Successful money managers face a dilemma. When they have small amounts of money to invest, it's easier to find opportunities that let them earn outsize returns. Yet once those high performance figures go public, investors typically race in to get a piece of the action, forcing managers to find equally lucrative new opportunities if they want to meet the high return expectations of their clients.
That's usually the reason that money managers cite for closing their doors to new investors. For Fairholme Fund and Morningstar Manager of the Decade winner Bruce Berkowitz, though, the story is a bit different.
The news Fairholme announced yesterday (link opens PDF file) that it would stop accepting new investors into its family of three mutual funds after the end of February. Existing shareholders as of that date will have the right to keep making future purchases of fund shares, but except for any exceptions the fund makes to its general policy, investors who don't already own shares will be locked out of the funds.
Fairholme had two justifications for the decision. First, it said that the funds were in a good position to invest and fund operations. Second, it argued that new investors might dilute existing shareholders in their ability to reap the benefits of the funds' current holdings.
How to read it What's different about Fairholme compared to most funds that close their doors is that Fairholme has suffered huge outflows in recent years. With absolutely terrible performance in 2011, Fairholme sent investors fleeing as big bets on financial stocks went awry. Even last year, when the fund had very strong performance and made back a big portion of the money it lost the previous year, Fairholme still had to deal with investors pulling out $2 billion.
Moreover, it's hard to argue that Fairholme doesn't have the ability to invest more money if it comes in. Many of the funds that close their doors are focused on small-cap and mid-cap stocks, where it's easy for a fund that's too big to move the market for a favored stock. But with top holdings American International Group, Inc. (NYSE:AIG) and Bank of America Corp (NYSE:BAC) , Fairholme is dealing with extremely liquid companies with market caps of $50 billion to $120 billion and average volumes of tens of millions of shares per day. Even Sears Holdings Corporation (NASDAQ:SHLD) , which has seen its price plunge to mid-cap status, still trades more than a million shares on a typical day.