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Time to Bail on Fairholme Fund--Or Stand Pat?

Morningstar readers share how they're approaching this beleaguered offering.

Christine Benz, 10/25/2011

Fairholme Fund FAIRX, one of the best-performing mutual funds of the past decade, has fallen hard in 2011. Owing in large part to losses in its financials holdings, the fund has shed more than a fourth of its value so far this year and places in the lower reaches of the large-value category for 2011 to date.

Yet more news rocked Fairholme fund-watchers' worlds on Tuesday, when the firm announced that comanager Charlie Fernandez had left the firm. (Analyst Kevin McDevitt has since posted an analysis that discusses Fernandez's departure as well as the arrival of two additional investment professionals at the firm.)

Given the recent headlines as well as the fund's popularity among many Morningstar.com readers, I decided to take the pulse of our Discuss forum participants on this now-controversial fund. Have investors been adding to Fairholme at this juncture, dumping it, or simply standing pat? And what factors have motivated their decisions?

A thought-provoking thread ensued, illustrating the conundrum that owners of truly active funds face when their managers struggle. While a healthy contingent of readers believes that the risk profile of the fund has changed due to manager Bruce Berkowitz's heavy emphasis on the financials sector, other posters argued that selling out now is short-sighted: If they liked Berkowitz when his charge was flying high, they should like him even more when his holdings could be on sale.

To read the complete thread or chime in with your own thoughts on Fairholme's fortunes, click click here.

'Too Much on His Plate'
At least a few posters noted that Fernandez's departure gives them trepidation about the fund's future.

Lanibay is one such investor, writing, "I just sold my shares on the news that Fernandez departed. I have deep respect for Bruce; however, there is no in-house contrarian voice that could tell Bruce that he may be wrong. Financials will eventually have their days in the sun, but I am selling on principle, in the view that I am no longer comfortable with a solo skipper, however brilliant."

BillGun's concern is that Berkowitz could have "too much on his plate." He noted, "In my opinion, he was already stretched too far after taking on double duties, 'joining' the board of directors of St. Joe Co. JOE (probably an ill-advised move on his part...). Perhaps his abundance of good press overly inflated his better judgment [regarding] assessing his personal capacity, abilities, and infallibility. The loss of Mr. Fernandez only makes matters worse, and may prove devastating."

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz and on Facebook.

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