BOSTON, April 4 (Reuters) - Many of 2011's trailing money managers bounced back in the first quarter thanks to the stock market's big rally. But few came back quite as strongly as Fairholme Fund's Bruce Berkowitz, who is already within sight of recovering all of last year's loss.
In 2011, just a year after being named Morningstar's stock fund manager of the decade, Berkowitz turned in a horrible performance, as big bets on financial stocks like American International Group and Bank of America cratered and his fund lost 32 percent, even worse than its 2008 decline of 30 percent.
But the Fairholme Fund jumped 31 percent in the first quarter of 2012, outperforming the Standard & Poor's 500 by almost 19 percentage points and the average return of similar funds by over 20 points, according to Morningstar data.
And that gave the fund's ranking a bizarre twist. After turning in the worst 2011 performance of any large cap value fund tracked by Morningstar, the research firm's 100th percentile rank, Fairholme ranked first for all such funds in the first quarter, Morningstar's 1st percentile.
Berkowitz's style of investing large amounts in a few positions or sectors has always made the fund potentially more volatile, Morningstar analyst Kevin McDevitt said. "It's almost surprising he didn't have a year like 2011 sooner," McDevitt said. "But he showed the conviction to stick with his positions and it has really paid off so far this year."
The Fairholme Fund's net asset value share price, which ended the year at $23.15, hit $30.36 on March 30. Berkowitz still needs to regain another $3.90, or 13 percent, to get back to $34.26, the price where the shares ended 2010 adjusted for dividend payments.
The percentage gain represented a lot fewer actual dollars this year. In addition to the big loss, investors yanked $6.6 billion out in 2011, according to data from Lipper, a Thomson Reuters company. That has left Berkowitz with $8 billion instead of the $20 billion he had a year ago.
Unlike many of his peers who stumbled, however, Berkowitz went into 2012 not just with many of the same holdings but concentrated even further and doubled down on several.
Shares of bailed-out insurance giant AIG made up 26 percent of the entire fund at the end of November, Fairholme's most recent disclosure, almost three times the allocation of a year earlier. AIG, up more than 30 percent in the first quarter, gained another 2 percent on Wednesday on news it may do a public offering for its International Lease Finance Corp subsidiary.
The weighting of Fairholme Fund's second-largest holding, former AIG Asian subsidiary AIA Group, more than doubled to 11 percent. Aside from 9 percent in cash and 11 percent in retailer Sears Holdings, virtually all of the remainder of the fund is in financial companies of one sort or another, ranging from insurers like AIG to real estate investment trusts like the St. Joe Co.
Berkowitz declined to comment for this story but has spoken in public several times in recent months explaining his strategy. The operating performance of financial companies the fund owned improved last year even as their stock prices dropped further, he noted. Investors ignored strong earnings growth potential because of "fixable problems," he said, according to the transcript of a conference call with investors held on Feb. 8.
"I've seen this play before. I've seen the cycle of financials," Berkowitz, 53, said. "That's the one good thing about old age, you've seen it before and you know how it plays out."
St. Joe, where Berkowitz stepped in as chairman last March, has been another loser turned winner. Last year, the stock plummeted 33 percent as short sellers, including hedge fund manager David Einhorn, continued to press their critique of the Florida REIT's asset value and strategy. But the stock got a huge bump last month after Berkowitz said he would bring in new management. The shares are up 22 percent so far in 2012.
GOOD FOR MANY
To be sure, the first quarter was a good one for stock fund managers, as 57 percent of actively managed stock funds beat the Russell 1000 index, according to a Bank of America Merrill Lynch report. Value-oriented managers did even better, as 72 percent beat their benchmark. Berkowitz far outdistanced the average value fund's outperformance of just under 1 percentage point.
Some other well-known managers who stumbled in 2011 have not recovered as much as Berkowitz. Ken Heebner's CGM Focus Fund , which lost 26 percent last year, was up 16 percent in the first quarter. And the Janus Overseas Fund managed by Brent Lynn gained 20 percent after a 33 percent loss last year.