has gained 20.4% year to date, pushing it to a 39% return over
the past 12 months. It has been trading over $38 for most of the
month of May, its highest point in its history. Berkowitz seemed
to see this coming, stating in his year-end letter: "We had a
great 2012, after a horrible 2011, and expect the Fund to reach
new highs in the not too distant future."
The growth continues the triumphal reversal of the fund's 32.4%
loss in 2011 when Berkowitz placed a major bet on financials,
after which it recovered 35.81% in 2012, compared to 16% for the
S&P 500 Index, without a significant change in holdings.
Berkowitz said in a February 2013 interview that it would take
three to five years for his thesis on the financial companies,
which formed the preponderance of the portfolio, to come to
Though 64.3% of the portfolio remains weighted in financials, in
the first quarter of this year, Berkowitz changed things up a
little, buying two new non-financial stocks - Chesapeake Natural
Resources Ltd. (
) and Canadian Natural Resources Ltd. (
) - along with Genworth Financial Inc. (
The largest new position, Chesapeake, which Berkowitz gave a 3.5%
weighting in his portfolio, climbed almost 34% year to date.
Canadian Natural Resources, a 0.45% portfolio weighting, gained
just over 4%, and Genworth Financial Inc. (
), a 0.11% portion, gained almost 38%.
As his eighth largest position, Chesapeake ranked just outside
Berkowitz's top five "best ideas." The investor bought more than
13 million shares at an average price of $20 in the first
quarter. Chesapeake trades for $22.22 on Tuesday.
The second largest U.S. natural gas producer, Chesapeake owns
approximately 45,700 operating natural gas and oil wells. After a
slew of troubles and investigations into his alleged
mismanagement in 2012, long-time Chesapeake CEO Aubrey McClendon
decided on Jan. 30, 2013, to resign in April, sending the stock
up 11% on the news.
In spite of it all, the company was able to report a 95% year
over year net income increase to $183 million in the first
quarter of 2013, on a 9% total production increase. Revenue also
jumped to $3.4 billion from $2.4 billion the previous year.
Chesapeake has continued its asset sale initiative of non-core
assets, relieving itself of $12 billion of assets in 2012, and an
additional $2 billion in the first three months of 2013.
Chesapeake price, revenue and earnings history:
The goal of the targeted $4 billion to $7 billion asset sales is
to fund capital expenditures and reduce debt.
Chesapeake long-term debt and long-term liabilities history:
Guru Mason Hawkins, who has a large stake in Chesapeake,
commented on the company in his third quarter 2012 report from
Southeastern Asset Management:
The substantial governance changes we discussed in last
quarter's report not only lifted the stock, but also improved the
prospects for more conservative capital allocation going forward.
The company announced $6.9 billion in asset sales during the
quarter and anticipates approximately $2 billion more this year.
In spite of the company's progress, the stock was down 14%
Although the natural gas price moved up in the quarter, it
remains below the marginal cost of production for most plays...
Longer term demand from industrial plants, LNG exports, and
conversion of trucks to this clean and abundant energy source
would support an increase in natural gas prices and a higher
value for both Chesapeake and CONSOL."
AIG, the largest position at 42.4% of the portfolio, continued
its solid performance climbing 28% year to date. Berkowitz
established his position over the four quarters of 2010, and more
than doubled it in the second quarter of 2011. His average gain
on the stock is 33%.
Holding and share price history:
AIG, the world's largest insurance company, operates in four
segments: AIG Property Casualty, AIG Life and Retirement, United
Guaranty Corporation and International Lease Finance Corporation.
In the first quarter of 2013, AIG's share price was completely
freed from the effects of its government bail-out during the
financial crisis, as it repurchased the remaining warrants it
issued to the U.S. Treasury in 2008 and 2009.
Book value per share also increased 12% year over year,
continuing its steady improvement, as seen in the chart below:
Berkowitz last commented on AIG in a shareholder letter in the
second quarter of 2012: "There are few occasions when
systemically important franchises sell for half of book value and
are profitable. This is one of those times. AIG warrants held by
the Fund (another 3% of the Fund) provide the right to 21+
million shares at $45, or maybe more shares at lower strike
prices for the next 34 quarters if dividends above $0.675 per
trailing 12-month period are paid."
Some have speculated that part of AIG's rally in 2013 could be
due to the possibility of it reinstating its dividend, which it
suspended in 2008 as the bottom fell out of its mortgage
operations. CEO Robert Benmosche said in a Feb. 22 conference
call that the company could consider a dividend later in the
year, Bloomberg reports.
Rounding out Berkowitz's top five ideas and forming nearly 80% of
its assets are Bank of America Corp. (
), Sears Holdings Corp. (
), St. Joe (
) and Leucadia National Corporation (
). Of these, only St. Joe has suffered in 2013, declining 10%
year to date.
Though the companies themselves have improved according to plan
and Berkowitz is a bottom-up investor, he continued to be
optimistic about the U.S. economic recovery also encouraging his
fund to new highs:
"The U.S. is in its fourth year of recovery, housing prices are
increasing but have yet to reach replacement values, unemployment
is starting to decline, and interest rates remain at record
lows," he noted in his second quarter letter.
Read more of Berkowitz's thoughts in his 2012 annual Fairholme
Fund letter here, or see his portfolio here.
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