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MBIA Investment a Big Win for Fairholme's Berkowitz

A promotion at Heartland Advisors, former Fidelity Magellan PM Jeffrey Vinik to shutter his hedge fund, and Southeastern readies another proxy fight.

Robert Goldsborough, 05/09/2013

Monday's announcement of a legal settlement between mortgage insurer MBIA MBI and Bank of America BAC was great news for MBIA investors, who saw the stock surge 45% on Monday.

It also was great news for clients of manager Bruce Berkowitz of Fairholme Capital Management, who has been a large holder of MBIA. Berkowitz, who was named Morningstar's domestic-equity Fund Manager of the Decade in 2010, has a small position in MBIA in Silver-rated Fairholme FAIRX, by far the largest equity position in Fairholme Allocation FAAFX, and a significant position in MBIA's bonds in Bronze-rated Fairholme Focused Income FOCIX. According to Morningstar's data, MBIA accounted for fully 42.7% of Fairholme Focused Income's assets as of Feb. 28, 2013. (Sears SHLD bonds were 17%, short-term Treasuries and a money market position were 40%, and AIG AIG represented a minuscule position, so in effect the fund holds bonds issued by two companies plus some cash.) And MBIA made up 22% of Fairholme Allocation's portfolio as of that same date.

Those investments were rewarded early this week as news of the settlement lifted the prices both of MBIA's stock and its bonds. The result? Fairholme Focused Income surged 11% in one day and a total of 15% across a three-day period, while the flagship Fairholme fund also enjoyed a more modest 3% lift from the MBIA news. Meanwhile, Fairholme Allocation is now up 23% for the year to date, second only in the mid-value category to Bill Miller's Legg Mason Capital Management Opportunity LGOAX.

The settlement brought to an end a longstanding legal battle between Bank of America and MBIA. The complicated dispute was over transactions prior to the financial crisis between MBIA and two other companies, Countrywide and Merrill Lynch, that Bank of America now owns. Now Bank of America will pay $1.6 billion in cash to MBIA, provide the troubled insurer with a $500 million credit line, and remit to MBIA the 5.7% senior notes that Bank of America acquired in late 2012. The deal also closes out various trading positions and gives the bank warrants to buy almost 10 million shares of MBIA stock. The deal saves MBIA, which was at risk of not being able to meet its obligations, and makes Bank of America an investor in and a lender to the insurer. And it brings Bank of America some closure with respect to its past mortgage misdeeds.

The rally in the prices of MBIA's equity and bonds undoubtedly came as no surprise to Berkowitz, who in January wrote to Fairholme Focused Income shareholders that he anticipated a settlement and an attendant boost to MBIA's bond prices. "We expect MBIA's lawsuits against Bank of America and its division Countrywide over representations and warranties on mortgages insured by MBIA to settle. A positive result should lift MBIA bonds," he wrote. "A negative result appears to be priced into today's marketplace."

Succession Planning Continues at Heartland
Heartland Advisors, the parent firm of the Heartland Funds, announced that Will Nasgovitz has been appointed the firm's chief executive officer. The move was widely expected since Nasgovitz has been taking on a larger role as his father Bill Nasgovitz nears retirement. (Bill Nasgovitz founded the Milwaukee, Wisc.-based firm in 1983.) While Will Nasgovitz will remain a portfolio manager at Heartland Select Value HRSVX and will continue to oversee a separate account, he is stepping down from his comanager role at Bronze-rated Heartland Value HRTVX. Bill Nasgovitz remains the lead manager on that fund. Heartland also announced it has hired Robert Sharpe as a comanager on Heartland International Value HINVX. That fund was launched in 2010. Sharpe was previously a portfolio manager at the State Teachers Retirement System of Ohio.

Report: Unhappy with Dell, Southeastern Asset Management and Carl Icahn Considering Teaming Up to Pick New Directors
According to news accounts, two investors are considering joining forces to shake up Dell DELL, because they are unhappy with the share price of a proposed $24.4 billion buyout of the PC maker that would be led by the computer company's billionaire founder Michael Dell and private equity firm Silver Lake Partners.

Southeastern Asset Management, the advisor to the Longleaf Funds, and billionaire investor Carl Icahn have come out vocally against the proposed $13.65-per-share buyout price, arguing that such a low price dramatically undervalues the company. Southeastern has commented that it believes Dell is worth close to $24 per share and it believes shareholders could unlock more value by breaking up Dell’s businesses.

On May 7, the Wall Street Journal reported that Icahn and Southeastern are considering nominating their own slate of directors at Dell in an effort to slow down or derail the buyout. But time is short for the two investors, who reportedly face a May 13 deadline to put forth director nominees.

It's also not clear whether a new board even would be able to block the buyout process, since an investor vote on the proposed $13.65 per share deal may take place before Dell investors vote on director nominees.

This wouldn't be the first time that Icahn, or for that matter Southeastern, has gotten involved in a governance fight. Last year, a similar effort by Icahn and Southeastern resulted in five new directors on the nine-member board of Chesapeake Energy CHK. Co-founder and CEO Aubrey McClendon followed them out the door not much longer afterward, retiring from Chesapeake on April 1, 2013, while only in his mid-50s. After the board shakeup, Southeastern noted in Longleaf Partners' 2012 annual report that the board changes resulted in Chesapeake moving forward with asset sales, cutting general and administrative expenses, and reducing board and CEO compensation.

Vinik to Close Hedge Fund
On May 3, hedge-fund manager Jeffrey Vinik announced plans to shut down his hedge fund and return all assets to his fund's investors.

Known outside of the investment world for his ownership of the Tampa Bay Lightning hockey team and his minority stake in the Boston Red Sox baseball team, Vinik, 54, managed Fidelity Magellan FMAGX, which currently carries a Morningstar Analyst Rating of Neutral, from 1992 until 1996 and was named Morningstar’s 1993 Portfolio Manager of the Year. A protege of Fidelity legend Peter Lynch, Vinik famously left Fidelity after a dramatic portfolio shift away from technology companies into U.S. Treasuries. That move, which he implemented in late 1995 and 1996, sparked an outcry from investors and resulted in significant underperformance, and he departed Fidelity in 1996 to start his own Boston-based hedge fund, Vinik Asset Management.

According to news accounts, Vinik sent a letter to clients of his hedge fund acknowledging that he'd made some poor investments. In particular, Vinik had rotated his clients' investments out of U.S. stocks, which have rallied of late, and into gold mining firms, which have struggled.

Now, Vinik plans to exit the investment world--at least, for now--and focus on his sports investments, his foundation, and his family.

In March 2012, Vinik announced that he had recruited David Iben from Nuveen Investments' Tradewinds affiliate. With the closure of Vinik's firm, Iben, who had managed Nuveen Tradewinds Global All-Cap Fund NWGAX from 2006 until 2012, plans to start his own independent investment firm and may even base it in Vinik Asset Management's offices in Tampa, Fla., according to reports.

Janus World Allocation Merges Into Janus Moderate Allocation
Last month, Janus Capital Group JNS merged a small allocation fund, Janus World Allocation, into Janus Moderate Allocation Fund.

The combined fund has been renamed Janus Global Allocation Moderate JMOAX. Janus World Allocation only had just over $5 million in assets at the time of the merger. The combined fund has just over $300 million in assets.

Fund analysts Shannon Kirwin and Rob Wherry contributed to this report.


Robert Goldsborough is an ETF Analyst at Morningstar.

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