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Bruce Berkowitz Rolling Dice On Bailout Babies--- Again !
I found Mr. Ely's comments to be a weak description of the issue, and points to a rather lackluster effort at reporting by Andrew Osterland .
From the Fairholme website:
“Fannie Mae and Freddie Mac are rapidly repaying the Government,” said Bruce R. Berkowitz, Managing Member and Chief Investment Officer of Fairholme Capital Management. “Their success should surprise no one given the value of Fannie and Freddie. Once the Government has recouped its investment, The Fairholme Fund – on behalf of our shareholders who are predominantly individual Americans with an average investment in the Fund of $43,000 – is owed a contractually specified, non-cumulative dividend for its investment in these companies. As solvent, highly profitable companies, Fannie and Freddie should honor all outstanding obligations to their investors.”
Fairholme’s actions do not challenge the 2008 emergency investments by the Government in Fannie and Freddie. Instead, Fairholme is contesting the August 2012 “Net Worth Sweep” that attempted to change the rules of priority. “Fairholme’s objective is quite simple,” continued Berkowitz. “The Government set the terms of their 2008 investments and should be held to their original deal.”
What strikes me most is the difference in volatility. Superior excess returns with lack of downside volatility is what I suspect really drove Fairholme's early attention and attendant AUM, once nearly $20B.
Here are the numbers from its inception through 1Q2007, just before financials popped (a kind of preview to my assignment for Mr. Moran):
Even through the great recession, FAIRX weathered the storm...fortunately, for many of us readers here on MFO. Here are the decade's numbers that helped earn Mr. Berkowitz Morningstar's top honor:
Pretty breathtaking. In addition to AUM, the success also resulted in Fairholme launching two new funds, FAAFX (profiled by David in April 2011) and FOCIX.
Here is table summarizing Fairholme family performance through June 2013:
Long term, FAIRX remains a clear winner. But investors have had to endure substantial volatility and drawdown this decade - something they did not experience last decade. It's resulted in extraordinary redemptions, despite a strong 2012. AUM is now $8B.
The much younger FOCIX tops fixed income ranks in absolute returns, but not risk adjusted returns, again due to high volatility (granted, much of it upward..but not all). The fund bet heavy with MBIA and won big. Here's current Morningstar performance plot:
And FAAFX? About all we shareholders can say is that it's beaten its older brother since inception, which is not saying much. Below market returns at above market volatility. (I still believe it misplayed its once-heavy and long-term holding in MBIA.)
Here are latest MFO ratings for all three Fairholme funds:
None are Great Owls.
Yet, if I had to bet on one fund manager to deliver superior absolute returns over the long run, it would be Bruce Berkowitz. But many of us have come to learn, it's gonna be a bumpy ride. Like some other deep value money managers, he may simply look beyond risk definitions as defined by modern portfolio theory...something fans of Fairholme may need to do also.
HI Charles: I personally am a satisfied investing customer although I was getting disgruntled during his media darling days. The man has seeds and he backs it up with something like over 70% of his wealth. It's conviction that's made me a boatload. I've been in pretty much since the launching of the fund and I bought more when he hit the rocky ground just like Buffett and Munger tell me to do. Just thankful that it's in a Roth account.
Superior over the long run? Only sort of. BB is an exciting manager, to put it mildly, but at every interval except 1y you got as good or better performance from YAFFX and FLPSX, with many fewer jolts. And if you're simply dying to rock 'n' roll, give your dough to Soviero (FLVCX) or Heebner (CGMFX). Never really got the appeal of FAIRX even when I held it (long time), except for returns-chasing.
Reply to @davidrmoran: Come on...credit where credit is due. You're certainly right about the volatility, but since inception FAIRX has delivered great absolute (and even risk adjusted long term) returns. He's just posted 2Q2013 shareholder letter, which I'm delightfully surprised to see.
And, here's performance plot from Fairholme site:
In the letters, he's obviously relishing BAC and AIG returns. And, trying to call attention to FAIRX's good performance over almost any five-year rolling period. As well as arguing his rationale for Freddie/Fannie holdings and attendant lawsuit.
