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Fairholme's Girth Doesn't Have to Spell Doom

This fund will eventually stumble, but the culprit won't necessarily be its size.

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 Fairholme Fund (FAIRX) has gathered $4.1 billion in net inflows so far in 2010, more than any other domestic-equity fund and an amount equal to 41% of its total assets under management just 11 months back. Managed by Morningstar's Domestic Equity Fund Manager of the Decade, Bruce Berkowitz, the fund now has $17 billion in assets, and is the 19th-largest actively managed domestic-stock fund.

That's a lot of scratch to put to work, and it's got some longtime Fairholme shareholders nervous. Many have contacted me to say they worry that Berkowitz will drown in a sea of cash and will have to ditch the flexible, eclectic approach he's used to build the fund's stellar record. That's a valid concern. Plenty of funds have raked in hot money during long winning streaks only to disappoint for a stretch thereafter. They've then had to manage big outflows that hamper their ability to execute their strategy. Bill Miller's  Legg Mason Capital Management Value (LMVTX) is a famous example of this, but far from the only one.

Big Is Not Always Bad
But it doesn't have to end in tears when assets pour into a fund. I looked at the 40 actively managed domestic-equity funds with more than $10 billion in assets and was surprised to see a steady group of performers showing few signs of losing a step. About 70% are beating their category average over the past three years and 82% are besting it over the past five. So, a bulging asset base is a big hurdle, but one that can be cleared.

Michael Breen has a position in the following securities mentioned above: JEF. Find out about Morningstar’s editorial policies.

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