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Fund Times

Fairholme Doubles Down on AIG Amid Continued Outflows

Manager exits at Columbia and John Hancock could signal more change for funds.

 Fairholme Fund  (FAIRX) manager Bruce Berkowitz had said that he would add to the fund's position in insurer  American International Group (AIG) when the company issued new shares in May, and he wasn't kidding. Fairholme's May 31 portfolio reveals that Berkowitz more than doubled the fund's AIG position to 18.2% of assets, including warrants. (As a nondiversified fund, Fairholme is free to invest more than 5% of assets in a given company.)

That's relatively conservative, though, compared with the concentrated bets in the May 31 portfolios of smaller siblings Fairholme Allocation  and  Fairholme Focused Income (FOCIX). Allocation, which is even less constrained than its larger sibling, has 27% of its assets in bond insurer MBIA (MBI) and 23.6% in AIG. Focused Income has 23.9% of its portfolio in various MBIA bonds. Both funds have about 15% of assets in cash.

Meanwhile, Fairholme's cash fell to just 4.4% of assets after hitting 25% in February. This erosion of cash has owed more to shareholder outflows, though, than to new stock purchases. With an estimated $780 million in additional July outflows, Fairholme has now lost about $4.3 billion thanks to five months of net redemptions.

Berkowitz recently sold several small positions to meet redemptions and bolster cash. June 30 13G filings show that Fairholme sold its small positions in  Spirit AeroSystems (SPR) and  RSC Holdings , which had been a combined 2.2% of assets as of Feb. 28, and trimmed its small stake in Winthrop Realty Trust .

Although the fund has historically avoided technology, Fairholme also opened a relatively small 3.6% position in  Cisco Systems (CSCO). Berkowitz spoke briefly about Cisco at the Morningstar Investment Conference in June, saying that the company's equipment is critical to the functioning of the United States, particularly in areas such as bank and credit card processing. The shares are trading at just half of Morningstar's current fair value estimate.

Berkowitz is also sticking with his big stakes in national lenders  Bank of America  (BAC) and  Citigroup (C). Both continue to hover near their respective 52-week lows. Berkowitz announced that he will hold a conference call with Bank of America CEO Brian Moynihan on Aug. 10 to discuss how the bank is navigating the economic environment and positioning its balance sheet.

John Hancock High Yield Fund to Button Up?
 John Hancock High Yield's (JHHBX) veteran manager, Arthur Calavritinos, left this week, and it's worth wondering whether the risk profile of the fund could change in his wake.

Calavritinos, who had run the fund since 1995, favored a concentrated, deep-value style, with a greater penchant for lower-rated junk bonds than most peers have. As of June 30, 2011, the fund held 44% of bonds rated below B, 43% of assets in its top 10 holdings, and a sizable exposure to casino bonds. The fund also devotes 22% of its assets to stocks.

Predictably, this fund has been volatile. It lost 49% of its value in the credit crisis of 2008 but came roaring back with a 94% gain from 2009 through 2010. Even with the rebound, however, the fund's previously stellar long-term record was badly tarnished.

Calavritinos leaves the fund with a five-year annualized return in the 96th percentile of its category as of Aug. 3, 2011, and having lost 4.5% for the year to date versus a 4.5% gain for the category.

Current portfolio managers Dennis McCafferty, John Iles, and Joseph Rizzo will continue to manage the fund. Because the fund seemed very much driven by Calavritinos, the jury is out on whether his replacements will follow the same aggressive approach. Considering that his departure follows a spate of bad performance, it would not be surprising to see the fund rein in its risk.

Vanguard U.K. Goes on Hiring Spree; Watch out for Falling Fees
Vanguard is going on a hiring spree in London, and its ongoing expansion there could continue to pressure fees within the U.K. mutual fund industry.

By the end of the year, Vanguard hopes to hire 20-30 new employees in London, many of whom will be investment managers. Already at 80 employees since it opened in 2008, Vanguard's London office has been ramping up its fund offerings. In June, Vanguard brought over its LifeStrategy fund series to the United Kingdom. Thomas Rampulla, managing director with Vanguard International, told Morningstar the firm may launch exchange-traded funds there, as well.

