Fairholme Funds: Does Berkowitz Have Any Investment Skill?

| About: Fairholme Fund (FAIRX)

Summary

Morningstar named Bruce Berkowitz "Manager of the decade" in 2010.

Since that award, the Fairholme fund is one of the worst performing funds in the world!

Was it luck or skill? Lets look at the data:

The investment management industry is full of people that were once considered "great investors" only to find out in the long run that said label was undeserved and that they got lucky for a short time. "Hero to Zero" is the label I like to use. A couple recent examples would include John Paulson, who had fantastic returns from 2007-09 only to have investors run in to catch his main fund losing 70% in 2011-12 or better yet, losing 90% in his gold fund. More recently Bill Ackman had the best returns in 2014 (up 40%). Investors ran in to lose almost 40% over the past 13 months. (It is interesting to note that both have had books written about some of their most profitable trades. True investment heroes once upon a time)

In 2010, Bruce Berkowitz won an award from Morningstar "Best Manager of the Decade". No surprise, the fund was up 26% in 2010, making him the top performer that year. Well, how has Mr. Berkowitz done since?

Data from Morningstar website:

Performance

FAIRX

More...

YTD

1 Mo

1 Yr

 

3 Yr

*

5 Yr

*

10 Yr

*

 

Growth of 10,000

8,416

9,037

7,813

 

9,123

 

8,800

 

14,040

 

Fund

-15.84

-9.63

-21.87

 

-3.01

 

-2.52

 

3.45

 

+/- S&P 500 TR USD

-7.33

-6.03

-13.08

 

-12.36

 

-11.85

 

-2.73

 

+/- Category

-7.14

-6.21

-8.52

 

-8.75

 

-9.16

 

-0.92

 

% Rank in Cat

99

99

96

 

99

 

99

 

74

 

# of Funds in Cat

1,476

1,483

1,369

 

1,187

 

1,037

 

751

 
Click to enlarge

Over the past five years, he has underperformed the S&P 500 by nearly 12% annually! His peer ranking - last place! Annual returns of NEGATIVE 2.5%. A simple summary would be: It has been a complete disaster!

YTD: down 16%, bottom 1% percentile again!

Data conclusion: all luck, no skill. Berkowitz has taken his place in the investor "Hero to Zero" hall of fame.

What are the lessons investors can learn?

1. Concentration goes both ways - Ackman, Paulson and Berkowitz all became investor heroes on concentrated bets that went their way. When they don't go their way, they quickly become the fallen stars. Beware of concentration - you either win big or lose big.

2. Many times the best funds become the worse funds. Don't chase performance, particularly when performance was the result of 1 or 2 big winners.

3. Are there any investor heroes today that run concentrated books that investors should take caution? CTAs were the heroes in January on two big bets - strong dollar and long treasuries. What will happen to them when those trades reverse? People can't get enough of investment grade bonds which have outperformed due to treasury rates coming in a lot in recent months. What will happen when treasury rates move up? Investors are loading up on private equity (chasing returns) which due to record commitments and peak multiples being paid is likely to be a disappointment.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.