Over the past 3 years, three star mutual fund managers have dominated the equity landscape - first Bill Miller of Legg Mason, then Ken Heebner of CGM Funds, and the past few years have seen the crowning of Bruce Berkowitz of Fairholme Funds. I am not sure when the downfall of Bill Miller actually began in relation to his fame, but he suffered a terrible cold streak for years - and Ken Heebner suffered the Sports Illustrated cover curse. [May 28, 2008: Ken Heebner - America's Hottest Investor] His Fortune cover story marked the 'top' of performance - within a month.
While Berkowitz has completely different style to myself, I've been a fan for quite a while - before he hit the megastar status. Now like the other two it will be a question of if he can manage the enormous fund flows he is now receiving; unlike Miller and Heebner his methods of investing (long term holds via value rather than growth) probably lend itself to more of a chance of success - but managing near $20 billion in a style that continue to outperfm in any style seems near impossible from this seat. That said, he is taking the fund in a completely unconventional direction - which might make it possible. In the near term, it appears Berkowitz has a major story in Fortune (can't tell if its the cover story) so we'll see if he can avoid Heebner's fate!
The full story is here - a compelling read; I'll cut and paste some snippets.
- He may be the most driven investor on earth. And now the founder of the $17 billion Fairholme Fund is making the boldest bet of his career.
- Berkowitz may not be a household name to most investors, but he should be. During the past decade, Fairholme has produced an annualized return of 11.6% over a span in which the S&P 500 (SPX) has risen a paltry 0.7% a year on average. Since the fund launched in 1999, Berkowitz has beaten the market every year except one (when Fairholme was up 24%, vs. the S&P's 29% rise in 2003), and he's on track (up 17% through early December) to easily beat it again in 2010.
- The highest compliment I can give, says hedge fund billionaire Leon Cooperman, who got to know Berkowitz when they both invested in telecom stocks earlier this decade, is if he called me up to recommend a stock, I would pay attention.
- The fund's outstanding returns -- along with Berkowitz's being crowned U.S. stock manager of the decade this year by investment research firm Morningstar -- have attracted a flood of new money to Fairholme. Investors have poured in more than $4 billion over the past year. And they've added $330 million more to his Fairholme Focused Income Fund, which launched in January. He plans to open a third fund, one that focuses on smaller opportunities, early in 2011.
- Berkowitz welcomes the influx of money. (He says his target is for Fairholme to reach $25 billion in assets.) For now, though, much of the new cash remains just that -- cash. Rather than put it all to work in active investments, Berkowitz has an unusually high 25% of Fairholme's portfolio in cash or short-term debt. It's a huge reserve of liquid funds, and Berkowitz wants it for a couple of reasons, both of which suggest that he sees a rocky road ahead for the U.S. economy. First, if a falling market scares his investors into withdrawing funds, the extra money means that he won't be forced to sell stocks he believes in.
- Second, stockpiling cash is in keeping with Berkowitz's plan to evolve Fairholme from a regular, stocks-only mutual fund into a more versatile distressed-asset investment vehicle, and to profit from the coming wave of corporate restructurings he anticipates. He believes that dozens of overleveraged companies will need to fix their balance sheets in the next couple of years -- commercial real estate is one industry ripe for it, he says -- and he wants Fairholme to be ready to step in as a Warren Buffett-style lender of last resort, with highly favorable terms for his investors, of course. As Berkowitz puts it, There aren't many people in the world you can call who can write a check for $1 billion today.
- Can Berkowitz continue to beat the odds? Can a single investor, even one with singular focus and discipline, successfully manage a portfolio the size of Fairholme? It's a challenge for any manager to take in that kind of inflow and repeat, says a large Fairholme investor. Says another: You hope that when you buy a manager, it's a seasoned team. Having a one-man band can be risky. Berkowitz acknowledges the concerns with his usual candor. Right now, he says matter-of-factly, we're at an interesting junction point where people can't decide whether we're about to blow up.