The fund had advanced 30 percent this year through last week. Holdings in American International Group Inc. (AIG) contributed about half of that gain, while Charlotte, North Carolina-based Bank of America Corp. (BAC) accounted for approximately 20 percent of the climb, according to data compiled by Bloomberg.
Berkowitz, 54, has cited the companies as examples of a strategy to “embrace the hated” and bet on the recovery of stocks that fell out of favor. The approach spooked some investors who withdrew funds as the lender and AIG plunged more than 50 percent in 2011. Bank of America had surged 78 percent this year through last week as capital levels rose, while AIG gained 42 percent as it bought back shares acquired by the U.S. in a 2008 bailout.
“In the long run, and Berkowitz is a long-run kind of guy, he’ll be thrilled to own what will be the dominant” property- casualty insurer, said Josh Stirling, an analyst at Sanford C. Bernstein & Co. who predicts AIG will beat the Standard & Poor’s 500 Index by more than 15 percentage points in the next year.
Berkowitz avoided the industry groups that underperformed this year through Nov. 23, like energy, which advanced 2.5 percent, or utilities, which slumped 5.9 percent. His greatest concentration is in financials, the leading performer in the Standard & Poor’s 500 Index with a 22 percent gain.
The fund manager has said he would rather focus investments on his best ideas than spread them out. More than three-quarters of the Fairholme Fund (FAIRX) was invested in seven companies as of Aug. 31, with 37 percent of the portfolio in New York-based AIG’s common stock, 8.8 percent in Bank of America and 10 percent in retailer Sears Holdings Corp. (SHLD)
That strategy fueled volatility. The fund finished 2011 in the last percentile among peers, and is in the top percentile this year, according to data compiled by Bloomberg. Berkowitz didn’t respond to a request for comment left with a spokesman.
Berkowitz still trails the S&P 500 for some periods longer than a year even after the gains in AIG and Bank of America. Returns for the equity benchmark beat the Fairholme Fund by 21 percentage points in the last three years and 1.9 percentage point in the five years through Nov. 23, according to Bloomberg data.
The fund charges annual operating fees of 1.02 percent and early withdraws are subject to a 2 percent fee, according to its prospectus.
Berkowitz also recovered from a sub-par 2003, when he finished in the lowest 10 percent because he missed a rally in technology companies. The next year his performance was in the top decile as Intel Corp. and Cisco Systems Inc. (CSCO) stock faltered and he benefited from bets on financial companies.
Berkowitz was named the U.S. domestic stock-fund manager of the decade in 2010 by Morningstar Inc. The Fairholme Fund has returned an annualized 9.6 percent since its inception at the end of 1999 through 2011, compared with a gain of less than 1 percent a year for the S&P 500, according to his last annual report. The 30 percent return from Dec. 31 through last week is 15 percentage points above the S&P 500, on pace to be the fund’s best year since 2002, relative to the benchmark.
Berkowitz built his AIG stake in 2010 and 2011 at a fraction of book value, or assets minus liabilities. Even as the insurer shrank through asset sales, it maintained a leading global property-casualty operation and U.S. life company, he said.
“When a recovering icon trades at half of our understanding of intrinsic value for a reason that has nothing to do with its prospects, we swing big,” Berkowitz wrote of AIG to the fund’s investors in July 2011.
The insurer has surged this year after repurchasing $13 billion of its shares from the U.S. Treasury Department. The buybacks were coordinated with sales to the private market that reduced the government’s stake from 77 percent at the end of 2011 to 16 percent. Berkowitz’s Fairholme Capital Management LLC is the next-largest shareholder with a 5.9 percent stake.
AIG is driving growth of book value per share by repurchasing shares, Stirling said. “It’s people like Berkowitz that can ride this stock back.”
Bank of America plunged last year amid concerns it would have to raise funds to comply with stricter international banking regulations and to settle legal disputes related to the housing crisis. In August 2011, Berkowitz hosted a conference call with Chief Executive Officer Brian T. Moynihan to answer questions from other shareholders and “skeptics.” Later that month, Warren Buffett agreed to invest $5 billion in the lender.
That injection has helped Bank of America strengthen its balance sheet after the Federal Reserve in 2011 rebuffed a plan to return more capital to shareholders. The lender’s Tier 1 common capital ratio reached almost 9 percent at Sept. 30 under the newest international standards, up from 8 percent three months earlier.
Moynihan’s firm has also benefited from a rebounding U.S. housing market. Rising home prices help limit the bank’s risk on mortgages after faulty loans and foreclosures cost the lender more than $40 billion since the start of 2007.
The last few years have shown that holding Bank of America is not for the “faint of heart,” said Marty Mosby, an analyst at Guggenheim Securities LLC. Still, investors can “come out over the next three to five years realizing the franchise value of a company that stretches the whole country and is one of the leading providers of bank services.”
Fairholme Fund benefited this year from its holding in Sears, which has climbed 66 percent from Dec. 31 through last week. The retailer has sought to cut inventory and other costs amid revenue declines that began in 2007. It’s also been selling stores and other assets.
Berkowitz has praised the company’s leadership and Chairman Edward Lampert. In January, the fund manager compared the retailer’s transition to Buffett’s transformation of Berkshire Hathaway Inc. from a failing textile maker into a company valued at more than $200 billion selling products from insurance to chocolate.
“For many reasons, including management, we continue to believe the assets of this iconic brand to be a multiple of values implied by its current stock-market price and continue to see the beginning of a new Berkshire Hathaway,” he wrote in a January letter to investors.
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