Named Morningstar's stock manager of the decade, Bruce Berkowitz's struggles in the last year or so at Fairholme Capital are well chronicled. Fairholme was beset with investor withdrawals as the fund values plunged due mainly to large and admittedly ill-timed bets on financials. In addition, some have questioned whether Fairholme's performance and focus have been damaged by personnel changes and Barron's even published gossip-y piece detailing Berkowitz's strange relationship with his cousin's husband. Undoubtedly, 2011 was a trying year for Berkowitz.
In a recent in-depth interview, Berkowitz remained adamant that his big bets on financials were simply early and would pay off handily in the future as these stocks are undervalued by multiples of their current prices. He's expecting these stocks to more than double his money. This bullish view may explain some of his warrant picks discussed below. So far, 2012 has seen a recovery in some of Fairholme's holdings as the "dogs" of 2011 have outperformed thus far.
Judging from the Q4 filing, it looks like Fairholme was again a forced seller due to investor withdrawals. The only new stake was JPMorgan (JPM) warrants. The only existing positions added to were AIG, Bank of America (BAC) and Wells Fargo (WFC) warrants. I have not done the analysis to see if the warrants are trading at a low premium or even discount but it seems Berkowitz may be using warrants to get leverage on stocks he already believes are deeply undervalued. With forced selling, warrants may be a way to get more bang for his buck in terms of exposure to upside and perhaps a calculated bet to make back the huge losses in 2011.
Berkowitz basically sold some or all of everything else, including a complete divestiture of Brookfield Asset Management (BAM), one of my core holdings. It is impossible to determine if Berkowitz was not high on the company. Fairholme only came to its BAM stake due to a deal to sell its stake in General Growth Properties (GGP). Berkowitz did not buy any BAM in the open market for as long as I've been following his filings. The complete exit from BAM suggests the stock was not a core holding for him. Other significant reductions include Berkshire Hathaway (BRK.B), Citigroup (C), Jefferies Group (JEF) and Regions Financial (RF). Many value investors use Berkshire Hathaway almost as a cash holding proxy so I would not read too much into that but Berkowitz states in the recent interview that the portfolio is becoming more focused, presumably on his best ideas, so it is probably safe to presume that while he views much of the financial services sector as undervalued, he favors JPM, BAC, AIG and WFC over C, JEF and RF.
At this point, Berkowitz is basically betting the farm on financial stocks to salvage his and the fund's investing reputation. The only non-financial stocks in his portfolio are Sears Holdings (SHLD) and St Joe's (JOE) but even here, these stocks have a heavy asset management component to them. Whether these bets will pay off remains to be seen.