Each quarter, hedge funds, such as Bruce Berkowitz’s Fairholme, file 13Fs with the SEC. These 13F forms disclose many of the positions held in the fund’s equity portfolio during the quarter. Fairholme is a very large managed fund, with over $19 billion in assets under management. Let’s take a look at how Berkowitz has been playing the financials, because retail investors can benefit from watching hedge fund sentiment; discover how here.
Number one
The fund’s largest financial sector holding, as well as its largest holding overall, was in the insurer American International Group Inc (NYSE:AIG), with 85,900,077 shares worth about $3.33 billion held as of March 31, 2013, a very slight increase from the amount held at the end of 2012. American International Group Inc (NYSE:AIG) comprises over 42% of the fund’s total equity portfolio, and it’s telling that Berkowitz famously focuses on value, because there’s still some left for American International Group Inc (NYSE:AIG) despite the fact that it’s trading near its 52-week high. Shares sport a sub-1.0 PEG and a forward P/E below 11.0, and Wall Street’s average price target on the post-bailout insurer indicate that a 6-7% upside is expected from current levels.
The best of the rest
Next up is Bank of America Corp (NYSE:BAC), the fund’s second largest equity holding overall. As of March 31, the fund held 100,589,215 shares of the banking behemoth, worth about $1.2 billion, 15.59% of the fund’s equity portfolio. The size of this position hasn’t changed significantly since the end of 2012, and Bank of America Corp (NYSE:BAC)’s price action has been impressive over the past twelve months, rallying from about $7 a year ago to $13.40 as of this writing, close to its 52-week high.
Berkowitz’s ongoing support of the broader financial sector—these positions have extremely significant spots in his 13F—indicates that he’s unwearied of worries over higher regulatory costs in this space. S&P holds a “Neutral” outlook on Bank of America Corp (NYSE:BAC)’s sub-industry, citing regulatory issues as a potential bearish issue, but the ratings agency views that the group is “well positioned for Basel III.” Any financial permabulls out there would do best to watch Berkowitz moving forward, but be aware that headwinds may arise in the near- to intermediate-term.
During the quarter, the fund also decreased its stake in financial services company MBIA Inc. (NYSE:MBI) by approximately 26%, to hold 31,425,820 shares worth over $322 million as of March 31, 2013. MBIA Inc. (NYSE:MBI) recently won a successful settlement against Bank of America Corp (NYSE:BAC), causing a 40% rise in its share price; Berkowitz’s Q1 sale may have been an attempt to hedge against the uncertainty created by the case, although if so, this proved to be unnecessary.
A new buy for Berkowitz this quarter was 898,800 shares in insurance company Genworth Financial Inc (NYSE:GNW), creating a position worth about $8.9 million as of March 31, 2013. Berkowitz’s move may have been in anticipation of an impressive earnings performance last quarter, as the company’s latest financials indicated that net income doubled to $103 million year-over-year.
Still, we postulate that Berkowitz’s interest in Genworth Financial Inc (NYSE:GNW) is due to its three-way breakup potential; it is expected to IPO its Australian mortgage insurance unit in the next 12-24 months for around $800 million, and sales of its alternative asset and wealth management businesses are estimated to be worth a sum of $400 million. The Australian IPO is Genworth Financial Inc (NYSE:GNW)’s first priority, and there’s beauty in this breakup: Wall Street expects Genworth shares to be worth $13 a piece on the high side. As of this writing, the stock is trading near $10.36.
Berkowitz also decreased his stake in banking and financial services company Wells Fargo & Co (NYSE:WFC), with the fund reducing its existing stake by about a quarter to 151,400 shares worth about $5.6 million, as of March 31, 2013. Wells Fargo is still the 11th largest holding for the fund in terms of value, but the reduction in stake was an interesting move, given that Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.B) increased its position in the bank last quarter.
Wells Fargo & Co (NYSE:WFC)’s advantages in the home lending segment of the U.S. economy are obvious, but it’s this obviousness that draws most investors to the bank, as thoughts of an ongoing housing recovery immediately lead one to be bullish. Still, Berkowitz’s cut may be do to valuation concerns; Wells Fargo sports the fourth-highest sales multiple (4.5) in the money center banking industry, and the ninth-highest cash multiple (13.1).
Final thoughts
Berkowitz is a large and influential investor, with a bias towards value-oriented plays. His current equity holdings are largely weighted toward the financial sector, with financial services giants American International Group Inc (NYSE:AIG) and Bank of America Corp (NYSE:BAC) taking the top two spots. Cuts to his Wells Fargo and MBIA Inc. (NYSE:MBI) stakes are intriguing, but we’re particularly interested in Genworth Financial. The breakup value for this company might be much higher than shares are currently resting at, though this potential can only be unlocked if an Australian IPO does happen.
Disclosure: none
