Is it “Miller Time” or the Market?
October 26th, 2009
Bill Miller is on the front page again, but this time it is good news. The famed manager was featured in a recent cover story by Barron’s titled “It’s Miller Time”.
Archive
Archive for the ‘Mutual Funds’ Category
Intrepid Small Cap Success: Stock Selection or Market Timing?
October 9th, 2009
The Intrepid Small Cap Fund, managed by Eric Cinnamond of Intrepid Capital Funds, has garnered noteworthy media attention this year. Bloomberg Online’s June 3, 2009 article featured Cinnamond’s fund as the only diversified stock manager to outperform Bill Gross’ venerable Pimco Total Return Bond fund over the trailing 3-year period (through 5/26/09):
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayC.BwlNdpFU.
Wall Street Journal’s print edition on October 5, 2009 also featured Mr. Cinnamond as placing second in the Winner’s Circle contest for the 12-month period through September 2009 (posting a 29% return).
We decided to take a closer look using daily data and returns-based style analysis (RBSA), and found Mr. Cinnamond’s selection skills over the past eighteen months have been strikingly strong relative to other small capitalization mutual funds.
To Hedge or Not To Hedge?
September 23rd, 2009
We are getting mixed signals from the industry this week. First, on Monday P&I reported that CalPERS decided to discontinue their equity hedging overlay program which caused the plan to lose almost $1B in a year.
http://www.pionline.com/article/20090921/PRINTSUB/309219966/1031/TOC
The message here is that hedging proved to be a tricky business even for CalPERS.
Fairholme Fund Revisited
August 25th, 2009
We continue to follow Fairholme Fund after posting a detailed attribution analysis of the fund on our blog early in the year. Read more…
Identifying Bond Fund Risks Before Getting Burned
June 23rd, 2009
The class action lawsuit involving the Oppenheimer Core Bond Fund (OPIGX) alleges that the firm understated the fund’s risks as reported in a Read more…
Stable Value a free lunch?
March 5th, 2009
Recent cases of alleged fraud involved investors placing billions of dollars in unregistered products attracted by smooth positive returns. Hedge funds and other unregistered investment vehicles do not have a monopoly on “stable” positive returns. In fact, there exists a class of products known as stable value funds that share similar stable return characteristics and can be found in many retirement plans. Read more…
Fairholme Fund
January 19th, 2009
In the January 3rd 2009 article “Mutual Fund Fought Off Bears but Now Is Clawed” The Wall Street Journal reporter Eleanor Laise attempts to find an explanation of the Fairholme fund’s subpar performance in the last quarter of 2008. She interviews fund manager Bruce Berkowitz as well as industry experts, analyses fund holdings, and looks at the most recent stock picks. Her conclusion: the fund made all the right sector moves (e.g., got rid of energy and financials) and its otherwise exceptional performance in 2008 has been marred by just a series of poor stock bets. The article concludes with assurances from the fund manager that the strategy is sound and that all the bets will pay off. We also learn that Mr. Berkowitz now has almost 100% of his net worth invested with his fund. The latter is indeed a good sign but we believe that a sophisticated investor deserves better insight on what the future might hold for this outstanding fund.
By performing an analysis of the Fairholme return record using MPI Stylus we tried to connect the dots to understand the sources of the fund’s past performance and provide some guidance in what to expect in the nearest future.
“Ignore the Crowd”
Fairholme fund indeed has an exceptional track record. It outperformed the S&P 500 index every single year since its launch at the end of 1999 except for 2003. Even last year, which was the focus of the WSJ article, the fund outperformed the index by 7.3%.
Fairholme is a no-load mutual fund with an expense ratio of 1%. Its manager is true to its motto “Ignore the Crowd” as prominently featured on the fund’s website. The fund makes focused sector and securities bets. It’s concentrated, holding about 22 stocks. The top ten holdings account for 64% of its assets (according to August 31, 2008 data.) We consider this degree of concentration to be especially high given the fund’s size of $7.2B. Annual turnover is only 14%.
Fairholme is classified as Large Blend by Morningstar and Mid-Cap Growth by Lipper. This seems a little odd, though it’s not surprising for fund research firms to disagree on such a concentrated portfolio. We performed a returns-based style analysis of the fund to better understand its style exposure. Then we undertook a second analysis with its focus on sector exposure to get at its underlying strategy and to determine the sources of its past and recent successes. This put us in a position to either confirm or refute conclusions presented in the reporter’s story.
In the chart below we show the fund’s cumulative performance since inception vs. the S&P 500 Index. A chart similar to this is prominently positioned in Fairholme’s semi-annual 2008 and annual 2007 reports. Note the accentuated 2008 loss—that’s how performance appeared to long-term Fariholme investors.
The depiction of the drop in 2008 seems a bit confusing given that Fairholme outperformed the index by 7.3% that year. For this very reason we find such “growth” charts to be very misleading because the compounding of a single-period return outlier gets multiplied and creates a distorted view of a fund’s performance. A simple cure for this problem is to employ a logarithmic scale on the y-axis as in the chart below. Doing so shows that most of the gains are attributed to years 2000-2002 while over the past several years the fund’s performance was more or less in sync with the S&P 500 index.
Fairholme could help itself either by replacing their growth chart in the 2008 annual report with this alternative form or by showing the fund’s annualized performance next to it. Such a chart will give the fund deserved credit for its outstanding track record despite recent losses.
Getting Under the Hood
In order to determine the drivers of the fund’s performance we needed to perform a returns-based style analysis (RBSA) of the fund. As a reminder, RBSA attempts to create a dynamic portfolio of generic asset indices that replicates the analyzed fund’s performance. For our analysis we use the nine years of Fairholme monthly returns1 through the end of 2008, the six Russell style indices, and the MSCI Canada equity index to represent Fairholme’s significant exposure to Canadian stocks. The results of the analysis are presented in chart below.2 Note that we didn’t use any holdings information to produce these results. All we needed was a stream of monthly return figures.
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