FAIRX - Master Deck - Shareholder Edition · Fairholme Ignore the crowd. This presentation uses...
Transcript of FAIRX - Master Deck - Shareholder Edition · Fairholme Ignore the crowd. This presentation uses...
Ignore the crowd.Fairholme
FAIRHOLMEIgnore the crowd.
CONFIDENTIAL ‐‐ NOT INTENDED FOR DISTRIBUTION
Ignore the crowd.Fairholme
This presentation uses Bank of America as a case study to illustrate Fairholme Capital Management’s investment strategy for theFairholme Fund. In the pages that follow, we show Fairholme Fund shareholders why we “ignore the crowd” with regard to Bank ofAmerica and other financial companies that currently are out of favor with the market.
However, nothing in this presentation should be taken as a recommendation to anyone to buy, hold or sell Bank of America securitiesor any other investment mentioned herein. Our opinion of Bank of America’s prospects should not be considered a guarantee offuture events. Investors are reminded that there can be no assurance that past performance will continue, and that a mutualfund’s current and future portfolio holdings always are subject to risk. As with all mutual funds, investing in the Fairholme Fundinvolves risk including loss of principal.
The Fairholme Fund’s holdings and sector weightings are subject to change. As of August 31, 2011, Bank of America securitiescomprised 6.1% of the Fairholme Fund’s total net assets. The Fairholme Fund’s portfolio holdings are generally disclosed as requiredby law or regulation on a quarterly basis through reports to shareholders or filings with the SEC within 60 days after quarter end. Acomplete list of the Fairholme Fund’s top ten holdings is available on our website at www.fairholmefunds.com.
The Fairholme Fund is non‐diversified, which means that it invests in a smaller number of securities when compared to morediversified funds. Therefore, the Fund is exposed to greater individual security volatility than diversified funds. The Fairholme Fund caninvest in foreign securities which may involve greater volatility and political, economic and currency risks and differences in accountingmethods. The Fund may also invest in “special situations” to achieve its objectives. These strategies may involve greater risks thanother fund strategies. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater forlonger‐term debt securities. Lower‐rated and non‐rated securities present greater loss to principal than higher‐rated securities.
The Fairholme Fund’s investment objectives, risks, charges, and expenses should be considered carefully before investing. Theprospectus contains this and other important information about the Fairholme Fund, and may be obtained by calling shareholderservices at 866‐202‐2263 or visiting our website at www.fairholmefunds.com. Read it carefully before investing.
Additional supplementary information can be found at the end of the presentation.
Ignore the crowd.Fairholme
The Fairholme Fund (FAIRX):Average Annual Total Returns as of 9/30/2011:
1 Year 5 Year 10 YearFairholme Fund ‐22.20% 0.12% 7.15%S&P 500 1.14% ‐1.18% 2.82%
30‐Day SEC Yield ‐0.52%Expense Ratio 1.01% *
*Includes acquired fund fees of .01%. Acquired fund fees and expenses are those expenses incurred indirectly by the Fairholme Fund as a result of investments in securities issued by one or more investment companies.
Cumulative Returns as of 9/30/2011:1 Year 5 Year 10 Year
Fairholme Fund ‐22.20% 0.61% 99.57%S&P 500 1.14% ‐5.76% 32.00%
Performance information quoted above represents past performance and does not guarantee future results. The investment return andprincipal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.Current performance may be higher or lower than the performance quoted herein. The Fairholme Fund imposes a 2.00% redemption fee onshares held less than 60 days. Performance data does not reflect the redemption fee. If reflected, total returns would be reduced. Fairholmeperformance numbers assume reinvestment of dividends and capital gains and include all expenses, including acquired fund fees and expensesincurred indirectly by the Fairholme Fund in securities issued by investment companies. While the Fairholme Fund has no front or back loads, or12b‐1 fees, management fees and other expenses still apply. Current month end performance may be obtained by calling Shareholder Servicesat 866‐202‐2263.
Ignore the crowd.Fairholme
Guiding Principles
Shareholders First Don’t LoseFocus on ValueLong‐Term PerformanceIgnore The Crowd
Ignore the crowd.Fairholme
Our performance since inception has been quite good…
$‐
$5,000
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ce of a
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* Based on total return. See last page for supplementary information
Ignore the crowd.Fairholme
…And, we’ve even kept pace with our heroes.