In FOCIX letter, he acknowledges "MBIA bonds were sold in the period, resulting in an above average return." That's an understatement. While holding Sears and JCP.
In FAAFX update, which is where I'm currently invested with Mr. Berkowitz:
The Fund’s annualized and cumulative performance returns since inception remain below those of the S&P 500 Index for the same period. We believe that the Fund’s portfolio is well-positioned in unique, small-quantity securities of recovering financial institutions to reverse that relative performance difference. Time will tell.
He makes no mention of what I believe was a misplayed holding in MBIA stock.
>> delivered great absolute (and even risk adjusted long term) returns.
No question, and all credit, sure, okay, if you can stand the ride. But what I posted above, about Yacktman, Tillinghast, Soviero ..., is totally easy to confirm. My taste for jolts (quality, degree, style, reason) has changed, I guess, since I held FAIRX. I mean, I love his graph, but everyone does that sort of thing, and you could readily show the same for any and all of the four I mentioned, since 2000, and see what you think of the comparative needs for shock absorption. I'm all for raving and posting about gogo guys, but I always want to check the competition, alpha, beta, etc.
Reply to @davidrmoran: Got it. Collectively folks have taken $10B away from Fairholme for that very reason. Fund behavior inconsistent with expectations.
I think Charles analysis is spot on. I would like to venture a guess if anyone can verify. FAIRX performance at beginning of last decade was fueled by EXACTLY the same kind of stocks that gave it stability, but which proved to be its downfall in the latter part of that decade, i.e. "Financials " and "Value" stocks. I think coming out of the tech bust, a lot of Financials were "value stocks". How deceptive.
Regardless of whether I'm right above, just like Yacktman at one point, Berkowitz has stuck to his guns and needs some kudos for that. As people on this board know, I bought this fund for trading since it seemed really down and out and have a nice gain in it. If only Berkowitz stops going on CNBC and/or falling all over Bartiromo, I might even consider keeping it as a long term holding. After all, I'm leaning toward go anywhere funds anyway so this fits the bill, while I keep wondering why M* will not classify FAIRX as a financial sector fund.
"Fannie Mae and Freddie Mac, which have reported record profits after a taxpayer bailout, are ignoring billions of dollars in potential losses on overdue loans as they take three years to adopt a new accounting system, a government auditor said in a letter made public today."
“A substantial percentage of the GSEs’ recent earnings and the subsequent dividend paid to Treasury was a result of decreasing loan-loss reserves,” said Tim Rood, a former Fannie Mae (FNMA) executive and now managing director at Collingwood Group LLC, a financial services consulting firm based in Washington. “If the new accounting standard being imposed on them stopped or slowed the release of those reserves, it would have a direct and negative effect on the amount of dividend payments.”
Comments
From the Fairholme website:
“Fannie Mae and Freddie Mac are rapidly repaying the Government,” said Bruce R. Berkowitz, Managing Member and Chief Investment Officer of Fairholme Capital Management. “Their success should surprise no one given the value of Fannie and Freddie. Once the Government has recouped its investment, The Fairholme Fund – on behalf of our shareholders who are predominantly individual Americans with an average investment in the Fund of $43,000 – is owed a contractually specified, non-cumulative dividend for its investment in these companies. As solvent, highly profitable companies, Fannie and Freddie should honor all outstanding obligations to their investors.”
Fairholme’s actions do not challenge the 2008 emergency investments by the Government in Fannie and Freddie. Instead, Fairholme is contesting the August 2012 “Net Worth Sweep” that attempted to change the rules of priority. “Fairholme’s objective is quite simple,” continued Berkowitz. “The Government set the terms of their 2008 investments and should be held to their original deal.”
http://www.fairholmefunds.com/show_pdf.php?file=http://www.fairholmefunds.com/sites/default/files/FCM-Press-Release-on-FNMA-and-FMCC-Litigation1.pdf
Of course, as should be quite clear, I am a big FAIRX shareholder. If B. Berkowitz is rolling the dice, I am at the rail betting with the shooter.
