Berkowitz, Nygren Build Big Stakes in Health

Shares of drugmakers and health insurers tumbled after President Barack Obama's election on fears that his reform plans would cut companies' profit margins.

Bruce Berkowitz, manager of the Fairholme Fund(FAIRX), started buying. By November, Fairholme had 48% of its assets in health-care stocks, including 18% in pharmaceutical giant Pfizer(PFE), an outsized bet for a diversified fund.

The Fairholme Fund isn't alone in building a big stake in health care. Managers of the Oakmark Select(OAKLX) and Pax World Balanced(PAXWX) funds also snapped up the stocks, deeming them excessively cheap for companies that will face continued demand.

The performance of health-care stocks has been mixed, but Berkowitz remains confident. Cash flows at his companies remain strong. While Washington's role in health care might expand, he says the government can't replace pharmaceutical and managed-care companies because they play vital roles. The fund's health-insurance holdings include UnitedHealth Group (UNH) and WellPoint(WLP).

Fairholme's position in Pfizer is controversial. Many analysts have shunned the stock because the blockbuster cholesterol drug Lipitor is coming off patent soon. Berkowitz argues the company can replace the big money maker with smaller successes, including some generic drugs.

"Pfizer will have a whole string of singles instead of the big hit of Lipitor," he said at the recent Morningstar Investment Conference.

Berkowitz has a sterling performance record. During the 10 years through June 5, Fairholme returned 7.7% annually, on average, beating all other large blend funds and topping the S&P 500 Index by 9.2 percentage points, according to Morningstar(MORN).