Fairholme Fund Dumps Goldman, Morgan Stanley

Bruce Berkowitz, suffering from redemptions after loading the Fairholme Fund with financial stocks, sold his stakes in Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) while keeping Citigroup Inc. (C) and Bank of America Corp. (BAC)

Fairholme held no Goldman Sachs or Morgan Stanley shares as of Aug. 31, according to a Form N-Q filed Oct. 28 with the U.S. Securities and Exchange Commission. The Miami-based mutual fund held 6.26 million Goldman Sachs shares and 34.8 million Morgan Stanley shares with a combined market value of $1.72 billion as of May 31, equaling almost 11 percent of net assets.

Berkowitz, whose fund fell 21 percent this year through last week, raised his Bank of America stake to 81.9 million shares as of Aug. 31 from 77.3 million as of May 31. He pared his Citigroup stake almost 2 percent to 20.8 million shares. The stocks have fallen about 48 percent and 33 percent in 2011, respectively.

“Selling the investment banks and keeping the commercial banks is probably a statement of where they believe the bigger upside is going to be,” said Bruce Siegel, an executive vice president at First Long Island Investors LLC, a Jericho, New York, firm that invests with Fairholme.

Berkowitz, named domestic stock fund manager of the decade in 2010 by Chicago-based Morningstar Inc. (MORN), has been betting heavily on financial stocks since that year began, buying shares in American International Group Inc. (AIG) and Regions Financial Corp. (RF) as well as Goldman, Citigroup and Morgan Stanley. The stocks have been dragged down by investor concern over the debt crisis in Europe and a potential relapse into recession in the U.S.

$4.7 Billion Redeemed

Fairholme is lagging behind the Standard & Poor’s 500 Index in 2011 after beating the U.S. benchmark in the previous seven years. The S&P 500 returned 3.9 percent through last week, including reinvested dividends.

During the quarter ended Aug. 31, the fund’s net assets shrank to $10.9 billion from $15.9 billion. Investors pulled a net $4.7 billion from Fairholme’s flagship fund through the end of September, forcing Berkowitz to raise cash by selling stocks he would otherwise have hung onto, said Kevin McDevitt, a Morningstar analyst.

“I don’t think he would have sold these under normal conditions,” McDevitt said in a telephone interview, referring to Goldman Sachs and Morgan Stanley. The Fairholme Fund (FAIRX) kept Bank of America because “BofA is a high-conviction position for Berkowitz.”

Berkowitz, 53, didn’t immediately return telephone calls seeking comment. The price of financial stocks such as Bank of America and Goldman Sachs already reflected poor results, providing a “huge margin of safety” for investors, he said in a June interview with Bloomberg Television.

To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net