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* Based on total return. See last page for supplementary information
Ignore the crowd.Fairholme
$‐
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‐ 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975
Performan
ce of a
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Munger Partnership Dow Jones Industrial Average
Value investing is a long‐term strategy…even Charlie Munger’s private partnership (pre‐Berkshire Hathaway) had tough investment periods.
* See last page for supplementary information
Ignore the crowd.Fairholme
1,000
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sh %
FAIRX Cash % S&P 500
Greedy when others are fearful, and fearful when others are greedy.
When investors are fearful prices are low, and we buy.
When prices are high and others are greedy, we raise cash.
Ignore the crowd.Fairholme
Value investors do not equate “volatility”with “risk” over the long‐term.
Vol•a•til•i•ty: [vol‐uh‐til‐i‐tee]
Webster’s Dictionary “Tending to fluctuate sharply and regularly.”
Barron’s Dictionary of Finance and Investment Terms“Characteristic of a security, commodity, or market to rise or fall sharply
in price within a short‐term period.”
Ignore the crowd.Fairholme
$5
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FAIRX Net Asset Value
(NAV
)
FAIRX NAV
‐15.12%
Peak To Trough4/30/02: $16.402/28/03: $13.92Span: 10 Months
Recovery Period8/29/03: $16.52Span: 16 Months
‐50.26%
Peak To Trough10/31/07: $34.822/27/09: $17.32Span: 16 Months
Recovery Period4/30/10: $35.20Span: 30 Months
Peak To Trough4/30/10: $35.206/30/10: $30.30Span: 2 Months
Recovery Period12/31/10: $35.38Span: 8 Months
‐13.92%
Market price volatility only measuresshort‐term perception of long‐term risk.
FAIRX Recovery Periods
Ignore the crowd.Fairholme
Investment Thesis for Financial Stocks
1% Return on Assets
10% Return on Owner’s Equity
20% implied annualReturn on Investment
This would be a reasonable return to profitability, and certainly not a difficult goal.
This is simply the math associated with
the leverage of financial companies.
This is the impliedannual return when you can buy stock at
½ book value.
Ignore the crowd.Fairholme
Case Study: Bank of America
Ignore the crowd.Fairholme
Ignore the crowd.Fairholme
Businesses we understand Favorable long‐term prospects
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Dollars Per Sha
re
Book Value Market Price Cash Revenue
Investing in our Circle of Competence Operated by honest and competent people Available at attractive prices
Ignore the crowd.Fairholme
$0
$500,000
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1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Dollars (in millions)
Acquisitions and Asset Growth
Total Assets
Bank of America’s Franchise5,700 Branches, 17,500 ATMs, and 16,500 Financial Advisors in 50 states and over 40 countries.
Touches 80% of the U.S. population, including 57 million consumer and small business relationships.
North Carolina National Bank Bankers Trust First Republic Bank C&S Sovran Nations Bank MNC Financial Barnett Bank Boatmen’s Bank Bank America Corp
Fleet Boston MBNA U.S. Trust Lasalle Bank Countrywide Merrill Lynch
Ignore the crowd.Fairholme
$0
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Long‐Term Debt
Long‐Term Debt Decline 22% decline since Q1 2010
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Charge‐offs
Charge‐Offs 53% decline since Q1 2010 Q‐o‐Q decrease since 2010
$920,000
$940,000
$960,000
$980,000
$1,000,000
$1,020,000
$1,040,000
$1,060,000
Deposits
Deposits 7% increase since Q1 2010 Reflects strong customer base
4%
6%
8%
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12%
14%
16%
18%
Tier 1 Common Equity RatioTier 1 Risk‐Based Capital RatioTotal Risk‐Based Capital Ratio
“You’ve got to admit it’s getting better...A little better all the time.”
Dollars (in millions)
Capital Sufficient Tier 1 Capital
* See last page for supplementary information
Ignore the crowd.Fairholme
Global Banking & Markets
Global Wealth & Investment ManagementLegacy Consumer Real Estate Services
Legacy Countrywide Loans…
Ignore the crowd.Fairholme
Consumer Real Estate ServicesLegacy Asset Servicing
Deposits Card Services Global Commercial Banking
Global Banking & Markets
Global Wealth & Investment Management
Consumer Real Estate Services
…Masks Strong Franchises.
