Former Fairholme Fund Managers Don't Share Old Boss's Bullish View on Financial Sector

Jul. 21, 2011 9:51 AM ETMSFT, HPQ, GOOG, BAC, FHI, MLI, SPB, DHCP, MBI
Devon Shire profile picture
Devon Shire
There have been a lot of eyes on Fairholme Fund manager Bruce Berkowitz lately. He has loaded up on financial stocks that everyone hates and his short-term performance has been lousy. Through the end of June 2011 the Fairholme Fund was down 9.42% and ranked in the last (pdf) percentile of funds in its category for the year to date.
And Fairholme investors are starting to lose faith with $2.5 billion being withdrawn in the last 3 months alone. Personally I find it unbelievable how little patience most investors have as they are bailing on a manager in Berkowitz that still has virtually the best five and ten year track record of any mutual fund. And more than that as is often the case these investors are likely redeeming at the exact time they should be buying as the stocks that Fairholme holds are likely the ones near a bottom.
As of the most recent fund update Fairholme’s largest positions are as follows:
AIG (AIG) – 8.7%
Sears (SHLD) – 6.0%
Bank of America (BAC) – 5.5%
Berkshire Hathaway (BRK.A) – 5.2%
Morgan Stanley (MS) – 5.2%
Goldman Sachs (GS) – 5.0%
Citigroup (C) – 4.9%
Brookfield Asset Management (BAM) – 4.7%
Regions Financial Corp (RF) – 4.5%
AIA Group Limited (HK listed) – 4.4%
Total Invested of Fairholme in these ten holdings – 54.1%
For most of the life of the Fairholme Fund Keith Trauner and Larry Pitkowsky were key cogs in the investing process. On April 11, 2011, Trauner and Pitkowsky, who had left Fairholme announced the launch of their own new fund called “The Goodhaven Fund.” I thought that it would be very interesting to check in with their start up to see if their thinking was still very much in line with their former colleague Berkowitz. With much of their expertise groomed beside Berkowitz I was expecting to see The Goodhaven Fund loaded with financial stocks.
I was wrong.
At May 31, the largest holdings in The Goodhaven Fund were:
Microsoft (MSFT) - 7%
Spectrum Brand Holdings (SPB) - 6%
Walter Investment Management (WAC) - 4.2%
Google (GOOG) - 4%
Miscellaneous Stocks - 3.9%
Hewlett Packard (HPQ) - 3.5%
Federated Investors (FII) - 3.3%
Qwest Corp Bond - 2.4%
Berkshire Hathaway (BRK.B) - 1.9%
Mueller Industries (MLI) - 1.9%
Total 38.1%
You can see pretty clearly that there is virtually nothing similar about the portfolio of Fairholme and that of Goodhaven. The only two similarities are that each hold a position in Warren Buffett’s Berkshire Hathaway and that both hold large cash positions (Fairholme 27% in cash and Goodhaven 53% in cash).
While Berkowitz/Fairholme is clearly heavily concentrated in the financial sector Goodhaven has almost entirely avoided that area. I thought that might be due to Goodhaven being a very small fund and Fairholme being enormous. But when you consider that Goodhaven’s largest positions consist of tech giants Microsoft, Google and Hewlett Packard you can clearly see they aren’t concerned with focusing on smaller companies. It appears that Goodhaven simply doesn’t see the value in the financial sector that Berkowitz does.
The inaugural Goodhaven semi-annual report sheds some light on the current thinking of Trauner/Pitkowsky on the financial sector:

“Although our cash position will decrease as we find new and appropriate investments, the world is still a troubled place and we are mindful that many of the causes of the 2008-2009 financial crises have not yet been addressed. Government finances are in shambles. Many European banks are stuffed with sovereign paper of questionable value and many domestic institutions are struggling with troubled assets, depressed markets, and costly legal issues. Most derivatives remain unregulated and unlisted on exchanges, where collateral and counterparty risk might be reasonably gauged. U.S. growth is subdued and the housing ATM shut down long ago. And although interest rates are bumping around historic lows as the Federal Reserve maintains its policy of zero percent, they are almost certain to rise in future years, perhaps meaningfully. Typically, these sorts of conditions do not make for easy sailing in financial assets.”

That is a big difference in perspective from their former colleague Berkowitz who through investments in Bank of America, AIG and others thinks that the financial sector is exactly where an investor should be.
Despite some clear current differences in opinion on the attractiveness of the financial sector, Trauner and Pitkowsky have certainly carried over from Fairholme the desire to be contrarian. At the turn of the century when technology stocks where all the rage Trauner/Pitkowsky wanted no part of them. Now that the same big tech titans are unloved with stock prices that have gone nowhere for more than a decade Trauner/Pitkowsky are buying. Here are their comments on their interest in the tech sector:

“As we start out, it is entirely fitting that our largest investments are in the technology arena – in a group of companies we refused to touch more than a decade ago when the world was enthralled with all things Internet and related securities were priced beyond perfection. Today, some of these same businesses have achieved a measure of dominance in their areas of specialty, have extraordinarily strong and liquid balance sheets, operate around the world, continue to grow, and now sell at low multiples of earnings and low prices compared to our estimates of intrinsic value. We have established meaningful investments in Microsoft, Google, and Hewlett-Packard. We believe all are capable of generating attractive owner returns over time from present prices irrespective of near-term economic conditions and doubts about the persistency of their franchises, which our research leads us to

believe are stronger than most realize.”

So who is correct ? Berkowitz and his big bet on financials ? Or Trauner/Pitkowsky and their interest in large cap tech ? I’m inclined to think that there is a really good chance that they both are.

The financial sector is likely beyond my circle of competence but should be right where Berkowitz does his best work. It is just too early to consider his moves a mistake. And buying the likes of Microsoft, Google and HP at current valuations likely can’t go too wrong for an investor and could go very right. Goodhaven is also likely on the right track.

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

This article was written by

Devon Shire profile picture
Author of the value investing newsletter detailing the formation of the "Punch Card Portfolio" ( Devon Shire is an accountant and an investor with 15 years experience managing a private portfolio. Devon Shire's preferred portfolio management style is a concentrated approach, investing only when finding opportunities that offer a sufficient discount to the intrinsic value of a business. Devon can be contacted at

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