Fairholme fund's Berkowitz isn't afraid to take risks

@Money August 19, 2011: 2:09 PM ET

(MONEY Magazine) -- Bruce Berkowitz is a money manager who seeks bargains and has the courage to go against the crowd. That's one reason his fund, Fairholme, is in the MONEY 70, our recommended list of funds. It's also why Morningstar crowned him U.S. stock fund manager of the decade.

Since then, though, Berkowitz has made some questionable bets that led to big losses. His response: "Never pay attention to short-term performance." Still, you should at least take note of his willingness to take huge risks.

Banking on financials

"We're value people," says Berkowitz. "We go toward stressed areas of the market."

He's not kidding. Of late, he's put nearly 75% of the fund in beaten-down financials such as Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500), and Goldman Sachs (GS, Fortune 500). Berkowitz argues that bank balance sheets are stronger now than they've been in over a decade, and that the stocks are incredibly cheap.

Others -- including his former co-managers Larry Pitkowsky and Keith Trauner, who recently launched the GoodHaven Fund (GOODX) -- see far too much risk here.

Says Trauner: "It's difficult to fully understand balance sheets that aren't transparent, as there are still ongoing issues with respect to liability from the mortgage mess."

Bleeding money

A secret to Berkowitz's success has been patience. His ability to buy and hold may be put to the test if investors keep leaving and he has to sell to raise cash. From March through June, the fund saw nearly $4 billion in redemptions, partly owing to Fairholme's having lost 9% during that stretch.

Other investors may be scared off by Berkowitz's activist approach. He recently became chairman of the St. Joe Co (JOE)., a land developer, following a proxy fight. While St. Joe represents only a 3% position in Fairholme, there's a concern it will demand a disproportionate amount of his time.

Berkowitz disagrees. "We are giving fund shareholders advantages usually reserved to a hedge fund," he says.

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A solid long-term record

Deep-value investing requires a lot of patience. And "our long-term record shows that we've been okay at this," Berkowitz says.

More than okay: The fund has beaten 99% of its peers over the past decade. Morningstar analyst Kevin McDevitt says, "It's silly to ask, 'Has he lost it?' after just a few months' underperformance." (MONEY agrees.)

What you really do need to ask is whether you can handle such an iconoclast. Planner Bob Weisse of Heritage Financial Services says he still puts most of his clients with equity exposure into Fairholme, but he uses it as part of a broad, multifund strategy -- not as someone's sole or primary stock fund.  To top of page

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