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There was an article on fairholme in Barron's this week. Not sure what to make of it. I am a shareholder in FAIRX and have been adding with recent slide. Not planning on selling but fairholme is certainly making headlines recently. Just google The Trouble at Fairholme. I didn't want to copy and paste the article. We shall see if Litman Gregory bails on FAIRX.
The whole thing continually reminds me of Cramer's discussion of the run on his hedge fund in "Confessions of a Street Addict". His fund started tanking and his wife told him to prepare for a run on the fund. He laughed it off, thinking that he'd made so much money for these people previously that there was no way they'd leave - sure enough, many of them who'd been invested with him for years and years did - and did so in no uncertain terms - and the fund got very, very close to having to liquidate.
In the case of Fairholme, it was a risk to make a gigantic bet on financials in this period - not only a bet, but betting to the level where many of the bets would likely be difficult to unwind. Fairholme is a core holding for many people, and when a giant bet went awry, the fund not only stuck with it, then doubled and tripled down.
People can can continue to call these financials "values" all they like, but it didn't work and there's really no catalyst for them on the horizon, yet Berkowitz continues to say that "this is a repeat of the '90s'." Even if Berkowitz is right - and I didn't think he was when his bet on the financials started - how long is he going to wait while the market stays - in his opinion - irrational?
This isn't a supporting player fund or specialized hedge fund (speaking of hedge funds,many of the funds who acted like the financials were "values" appear to have wisely bailed part/all.) Fairholme is (was?) a core holding (for many people) mutual fund that has a large minimum investment. It's not even a matter of risk as much as it is one manager's wrong-way bet - and the retail investor isn't going to be loyal, no matter what Berkowitz has done over the last decade. All the hot money who heard about this "Berkowitz guy" from Morningstar or elsewhere have now headed for zee hills.
People are not only not going to wait around forever (especially if the fund doubles and triples down on the investment) for a risky fund-sized bet to work out sometime, but it risks severely negative press and outflows (speaking of negative press, I can't believe more hasn't been made of Fairholme Allocation's ridiculous allocation to only a couple of names, as well as its appearance of just a way to extend financial bets.)
It all puts a damper on anything like trying to do something with St Joe (which wasn't going to happen anytime soon anyways, but after all that's gone on this year, any possibilities for that have been extended further into the future.) Fernandez has now left, and that doesn't get into the ridiculous thank you note to the government or the conference call with BoA's CEO, which felt like a desperate PR stunt.
As for the Barrons article, you have to be a subscriber. I see something about Berkowitz forgiving a large loan to Fernandez in the preview, though?
Hi Scott, If you go to google and enter the title of the article (see first link), you can get the article. I guess for now, I am sticking with the fund (5% of my portfolio). I realize that value investors buy things on the cheap and they can stay cheap for a while. Also buying things on the cheap is NO guarantee that they will not get cheaper. Withman (third avenue) and Davis (selected) have been struggling recently (also hedge funds run by Paulson, Einhorn and Ackman). Some of their holdings have been wiped out: AIG/sino forest (Davis) and MBIA (Withman). However, in Bruce's case I am not aware of any investment that he had that was wiped out. I know your stance on Bruce and I respect that. However, for now, I am sticking with him. I also own CGM focus, Third Avenue Value, and selected. Even Bruce will admit that he piled on early but according to him he bought the assets on the cheap. In addition, I am assuming he is doing his homework since he didn't buy AIG in the past (prior to it blowing up). I realize that "we shall see" is not an investment strategy but in this case, I am willing to hold on to FAIRX. What bothers me is the departure of Fernandez with no prior explanation and the fact that he did not close the fund as all the idiots were pilling on near the top and are now leaving with the underperformance. Also FAIRX has always been concentrated and it is a surprise that only recently has it underperformed.
Reply to @ET91: Well - and I think this is probably the last I'll say about Fairholme because even I think I'm going over the same ground.
