Anyone who follows the FNMA (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) saga or invests in either/both should be very familiar with the name Bruce Berkowitz. Bruce Berkowitz is a contrarian value investor known for his highly concentrated portfolio. He owns/leads Fairholme Fund (MUTF:FAIRX) which is suing the United States regarding FNMA and FMCK and has been making the best progress of the current FNMA and FMCK lawsuits against the U.S.A.
I believe Bruce Berkowitz currently has 30%+ of assets in Fannie and Freddie preferred. He also had a high weighting in these shares in 2016 (primarily FNMAS and FMCKJ as per its 2016 annual report which covered the period ending 11/30/16). The Fairholme Fannie Freddie outsized bet enabled the fund to report a 25.68% gain in 2016 (+13.72% vs. the SP 500). The other side of the coin is how it has brought down the fund’s performance YTD which stands at -.88%, -6.82%% lower than the SP 500. Bruce Berkowitz was named coveted fund manager of the decade by Morningstar in 2009 and has a life of fund annual performance of 11.06% vs. 4.53% for the SP 500 since its inception in 1999.
Fairholme lagged the SP 500 big time in 2011, 2014, and 2015 which is not uncommon for concentrated portfolios. All it takes is one big bet that doesn’t pay off like Sears Holdings (NASDAQ:SHLD) for Fairholme and your fund performance will suffer. Assuming the fund maintains its current position in Fannie and Freddie preferred, they could reach 60%+ of assets if/when they reach par again. If this happens in 2017, the fund could be +60% or more for the year regardless of SP 500 performance which certainly will lag this kind of potential performance by a wide margin.
This brings me to a philosophical question. How much is too much for investing in your best investment ideas? Sure, it can vary based on one’s tolerance for risk, assets/income, age and working vs. retired. How much are FNMA or FMCC common and/or preferred stock as a % of investable assets? All of us who read all Glen Bradford’s insightful articles on Fannie and Freddie probably see he literally bet the ranch on Fannie and Freddie preferred. If he is right, which I believe he is, he will earn millions on his 100+% allocation of investable assets to Fannie and Freddie preferred. If he is wrong, he is smart and is still a young guy who still should have ample time to turn his financial future back around.
Getting back to Bruce Berkowitz, outsized bets are the norm in his Fairholme Fund. Allocations that rose to 40%+ in AIG stock at one point propelled the fund to a $2 billion profit in 2015 when AIG shares were sold. The sale also resulted in a huge tax bite of between 32 and 34% of NAV, ouch.
Even the great Warren Buffett which has an amazing long term track record of 20.8% over the last 51 years with his Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is known for heavier concentration by position (e.g. Wells Fargo, symbol WFC) and sector (banking and insurance). Here is the latest look at the current public positions owned by Berkshire Hathaway. Sure he has negotiated better deals than any of us could with his financial resources and reputation with everyone from Goldman Sachs (NYSE:GS) to Bank of America (NYSE:BAC) during the financial crisis and beyond.
Billionaire Bruce Berkowitz became rich operating his Fairholme Funds which reached $19 billion in assets at its peak before crashing down under $3 billion beginning when the hot money left when his performance began to suffer in 2011. Fortunately he eats his own cooking and reportedly has much of his asset in the Fairholme Fund investments. Want some fries with that Fannie and Freddie stock?
If Bruce Berkowitz is right with his big bet on Fannie and Freddie preferred stock, he could see assets of Fairholme Fund rise big time sadly for the wrong reason and his net worth increase by many hundreds of millions of dollars. If he is wrong, perhaps his days will be numbered in the mutual fund business.
I own Fairholme Fund and indirectly own Fannie Mae and Freddie Mac preferred shares, which have a large position in Fairholme Fund.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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