MIAMI--(BUSINESS WIRE)--The Fairholme Fund, The Fairholme Focused Income Fund, and The Fairholme Allocation Fund filed their Annual Reports with the United States Securities and Exchange Commission (“SEC”). The filings contain information on the respective portfolio holdings of The Fairholme Fund (NASDAQ: FAIRX), The Fairholme Focused Income Fund (NASDAQ: FOCIX), and The Fairholme Allocation Fund (NASDAQ: FAAFX) as of November 30, 2013.
The Portfolio Manager’s Reports for each series of the Fairholme Funds and their respective 2013 Annual Reports will be available online to the public on the SEC’s EDGAR database and are currently available at www.fairholmefunds.com. The following is the Portfolio Manager’s Report for The Fairholme Fund:
Mutual fund investing involves risks, including loss of principal. The chart below covers the period from inception of The Fairholme Fund (December 29, 1999) to December 31, 2013. Past performance information quoted below does not guarantee future results. The investment return and principal value of an investment in The Fairholme Fund will fluctuate; an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information quoted below. Performance figures are after expenses and assume reinvestment of dividends and capital gains but do not reflect a 2.00% redemption fee on shares redeemed within 60 days of purchase. Any questions you may have, including most recent month-end performance, can be answered by calling Shareholder Services at 1.866.202.2263. The S&P 500 Index is a broad-based measurement of changes in the stock market, is used for comparative purposes only, and is not meant to be indicative of The Fairholme Fund’s performance, asset composition, or volatility. The Fairholme Fund maintains a focused portfolio of investments in a limited number of issuers and does not seek to diversify its investments. This exposes The Fairholme Fund to the risk of unanticipated industry conditions and risks particular to a single company or the securities of a single company. The Fairholme Fund’s performance may differ markedly from the performance of the S&P 500 Index in either up or down market trends. The performance of the S&P 500 Index is shown with all dividends reinvested and does not reflect any reduction in performance for the effects of transaction costs or management fees. Investors cannot invest directly in an index. As reflected in its current prospectus, dated April 1, 2013, The Fairholme Fund’s total expense ratio is 1.00%.
January 29, 2014
To the Shareholders and the Directors of The Fairholme Fund:
The Fairholme Fund (the “Fund” or “FAIRX” or “Fairholme”) gained 35.54% versus 32.39% for the S&P 500 Index (the “S&P 500”) in 2013. The following table compares the Fund’s performance (after expenses) with that of the S&P 500, with dividends and distributions reinvested, for various periods ending December 31, 2013.
At December 31, 2013, the value of a $10.00 investment in the Fund at its inception was worth $55.09 (calculated by assuming reinvestment of distributions into additional fund shares) compared to $16.47 for the S&P 500. FAIRX returned almost seven times more than the S&P 500 on a $10.00 investment over 14 years. Of the $55.09, the year-end share price (net asset value per share) was $39.20 and the value of distributions reinvested was $15.89. This difference, more than anything, demonstrates how the Fund has outperformed the market (as represented by the S&P 500) over the long run.
The advantages of our long-term focused investment approach are most evident when evaluating our performance over any 5-year period since the inception of FAIRX. Fairholme has achieved 105 positive 5-year return periods and only 4 negative 5-year return periods, compared with 82 positive 5-year return periods and 27 negative 5-year return periods for the S&P 500. The Fund’s average rolling 5-year return was 69.15% versus 20.57% for the S&P 500. The Fund has outperformed the S&P 500 in 95 of 109 5-year periods, calculated after each month’s end. The Fund’s worst 5-year-period return was (6.89)% versus (29.05)% for the S&P 500. In its best 5-year period, the Fund’s return was 163.08% versus the S&P 500’s best return of 128.19%.
Our largest issuer position, at nearly 50% of assets, is in AIG common and warrants. Our second largest, at 15%, is in Bank of America common stock. Both are designated Global Systemically Important Financial Institutions.1 In other words, they are too important to fail, have significant value beyond their fortress-like balance sheets, and are capable of distributing healthy earnings to owners through dividends and/or buybacks of common stock. Yet, both trade at discounts to book value.
Headlines shout of Sears’ disastrous 2013 loss of $12 per share. A longer history shows that since the merger of Sears with Kmart, about 9 years ago, Sears has distributed over $66 of cash per share via buybacks and spin-offs and has paid down $27 per share of a pension liability that is no different, in our view, from debt. Fairholme research estimates that the fair value of Sears’ net assets exceeds $150 per share. If our research is accurate, we expect Sears’ market price of $38 to increase to this value over time.
Two of our best performers during the period were Fannie Mae and Freddie Mac. Both are absolutely essential for uniquely-American, affordable mortgages. If you disagree, try getting a 30-year, sub-5% mortgage outside of the United States. In 2008, both companies agreed to U.S. conservatorship and extraordinarily harsh terms and conditions during a time of global crisis. The plan worked. Fannie and Freddie saved the day, repaid nearly every penny of cash received from the U.S. Treasury, and can look forward to resuming a prosperous future based just on the aging of assets held. However, many believe Fannie and Freddie will be victims of a government-sponsored expropriation that brings our country closer to a future conceived by George Orwell in his novel, 1984. We disagree.
On the macroeconomic front, U.S. fiscal responsibility and U.S. energy independence are on the horizon! Economic progress will eventually lift interest rates, which will depress asset valuations. However, our banks and insurers should more than counter this weight with a lifting of margins between earning assets and paying liabilities. Overall - a net positive.
The Fund’s portfolio prices remain a third below our growing estimates of intrinsic value... If history is any guide, expect these two measures to converge one day. For now, we believe, the difference between them to be a large margin of safety.
Onward and upward,
Bruce R. Berkowitz
Fairholme Capital Management
1Designated by FSOC/the Financial Stability Board
The Portfolio Manager’s Report is not part of The Fairholme Fund’s Annual Report due to forward-looking statements that, by their nature, cannot be attested to, as required by regulation. The Portfolio Manager’s Report is based on calendar year performance. A more formal Management Discussion and Analysis is included in the Annual Report. Opinions of the Portfolio Manager are intended as such, and not as statements of fact requiring attestation. All references to portfolio investments of The Fairholme Fund are as of the latest public filing of The Fairholme Fund with respect to such holdings at the time of publication, unless specified.
For a copy of the top holdings for The Fairholme Fund, please click here. Portfolio holdings are subject to risk and may change at any time.
The Fund's investment objectives, risks, charges, and expenses should be considered carefully before investing. The prospectus contains this and other important information about the Fairholme Fund, and it may be obtained by calling Shareholder Services at 1.866.202.2263 or visiting our website www.fairholmefunds.com. Read it carefully before investing.