"Focused" mutual funds are non-diversified, holding stakes in a small number (generally under 50) of stocks, as opposed to fully diversified funds that might hold hundreds, or even thousands, of positions. In a focused fund, it's not uncommon to see a 10% allocation to a single stock, if the fund manager thinks it's a conviction buy.
Many great investors are of the belief that your highest conviction picks should garner the most capital. Berkowitz obviously follows this school of thought as his AIG position represented almost 35% of his firm's reported assets at the end of 2011.
Before you go writing Berkowitz off as a lunatic, keep in mind that he was Morningstar's Manager of the Decade -- not an honor to be taken lightly. Through the "Lost Decade," he averaged an annualized return of over 11%, demolishing the S&P 500's paltry 0.5% return.
I've previously cited Berkowitz's analysis in my article about why I'm bullish on Bank of America (NYSE:BAC). However, his stake in BofA is a relatively tame 8%. His reasoning for investing in AIG is similar, but some question his judgment -- there's a reason CNN called the investment the boldest move of his career.
Berkowitz has a detailed case study on Fairholme's website explaining his conviction behind AIG. The highlights:
- AIG trades at less than one‐half tangible book value
- AIG has a fortress balance sheet
- AIG is the leader in global property and casualty insurance and a dominant U.S. life insurance and retirement services provider
Basically, Berkowitz claims that AIG's core franchises are still intact, and still earning the company money.
It's starting to look like Berkowitz may be right. While most doubted AIG's ability to repay taxpayer loans, they did it. Via the Wall Street Journal:
The Federal Reserve Bank of New York said it has fully recouped more than $70 billion in loans it made to support the 2008 bailouts of Bear Stearns Cos. and American International Group, closing a contentious chapter in the central bank's history.
On Thursday, the regional Federal Reserve bank said it has been repaid, with interest, on $53.1 billion in loans it made to two crisis-era vehicles that held complex subprime mortgage bonds, home loans, commercial-property loans and other unwanted assets from Bear and AIG. The New York Fed earlier recouped a separate $19.5 billion loan that financed the purchase of mortgage-backed securities from AIG.
Will AIG's stock price recover? Only time will tell. I'm leaning towards saying "yes," although I would never have the guts to initiate a 30% stake like Berkowitz has.
(One more factor worth considering: insiders at AIG are buying.)
Disclosure: I am long BAC.
Additional disclosure: I may initiate a long position in FAIRX over the next 72 hours.