Bruce Berkowitz’s Noteworthy Q1 Moves in Financial Stocks

Bruce Berkowitz was recently in the spotlight for his strong criticism of how the U.S government has managed the Fannie Mae and Freddie Mac situation, over which he filed a lawsuit against the government in 2013. However, Berkowitz is used to the attention; back in 2010, Morningstar named him the Domestic-Stock Fund Manager of the Decade for the 2000-to-2009 period, mostly for his work at Fairholme. Talking about Fairholme, the Florida-based mutual fund recently filed its latest 13F, disclosing its long equity stakes as of March 31, which were valued at more than $1.65 billion, down from $2.43 billion at the end of 2015. While the portfolio was heavily focused on real estate (35%) and consumer discretionary (33%) stocks, some of the most interesting moves made by the renowned fund manager in the first quarter were related to its stock picks in the financial sector. Let’s take a look at some of those moves and see which stocks Mr. Berkowitz is bullish on and which he may have lost faith in.

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see the details here).

Berkowitz Disposes of American International Group Inc (NYSE:AIG)

Let’s start with American International Group Inc (NYSE:AIG), a company in which Fairholme trimed its position in every quarter since the third quarter of 2013. During the first quarter of 2016, the firm finally sold off its remaining 271,560 shares of the insurer, though it still holds 10.67 million stock warrants valued at almost $200 million. It should be noted, nonetheless, that over the January-to-March period, Mr. Berkowitz sold 11.32 million warrants, cutting his fund’s stake by 51%.

For the time being, the sales do not seem to have been a wise decision, as shares of AIG have gained 8% in the second quarter. On Tuesday, the stock gained more than 1.3% on the news that the company will enter the crowdfunding scene, not to raise money, but rather to offer insurance for investors putting their money into such projects. The company said it will soon launch “Crowdfunding Fidelity,” an insurance product aimed at protecting investors using equity crowdfunding platforms against fraud.

Fairholme was not the only fund that we track to have closed a position in AIG during the quarter, as the number of funds in our database long the stock fell by almost 7% to 94. Among the other funds that closed out their stakes in AIG, we can count Barry Rosenstein’s JANA Partners, which disposed of its 4.25 million shares of the company.

Fairholme Exits Positions in Berkshire Hathaway Inc. (NYSE:BRK.A)/(NYSE:BRK.B)

Next up are two other closed stakes, in Berkshire Hathaway Inc. (NYSE:BRK.A) and Berkshire Hathaway Inc. (NYSE:BRK.B). On December 31, Fairholme held stakes in both classes of Berkshire’s shares. During the first quarter of 2016, the firm sold all of its 135,242 Class B shares and its 3 Class A shares, which had a combined value of more than $18 million at the end of 2015.

Shares of Berkshire Hathaway have done pretty well in 2016, posting gains of roughly 9%, including gains of about 1% in the second quarter, outperforming the major U.S stock indexes. On May 20, the company’s General Re (reinsurance) unit named Kara Raiguel as its new chief executive officer, to replace the retiring Tad Montross. Shares of Berkshire Hathaway rose by roughly 0.75% on that day.

Another firm that seemed bearish on Mr. Warren Buffett’s holding company was Ray Dalio’s Bridgewater Associates, which disposed of its 77,044 Class B shares over the first quarter.

We’ll take a look at two other big first quarter moves by Mr. Berkowitz on the next page.

Berkowitz Nearly Disposes of Leucadia National Corp. (NYSE:LUK) Position

Leucadia National Corp. (NYSE:LUK) also felt Mr. Berkowitz’s bearishness in the first quarter of 2016, as Fairholme sold off 98% of its 4.54 million-share stake, keeping only 66,000 shares worth slightly more than $1 million on March 31. Once again, the stock has been on the rise since the first quarter ended, surging by more than 9.5%. Most recently, the strength seems to have been driven by the announcement a couple of weeks ago that the company was acquiring ITG Investment Research, LLC (formerly Majestic Research) from Investment Technology Group. More recently, the company’s investment banking business, Jefferies Group LLC, hired five senior investment bankers from Credit Suisse Group AG (ADR) (NYSE:CS); shares rose by 1.2% the day after the announcement.

Among the funds that we track, 33 were long Leucadia at the end of the first quarter, up from 29 at the end of 2015. Among the most bullish firms was Robert Rodriguez and Steven Romick’s First Pacific Advisors LLC, with a holding of 20.9 million shares worth roughly $338 million on March 31.

Berkowitz Doubles Down on Bank of America Corp (NYSE:BAC)

Finally, there’s Bank of America Corp (NYSE:BAC), one of Fairholme’s most bullish moves of the first quarter. After more than doubling its exposure to the company during the period, the firm held 8.57 million shares worth more than $115 million on March 31, making it the fund’s sixth-largest position. By the end of the first quarter of 2016, the company counted 109 other hedge funds with long positions, including Harris Associates, which boosted its stake in the company by 3% over the period; the firm disclosed ownership of 144.29 million shares, worth roughly $1.95 billion on March 31. While shares of Bank of America are down by 12.5% in 2016, they have managed to recuperate 8.8% of their value in the second quarter. On Monday, a U.S appeals court dismissed a $1.27 billion penalty that Bank of America was scheduled to pay in relation to a fraud case concerning defective mortgages. Shares of the bank are up by 2.6% since the announcement.

By the end of the first quarter of 2016, there were 109 other hedge funds with long positions in Bank of America, including Harris Associates, which boosted its stake in the company by 3% over the period to 144.29 million shares worth roughly $1.95 billion on March 31.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.