe after David Einhorne, another well-known investor, announced he was shorting the company.
Mr. Berkowitz joined St. Joe's board late last year, only to resign six weeks later, citing differences with management.
Then in February, he was successful in removing St. Joe's chief executive, Britt Greene, and three other board members. On March 4, Mr. Berkowitz was named chairman.
Although St. Joe accounts for only 3% of The Fairholme Fund, the firm has spent a lot of time on the position, prompting concern from some investors.
“Since St. Joe is such a modest position for Fairholme, people have wondered if it is going to suck up a disproportionate about of time for Berkowitz,” said Russel Kinnel, director of mutual fund research at Morningstar Inc. “He has maintained in the past that it won't, but an SEC investigation could certainly change that.”
And the news of the SEC investigation comes just as the $14.9 billion Fairholme Fund has been struggling recently from poor performance and huge outflows. So far this year, the fund has returned -8.04%, ranking it in the 99th percentile of its category, down from leading its category for 10-year performance, according to Morningstar. Since March 1, the fund has seen $2.5 billion in net outflows.
“I am worried that this news will cause further redemptions,” said Bob Weisse, director of research at Heritage Financial Services Inc., which has $20 million invested in The Fairholme Fund. “He has kept a lot of cash, so that has been fortunate, but I am worried he is going to be forced to sell positions.”
But despite such concerns, Mr. Weisse is one of a number of advisers who are sticking with the fund for now. “I am sure he has a team of lawyers that are taking care of this,” he said.
Similarly, Edward Kuresman, principal and portfolio manager at Madison Wealth Management, an advisory firm that has $8 million invested in The Fairholme Fund, said he has faith in Mr. Berkowitz.
“I think if this becomes too much of a distraction for him, he will do something about it,” Mr. Kuresman said.
