Berkowitz on His Roughed-Up Financials Stake

Bruce Berkowitz--who will be a featured guest at Morningstar's 2011 Investment Conference on Thursday--is always on the hunt for a roughed-up sector. The manager of Fairholme Fund FAIRX also has an affinity for the financial-services industry. And he's aware that negative public sentiment can weigh down share prices when headlines sour public perceptions.

When all three factors coalesce? That's when Berkowitz, who made his name by concentrating massive portions of investors' assets in reeling sectors, really starts betting big.

"Right now, Fairholme is smack-dab in the middle of some of the most hated companies in the United States," Berkowitz said of Fairholme's stake in the financial-services industry. Nearly three fourths of the fund's invested assets are in that sector, including nearly one third in American International Group AIG, Bank of America BAC, Morgan Stanley MS, Goldman Sachs GS, Citigroup C, and Regions Financial RF.

Berkowitz has spent his career piling assets into whatever sector he deems to be unfairly bruised by investors, including his outsized health-care plays earlier in the decade. But that doesn't mean he's ambivalent about where his nose for undervalued industries takes him. His big bets on financial institutions in the past few years have been something of a homecoming.

"Financials, that's my sweet spot," he said. "That's where I made my name in the early '90s. That's the industry I understand the most."

He said he expects mortgage lenders to surge back into favor in the coming years. They are steadily grinding their way through the last of the bad loans that paved the way to the economic collapse, setting the table for a rebound.

"You make your very best loans during the tough times," Berkowitz said. "As these institutions have been burning through their bad loans, the result is a massive injection of good loans."

Distrust of the financial-services industry is also holding the stocks back, he said. Some investors continue to worry that the sector will be held back by problem loans and onerous new regulations. Even if those concerns turn out to be well-founded, though, Berkowitz said his bets in Fairholme Fund are good investments. "The companies we bought were already priced for (a double-dip recession)," he said. "At the prices we paid, they don't have to go back to where they were to be good investments."