Bruce Berkowitz and Fairholme Fund’s Alpha

Bruce Berkowitz launched Fairholme in 1999. It earned him the title of “Stock Manager of the Decade” from Morningstar and is now a $19 Billion mutual fund. Berkowitz’s Fairholme Fund managed to return 1.02% per month since September 2000. This compounds to an average annual return of 12.9% for the past 10 years. In 2010, Fairholme Fund returned 25.5%, beating the SPY by more than 10 percentage points. In fact, Berkowitz managed to beat the market every year except in 2003.

FAIRHOLME (FAIRX) Bruce Berkowitz

Bruce Berkowitz had hired two stock pickers, Larry Pitkowsky and Keith Trauner, when he launched Fairholme in 1999. Keith Trauner is a value investor. Berkowitz himself is a value investor too, investing in Berkshire Hathaway earlier in his career on behalf of his clients. Trauner and Pitkowsky quit Fairholme after the arrival of Charlie Fernandez, though they kept providing consulting services until last year. In January, the duo announced that they’re in the process of launching their own mutual fund. Their first client and minority shareholder of the new company is Tom Gayner’s Markel Corp.  WSJ reports the following about the new fund:

The GoodHaven fund will be highly concentrated, like Fairholme, with roughly 15 or 20 holdings, the managers say. And it will follow Fairholme’s example of looking for bargains among companies that are under stress. “We’re the kind of people who want to run toward a fire, instead of away from it,” Mr. Trauner says. At Fairholme, Mr. Berkowitz has lately loaded up on financial-services firms such as American International Group Inc. and Citigroup Inc. that were beaten down during the financial crisis.

But Messrs. Pitkowsky and Trauner won’t stick strictly to the Fairholme playbook. One difference: They are eager to look at smaller companies, whereas Fairholme has generally gravitated toward larger-cap holdings.

Insider Monkey, your source for free insider trading data, will keep an eye on Pitkowsky and Trauner, but our main interest is whether Bruce Berkowitz has a statistically significant alpha or not. We downloaded Fairholme’s monthly returns from Yahoo! Finance and used Carhart’s four factor model to calculate Berkowitz’s alpha. Between September 2000 and November 2010, Berkowitz generated a monthly alpha of 50 basis points. His market beta was 0.7 and value effect beta was 0.59. His investment style for the entire period was much closer to value investing and since anybody who purchased value stocks during the past decade achieved significantly better results than the SPY we don’t give any credit to Berkowitz for this. (If value stocks performed badly during the past decade, he wouldn’t have been penalized for this either).

One might argue that Fairholme was a much smaller fund during the first five years of its existence, so we should only consider its performance since 2005. When we did that his alpha went down to 44 basis points per month. Still a great performance. However, we’ve been calculating alpha for most hedge fund managers starting from 2008. The past three years have been an exceptionally challenging time for fund managers. That’s why we like to use this time period to determine more accurately whether a hedge fund manager has alpha. Unfortunately, Bruce Berkowitz’s monthly alpha goes down to 22 basis points per month. It isn’t as high as 6%, but it’s still nearly 3% per year. Whitney Tilson and Daniel Loeb had higher alpha during the same time period, whereas Warren Buffett didn’t have any alpha for the 2000-2009 period (see Warren Buffett‘s latest stock picks).

Overall, Bruce Berkowitz still manages to generate a positive alpha for his investors even though he now manages nearly $19 Billion. Mutual fund investors should consider investing with him because there aren’t many mutual funds that can generate a 3% alpha per year.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Top Reasons For Getting Fired

The 3 Best States to Start an LLC

10 Jobs That Allow You to Travel

7 High-Paying Jobs You Can Do From Home

12 Best Cities to Shop in USA

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!