GoodHaven fund annual report 2013

[VersaillesinNY]

These are Bruce Berkowitz's former partners and analysts:

 

http://www.goodhavenfunds.com/media/pdfs/2013_AR.pdf

 

"In the aggregate, we now have a reasonably sized holding in the energy business,

particularly focused on natural gas. Huge discoveries of “shale gas” in the United

States led to a drilling boom and then a sharp decline in gas prices.

We made our initial investments over a year ago as panicked investors drove gas prices to $2 per

thousand cubic feet (“MCF”), well below the level that most need to generate profits.

Current natural gas pricing is closer to $4 per MCF. Our current holdings consist of Devon Energy,

Exco Resources,WPX Energy, and Birchcliff Energy.

Of these, Exco and WPX recently experienced leadership changes, which we believe may act as a

catalyst to improve operations. Although natural gas prices are heavily influenced by weather,

there are some good reasons to think that another huge price bust may not occur for a while.

Crude oil contains about 6 times more energy than natural gas while the price of crude oil

hasrecently ranged between 20 and 25 times the price of natural gas. We expect that

gap to narrow as industrial users attempt to make substitutions. More importantly,

severe regulatory restrictions on the burning of coal and the building of new

coal-fired plants continue to increase the market share of natural gas in electrical

generation. Furthermore, a small but growing part of the commercial transportation

business is converting from diesel to natural gas. Lastly, there are a number of

permitsin progressto create modest but meaningful export capacity for natural gasto

take advantage of large price differentials, such as in Japan where landed prices per

MCF are more than four times U.S. wellhead prices. Given relatively soft valuations

and a bright longer-term outlook, we continue to look for additional opportunities in

this area."

GoodHaven_Fund_2013_Annual_Report.pdf

[fareastwarriors]

Good read thanks.

I like these 2 guys.  I will continue to monitor their activities.

[Guest 50centdollars]

thanks

[dcollon]

Thanks for posting

[nkp007]

These guys always have great letters.

[Liberty]

Thank you.

[obtuse_investor]

I have been following them too since they parted ways from fairholme.

 

It is interesting to notice that they diversified their cash position away from USD, into Canadian dollar and the Norwegian kroner-- two of the most overvalued currencies out there. The Canadian dollar, less so now that it has dropped close to 10% in the last couple months.

 

If this wasn't a [bad] macro call, then I don't know what it was.

[CorpRaider]

They are definitely not just a more diversified version of fairholme though, are they?  I can't see berkowitz buying so many tech stocks or norweigan kroners.

[Guest wellmont]

these guys invest in the way fairholme did when FF was small. ff has had a hard time outperforming the index since assets ballooned.

[OracleofCarolina]

these guys invest in the way fairholme did when FF was small. ff has had a hard time outperforming the index since assets ballooned.

 

Their returns have pretty much mirrored the s&p 500 since inception though.

[Guest wellmont]

the index was very strong in 2013. GARP stocks did really well. these guys carried a lot of cash since inception. they invested in gold mining, commodities. and they invested in currencies. that to me is what I don't want from equity fund manager. I don't want them speculating in currencies. they also have 1.10% penalty every year from expenses. If I was going to pick a fund to invest in it would not be this one. It's very interesting to monitor what's going on at fairx. He under performed from the bottom in 2009. that's a period where I would have expected him to outperform. Size is the enemy of performance. It would not surprise me if bruce exited fairholme somehow and moves over to hedge fund side.

[constructive]

I think people are sometimes too quick to blame size for reducing returns.

 

In most cases it could just as easily be luck, overconfidence, complacency or just not having the skill to adjust to different market conditions.

[constructive]

Take Fairholme. Berkowitz has responded to getting bigger by getting more concentrated than he was in the 2000s (more leveraged securities too). He still runs it like a $100M fund, not a $8.5B fund. If he underperforms it's not primarily because of size.

[Packer16]

I think size is the major reducers of returns.  Look at Buffett and Baupost.  Buffett returns have declined as size has increased and Baupost returns capital (forcibly reducing size to maintain performance).  I have to add a caveat that is size and diversification.  In order to diversify many funds have to invest their modestly cheap versus super-duper cheap companies.  Also, some like GoodHaven go into other areas that are more speculative gold and Norwegian Kroner.

