Bank of America Corp (BAC), American International Group Inc (AIG): What Fairholme Fund’s Reopening Means for These Stocks

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As fund closures go, Fairholme Fund's was relatively short. After closing its doors to new investors at the beginning of March, Fairholme officially reopened last week, offering new shares to all comers.

After such a quick about-face in fund policy, the natural question is why fund manager Bruce Berkowitz and the fund's board of directors believed that reopening the fund made sense at this time. The answer could well hinge on Berkowitz's willingness to make another big bet on a pair of stocks related to the financial industry.

FAIRHOLME (FAIRX) Bruce Berkowitz

Reading the tea leaves In the press release reopening the fund, Fairholme said that it had an "expectation that, given the Fund's current holding, investment opportunities, and liquidity, inflows from new investors can be invested in a manner that is consistent with the Fund's investment objective and strategies." That statement stands in contrast to Fairholme's explanation for closing the fund earlier this year, when it said that "inflows from new investors into a Fund may dilute the proportionate interests of existing Fund shareholders in the Fund's current portfolio holdings."

Translated, those two statements suggest that earlier this year, Berkowitz didn't have any compelling new investment ideas, but now, he does. Although Fairholme didn't reveal which of its investment ideas it thinks are most compelling, recent actions suggest that Fannie Mae and Freddie Mac could be the fund's expected destination for new cash.

Looking for the next score Fairholme saw a huge defection of investors from its fund in 2011, when it posted abominable performance due to big bets on financial stocks that turned out to be short-term losers. Bank of America Corp (NYSE:BACended up needing to ask Warren Buffett for a big infusion of capital, while insurance giant American International Group Inc (NYSE:AIGtook longer than expected to get its own asset sales and corporate restructuring done. Even though the fund rebounded sharply last year, its investors still withdrew billions of dollars, making its closure seem somewhat unnecessary. But what the closure did suggest was that Berkowitz no longer saw Bank of America Corp (NYSE:BAC) and American International Group Inc (NYSE:AIG) as a compelling source of strong future investment returns.

By contrast, since the closure, Fairholme has made several public moves with Fannie and Freddie. As Fairholme put it in its semiannual report, the fund sees the preferred shares of the two government-sponsored enterprises as "investments in the recovery of homeownership." Given that a group of lawmakers in the U.S. Senate have presented bills to wind down both entities, potentially leaving shareholders with worthless stock, Berkowitz's initial $2.4 billion stake in the entities definitely carries some risk.

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