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Bruce Berkowitz has been a man in the news lately, but for all the wrong reasons. Named Morningstar's U.S. Stock Manager of the Decade, Berkowitz's Fairholme Group has delivered outsized returns for investors for some time, but in recent months Fairholme has struggled due to big bets on financial firms like American International Group (NYSE:AIG), Citigroup (NYSE:C) and Bank of America (NYSE:BAC). As a result, Fairholme's funds are badly lagging the broader market and investors are pulling money from the firm, including The Big Picture's Barry Ritholtz announcing in April that he was "firing" Fairholme from his clients' model portolio allocation.

Due to money outflows, Fairholme's Q2 2011 13F-HR filing may reflect transactions of necessity rather than Berkowitz's current investment outlook. Only 3 new and fairly small positions were added:

COMPANY Current Price Market Cap Yield PE
Jefferies Group Inc (JEF) $16.56 3.689B 0.30 (1.88%) ex-div:"Jul 13" 11.4
Vodafone Group PLC (NASDAQ:VOD) $27.68 142.8B 1.444 (5.33%) ex-div:"Jun 1" 11.0
Assured Guaranty Ltd (NYSE:AGO) $12.00 2.210B 0.18 (1.57%) ex-div:"May 16" 6.1

Fairholme continued to pile chips on the financial sector, most notably American International Group, where he more than doubled his stake to $3B. The group also added to stakes in Berkshire Hathaway (NYSE:BRK.B), MBIA and BAC.

While Berkowitz sold off a relatively large number of stocks, only Cisco (NASDAQ:CSCO), RSC Holdings (NYSE:RRR) and Spirit Aerosystems (NYSE:SPR) topped $100M in holdings during last quarter's filing.

Readers can view all of Fairholme's Q2 moves in spreadsheet format here.

Bruce Berkowitz has always been on my (very) short list of money managers I would recommend to retail investors. In fact, I have often considered delegating my investment decisions to Fairholme and doing something else with my time. But this recent spell is troubling, not for the short-term dry spell of losing 25% so far in 2011 vs. the S&P 500's 6% loss, but rather the context in which this downturn is occurring.

In recent years, Berkowitz has carved a new direction for Fairholme. With billions under management, he encountered the same issues that afflicted other noted value investors like Warren Buffett: once a certain size is reached, bigger investments are needed to "move the needle" and smaller opportunities are no longer viable. Buffett responded by eventually turning Berkshire Hathaway into a conglomerate. Berkowitz, in turn, has become more active in investments: serving as chairman of St. Joe (NYSE:JOE), calling a joint conference call with Bank of America CEO Brian Moynihan, working with other investors in taking General Growth out of bankruptcy. In general, Berkowitz is moving toward exercising more control in his investments rather than being just a passive stock-picker.

This new direction did not sit well with two long-term Fairholme lieutenants, Larry Pitkowsky and Keith Trauner, who left the firm and now run their own value investment fund called Goodhaven. And with Fairholme's performance of late, it may be fair to ask just how much of that long term track record was attributable to the team around Berkowitz.

Luckily, I still plan on managing my own money and do not have to answer that question. Berkowitz has seen hard times before. Last week's conference call with Bank of America was reminiscent of a call he had with investors during the financial crisis to reassure them. Back then, he was confident that controversial picks which were diving, like Sears Holding (NASDAQ:SHLD), would work out and of course, he was right. But now, instead of Eddie Lampert, Berkowitz is dependent on folks like Moynihan and the AIG brain trust to pull this one out -- a step down in quality which may ultimately reflect on Fairholme itself.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Hedge Fund Tracking: Bruce Berkowitz Goes All-In on Financials