Fairholme Funds Conference Call

[dcollon]

I thought the transcript for a recent Fairholme conference call might be of interest to some of you.

 

http://www.fairholmefunds.com/player/09-30-09.pdf

 

 

[txlaw]

Thanks.  Have been waiting for this to come out.

[txlaw]

Another great conference call.

 

It was particularly interesting to see their discussion about health care reform, as they gave some more detail on what conclusions they've come to after conducting their regulatory due diligence.  The brief discussion on PFE also echoes some of the thoughts I had about big pharma in another post a couple of months ago.

 

I'm quite excited for the possibility of an income fund managed by Fairholme.  It would be great to have such a fund for my parents' sake.

[mhdousa]

Anyone else unsatisfied by Berkowitz's response to the question about closing the fund?

 

JM: All right. One that continuously comes

up, now that we're over $10 billion in assets again:

When are we going to close the fund?

 

BB: We've spent a lot of time thinking about

this question. We've answered it many, many times.

Basically, by having most of my family's money in the

fund, I try to create the balance necessary for such

decisions. Personally, I don't wish to sacrifice that

which I have worked hard for and may need for that which

I will not need. For now, size has helped. Having cash,

when few do, has helped. Having heft makes a positive

difference, and one of the few advantages against the

unknown. Size also allows us to keep focused on the

fund, while keeping fees relatively low for what we do.

With scale, we can meet the ever-increasing costs of

doing business. The bottom line, we have smart

shareholders and directors, who are not afraid to voice

their opinion on how our size is affecting our

performance.

 

It's inexcusable for them to let this fund get so big, and it's odd that Bruce wouldn't recognize that with every extra billion in AUM, he's further limiting his investment universe.  The statement "Size also allows us to keep focused on the fund, while keeping fees relatively low for what we do" holds no water as their ER has remained 1% since they started.  They held the same percentage of cash when they were $9b smaller, so I'm not sure how that's a justification.

And no matter how much of your family's money you have in the fund, you're still pulling in $100m in fees each year.  I realize that doesn't all go to Bruce, but that's going to be a much bigger factor in his net worth than whether FAIRX gains 20% or loses 20%.

 

Unfortunately, I can't think of any alternative mutual funds to switch to.  If anyone has any ideas, I'd love to hear them.

 

[dcollon]

I would prefer that they do a soft close for the fund.

 

I am also interested in the "income" idea that they floated during the call.  To this point I have only been able to find a few funds that I really like in that area. 

 

I enjoyed the commentary on healthcare and hope they are right. 

[txlaw]

mhdousa,

 

I would agree with you that Berkowitz's "keeping fees low" rationale isn't very persuasive.

 

But I'm not so sure that FAIRX has yet reached a size where performance will be materially affected.  In fact, if we do have more pain in our future (in the US), we could see him deploy the cash that he gets from new shareholders into more distressed positions and into situations where FAIRX helps recapitalize companies at a large gain.  I'm thinking of more deals like the ACF deal from last October and situations like HTZ where the underlying business has a bright future but where there are major debt issues to take care of.

 

Also, there's the whole commercial real estate disaster that's coming up.  FUR just announced a rights offering.  From the press release:

 

In addition, the Company has granted an ownership waiver to Fairholme Capital Management, L.L.C. on behalf of its investment advisory clients and affiliates, an affiliate of Bruce R. Berkowitz, our former trustee, which permits Fairholme to acquire up to 24% in the aggregate of our outstanding Common Shares on a fully diluted basis.

 

As I predicted in another thread, it looks like Berkowitz is going to use FUR as a platform to take advantage of distress in the CRE market.

 

The only U.S.-centric mutual fund that I will invest in is FAIRX.  I'm not sure there's anyone better.

 

-txlaw

[mhdousa]

mhdousa,

 

I would agree with you that Berkowitz's "keeping fees low" rationale isn't very persuasive.

 

But I'm not so sure that FAIRX has yet reached a size where performance will be materially affected.  In fact, if we do have more pain in our future (in the US), we could see him deploy the cash that he gets from new shareholders into more distressed positions and into situations where FAIRX helps recapitalize companies at a large gain.  I'm thinking of more deals like the ACF deal from last October and situations like HTZ where the underlying business has a bright future but where there are major debt issues to take care of.

 

Also, there's the whole commercial real estate disaster that's coming up.  FUR just announced a rights offering.  From the press release:

 

In addition, the Company has granted an ownership waiver to Fairholme Capital Management, L.L.C. on behalf of its investment advisory clients and affiliates, an affiliate of Bruce R. Berkowitz, our former trustee, which permits Fairholme to acquire up to 24% in the aggregate of our outstanding Common Shares on a fully diluted basis.

 

As I predicted in another thread, it looks like Berkowitz is going to use FUR as a platform to take advantage of distress in the CRE market.

 

The only U.S.-centric mutual fund that I will invest in is FAIRX.  I'm not sure there's anyone better.

 

-txlaw

 

Txlaw,

Thanks for the thoughts.  My criticism is based on the study (can't remember where I saw it) that shows alpha halves as assets double.  But if he's using the extra asset base to take advantage of distress, then it may not be a bad thing.

 

You mentioned to US-centric side of things.  Mind sharing any foreign funds you find especially appealing?

 

Thanks again.

-M

[txlaw]

You mentioned to US-centric side of things.  Mind sharing any foreign funds you find especially appealing?

 

M,

 

I haven't really put that much effort into finding a mutual fund focused on international equities that would be worth putting my money into.  I have too much other stuff on my plate at this time.  I probably won't put money into a fund that is focused abroad until I feel I can't find any investments on exchanges I have access to at this time.

 

I respect Southeastern Asset Management and Third Avenue, so I will probably watch LLINX and TAVIX for another few quarters to see what moves they make.

 

-txlaw