American International Group Inc (AIG), Bank of America Corp (BAC) Cripple Bruce Berkowitz’ Q1 Returns

Bruce Berkowitz’ mutual fund Fairholme struggled in the first quarter, as our weighted returns metric suggests Berkowitz’ 17 qualifying long positions lost 0.7% during the quarter, underperforming the S&P 500’s return of 0.9%. While that didn’t land him among the 40 worst performing funds of the quarter, it was in the bottom 10% out of the more than 700 funds we track at Insider Monkey.

The average investor doesn’t have enough time to do in-depth analysis on each stock they include in their portfolios. Professional investors like Berkowitz spend considerable time and money conducting due diligence on each company they invest in, which makes them the perfect investors to emulate. However, we also know that the returns of hedge and mutual funds have not been good for several years, underperforming the market. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of these funds performed far better than their large-cap picks, which is where most of their money is invested and why their performances as a whole have been poor. A portfolio of the 15 most popular small-cap stocks among funds outperformed the S&P 500 Total Return Index by 95 basis points per month between 1999 and 2012. The exceptional results of this strategy got even better in forward testing after the strategy went live at the end of August 2012. The 15 most popular small-cap stock picks among the funds we track in our database have beaten the market by more than 82 percentage points since then (see the details).

Berkowitz’ fund was a perfect microcosm of this phenomena during the first quarter. He has three notable stocks in his equity portfolio which amount to over 70% of the total value of that portfolio. Two of them are large-caps, one is a small-cap. The large caps both underperformed the market during the first quarter, dragging down Berkowitz’ overall returns, while the small-cap holding enjoyed a strong quarter.

Berkowitz’ top pick is American International Group Inc (NYSE:AIG), in which his fund holds more than 75.25 million shares, a 5.3% stake in the financial services and insurance company. The stake also single-handedly accounted for more than 47% of the value of Berkowitz’ equity portfolio. After a strong two-year run through 2012 and 2013, American International Group Inc (NYSE:AIG)’s returns began to slow in 2014, coming in at less than 10%. 2015 is off to an even worse start, as shares have dipped by 1.7% through the first quarter of the year.