Ignore the crowd.Fairholme
Get vs. Give
Owners Capital: $200bnReserves: $50bn
Market Cap: $70bn
Future Cash Flows
Using Ben Graham’s framework, recently the market has been a “voting machine,” but when it returns to a “weighing machine” Bank of America’s strong fundamentals will come into play.
Ignore the crowd.Fairholme
Déjà vu?
“…Its earnings power has been disguised by theintense provisioning for loan losses. But when theprovisioning gets back to a normal level, you’ll startto see that incredible earnings power come down tothe bottom line. And it’s as simple as that.”
Bruce R. Berkowitz Outstanding Investor Digest November 25, 1992
Ignore the crowd.Fairholme
Started to Buy Wells Fargo
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Cumulative Re
turn
Wells Fargo S&P 500
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turn
Wells Fargo S&P 500
Wise investors do not permit “Mr. Market’s” daily fluctuations to affect their understanding of fundamental value.
Banks have been here before.
Ignore the crowd.Fairholme
The S&P 500 Index is a broad based measurement of changes in the stock market, is used for comparative purposes only, and is not meant to be indicative ofthe Fund’s performance, asset composition or volatility. Given the wide scope of securities held by S&P 500, it should be inherently less volatile. Our resultsmay differ markedly from those of the S&P 500 in either up or down market trends. The performance of the S&P 500 is shown with all dividends reinvestedinto the index and does not reflect any reduction in performance for the effects of transaction costs or management fees. Investors cannot invest directly inan index.
The performance quoted for Berkshire Hathaway (“Berkshire”) and Leucadia National Corporation (“Leucadia”) is based on the closing market price ofBerkshire’s Class A Common Stock and Leucadia’s common shares. Berkshire is a conglomerate holding company owning subsidiaries that engage in a numberof diverse business activities including property and casualty insurance and reinsurance, freight rail transportation, utilities and energy, finance,manufacturing, services and retailing. Leucadia is a diversified holding company engaged in a variety of businesses, including manufacturing, land basedcontract oil and gas drilling, gaming entertainment, real estate activities, medical product development and winery operations. Berkshire and Leucadia arenot mutual funds. They are subject to different corporate, securities, and tax regulations that affected their return in ways different than a mutual fund.Berkshire has not paid a dividend. Its earnings are retained and taxed at prevailing corporate income tax rates. The quoted returns for Berkshire and Leucadiado not reflect capital gains tax a shareholder would pay upon sale of their stock. As a registered mutual fund, Fairholme Fund's net investment income isexempt from corporate taxation provided it is paid out as dividends. The Fund's quoted returns do not reflect a shareholder's taxes on dividends or uponredemption of shares. Berkshire was the Fund’s fourth largest holding as of August 31, 2011, representing 7.9% of the Fund’s total net assets. Leucadia wasnot among the Fund’s top ten holdings as of the same date.
The “Munger Partnership” was a private investment partnership run by Charles Munger, who is now Vice‐Chairman of Berkshire Hathaway.
Tier 1 Capital: a regulatory measure of a bank’s financial strength. It is composed of core capital, which is principally common stock and retained earnings.
Tier 1 Common Equity Ratio: the measurement of a bank's core equity capital compared with its total risk‐weighted assets. This is the measure of a bank'sfinancial strength. The Tier 1 common capital ratio excludes any preferred shares or non‐controlling interests when determining the calculation.
Tier 1 Risk‐Based Capital Ratio: the ratio of Tier 1 capital to its Risk‐weighted assets. Risk‐weighted asset is a bank's assets or off‐balance sheet exposures,weighted according to risk.
The historical return shown for Wells Fargo is based on Closing Price of its Common Stock. The chart refers to the purchase and sale of Wells Fargo stock byFairholme Fund’s portfolio manager while he was portfolio manager for Shearson Lehman Brothers. Wells Fargo securities were not among the FairholmeFund’s top ten holdings as of August 31, 2011, and were not held by Fund as of its last shareholder report dated May 31, 2011.
Opinions expressed are those of the author and/or Fairholme Capital Management, L.L.C. and should not be considered a forecast of future events, aguarantee of future results, nor investment advice.
Shares of the Fairholme Fund are distributed by Fairholme Distributors, Inc.
Ignore the crowd.Fairholme
FAIRHOLMEIgnore the crowd.