 

Packer 

[Guest wellmont]

Take Fairholme. Berkowitz has responded to getting bigger by getting more concentrated than he was in the 2000s (more leveraged securities too). He still runs it like a $100M fund, not a $8.5B fund. If he underperforms it's not primarily because of size.

 

I think if he was running $100m of permanent capital in early 2009, he would have dramatically outperformed index over next five years.

[constructive]

I think size is the major reducers of returns.  Look at Buffett and Baupost.  Buffett returns have declined as size has increased and Baupost returns capital (forcibly reducing size to maintain performance).

 

I think Buffett has slowly lost the go for the jugular, animal instinct to grab more than his share. He had that impulse like Soros and Icahn when he was a young man. Icahn is still willing to fight you over a dollar on the sidewalk (just ask Ackman).

 

Baupost is a good point. They are still pretty huge though.

[jay21]

I think size is the major reducers of returns.  Look at Buffett and Baupost.  Buffett returns have declined as size has increased and Baupost returns capital (forcibly reducing size to maintain performance).  I have to add a caveat that is size and diversification.  In order to diversify many funds have to invest their modestly cheap versus super-duper cheap companies.  Also, some like GoodHaven go into other areas that are more speculative gold and Norwegian Kroner.

 

Packer

 

I read in an article that one of Klarman's problems with size is that he may dilute the culture.  He has a very large team and if they kept growing so would the team.

[VersaillesinNY]

GoodHaven Fund 2014 Semi-Annual Report‏

GoodHaven_2014_Semi-Annual_Report.pdf

[VersaillesinNY]

Unfortunately, another bad year for the duo. These guys are trying hard but redemptions will lower their ability to seize opportunities. Their well written letter covers topics such as natural gas, Ocwen and gold miners.

 

GoodHaven annual report 2014

At 5/31/2013 assets of the Fund were $450 million; they climbed to $609 million at May 30, 2014 and

fell to $443 million at 11/30/14. We have always tried to attract investors sharing a long-term approach

to sensible money-management, but note that such dramatic swings in and out of the Fund make our job

as portfolio managers more difficult. In the last year or so, we spent a great deal of time attempting to

mitigate the effects of cash flows on our shareholders.

GoodHaven_2014_Annual_Report.pdf

[Txvestor]

Agreed, but you've got to say, their underperforance for the past 6mths has been breathtakng.

Whats more, the risk of permanent loss of capital on some of their relatively concentrated bets

is now increased. Time will tell whether they are right or wrong. If they turn out to be right this could turn out to be a brilliant entry point. So in a way, to enter here you would have to bet on them.

I had a small position in HPQ which i recently exited at $38-39 after a pretty rough roller coaster ride, got in at 25, doubled my position at 18, watched it sink further to 12(and couldn't muster the courage to add further, and then all the way back up to 40. There could be a little more for it to run, but I thought the downside risk matched possible upside gains as well. I once heard them say that up to 30 is a no brainer. Their letter sounded like they planned to sell HP, but delayed due to tax deferral reasons and instead bought jan 2015 puts. They may have reduced or sold their HP position since the letter(pure speculation). However they also mentioned that it is selling for less than 10x cash flow.

Staples was another one that was heading nowhere for a long time, until an activist shareholder got onboard and started pushing the really hard choices. Again with the real decline in brick and mortar stores, one wonders how sound the business model is going to turn out to be, the saving grace for Staples is their really strong and competitive online presence. It could turn out to be a reasonable investment, but there is a lot of smoke around the transition, and for me it is in the 'too hard' pile.

WAC and OCN have been total disasters to date for them. They got into WAC early, but didn't ring the register when it more than doubled for them, reading the letter it sounded to me like they might feel they should have, and now they are back to holding and defending the position, with certainly more regulatory risk in the air. They as much as admitted that investing in OCN was a mistake. For my part, I am not sure how much of this is isolated to OCN and how much is industry practices. One thing is for certain, the selling of MSRs to these secondary servicers has virtually stopped in its tracks. They see it eventually doubling to 2 trillion.

We will know in a couple of years, but WAC is either gonna be a 2-3x from here or crash the way OCN is doing. I do have a small position in WAC, but haven't yet mustered the courage to add to it thus far, even after reading all I could find on them.

