Bruce Berkowitz’ mutual fund Fairholme struggled in the first quarter, as our weighted returns metric suggests Berkowitz’ 17 qualifying long positions lost 0.7% during the quarter, underperforming the S&P 500’s return of 0.9%. While that didn’t land him among the 40 worst performing funds of the quarter, it was in the bottom 10% out of the more than 700 funds we track at Insider Monkey.
The average investor doesn’t have enough time to do in-depth analysis on each stock they include in their portfolios. Professional investors like Berkowitz spend considerable time and money conducting due diligence on each company they invest in, which makes them the perfect investors to emulate. However, we also know that the returns of hedge and mutual funds have not been good for several years, underperforming the market. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of these funds performed far better than their large-cap picks, which is where most of their money is invested and why their performances as a whole have been poor. A portfolio of the 15 most popular small-cap stocks among funds outperformed the S&P 500 Total Return Index by 95 basis points per month between 1999 and 2012. The exceptional results of this strategy got even better in forward testing after the strategy went live at the end of August 2012. The 15 most popular small-cap stock picks among the funds we track in our database have beaten the market by more than 82 percentage points since then (see the details).
Berkowitz’ fund was a perfect microcosm of this phenomena during the first quarter. He has three notable stocks in his equity portfolio which amount to over 70% of the total value of that portfolio. Two of them are large-caps, one is a small-cap. The large caps both underperformed the market during the first quarter, dragging down Berkowitz’ overall returns, while the small-cap holding enjoyed a strong quarter.
Berkowitz’ top pick is American International Group Inc (NYSE:AIG), in which his fund holds more than 75.25 million shares, a 5.3% stake in the financial services and insurance company. The stake also single-handedly accounted for more than 47% of the value of Berkowitz’ equity portfolio. After a strong two-year run through 2012 and 2013, American International Group Inc (NYSE:AIG)’s returns began to slow in 2014, coming in at less than 10%. 2015 is off to an even worse start, as shares have dipped by 1.7% through the first quarter of the year.
Shares performed particularly poorly in January, dipping by well over 10% after AIG announced an $800 million debt offering with a yield of 4.375%. Despite also missing earnings estimates in the middle of February, American International Group Inc (NYSE:AIG) made up for most its January losses with a strong performance in February and March. That helped prevent Berkowitz’ performance from being far more dreadful, and was also good news for other investors, which include billionaires D.E Shaw and Larry Robbins.
Bank of America Corp (NYSE:BAC) was Berkowitz’ second-largest position, as he held over 108.12 million shares in the investment bank. Like AIG, Bank of America Corp (NYSE:BAC) endured a horrid January, falling by more than 15%. Unlike AIG however, Bank of America made little headway in making up for those losses over the course of the next two months, finishing the quarter down by 13.69%. Bank of America Corp (NYSE:BAC)’s January tumble was the result of its latest earnings release, in which it reported a 14% dip in quarterly revenue. The Federal Reserve’s annual Stress Test did it no favors either, as it chided Bank of America for failing to effectively map out its capital plans. Billionaire Ken Fisher had the second-largest position in Bank of America after Berkowitz, though his exposure to the stock was far less, at just 1.55% of his portfolio.
Sears Holdings Corp (NASDAQ:SHLD) was Berkowitz’ third-largest position, consisting of 32.97 million shares. The famed retailer, now being run by Edward Lampert of ESL Investments, had a huge first quarter, soaring by 25.47%, though it remains a small-cap company. That continued to build upon a strong rebound from its early October low, when it sank to less than $25. Shares are now up over 70% in the six months since. Regarding Sears Holdings Corp (NASDAQ:SHLD), Berkowitz recently released a case study summary ahead of a full presentation on the retailer to be presented at a later date, citing its massive commercial real estate space as being a very valuable commodity, while claiming that the lackluster holiday sales and store closures were actually positive developments. Berkowitz was the largest shareholder among funds we track, while Murray Stahl’s Horizon Asset Management is another long-term shareholder of Sears Holdings Corp (NASDAQ:SHLD).
Disclosure: None