1. I hope Fairholme does well/turns around for the people who own it.
2. I think Berkowitz is an excellent investor, but even I thought the banks simply were in the eye of the storm before problems appeared again. Some other major investors (Tepper, etc) who had a similar thesis ("OMG, the banks are values!") got largely out before the turn. While Berkowitz can continue to believe that this is a repeat of the '90's, there's a point where people aren't willing to follow on a massive - to the point where the fund relied on it - bet that isn't working. Fairholme has almost always been concentrated, but I don't believe bets have been made similar to the size of the AIG bet, for example. Managers get upset when people run during a tough period - I believe Whitman also got royally pissed when people ran in 2008 - but money (whether it be rich money, smart money, dumb money, old money, funny money) will head for zee hills in this sort of situation, without fail. Again, read the Cramer book - managers think that "I've made so much money, people won't leave." Yes, they will. Raising the minimum investment doesn't do anything - people are still going to leave.
Even hedge fund managers are coming up with new ideas to get stable sources of money - Ackman is taking a fund public next year and Third Point has started a reinsurance company like Einhorn has (although it isn't public, yet.)
2a. I'm surprised there haven't been hedge fund-like mutual funds created with a lock-up period (as a trade-off, they would have far greater flexibility than traditionally seen with a mutual fund.) Then managers could make unusual/risky/hedge-fund like bets on anything and have the ability to use hedge-fund like tactics - private equity, whatever - and people would know going in.
2b. Here's a question that could deserve its own thread: can you be a mutual fund like Fairholme and make a massive bet (and while the fund has been concentrated, I don't think it's ever been this concentrated in terms of the size of the bets and the hot money probably allowed him the ability to go that big in terms of the bets) on something like financials that may not work for a year or two or three when the level of underperformance will cause large redemptions, negative press and a general negative feedback loop (having to sell positions to raise cash, people not in the fund staying away because of what they're seeing and reading) probably by the end of the first year? It doesn't matter if it's Berkowitz, either: John Paulson could make the biggest trade ever and if his fund tanks the next year (worse than Berkowitz is doing), it really is a "what have you done for me lately?" They're not going to go, "Oh ok, better luck next year." (Speaking of, I wonder how Paulson's fund betting on literal real estate in the SW is doing.)
Every manager is going to have a bad period - it's a given. However, I think how they handle it shows a lot.
One almost has to be a smaller, specialized fund to make these sorts of bets and be able to sit on them under the radar and with investors who know what they're getting into. People on here can know what Fairholme is generally about, but I'd be curious what % of money in Fairholme is average people who invested in "this Berkowitz guy" who was "Morningstar's Manager of the Decade".
2c. Does raising the minimum investment for a mutual fund to $10K, $25k, etc cause money to be redeemed faster when things go South? If people have less money at stake, maybe they'll give the manager a little more time. Some are obviously dealing with giant portfolios, but how many people had Fairholme as a gigantic holding in a smaller portfolio, given how it's done in prior years?
3. The "thank you note" to the government was off-putting and seemed really about ego; it may as well have said "thank you for continuing to bail out my top positions." The banks may be bailed out/backstopped again if they get into trouble (actually, it seems likely), but I think that's a really unsatisfactory investment thesis. If you're telling me there's no better ideas out there than piling money - doubling and tripling down - into financial stocks who will continue if things go bad again because they'll get bailed out, things are even worse than I think.
Even if the world doesn't turn sour again, not seeing what the catalyst for banks will be anytime soon - they'll be dealing with increased regulations, increasing anger from the general population, etc. I will say at least Berkowitz has admitted it hasn't been a good year, it isn't like Kinetics Paradigm and their response when they stuck with financials all the way down in 2008.
4. It's exciting to me when great investors offer new products that can give retail investors new strategies or asset classes or even just another take on the usual asset classes from a great investor. I look at Fairholme Allocation and I think the idea of having nearly half the fund in two names is absurd, and what's new in it?. Fairholme Allocation almost feels like it was a way to get more money to invest in the same financial bets. If the fund isn't going to take a different approach than the other fund, then really - why offer it? Closing Fairholme also should have been considered.
5. I'm a little surprised that the situation with Fernandez was so sudden, although it appears as if it was prepared for.
Fascinating read. Maybe a future HBO series. Googled "Trouble at Fairholme" and got the article as ET said. For some reason when I tried to link that for you, wouldn't load completely. Guess Googling gets ya in the back door. Don't have any wsj publications and wouldn't again after recent trouble getting our Barron's IPad edition stopped. #%*!#.
Do think hot money and bloat a big problem with some funds. Causes fund to throw more and more at same holdings as money rushes in. To some extent self-fulfilling as helps drive those stocks even higher. Copy cat investors see this too and pile into same stocks. Hard to quantify, but no doubt somebody's studied it.
