Should Investors Jump Into the Fairholme Fund While They Still Can?
Alex is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On January 30, 2013, Fairholme Funds announced that it will suspend the sale of shares to new investors. The funds impacted by this suspension will be The Fairholme Fund, Fairholme Focused Income and Fairholme Allocation .
Let me start by stating that I am not your typical mutual fund investor. In fact, I own only one mutual fund in my entire portfolio and FAIRX is it. The primary reasons to hold a mutual fund is a belief the manager of that fund has the ability to outperform your own portfolio or to easily get access to a specific sector in a convenient manner. I continue to hold FAIRX for both of those reasons.
Bruce Berkowitz is the manager of this fund and has proven to me in my years following his performance that he knows how to exploit price inefficiencies in the marketplace. Many were skeptical when the fund was taking large positions in the likes of American International Group, Inc ) and Bank of America Corporation ). Even though the fund was faced with massive redemptions in 2011 and 2012, Mr. Berkowitz stood firm to his investment thesis in these financials.
I stuck with FAIRX during this time of massive redemptions and have been rewarded with a return that exceeded 35% for 2012. So is the party over? I don’t think so. Mr. Berkowitz is showing a high level of confidence in his AIG investment that now makes up approximately 43% of the fund’s holdings as well as BAC which accounts for approximately 13%.
This brings me to the second reason to own a mutual fund and that is exposure to a specific sector in a convenient manner. One sector of the market I have never been aggressive buying is the financial sector. While this served me well in the last decade, I wanted to get my portfolio exposed to this sector via an experienced investor in order to participate in the rebound. At the time, FAIRX was aggressively acquiring and later defending investments in the financial sector.
Make no mistake, this mutual fund does not give you the diversification many seek from this type of investment. The top six holdings make up 90% of the fund and essentially get you exposure to the financials, cash, retail and real estate. In addition to its large holdings in AIG and BAC the fund also has sizable investments in Sears Holdings Corporation ), General Growth Properties, Inc. ), The St. Joe Company (NYSE: JOE) and holds approximately 12% of the fund’s assets in cash. While the fund’s investment in SHLD gives the investor access to the retail sector through the fund, the primary thesis to this investment appears to be more for the company’s vast real estate portfolio.
So if you are looking for a focused portfolio with exposure to primarily the financial and real estate sectors, FAIRX may be the fund for you. However, this is not decision you can sit on too long as the fund is closing to new investors on February 28, 2013. However, once you are a shareholder of the fund you will be able to purchase additional shares even after the fund closes to new investors.
ScavengerReport owns shares in The Fairholme Fund