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Fairholme Sells AIA, Raises Cash Position

Franklin Resources fills void left by a manager's death, Vanguard's Sauter retires, and more.

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 Fairholme (FAIRX) has taken major steps to strengthen its firewall against outflows and increase its flexibility. In order to boost liquidity, manager Bruce Berkowitz told Morningstar that last week he finished selling the fund's position in Hong Kong-based insurer AIA Group (AAGIY). That stock claimed 14% of assets as of February 2012. That sale increased the fund's cash weighting from less than 5% in February to 18% as of June 27, 2012. This is more in line with the fund's historical cash range. From 2000 to 2010, cash was typically 10%-20% of assets, which helped dampen volatility and gave the fund substantial flexibility. Berkowitz sold AIA, as well as China Pacific Insurance Group in January 2012, based largely on valuation, believing that the fund's existing U.S.-based holdings offered better value.

The sales make the equity portfolio even more concentrated in its remaining 10 or so holdings, but the increased cash brings greater overall stability. It also makes it less likely that Berkowitz will need to sell additional positions to meet future redemptions. The fund has already sold a handful of holdings over the past 15 months to meet $9 billion in outflows. Recall that these outflows stemmed from the fund's horrific 2011 as its financials positions, such as  AIG (AIG) and  Bank of America (BAC), cratered and the fund dropped 32.4% that year. However, even though outflows continue, they have slowed substantially from 12 months ago. Outflows averaged more than $1 billion per month from April 2011 through August 2011. This forced Berkowitz to sell stocks that he would have rather hung onto. Outflows have declined to an average of $150 million during the past three months through May 2012 as the same stocks that tanked last year, along with  Sears Holdings (SHLD), have rebounded so far in 2012, pushing returns up 20.6% through June 27, 2012.

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Morningstar Fund Analysts does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.