June 14, 2011
Bruce Berkowitz has said that his deep value and contrarian investing style will not guarantee short-term results, but he promises his shareholders will be rewarded for their patience over the long term. Last week, he explained why some of his positions – especially those in the financial services sector – are among the best opportunities in the market.
Berkowitz was named Morningstar’s US Fund Manager of the Decade for the period 2000-2010, as his flagship Fairholme Fund outperformed virtually all of its peers. This year has been a different story, though, as his fund has lost 7.76%, a disappointing mirror of the 7.70% gain the market as a whole has experienced.
In a keynote presentation at Morningstar’s Investment Conference on Thursday, moderated by Don Phillips, Berkowitz defended his holdings in firms such as AIG, Bank of America and MBIA, and he responded to a number of now-common criticisms of Fairholme. Berkowitz moved to put skeptics at ease over Fairholme’s unorthodox structure and business model, and he denied charges that the firm’s rapid growth has made it too large to maintain its culture and investment style.
“Ignore the crowd”
Fairholme has always sought to “ignore the crowd,” Berkowitz stressed. Indeed, that is his firm’s tag line, and he described how he has organized his firm in a unique and distinctive manner.
Berkowitz said he relies on a small internal staff and hires consultants for industry analysis to minimize the deleterious effects of groupthink at the company, and in doing so ultimately saves shareholders money. Instead of relying on in-house “experts,” whose expertise can become irrelevant at any time, Fairholme’s heavy use of consultants eliminates the need to retraining periodically useless employees. This hire-as-needed strategy also gives the firm flexibility to seek out the top minds for whatever problem Fairholme needs clarified.
The small size of Fairholme’s staff is not without precedent in the financial industry, Berkowitz further noted. In fact, it is very common among hedge funds, and even Warren Buffet operates in Omaha with a minimal set of permanent personnel. In Berkowitz’s estimation, Fairholme is wisely ignoring the popular wisdom of the modern mutual fund industry in order to follow a more sensible path, one already trod by respected financial leaders.
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