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In an article on Fannie Mae and Freddie Mac last month, I suggested that troubled insurer AIG was a different situation on the basis that "although it may be tricky to put a number on it, AIG's (NYSE: AIG ) equity has value." Several readers took me to task for this in follow-up comments, which made me wonder whether I had been too casual with that assertion. Since then, however, I have identified some evidence to support my original position.
A massive bet ...
Last month, Fairholme Capital Management announced that it had raised its stake in AIG by 29%, to 32.8 million shares; Fairholme was already the insurer's largest nongovernment shareholder.
... by an exceptional investor
Normally, I wouldn't place much weight on the dealings of a single investor, but Bruce Berkowitz, who manages the Fairholme Fund, is in a league of his own. From inception in December 1999, the Fairholme Fund has generated an annualized return of 12.6% versus a 1.6% loss for the S&P 500. According to Lipper, the fund has outperformed 99% of its peers over the trailing five-year and 10-year periods.
A Buffett-style value investor, Berkowitz is comfortable making contrarian investments. Last week, for example, he disclosed that Fairholme has become one of the largest shareholders of Morgan Stanley (NYSE: MS ) , with a near-2% stake. This amounts to a bet that the turnaround orchestrated by new CEO James Gorman will continue to succeed and that the securities firm will close the gap with its closest rival, Goldman Sachs (NYSE: GS ) , which it lagged during the credit crisis (financially, that is -- not in terms of public image).
A contrarian bet on financials
In fact, within the first six months of Fairholme's fiscal year 2010, all six of Fairholme's newly initiated stock positions were financials, including AIG, Bank of America (NYSE: BAC ) , Goldman Sachs, and Morgan Stanley. This contrasts with other value investors, such as Bill Miller of Legg Mason, who were badly burned by holding financial shares going into the financial crisis.
A meaningful signal
To recap: In Berkowitz we have an investor who:
- Has an exceptional track record.
- Is highly risk-averse and does exhaustive fundamental analysis before making an investment. Fairholme's professionals like to spend a lot of time thinking about how an investment could go wrong.
- Runs a highly concentrated portfolio within which AIG is one of his highest conviction ideas.
Bottom line: Berkowitz's AIG investment is a meaningful signal for investors.
The case for value
Personally, I wouldn't be entirely comfortable investing in AIG and I am not advising anyone to purchase their shares. However, Bruce Berkowitz's investment suggests that one cannot dismiss out of hand the idea that there is adequate residual value in AIG shares and that, even after a 470% run-up off their March 2009 low, they represent an attractive investment.
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