Opposite happens when the fund hits rough patch. Manager forced to liquidate at lower and lower prices as investors bail. Don't need to be focused to experience this. Dodge and Cox may have been victim too, but not to same extent. Focused funds volatile I know. Got no focused funds per se, but a tad in sector funds (real estate and natural resources.) Probably feels similar - like sitting on a keg.
link to the article. Doesn't inspire confidence in the back office operations either. I think I can see why the two analysts left. May be awhile before this fund rights itself.
Amazingly enough, I own FAAFX and it has been one of my top performing funds in the last month. Alas... it is still down quite a bit since I bought it in February. I'm just hoping (for my own sake) in a year from now, Berkowitz is able to snub his nose at all the naysayers who have ripped him apart this year and say... yup, I got the last laugh.
Early on in the whole St Joe discussion, I said they should bring Asian conglomerate Genting over to build one of their destination resorts. Genting did decide to start in Florida soon after - only in Miami. The property (Resorts World Miami) will cost over $3b and be the largest resort/casino in the world. Additionally, one of the largest developments in Florida history. Epic, epic looking place.
Comments
In the case of Fairholme, it was a risk to make a gigantic bet on financials in this period - not only a bet, but betting to the level where many of the bets would likely be difficult to unwind. Fairholme is a core holding for many people, and when a giant bet went awry, the fund not only stuck with it, then doubled and tripled down.
People can can continue to call these financials "values" all they like, but it didn't work and there's really no catalyst for them on the horizon, yet Berkowitz continues to say that "this is a repeat of the '90s'." Even if Berkowitz is right - and I didn't think he was when his bet on the financials started - how long is he going to wait while the market stays - in his opinion - irrational?
This isn't a supporting player fund or specialized hedge fund (speaking of hedge funds,many of the funds who acted like the financials were "values" appear to have wisely bailed part/all.) Fairholme is (was?) a core holding (for many people) mutual fund that has a large minimum investment. It's not even a matter of risk as much as it is one manager's wrong-way bet - and the retail investor isn't going to be loyal, no matter what Berkowitz has done over the last decade. All the hot money who heard about this "Berkowitz guy" from Morningstar or elsewhere have now headed for zee hills.
People are not only not going to wait around forever (especially if the fund doubles and triples down on the investment) for a risky fund-sized bet to work out sometime, but it risks severely negative press and outflows (speaking of negative press, I can't believe more hasn't been made of Fairholme Allocation's ridiculous allocation to only a couple of names, as well as its appearance of just a way to extend financial bets.)
It all puts a damper on anything like trying to do something with St Joe (which wasn't going to happen anytime soon anyways, but after all that's gone on this year, any possibilities for that have been extended further into the future.) Fernandez has now left, and that doesn't get into the ridiculous thank you note to the government or the conference call with BoA's CEO, which felt like a desperate PR stunt.
As for the Barrons article, you have to be a subscriber. I see something about Berkowitz forgiving a large loan to Fernandez in the preview, though?
1. I hope Fairholme does well/turns around for the people who own it.
2. I think Berkowitz is an excellent investor, but even I thought the banks simply were in the eye of the storm before problems appeared again. Some other major investors (Tepper, etc) who had a similar thesis ("OMG, the banks are values!") got largely out before the turn. While Berkowitz can continue to believe that this is a repeat of the '90's, there's a point where people aren't willing to follow on a massive - to the point where the fund relied on it - bet that isn't working. Fairholme has almost always been concentrated, but I don't believe bets have been made similar to the size of the AIG bet, for example. Managers get upset when people run during a tough period - I believe Whitman also got royally pissed when people ran in 2008 - but money (whether it be rich money, smart money, dumb money, old money, funny money) will head for zee hills in this sort of situation, without fail. Again, read the Cramer book - managers think that "I've made so much money, people won't leave." Yes, they will. Raising the minimum investment doesn't do anything - people are still going to leave.
Even hedge fund managers are coming up with new ideas to get stable sources of money - Ackman is taking a fund public next year and Third Point has started a reinsurance company like Einhorn has (although it isn't public, yet.)
