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Fairholme and Third Avenue Try Out Bond Funds

Two focused bond funds look more like stock funds.

Russel Kinnel, 04/06/2010

If you like Fairholme Fund FAIRX, you'll probably like Fairholme Focused Income FOCIX, too. And if you're a fan of Third Avenue Value TAVFX, you'll probably be intrigued by Third Avenue Focused Credit TFCVX. But don't be fooled by the similarity in the names of these two new funds. They're charting very different courses.

Fairholme and Third Avenue are known for their stock funds, but neither is new to bonds; Third Avenue, in particular, has long specialized in distressed debt. But Fairholme Focused is staking out conservative territory, taking little interest-rate risk and only modest credit risk, while Third Avenue Focused is assuming a whole lot of credit risk. Both aim to achieve their objectives by holding relatively few bonds--15 to 50 in Fairholme's case, and 50 to 60 at Third Avenue.

The funds are drawing a lot of investor interest right away. Third Avenue Focused Credit is up to $434 million and Fairholme Focused Income has quickly grown to $180 million.

Differing Goals
The funds give their managers a lot of flexibility, but they have very different aims. Bruce Berkowitz, who runs Fairholme Fund, sees Focused almost as an enhanced money-market fund that will invest in a mix of cashlike instruments and high-grade corporate bonds. Depending on your perspective, Focused is either a sedate multisector fund or a bold short-term bond fund.

By contrast, the initial portfolio disclosed by Third Avenue Focused is pretty junky. It's filled with corporate bonds and bank loans that have below-investment-grade ratings. High-yield investors expect credit risk, of course, but the new Third Avenue fund may give them more than they bargained for. After all, even the best-managed junk-bond funds usually suffer a few blowups every year.PAGEBREAK

Differing Approaches
Another difference in the funds is crystal-clear: Expenses for Fairholme Focused will be low for at least a little while. The fund officially charges 1% annually, but it is waiving half that for the first year; it requires a $25,000 minimum investment. Third Avenue is charging a hefty 1.40% a year, although its minimum is just $2,500. If you have $100,000 to spare, you can buy the institutional shares TFCIX for 0.95% a year.

A third difference is that Third Avenue has added some brainpower to its fund. Six professionals are dedicated to Focused, led by Jeff Gary, who came from BlackRock (Third Avenue founder Marty Whitman is not on the Focused team). Fairholme, by contrast, hasn't added staff. It will be run by the same people who run Fairholme Fund: Berkowitz and comanager Charles Fernandez. But given Fairholme Fund's fabulous record, you could argue this is a plus.

A fourth difference was apparent in how the funds were launched. Third Avenue Focused Credit quickly built up a portfolio, while Fairholme Focused initially was largely in cash. If you check out its chart, you'll see the fund was flat through February and early March but then jumped to life and passed the benchmark and category averages it had been lagging. Berkowitz had bought CIT debt shortly before it popped. It appears Berkowitz is gradually putting money to work, but don't hold your breath waiting for it to be 100% in bonds.

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