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Fairholme Closes Funds to New Investors After Rebound

Bruce Berkowitz is closing the gate to his top-performing Fairholme Fund (FAIRX) after it posted its best performance in a decade last year.

The $7 billion Fairholme Fund will suspend sales of shares to new investors effective Feb. 28, according to a filing yesterday with the U.S. Securities and Exchange Commission. The fund outperformed 99 percent of its peers last year by producing a 36 percent gain, more than double the 16 percent return for the benchmark Standard & Poor’s 500 Index.

Berkowitz was named Morningstar Inc. (MORN)’s U.S. stock manager of the decade in January 2010, prompting investor deposits that boosted assets in the Fairholme Fund to $17 billion by the start of 2011. As the fund’s largest holdings floundered that year and investors cashed out, the manager was forced to sell stocks to meet redemptions. Berkowitz may be seeking to avoid a replay after his fund beat the benchmark S&P 500 in 2012 by the widest margin since 2002, according to data compiled by Bloomberg.

“My reading is that they are afraid hot money will come in and dilute performance,” said Bruce Siegel, general counsel at First Long Island Investors LLC, a Jericho, New York-based wealth-management firm that has been invested with Fairholme since 2008. “They are looking out for the interests of current shareholders.”

Berkowitz, the managing member of Miami-based Fairholme Capital Management LLC, didn’t immediately return a telephone call seeking comment.

Equity Deposits

The firm is also closing the Fairholme Focused Income Fund (FOCIX) and Fairholme Allocation Fund (FAAFX) to new investors, according to yesterday’s filing. Existing investors will be able to continue putting money into all three funds, the notice said.

Stock mutual funds in the U.S. gathered $9.3 billion in the week ended Jan. 16, after attracting $14.8 billion in net new money during the prior week, the most since at least 2007, according to the Investment Company Institute in Washington, D.C.

Investors had been avoiding domestic stock funds since the 2008 financial crisis, opting instead for the perceived safety of bonds. This trend continued last year, with domestic stock funds reporting net redemptions of $99.6 billion through November, according to Morningstar, even though the benchmark Standard & Poor’s 500 Index returned 15 percent during the period, including dividends.

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

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