The LifeStrategy funds, like all Vanguard funds in the U.K., cost less than rivals do, and that, coupled with the U.K.'s ban on commission payments on mutual fund sales starting in 2013, should create a competitive advantage for Vanguard's direct-sales model.

Prior to the arrival of the firm in the U.K., rivals charged upwards of 1.2% per year for index funds. Faced now with Vanguard charging less than half that, these firms have been cutting fees. With Vanguard's expanding presence, the pressure may only increase on other firms to continue the trend.

Possible Good News at Columbia
A round of management changes within Columbia's mid- and large-cap funds could be good news for investors and could signal a fund merger.

Columbia said managers Laton Spahr, Steven Schroll, and Paul Stocking took control of  Columbia Large Cap Value , adding to their existing charges: Columbia Dividend Opportunity (INUTX) and  Columbia Mid-Cap Value Opportunity . After leading Dividend Opportunity to a top-decile performance during the trailing five years, Spahr, Schroll, and Stocking will be tasked with improving the performance of Large Cap Value, which has lagged two thirds of its peers during the same period.

In Columbia's mid-cap category, manager George Myers will take the lead on  Columbia Mid-Cap Growth Opportunity . Myers and his team already manage  Columbia Mid-Cap Growth (CBSAX), which has generated an annualized gain of 5.9% since Myers assumed the helm in 2006, beating the category and the Russell Mid Cap Growth Index. Meyers' arrival at Mid-Cap Growth Opportunity could help that fund, which has been a laggard.

Now that the similar Mid-Cap Growth and Mid-Cap Growth Opportunity funds have the same manager, it may make sense for Columbia to merge them. Mid-Cap Growth Opportunity was a RiverSource fund before Ameriprise, RiverSource's parent, bought Columbia funds. Many RiverSource funds have been merged into existing Columbia funds since then.

Dodge & Cox Manager Departure
 Dodge & Cox International Stock (DODFX) has lost a veteran manager, but the fund's remaining management team is deep enough to alleviate any concern. Yasha Gofman, who had been one of the managers of the fund since its inception in 2001, left Dodge & Cox, a rare event for the firm, which has seen only one comanager depart since 2004. A spokesman said Gofman left for family-related reasons. For now, Gofman is not being replaced on the committee that runs the fund. It now has eight managers.

American Century Growth to Close to New Investors
 American Century Growth (TCRAX) will close to new investors Aug. 31. The fund, managed by Prescott LeGard and Gregory Woodhams, has roughly $8 billion in assets. The strategy, which includes separate accounts and institutional portfolios run in the same manner by these managers, has a total of $14.5 billion, according to an American Century spokesman. Current shareholders may continue to invest in the fund.

The spokesman said the fund closed for the first time because the asset size was nearing the level at which it could have affected the managers' approach. He said the most sizable inflows were coming from the defined-contribution and institutional channels, areas in which American Century had not been active until recent years.

MFS Florida Municipal Bond
  will merge into  MFS Municipal Income (MFIAX).

Scout TrendStar Small Cap  will merge into  Scout Small Cap (UMBHX).

DWS Climate Change's  manager Nicolas Huber will be replaced by Andrew Pidden. The fund will also change its name to DWS Clean Technology on Oct. 1, 2011.

 PIMCO Developing Local Markets (PLMIX) will change its name to PIMCO Emerging Markets Local Currency on Aug. 16, 2011.

Christopher Smith joined the management team of Federated Capital Income (CAPAX). The fund is now managed by Smith, as well as existing managers John Nichol, Joseph Balestrino, Linda Bakhshian, Todd Abraham, Mark Durbiano, and Roberto Sanchez-Dahl. Smith and Balestrino will be responsible for managing the fund's fixed-income sleeve.

(Editorial director Kevin McDevitt, European research director Christopher Traulsen, and mutual fund analysts Flynn Murphy and Kailin Liu contributed to this report.)

Susan Daker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.