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Berkowitz on mutual fund constraints & fund closings: TRANSCRIPT


Bruce Berkowitz, founder of Fairholme Capital Management, spoke with Bloomberg TV’s Erik Schatzker about moving beyond mutual funds, his decision to close existing funds to new investors and why he likes financials.  Berkowitz said, “Mutual funds are great vehicles…They’re transparent. They give investors daily liquidity. They’re highly regulated. But there are also constraints that go along with that.”

 

Berkowitz, who is raising money for a partnership that takes minimum investments of $1 million, said “at this point, I can’t talk about it, but stay tuned.”

 
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Berkowitz on whether he feels vindicated due to his fund’s performance in 2012:

 

“Not yet…2011 was horrible, because the price to climb, the market declines in the companies that we owned didn’t make sense to me in that the business trends of those companies were rising.  In fact, it was in the second full year of rising.  So I couldn’t understand how our businesses were improving, but the prices were going down. And the reason, of course, is, you know, people like to predict rather than price.  And investors were predicting a double dip recession, the death of Europe and so on.  So even though I’m watching these business trends improve and, look, values going up and profits and bad debt going down and bad loans going down.  And as expected the prices went down.  So it was horrible and yes, 2012 was better.”

 

On what it will take for him to feel vindicated:

 

“I think three to five years.  The thesis that we have on these financials whose prices were so decimated in 2011 is that we were able to buy them at half their liquidation value, and that as they recovered, they’re going to make money.  And a more normal environment’s going to regress to a more normal environment. And they will earn a nice, reasonable profit.  So over the next five, seven years, their equity values will double.  And the prices will more than just meet those equity values.  They’ll increase it.  And I expect we’ll see four times the price on these financials over five to seven year period…We keep working on having shareholders that will that will stay with us at least for five years.  And that’s the reason why we’re no longer going to accept new shareholders in the end of February, because I feel that those shareholders that have stayed with us understand what we’re about.  And I don’t want the possibility of new money diluting the positions that we now have.”

 

On whether he has any regrets and what lessons he’s learned:

 

“Well, with hindsight?  Oh, there are always there are hundreds of mistakes…Lessons learned is as bad as I expect something to happen, it could be worse that I didn’t really fully understand how people overweight the near past.  So, you know, for a lot of what people think that the last year of something happening or two years has more weight than maybe the last 200 years.  So what I saw was a cycle repeating itself what people saw something new that was going to continue to be bad forever.  And I seem to suffer from a premature accumulation.”

 

On whether investors have learned that focusing on the short-term isn’t a good idea:

 

“I think the markets learned that.  I still suffer from it though.  I haven’t found the right technique or medication yet for premature accumulation.  I just see it’s cheap.  I count the cash.  I look at the intrinsic value of the company and the price.  And I think, ‘This is too good to be true.’  And I buy and then it goes lower.”

 

On whether he’s ever closed his fund before:

 

“No, in the history of the funds, have not.  It’s a little counterintuitive, I know.  Most funds closed when they had a lot of cash, a lot of money.  We stayed open when we had a lot of cash, knowing that that cash would be a good cushion.  And now we still have a lot of cash, so our fund today, Fairholme Fund is 20% cash.”

 

On why he puts up with mutual fund rules:

 

“A good question…Stay tuned…At this point, I can’t talk about it, but stay tuned…mutual funds are great vehicles.  They’re transparent.  They give investors daily liquidity–highly regulated.  But they’re also constraints that go along with that, in terms of how much you can own of, you know, one type of company, how much you can have in concentrated positions.  And it’s fine.  But it’s proven not to be the perfect vehicle for non-public companies or illiquid investments.”

 

On whether the golden age of the mutual fund is over:

 

“No…No, people– there– there’s– you know, a large group.  There’s many ways to make money and we want to try and offer the best possible ways for our shareholders, existing clients, to do reasonably well over a long period of time.”

On why not be more concentrated:

 

“I think we have kept our promises as to being a focused fund and that we would stay the course with our very best ideas, rather than invest in lesser ideas.  So in case of Bank America, of course, at one point, we would love to own much more Bank of America, but mutual funds can’t invest more than 5% of their assets in a company that has a significant broker dealer.  So we were limited.  But because shareholders left, we didn’t sell any Bank of America.  So it became a bigger position than 5%.”

 

On whether he’d want to own more Bank of America if he could:

 

“Yes.”

 

On whether one can assume that Fairholme’s holdings–AIG, Sears, Bank of America, MBIA, etc.–are Berkowitz’s best investment ideas:

 

“Yeah, you only need a few good ideas to make a significant difference in a lifetime.”

On whether tech stocks like Dell, Hewlett-Packard and Apple appeal to him:

 

“It’s not within my circle of competence.  I mean, what I’m doing now I believe to be a replay of what I did in the ’90s, so I understand it.  You buy something at half its liquidation value.  Problems are fixed.  More normal environment develops.  The equity values double.  Price eventually surpasses equity values and you have an above average performance return for a number of years.”

 

On why he doesn’t own Wells Fargo:

 

“Until recently, Bank of America had that with Countrywide…Bank of America decided they want to only serve their core customer, which makes sense.  I mean, wholesale mortgage lending’s very good right now, given what happened in the past.  But eventually that is a very fickle intermediary base, so I like what I think Brian Moynihan is going make Bank of America more like Wells Fargo than Wells Fargo.”

 

On whether he believes that owning Bank of America is a bet on America:

 

“It is America’s bank.”

On whether he’d rather own Bank of America than make a bet on globalization and emerging markets with Citigroup, which is also priced very cheap:

 

“Citi doesn’t have that kind of retail element that it has, I mean, in terms of definitely in the United States, which I know the best.  And Wells Fargo’s a fine institution.  But you know, investing’s all about what you give versus what you get.  And Bank of America gave you the chance to get an awful lot for very little.”

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