At The Motley Fool, we understand that it often pays to zig when Wall Street zags, but that doesn't mean that we don't pay attention to what leading fund managers are buying and selling. Mutual funds that don't always move in lockstep with the broader market can be a particularly valuable source of insight.
Every quarter, fund managers overseeing more than $100 million must disclose their quarter-end holdings publicly by filing Form 13-F with the SEC. The form lists all U.S.-traded securities the manager held at the end of the quarter. Although the form doesn't disclose the manager's short positions or the manager's intraquarter trades, it can shine a bright light on his or her "long" stock bets. To help us make use of 13-F data, we turned to Motley Fool partner AlphaClone, a research and investment-management firm that tracks fund public disclosures and develops investment strategies based on them.
Q2 2011 update
Bruce Berkowitz founded Fairholme Capital Management, which today oversees three mutual funds of interest:
- The flagship Fairholme Fund (FAIRX) seeks long-term capital growth.
- The Fairholme Focused Income Fund (FOCIX) focuses on current income.
- The Fairholme Allocation Fund (FAAFX) pursues long-term total return.
Each fund owns less than two dozen holdings, instead of the hundreds held by many of their peers. The Fairholme fund has many admirers, and Berkowitz was named Morningstar's fund manager of the decade. But the fund has faltered recently, having made some seemingly risky big bets.
Why should you look at Fairholme Capital Management's moves? Well, check this out: According to AlphaClone's back-test simulation, anyone who invested in Fairholme Capital Management's 10 largest holdings at the time they were disclosed publicly each quarter would have returned 132% since 2000, versus... uh, zero for the S&P 500 (including dividends) as of Aug. 26, 2011. (Note that this data reflects the holdings of the overall Fairholme Capital Management company, not necessarily any one particular fund.)
The total market value of Fairholme Capital Management's disclosed equity holdings as of June 30, 2011 -- the latest quarter for which data is available -- was $12.9 billion across just 20 holdings. The fund company's 10 largest positions and associated changes in number of shares held as of June 30, 2011 were:
American International Group
Bank of America
Brookfield Asset Management
Berkowitz has long been bullish on financial companies, even while others have fled the sector. Thus, it's not surprising to see that he grabbed more shares of AIG while its stock slumped during the quarter.
During the quarter, the fund family also sharply reduced its exposure to Morgan Stanley and RSC Holdings. And it sold out of several stocks entirely, including Cisco Systems
Selected Q2 2011 commentary
Fairholme Capital Management has about 75% of its assets in the financial sector. The distribution hasn't changed noticeably over the past few quarters. The company is a great example of "focused" investing, as it holds so few stocks and has parked such great chunks of its assets in just a few sectors. This kind of concentration tends to amplify results, delivering outsized gains -- or losses.
Here's where the firm is currently winning, losing, and making new bets:
The quarter wasn't pretty for Fairholme Capital Management, with no big winners. But its stake in Eli Lilly
A notable loser for the company was Regions Financial, with Fairholme's stake in the company shrinking by nearly 15% in the quarter. Regions may do better in upcoming quarters, though; it has been improving its credit quality and reducing its provisions for bad loans. The company has a two-star rating in Motley Fool CAPS.
The largest new addition is the Jeffries Group, which our own Motley Fool Stock Advisor has also recommended recently. Fool co-founder Tom Gardner likes the midsize investment bank's habit of hiring a lot of talent from its big-name competitors.
During the quarter, Fairholme also started new positions in Assured Guaranty and Vodafone.
You should never blindly copy any investor's moves, no matter how talented the investor. But it can be useful to keep an eye on what smart folks are doing. 13-F forms can be great places to find intriguing candidates for your portfolio.
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