Their holdings in the oil patch, have of course taken a beating like everything else in that space.They claim to have experience in that area, but commodity based investing is a difficult thing, the ground is unsteady, and valuing a business already has so many variables, that we don't need to add anither big one. Over the years, i have found that area hard to predict and invest in. None other than WEB had permanent loss of capital in this arena with COP in 2007/8.

One of their recent additions Dundee i find interesting, it crashed literally months after they initiated a position in it in the the mid teens. It now trades around 10. It does have some canadian oil/gas exposure, and real estate exposure but perhaps the selling has been overdone in tis one.

 

But nonetheless, their oil/gas holdings are not going to recover anytime soon, and one always does risk dilution, and the time loss of capital. Their claim is that these companies are more gas centric, and western based, hence more valuable. I'm skeptical. They are full of praise for the WPX ceo, who appears central to their investment thesis. At any rate, the collapse of oil/gas has hurt them bad.

 

I hope for their sake they exited MSFT before its recent results driven pull back. I always felt the optimism over the new CEO was a bit overdone, especially after the tortured decade under Balmer. It almost felt like a relief rally. LOL.

FWIW, I do think Nadella is a better CEO, and for sure I doubt he will burn cash the way Balmer's acquisitions turned out to be, but time will tell. With the Cash microsoft brings in predictably Q after Q, you could almost say the capital allocation decisions of the CEO are just as important as his/her role running the company. I would be tempted if it gets to mid 30s again, but I don't really sense any near term catalysts to move this behemoth.

Their defense of their Barricks gold position bothers me. This is another company that has not had capital allocation discipline during an upcycle in gold. So much so that they did a multi billion dollar dilutive capital raise last year. Their stock has gone nowhere in over a decade, despite a tripling of the gold price. Their profitability likewise has been average. So with average profitability, an inability to print money after a tripling of your products price within a decade, and poor capital allocation decisions, this is not a good buy in my view. They claim it is an option on central bank induced volatility, whcih makes some sense, but it sure appears to be an expensive option. They claim the new management will do better with cash flows etc. call me skeptical. I've lost enough in miners not to believe anything they say. They always dilute you and at the worst possible times too! If gold makes a new high however, this is a triple from here, but you had better ring the register quickly if you happen to catch that ride.

Leucadia and Whitemountain have gone nowhere in recent times, but remain good long term bets IMHO.

 

So all in all, a very rough year mainly due to their commodity exposure, regulatory overhang with WAC/OCN, and ?? Near term peaking of their large tech. bets. What a way they have suffered, with over 20% points of underperformance. They will have a long way to climb back to get out of this underperformance hole and make their 10/15 yr charts look good. 

 

 

[Guest wellmont]

things have only gotten worse for them since nov 14. one good thing is they sold their resource based currencies. one of their issues in the energy patch is they chose cheap over quality. that's a tempting choice that many of us struggle with. It seems to be a theme in their portfolio. I would think they and fairx are suffering huge redemptions. If we don't get a change in the current trade (selling real assets and buying perceived safety and growth), you will see some value guys close up shop. that might be the signal that the sea change is upon us....

[VersaillesinNY]

More blood down the road.

 

GoodHaven semi-annual report 2015

 

The last twelve to eighteen months have been a different story. We

underperformed large cap equity indexes by a sizeable margin and had negative

absolute returns last year for a variety of reasons – most discussed at length in our

Annual Report of November 2014. As equity indexes climbed higher, momentum driven

investors turned their backs and our reputation flagged. We never like going

through such periods but recognize they are inevitable, have experienced them before,

and know they are not a reason to become despondent. Following a weak three

months after the end of the fiscal year, it appears that February marked our recent low

point – since then we have begun to regain some absolute and relative ground.

GoodHaven_2015_Semi-Annual_Report.pdf

[VersaillesinNY]

More blood down the road part II. (AR attached)

 

These ex-Fairholme fund guys opened their spin-off fund at the wrong time and placed too many wrong bets.

The result is a permanent loss of capital and investors flying through the exit door.

It’s going to be hard to make it back.

 

“Many shall be restored that now are fallen and many shall fall that now are in honor.”

Ben Graham’s quoting the Roman poet Horace in Security Analysis

GoodHaven_2015_Annual_Report.PDF