Berkowitz: Fund Plunge ‘Makes Little Sense’

Bruce Berkowitz, who oversees the largest non-government stake in American International Group Inc. (AIG) and a holding in Bank of America Corp. (BAC), said the stocks in his flagship Fairholme Fund will rebound.

“The Fund’s performance last year makes little sense,” in light of improving balance sheets and prospects for profit, Berkowitz wrote in his 2011 report to investors who have money with his Miami-based Fairholme Capital Management LLC. “We can only hypothesize from public comments that investors did not fathom our financials’ assets.”

The Fairholme Fund plunged 32 percent last year compared with a gain of 2.1 percent for the Standard & Poor’s 500 Index, counting reinvested dividends. Berkowitz, 53, is seeking to reassure investors as he maintains holdings in Bank of America, the worst performer in the Dow Jones Industrial Average (INDU) in 2011, and bailed-out AIG, which fell by 52 percent in the year.

The insurer, which received a $182.3 billion government rescue in 2008, has a history “worthy of a Dickens novel,” Berkowitz said in the letter. AIG trades for about half its book value, a measure of assets minus liabilities, on speculation that the U.S. Treasury Department will sell its 77 percent stake below the government’s break-even price, he said.

Bruce R. Berkowitz, managing member and founder of Fairholme Capital Management LLC. Photograph: Fairholme Capital Management LLC via Bloomberg Close

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Bruce R. Berkowitz, managing member and founder of Fairholme Capital Management LLC. Photograph: Fairholme Capital Management LLC via Bloomberg

AIG reported a $4.1 billion third-quarter loss in November fueled by losses in the market value of mortgage-related investments and a stake in an Asian insurer. The New York-based company is scheduled to report full-year results this month.

‘Stay the Course’

“Our companies are strong and cheap,” Berkowitz said in the letter, posted yesterday on Fairholme’s website. “Shareholders have kept their courage and conviction under stress. Fairholme has kept its word to focus on value-based, long-term investments. We will stay the course.”

The Fairholme Fund (FAIRX) advanced about 11 percent in January as AIG gained 8.2 percent and Charlotte, North Carolina-based Bank of America jumped 28 percent to close yesterday at $7.13.

The bank “was our worst laggard” last year, Berkowitz wrote. “Even with results showing $20 per share of book value, $5 per share of reserves for bad debt and legal issues, and yearly pre-provision, pretax cash flows growing to $4 per share.”

Berkowitz was named the U.S. domestic stock fund manager of the decade in 2010 by Morningstar Inc., a Chicago-based research firm. The Fairholme Fund has returned an annualized 9.6 percent since inception at the end of 1999 through Dec. 31, 2011, compared with a gain of less than 1 percent a year for the S&P 500, according to his report.

His letters feature the phrase “ignore the crowd” and he asks investors to focus on results beyond 12-month periods.

“In great years, we asked shareholders not to be swayed by short-term performance,” Berkowitz said in the letter. “The same is true in a bad year. “One circling of the sun is too short a time to differentiate between good and lucky.”

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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