The next year, Fairholme lost 32.4% and finished dead last of the 373 competitors in its category. In 2012, the fund came in first.
Long-term investors have little reason to complain. During the past 10 years, Fairholme has outdone 99% of its peers. But masses of shareholders have dumped the fund, unnerved by the volatility. Assets have dropped from $18.8 billion in 2010 to $7.6 billion now.
Fairholme portfolio manager Bruce Berkowitz has achieved the high returns and extreme volatility by maintaining a concentrated portfolio. While the average large value fund holds a diversified portfolio with more than 100 stocks, Berkowitz keeps most of his portfolio in 10 unloved stocks.
The fund has 49% of its assets in two stocks, American International Group
Fairholme belongs to a shrinking breed of focused funds that put most of their assets in fewer than 30 stocks. By making big bets on a few holdings, the focused managers aim to deliver results that vary from the benchmarks.
A generation ago, dozens of funds followed the concentrated approach. But because of the risks of placing big bets, the largest fund companies have abandoned the strategy. Today most portfolio managers aim to stay broadly diversified and avoid the kind of bumps that unhinge shareholders.
The remaining focused funds are run by entrepreneurs and smaller companies. Survivors include CGM Focus
Because they suffer "off" years, typical focused funds may not be suitable for cautious investors. But there are a handful of focused managers who have produced winning results while giving shareholders relatively steady rides.
The best choices emphasize rock-solid companies that can avoid big losses in downturns. Top funds include Akre Focus
Among the steadiest performers is Hennessy Focus
Such predictable performers are hard to find. Hennessy portfolio manager Ira Rothberg stays away from materials and energy companies because such cyclicals tend to sink during recessions. He also avoids biotechnology businesses that could sputter if their research efforts fail.
Instead, Rothberg looks for companies that dominate growing niches. The Hennessy managers prefer buying stocks that have below-average price-earnings multiples. To find bargains, the managers often buy when temporary problems push down prices of premier companies. "We will follow a company for years until some short-term disappointment gives us an entry point," says Rothberg.
A holding is American Tower
Another holding is Encore Capital Group
Another solid focused fund is Weitz Hickory
Portfolio manager Wally Weitz seeks dominant businesses with rich cash flows. A diehard value investor, he only takes stocks that sell at 30% discounts to their fair values. When Weitz can't find bargains, he holds cash. The fund currently has 30% of assets in cash. While the cash can be a drag on results in bull markets, it helps to stabilize the portfolio in rough times.
Weitz likes to snap up stocks after they have fallen out of favor. A holding is CACI International
Another holding is TransDigm
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
- 10 Greenest Cars of 2013
- 10 Biggest Summer Blockbusters Without Superheroes
- 10 Major League Towns Where Baseball Doesn't Cost a Bundle
- Investment & Company Information