Monday, October 24, 2011

The Trouble at Fairholme

Thanks to Will for passing this article along.

The once highflying mutual fund is down sharply this year, and one of its top executives has abruptly left the firm. Is there a connection?

Bruce R. Berkowitz had plenty of admirers while his Fairholme Fund was tripling investors' money over the past decade. Financial publications like this one encouraged readers to put their savings into the hands of the now 53-year-old value investor who affects the plain-spoken ways of Warren Buffett and beat the market by an average of 14% in each of the past 10 years. But this year, the mutual fund (ticker: FAIRX) is down 27%, while the broad market has been roughly flat.

Suddenly, Berkowitz has plenty of doubters. Redemptions and negative returns have cut Fairholme's assets in half since last year, to about $9 billion.

Folks with firsthand knowledge of Berkowitz wonder if the brilliant investor—whom Morningstar last year dubbed Manager of the Decade for his U.S. stockpicking–has lost his way. Says a Wall Streeter familiar with Berkowitz: "The way he's making money—and who he's doing it with—is not how the 10-year track record was created."

As for "who," that would be Charles M. Fernandez, whom Berkowitz abruptly made director, president and co-manager of Fairholme in 2008. Fairholme's long-time team of portfolio professionals were effectively displaced by the now 49-year-old Fernandez, who had no apparent experience in investment management. Berkowitz even installed Fernandez in the mansion next door to his own, in the tony Tahiti Beach Island enclave of Coral Gables, Fla., and then forgave Fernandez's $9 million mortgage. But something seems to have changed in their relationship.