FAIRX by the numbers...
First 3.5 years of 2000's:
First 3.5 years of 2010's:
What strikes me most is the difference in volatility. Superior excess returns with lack of downside volatility is what I suspect really drove Fairholme's early attention and attendant AUM, once nearly $20B.
Here are the numbers from its inception through 1Q2007, just before financials popped (a kind of preview to my assignment for Mr. Moran):
Even through the great recession, FAIRX weathered the storm...fortunately, for many of us readers here on MFO. Here are the decade's numbers that helped earn Mr. Berkowitz Morningstar's top honor:
Pretty breathtaking. In addition to AUM, the success also resulted in Fairholme launching two new funds, FAAFX (profiled by David in April 2011) and FOCIX.
Here is table summarizing Fairholme family performance through June 2013:
Long term, FAIRX remains a clear winner. But investors have had to endure substantial volatility and drawdown this decade - something they did not experience last decade. It's resulted in extraordinary redemptions, despite a strong 2012. AUM is now $8B.
The much younger FOCIX tops fixed income ranks in absolute returns, but not risk adjusted returns, again due to high volatility (granted, much of it upward..but not all). The fund bet heavy with MBIA and won big. Here's current Morningstar performance plot:
And FAAFX? About all we shareholders can say is that it's beaten its older brother since inception, which is not saying much. Below market returns at above market volatility. (I still believe it misplayed its once-heavy and long-term holding in MBIA.)
Here are latest MFO ratings for all three Fairholme funds:
None are Great Owls.
Yet, if I had to bet on one fund manager to deliver superior absolute returns over the long run, it would be Bruce Berkowitz. But many of us have come to learn, it's gonna be a bumpy ride. Like some other deep value money managers, he may simply look beyond risk definitions as defined by modern portfolio theory...something fans of Fairholme may need to do also.
And, here's performance plot from Fairholme site:
In the letters, he's obviously relishing BAC and AIG returns. And, trying to call attention to FAIRX's good performance over almost any five-year rolling period. As well as arguing his rationale for Freddie/Fannie holdings and attendant lawsuit.
In FOCIX letter, he acknowledges "MBIA bonds were sold in the period, resulting in an above average return." That's an understatement. While holding Sears and JCP.
In FAAFX update, which is where I'm currently invested with Mr. Berkowitz: He makes no mention of what I believe was a misplayed holding in MBIA stock.
>> delivered great absolute (and even risk adjusted long term) returns.
No question, and all credit, sure, okay, if you can stand the ride. But what I posted above, about Yacktman, Tillinghast, Soviero ..., is totally easy to confirm. My taste for jolts (quality, degree, style, reason) has changed, I guess, since I held FAIRX. I mean, I love his graph, but everyone does that sort of thing, and you could readily show the same for any and all of the four I mentioned, since 2000, and see what you think of the comparative needs for shock absorption. I'm all for raving and posting about gogo guys, but I always want to check the competition, alpha, beta, etc.
Regardless of whether I'm right above, just like Yacktman at one point, Berkowitz has stuck to his guns and needs some kudos for that. As people on this board know, I bought this fund for trading since it seemed really down and out and have a nice gain in it. If only Berkowitz stops going on CNBC and/or falling all over Bartiromo, I might even consider keeping it as a long term holding. After all, I'm leaning toward go anywhere funds anyway so this fits the bill, while I keep wondering why M* will not classify FAIRX as a financial sector fund.
“A substantial percentage of the GSEs’ recent earnings and the subsequent dividend paid to Treasury was a result of decreasing loan-loss reserves,” said Tim Rood, a former Fannie Mae (FNMA) executive and now managing director at Collingwood Group LLC, a financial services consulting firm based in Washington. “If the new accounting standard being imposed on them stopped or slowed the release of those reserves, it would have a direct and negative effect on the amount of dividend payments.”
http://www.bloomberg.com/news/2013-08-19/fannie-mae-and-freddie-mac-said-to-avoid-billions-in-write-offs.html