Famed value investor Bruce Berkowitz has hit hard times over the past decade, with big bets on losers like Eddie Lampert’s Sears Holdings. In fact, over the past 10 years, his Fairholme Fund’s annualized return is only 4.89 percent – less than half of the S&P 500’s 13.56 annualized gain.
But contrarian Berkowitz is on the comeback trail. Last year, his flagship Fairholme Fund bested the market to gain 32.06 percent – a stark contrast to its loss of 23.17 percent in 2018.
Berkowitz, who runs a concentrated portfolio, managed that gain despite holding 38.5 percent of the fund in cash, according to the annual report of Fairholme Capital Management.
The biggest contributor to performance was his long-held stake in the St. Joe Co., a Florida real estate concern that in the past has been the target of short sellers, including Greenlight Capital’s David Einhorn. The stock gained about 50 percent in 2019 and contributed 13.9 percentage points to Fairholme’s returns.
“The company, with partners, has ignited residential and hospitality operations to meet accelerating demand,” Berkowitz wrote in a letter to investors.
Fannie Mae and Freddie Mac, long investment widow makers, also were winners. Berkowitz shed his common stock holdings in the mortgage giants years ago, but preferred shares of Fannie Mae and Freddie Mac still comprise about 20 percent of his portfolio.
Those stocks jumped last year on renewed optimism that the Trump administration would release the two companies from the conservatorship status and recapitalize them by selling the government’s nearly-80 percent stake to private investors.
Berkowitz is one of several big-name investors – including Richard Perry and Pershing Square CEO Bill Ackman – who took stakes in Fannie and Freddie in 2013 after the federal government decided to take all future profits to repay the money it lent them during the crisis, a maneuver known as the net-worth sweep.
Those three investors were among the first to sue the government over that action. The lawsuits are winding through the courts, with several rulings in the investors’ favor last year.
“The law mandates their eventual release and recent court decisions (after review of discovery documents) are starting to confirm,” Berkowitz told investors.
“Fannie and Freddie are expected to earn and retain billions of dollars each year – charging less than one-half of one percent to guarantee affordable, long-term mortgages,” he wrote. “No other institution does it for less or better serves families who want the American dream of home ownership and financial independence.”
Fannie and Freddie’s preferred stocks contributed 8.3 percentage points to Fairholme’s gains in 2019.
According to the annual report, Fairholme also owns stakes in Anheuser-Busch, AT&T, Warren Buffet’s Berkshire Hathaway Energy, and a smattering of other names.
A black mark on Berkowitz’s investing prowess in recent years was his willingness to stick with Lambert’s disastrous retailing experiment until the bitter end, when it filed for bankruptcy in 2018.
Even as he remained its second-largest shareholder, Berkowitz left the Sears board and told investors in his 2017 annual letter that Sears had “wrecked” his fund’s performance. At the end of 2019, Sears corporate bonds and commercial paper accounted for 0.1 percent of the Fairholme Fund portfolio.
Berkowitz also had been an investor in Seritage Growth Properties, the Sears real estate spinoff, but he sold all his shares before Sears’ bankruptcy filing.
Fairholme’s assets under management peaked at $20 billion in 2011, but – like many contrarian hedge fund managers – assets shrunk due to a decade of underperformance. He now runs about $1.2 billion across three funds, according to the recent annual report. In addition to the Fairholme Fund, these funds are the Fairholme Focused Income Fund and the Fairholme Allocation Fund.
Berkowitz said he and affiliated entities own about 20 percent of the Fairholme Fund, which is the largest of the three at approximately $1 billion in AUM.
