Bruce Berkowitz is one of my favorite fund managers. His contrarian way of thinking has allowed him to continually generate fantastic returns since he started his Fairholme Fund. However, this consistency came to a halt last year, when his overweight positions in financials took a toll on the fund's portfolio.
Lets look over some of Berkowitz's positions.
His holdings include:
Bank of America (BAC)
American International Group (AIG)
Sears Holding (SHLD)
CIT Group (CIT)
All but one of these companies are financials. However, even Sears Holding has seen a great deal of problems arise recently.
With the European debt crisis popping up and the S&P downgrade of the U.S., financials were the hardest hit last year.
Bruce Berkowitz had a heavily concentrated portfolio and not only his portfolio value decreased significantly, but many investors sold causing Berkowitz to sell assets to meet redemption requests.
Bank of America fell 65% last year. AIG fell more than 50%. Sears Holding fell 41%. CIT Group fell 15%. Citigroup fell 30%.
So how did Berkowitz get it so wrong?
Well, lets take a look at AIG. The government chose to sell shares at a lower price than Berkowitz initially believed. This caused the price to stay depressed.
Regarding financials such as Bank of America and Citigroup, Berkowitz wasn't necessarily wrong, but his timeframe was off. He believed that both banks would strengthen their balance sheets and sell non-core assets. This is something that we are just beginning to see.
Sears has been getting rid of underperforming stores as well. Last month, it announced plans to sell up to 200 stores. The stock fell on the news, but recently has bounced back.
So the real question is, can Berkowitz redeem himself in 2012?
I actually believe he can. He is a contrarian and buys companies that are just strongly disliked. However, something to note about these companies is that almost all are profitable except for Sears.
Berkowitz did well in the early 90s when he took a stake in Wells Fargo. That was a time when the financials happened to be very unfavorable as well. I believe Berkowitz will bounce back as these financials are getting rid of toxic assets at a rapid pace and finally focusing on their core businesses.