Investing: Fairholme Fund bounces back

Both Berkowitz and his fund suffered through a miserable 2011, as many of the concentrated fund's biggest holdings cratered. Fairholme finished 2011 with a 32-percent decline, lagging Standard & Poor's 500-stock index by a staggering 35 percentage points. Many of Fairholme's shareholders decided that the Miami heat had gotten the best of Berkowitz and pulled billions from his fund.

But the same stocks that performed so poorly last year have rebounded dramatically this year, and Fairholme has benefited. In the first four months, the fund gained 31.4 percent, beating the S&P 500 by 20 points.

So is it time to buy shares of Fairholme again? With just over $8 billion in assets as of last February, the fund is now half the size it was in late 2010. But we still have doubts about the wisdom of buying shares now. Beyond the matter of size, Fairholme has had a string of staff departures. Co-manager Charles Fernandez abruptly resigned last October for personal reasons, and that parting followed the 2008 exits of co-managers Keith Trauner and Larry Pitkowsky, who went on to launch the GoodHaven Fund.

Berkowitz has hired two new executives: Dan Schmerin, a former Treasury Department official, and Fred Fraenkel, former chairman of investment policy at money manager Beacon Trust. Both have experience with financial outfits -- a bonus, given that 72 percent of Fairholme's assets were invested in financial companies at last report.

Which brings us to the fund's still-outsize stake in financials. A bet like that isn't out of character for Fairholme -- in 2000, nearly 70 percent of the fund was invested in that sector. Plus, Berkowitz said in a recent video interview that financial-services companies are "what I know best" and that the sector is on the verge of a turnaround.

Before Fairholme's 2011 misadventure, it had performed brilliantly. From 2000, its first full calendar year, through 2010, Fairholme beat the S&P 500 ten years out of 11. The fund's long-term record remains superb; over the past ten years, it gained 9.1 percent annualized, topping the S&P 500 by an average of 4.8 points per year.

We were once among Berkowitz's biggest fans. But after his nerve-racking flop in 2011, our confidence in him is shaken. He may go on to post strong results in the years to come, but is that worth the risk of suffering another disaster? For most investors, we think the answer is no.