BofA Call Raises Questions for Fairholme

Whether Fairholme's FAIRX investment in Bank of America BAC will end up being a mistake is still unknown, but it seems the fund's manager Bruce Berkowitz wasn't given fresh reasons to be bullish after a hosting a call for the bank's chief executive officer on Wednesday.

It's an unusual move for a fund manager to host a call for the CEO of a holding, but given Fairholme's nearly 6% position in Bank of America as of May 31, Berkowitz has a vested interest in helping CEO Brian Moynihan get his story out. The conference call with Moynihan reportedly had more than 6,000 participants. Investors are searching for answers after the stock's 49% decline for the year to date over mortgage-related issues and capital adequacy concerns.

In the end, Moynihan did not announce any new initiatives that would make the stock a more attractive investment. In fact, Berkowitz may have received some disappointing news.

During the Q&A, he asked Moynihan whether the bank could earn 1% on its assets and a 10% return on equity over an entire business cycle. Recall that Berkowitz suggested at the Morningstar conference in June that his belief in the stock was predicated to some extent on the company hitting these numbers. Moynihan said that a 1% return on assets was a reasonable target for the balance sheet, but only if the Federal Funds rate was at 1.25% to 1.50%. Given that the Federal Reserve now believes economic conditions will warrant keeping rates close to 0% until mid-2013, it doesn't appear that the company will hit the 1% target any time soon.

Does this undercut Berkowitz' rationale for holding the stock? We hope to learn more after speaking with him in the days to come.

Standout Funds in a Tough Stock Market
It was back to the future in the world of domestic-equity funds as many of the same large-cap funds that did well during the 2008 credit crisis also did well this week. The Dow Jones Industrial Average has closed up or down by more than 500 points since Monday amid fears of a global economic recession and a worsening sovereign debt crisis.

After two years of the market being enamored with risky fare and momentum, investors were splashed with an ice cold reminder of the obvious: Firms that maintain healthy balance sheets while strengthening their competitive advantages and generating steady cash flow make good long-term investments, as do the funds that buy them.

Some of these funds were wallflowers when the market recovered in 2009, but some underperformance in bull markets can be acceptable when paired with outperformance during periods of sharp decline.

It was no surprise that the large-cap funds that are well-known for investing in firms with moats, such as Sequoia SEQUX, Jensen JENSX, and Vanguard Dividend Growth VDIGX, were standouts this week, but this is an opportunity to research funds which are less talked about but have similarly high investing standards, like BlackRock Equity Dividend MADVX, LKCM Equity Institutional LKEQX, and Amana Trust Income AMANX. All of these funds have outperformed their peers over the long term partly thanks to superior downside protection over the trailing three-, five-, and 10-year periods.