Morningstar's Domestic Equity Manager for 2009: Bruce Berkowitz

|
 |  Includes: ACF, BRK.B, FRX, HTZ, HUM, JOE, LUK, PFE, SHLD, SPR
by: Jacob Wolinsky

Bruce Berkowitz was voted guru of the year on gurufocus.com. Tuesday Berkowitz has added another award. Morningstar.com announced that Bruce Berkowitz won the award for domestic equity manager of 2009. Berkowitz bested other famous value investing gurus, including Bill Nygren of Oakmark funds and Mason Hawkins and Stanley Cates of Longleaf Partners.

Berkowitz’s Fairholme Fund returned 39% versus 26.5% for the S&P 500 in 2009. Morningstar notes that this feat is more impressive accounting for the fact that 17% of his fund is in cash. Morningstar also notes that in 2008, Berkowitz also outperformed the S&P, losing 30% versus 37% loss for the S&P. The article also notes that Berkowitz drastically reduced his stakes in energy stocks, and was heavily invested in health care stocks in 2009.

Currently 26% of Berkowitz’s holdings are in financial stocks, and 36% in health care stocks. Berkowitz, like some other value investors, has a concentrated portfolio. He has stated, "We want to put most of our money to work in our top few ideas, not our 50th best idea or our 100th best idea." Berkowitz’s top ten holdings account for 57% of his portfolio.

Berkowitz’s top holdings:

Pfizer Inc. (NYSE:PFE) 12.80%

Sears Holdings Corporation (NASDAQ:SHLD) 8.64%

St. Joe Corporation (NYSE:JOE) 7.32%

AmeriCredit Corporation (ACF) 5.50%

Hertz Global Holdings, Inc. (NYSE:HTZ) 4.64%

Berkshire Hathaway Inc. B (NYSE:BRK.B) 4.07%

Humana (NYSE:HUM) 3.93%

Forest Laboratories, Inc. (NYSE:FRX) 3.90%

Spirit AeroSystems Holdings, Inc. (NYSE:SPR) 3.46%

Leucadia National Corporation (NYSE:LUK) 2.96%

Bruce Berkowitz has stated on numerous occasions that one of his favorite valuation metrics is cash flow. The average stock in Fairholme’s portfolio has a price/cash flow of 4.95 versus the category average of 8.07.

Here is a video of a recent interview with Berkowitz. He explains why his top holdings are Pfizer and Sears. He believes the price relative to cash flows makes Pfizer attractive at its current price. He expresses confidence in Eddie Lampert’s management and expects him to put the money to good use. He compares Sears to Berkshire Hathaway and expects the company to reallocate cash towards the best uses.

For the year, Berkowitz’s fund is ranked in the top 9% among other large blend funds. However, what is truly noteworthy is his longer term record. Below is a chart of Fairholme’s performance:

Cumulative Returns

3-Year +9.66%

5-Year +50.64%

Since Inception +225.88%

Average Annual Total Returns

3-Year +3.12%

5-Year +8.54%

Since Inception +12.87%

His phenomenal long term record has also attracted Morningstar’s attention. As I noted in a previous article, Bruce Berkowitz is also in the running for the domestic equity manager of the decade. Among his competitors are Donald Yacktman of the Yacktman funds and Charlie Dreifus of the Royce Special Equity fund. Morningstar should be announcing the winner in the coming days. It would be a remarkable feat if Berkowitz won manager of the year and the decade.

I congratulate Bruce on this reward, and wish him and his contestants the best of luck for the domestic equity manager of the decade award.

Author's Disclosure: pfe, hum, spr