But, this year, it appears he's lost the golden touch as big bets on insurance giant
American International Group(AIG_) and other financial stocks have turned against him.
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| Fairholme Fund's Bruce Berkowitz |
In a conference call with shareholders Monday morning, Berkowitz said "I was wrong" in buying up shares in the troubled AIG and making it the fund's largest holding, according to a story in today's Wall Street Journal.
That's because AIG is going to make a new stock offering this month that will likely dilute the value of existing shares, which have tumbled 49% this year.
The size of this month's offering has yet to be determined, but the company said it plans to raise as much as $7 billion by Jan. 14, 2012, by executing one or more offerings, according to documents filed with the Securities and Exchange Commission.
In 2008, AIG got a $130 billion infusion from the government that included loans, and the purchase of shares and a mortgage securities portfolio, under a "too big to fail" effort after the stock market collapsed.
AIG plans to use the proceeds to pay back some of the government's 92% ownership stake, part of its $47.5 billion share buy in 2008. The company has already paid back more than $40 billion in loans, including interest and fees.
AIG's shares are currently trading around $29.50, which means the government -- and, by proxy, taxpayers -- could take a loss on the deal if there's a stock-price decline, as so often happens when there's significant new share issuance.
But the government could decide to hang on to some of the shares if the market response to the offering is disappointing in hopes of selling at a better price later. The Treasury's break-even price on its AIG stake is about $28.70 per share.
The Fairholme fund began buying AIG shares in early 2010, when they were trading in single digits, but the bulk of the purchases came later, when they were selling for $32.
AIG's shares rose steadily through 2010 and, by late in the year, the government was crowing that it could turn a big profit on the deal for taxpayers.
AIG shares traded as high as $63 the first week of 2011, which made Berkowitz look like a genius. But, in February, the company raised its estimated losses from insurance claims by $4 billion, and that raised red flags for investors. Its shares have been on a downhill slide since then.
Berkowitz said on the conference call that he was caught by surprise from the government's decision to sell its shares over the next few months at below a break-even price. "I found it very hard to believe the government would sell its stake below book value and right now AIG is trading at two-thirds of book value," he said, according to the published report.
The book value is $47.66 per share.
"The government wants to sell 1.6 billion shares with their cost basis around $29 per share," he added, "while the proposed public offering will likely sell in the range of $27 to $29."
AIG's shares currently have a $55 billion market value.
AIG isn't Berkowitz's only big loser this year, as he bet heavily on a financial-services rebound and made the industry 74% of the fund's assets.
As of the end of February, the fund's 20-stock portfolio was led by AIG, at 7.6%,
Sears Holdings(SHLD_), 6.1%;
Bank of America(BAC_), 5.6%;
Morgan Stanley(MS_), 5.3%;
Goldman Sachs(GS_), 5.1%; and
Citigroup(C_), 5%.
All five of the financial stocks in that group are in the loss column this year. Excluding AIG, their declines range from 6.6% for Citigroup to 16.3% for Goldman Sachs.
The $17.5 billion Fairholme Fund is down 4.9% this year through May 9. It's up 8.3% over the past 12 months and has a sterling 6.7% average annual return over five years. The S&P 500 Index is up 7.7% this year and 24% over 12 months.
Morningstar analyst Kevin McDevitt said in a May 5 research note on Fairholme that investing in financial-sector stocks have been Berkowitz's strong point "dating back to the early 1990s' (savings and loan) crisis. As always, the fund's success hinges on Berkowitz getting such bets right. And while he has been early in the past, he has rarely been wrong."
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