The 411 on Fairholme's New Bond Fund

• By Ryan Leggio
• On 3:04 pm EDT, Thursday October 22, 2009

Fairholme's (NASDAQ:FAIRX - News) Bruce Berkowitz has filed to launch a focused bond fund in January.

Managed by Berkowitz, Fairholme Focused Income Fund will be a multisector fund that can invest in corporate bonds, government bonds, convertibles, and preferred shares. The idea of a focused portfolio of bonds is rather unusual, as most bond funds try to diversify away issue-specific risk for the benefit of conservative investors.

However, Berkowitz said he intends to keep the fund's duration on the low side. That would seem to place the fund's risk profile a bit in between a typical intermediate bond fund's risk profile and that of a multisector fund.

The fund will charge an expense ratio of 0.50%--half that of Fairholme Fund. However, that comes after a 0.50% waiver, which is set to expire after the fund's first year. The fund will start out very cheap for a multisector fund, but if it were to go to 1.00%, it would charge more than multisector king Dan Fuss at Loomis Sayles Bond (NASDAQ:LSBRX - News). So, someone who buys the fund in January 2010 would have to be willing to tolerate a big fee hike, be willing to sell the fund should fees go up to 1.00%, or trust that fees won't go all the way up to 1.00%.

At the Morningstar Investment Conference in May, Berkowitz had expressed a growing interest in bonds. He tells us that the income fund idea grew out of work he's done managing liquidity at Fairholme Fund. Moreover, he's long researched the entire capital structure of companies in which he invests, so this fund will capitalize on that work. He says some bonds would be good for the new bond fund but are not a good fit for Fairholme. It's also possible that he could buy bonds in companies in which he already hit the ownership limits on the equity side.

In addition, he notes some longtime clients wanted something for shorter-term needs, though not as short as a money market.

Berkowitz points out that he got his start in investing with bonds in London in the early 1980s when bonds paid mammoth yields.

The fund comes with a minimum investment of $25,000. Berkowitz says that will help to keep expenses low. In addition, he doesn't want investors to use this fund as a money market substitute.

We wouldn't worry too much about this creating more work for Berkowitz given the reasons he cited. Other firms like Dodge & Cox, Calamos, Third Avenue, and FPA blend stock and bond analysis.

Details on Which Van Kampen Managers Are Not Going to Invesco
Some Van Kampen funds will lose high-profile Morgan Stanley (NYSE:MS - News) managers as a result of Invesco's (NYSE:IVZ - News) purchase of Morgan Stanley's retail mutual fund business.

None of the Van Kampen funds will see any management changes until the Invesco deal closes sometime in the second quarter of 2010. At that time, Invesco expects the appropriate Invesco investment team will take over these funds.

The big losses for Van Kampen shareholders will be the eventual departure of manager Dennis Lynch at Van Kampen Capital Growth (NASDAQ:ACPAX - News) and Peter Wright and William Lock, who run Van Kampen Global Franchise (NASDAQ:VGFAX - News).

Other strategies affected by departures include the Van Kampen real estate (Bigman), emerging-markets (Sharma), asset-allocation (McVey), and certain fixed-income strategies, including core/core plus bond (Armstrong/Verma) and emerging-markets debt (McKenna).

For details on which funds are affected, please see this document.

A New Leader for the New Era
Charles Ober will step down as manager of energy and mining stock fund T. Rowe Price New Era (NASDAQ:PRNEX - News), on June 30, 2010. In the interim, T. Rowe (NasdaqGS:TROW - News) will groom its energy analyst, Timothy Parker, to take over the role. Under Ober, who's been with T. Rowe for nearly 30 years, New Era was a solid fund since 1997. His departure will be a loss.

T. Rowe usually takes its time with manager transitions to ensure continuity. In fact, successors are usually already members of the fund's advisory committee (as is the case here). Moreover, the departing manager typically stays on the advisory committee for several months after stepping down. Indeed, Ober, 60, will remain on this fund's committee until his Dec. 30, 2010, retirement.

Parker joined T. Rowe in 2001 after serving as a summer intern in 2000. During his eight years with T. Rowe, he has distinguished himself as an energy analyst with successful calls, like accelerating the fund's investment in oil services and drillers starting in the earlier part of the decade. He has no experience running a fund on his own, but as the lead energy sector analyst he's already had a large influence on the portfolio. Parker is responsible for covering about 30% of the fund's stocks, and energy represents about 60% of the fund's assets.

Etc.
Chase Growth (NASDAQ:CHASX - News) and Chase Mid Cap Growth (NASDAQ:CHAMX - News) are losing a comanager. Yesterday, David Scott, comanager of the funds and CIO of Chase Investment Council since 2006, announced his intentions to retire from the firm at the end of this year. That means firm founder Derwood Chase Jr. will resume his role as CIO of the company.

Tweedy, Browne's new mutual fund, Tweedy, Browne Global Value Fund II - Currency Unhedged, will be available for purchase on or about Oct. 26.

Dodge & Cox and Longleaf Partners have estimated there will be no capital gains distributions this year for any of their funds. Osterweis has estimated there will be minimal, if any, capital gains distributions this year for its funds.

Shareholders approved the liquidation of Fidelity Strategic Advisers Small Cap and Fidelity Strategic Advisers Mid Cap Value. The two funds will be liquidated with assets distributed to shareholders by Dec. 4, 2009.

Nikolaus Poehlmann and Udo Rosendahl joined the management team of DWS Europe Equity (NASDAQ:SERAX - News), which has seen high manager turnover for the past few years.

Pierre-Yves Bareau took over as portfolio manager of JPMorgan Emerging Markets Debt (NASDAQ:JEDAX - News). Prior to joining JP Morgan, Bareau was CIO of emerging-markets debt at Fortis Investments.

Maren Lindstrom is no longer a portfolio manager of Lord Abbett Convertible (NASDAQ:LACFX - News), leaving Christopher Towle as sole manager of the fund.

Director of mutual fund research Russel Kinnel and fund analysts Harry Milling and David Falkof contributed to this report.

Ryan Leggio has a position in the following securities mentioned above: FAIRX

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