2a. I'm surprised there haven't been hedge fund-like mutual funds created with a lock-up period (as a trade-off, they would have far greater flexibility than traditionally seen with a mutual fund.) Then managers could make unusual/risky/hedge-fund like bets on anything and have the ability to use hedge-fund like tactics - private equity, whatever - and people would know going in.
2b. Here's a question that could deserve its own thread: can you be a mutual fund like Fairholme and make a massive bet (and while the fund has been concentrated, I don't think it's ever been this concentrated in terms of the size of the bets and the hot money probably allowed him the ability to go that big in terms of the bets) on something like financials that may not work for a year or two or three when the level of underperformance will cause large redemptions, negative press and a general negative feedback loop (having to sell positions to raise cash, people not in the fund staying away because of what they're seeing and reading) probably by the end of the first year? It doesn't matter if it's Berkowitz, either: John Paulson could make the biggest trade ever and if his fund tanks the next year (worse than Berkowitz is doing), it really is a "what have you done for me lately?" They're not going to go, "Oh ok, better luck next year." (Speaking of, I wonder how Paulson's fund betting on literal real estate in the SW is doing.)
Every manager is going to have a bad period - it's a given. However, I think how they handle it shows a lot.
One almost has to be a smaller, specialized fund to make these sorts of bets and be able to sit on them under the radar and with investors who know what they're getting into. People on here can know what Fairholme is generally about, but I'd be curious what % of money in Fairholme is average people who invested in "this Berkowitz guy" who was "Morningstar's Manager of the Decade".
2c. Does raising the minimum investment for a mutual fund to $10K, $25k, etc cause money to be redeemed faster when things go South? If people have less money at stake, maybe they'll give the manager a little more time. Some are obviously dealing with giant portfolios, but how many people had Fairholme as a gigantic holding in a smaller portfolio, given how it's done in prior years?
3. The "thank you note" to the government was off-putting and seemed really about ego; it may as well have said "thank you for continuing to bail out my top positions." The banks may be bailed out/backstopped again if they get into trouble (actually, it seems likely), but I think that's a really unsatisfactory investment thesis. If you're telling me there's no better ideas out there than piling money - doubling and tripling down - into financial stocks who will continue if things go bad again because they'll get bailed out, things are even worse than I think.
Even if the world doesn't turn sour again, not seeing what the catalyst for banks will be anytime soon - they'll be dealing with increased regulations, increasing anger from the general population, etc. I will say at least Berkowitz has admitted it hasn't been a good year, it isn't like Kinetics Paradigm and their response when they stuck with financials all the way down in 2008.
4. It's exciting to me when great investors offer new products that can give retail investors new strategies or asset classes or even just another take on the usual asset classes from a great investor. I look at Fairholme Allocation and I think the idea of having nearly half the fund in two names is absurd, and what's new in it?. Fairholme Allocation almost feels like it was a way to get more money to invest in the same financial bets. If the fund isn't going to take a different approach than the other fund, then really - why offer it? Closing Fairholme also should have been considered.
5. I'm a little surprised that the situation with Fernandez was so sudden, although it appears as if it was prepared for.
Do think hot money and bloat a big problem with some funds. Causes fund to throw more and more at same holdings as money rushes in. To some extent self-fulfilling as helps drive those stocks even higher. Copy cat investors see this too and pile into same stocks. Hard to quantify, but no doubt somebody's studied it.
Opposite happens when the fund hits rough patch. Manager forced to liquidate at lower and lower prices as investors bail. Don't need to be focused to experience this. Dodge and Cox may have been victim too, but not to same extent. Focused funds volatile I know. Got no focused funds per se, but a tad in sector funds (real estate and natural resources.) Probably feels similar - like sitting on a keg.
http://online.barrons.com/article/SB50001424052748703927304576637270740785508.html?mod=BOL_twm_fs#articleTabs_panel_article=1
Looks like Whitney Tilson is liking the banks now....
http://www.marketwatch.com/Story/story/print?guid=982B3AA0-FE71-11E0-96DF-002128040CF6
Early on in the whole St Joe discussion, I said they should bring Asian conglomerate Genting over to build one of their destination resorts. Genting did decide to start in Florida soon after - only in Miami. The property (Resorts World Miami) will cost over $3b and be the largest resort/casino in the world. Additionally, one of the largest developments in Florida history. Epic, epic looking place.
Website now up: http://rwmiami.com/media_gallery.html