Challenging times for this fund manager?

Bruce Berkowitz's Fairholme Fund is beginning to show some recovery signs in his long-term bets.

By GuruFocus.com Jun 21, 2012 10:20AM

After losing more than 32% on heavy bets on financials in 2011, Bruce Berkowitz's Fairholme Fund (FAIRX) has rebounded to the top 1% of funds, according to Morningstar.


Berkowitz often emphasizes that he does not believe performance can be measured by a revolution of the sun but on a long-term basis. Though his fund suffered a challenging year, some of his long-term bets are beginning to show the recovery he anticipated.

 

AIG

AIG (AIG) is up 38% so far in 2012, after a difficult 2011 in which it lost 62%. It is Berkowitz's largest holding with more than 30% of his portfolio's weighting.

 

AIG was once a leading insurance company until the 2008 financial crisis. Catastrophes led to the government bailing out the insurer and eventually owning most of it. Since then, recovery has been uneven, as the company's top-line has fallen while earnings increased.

 

In the first quarter of 2012, reported on May 3, the company said it earned $3.2 billion compared to $1.3 billion in the prior-year quarter, with improvements in two out of three of its insurance operations.

 

AIG is also continuing to clean up the mess from its near-collapse. Last week, it repaid its part of the $70 billion in bailout loans the Federal Reserve Bank of New York gave it and Bear Stearns Cos. through an auction of certain Maiden Lane III assets. This means it has repaid all of its loans from the period.


The U.S. Treasury's stake has also been reduced by $17.5 billion, and AIG's Maiden Lane II and Maiden Lane III loans have been completely repaid. As of June 14, the U.S. government owns $30 billion worth of shares of AIG common stock, after reducing total government support by 83%, or $152 billion, since the crisis.

 

Sears

Berkowitz has owned shares Sears Holding Corp. (SHLD) since 2007. The company has experienced well-publicized trouble in recent years as investor Eddie Lampert has taken an activist position in turning it around. The company's share price plunged 56% in 2011, and has come back 71% so far in 2012, which has contributed a great deal to Berkowitz's year-to-date returns.

 

Sears' first-quarter results indicate it will fend off bankruptcy again. In the three months ended April 28, it earned $189 million and said it may grow its capital position to $1.7 billion in the next year. The profitability was not due to a grand increase in sales, however. It made $233 million from selling stores and real estate, while sales shrunk modestly.

 

CEO Lou D'Ambrosio said on Bloomberg last week that the retailer is open to selling more assets amid its turnaround. He also denied that the company was in the process of breaking up or being liquidated.

 

Bank of America

Bank of America's (BAC) stock price has made a 46% comeback so far this year, after falling 61% last year. Because Berkowitz bought most of his shares at even higher prices, he has yet to make a significant profit on the stock.

 

In the first quarter, BAC reported net income of $653 million, a decline from $2 billion in the year-ago quarter. Revenue was $22.5 billion, also a decline from $27.1 billion in the year-ago quarter.

 

The company has benefited from an improving economy and from strengthening and simplifying its business, as it saw earnings improvements across all of its segments compared to the previous quarter. It also strengthened its balance sheet in the quarter through increasing its Tier 1 common equity ratio 92 basis points, achieving record liquidity and continuing to reduce risk-weighted assets.

 

The company has continued to cut costs recently. Last week it announced that it will lay off 675 workers in Fort Lauderdale, Fla., and 130 workers in Hialeah, Fla. It is also considering a sale of Merrill Lynch's non-U.S. wealth management to Julius Baer.

 

CIT Group

CIT Group (CIT), Berkowitz's fourth-largest holding, has not contributed to his gain this year as it has declined 1% so far in 2012, after declining 28% in 2011. Berkowitz has been selling shares of the bank holding company each quarter since 2011.

 

In the first quarter, CIT reported $1.1 billion in revenue, a decline from the $1.3 billion it reported in the year-ago quarter and the $1.2 billion in the previous quarter. Its net loss was $447 million, a decline from net income of $65.6 million in the year-ago quarter and $33.9 million the previous quarter. The net loss included debt refinancing charges of $620 million.

 

Last week, CIT announced it was seeking acquisitions to make it "more bank-like," particularly in growth markets such as China and Brazil, according to Dow Jones Newswires. Since opening its online bank late last year, it has raised more than $1.5 billion in deposits. More deposits will strengthen its capital case, allowing it to enhance its lending profitability.

 

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