This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
$1 buys you full access to ALL of TheStreet's Subscription Services! Learn More

What Ails Fairholme?

Stocks in this article: FAIRXAGTHXNYVTXDODGXPTTDXFMAGX

Part of Magellan's problem is surely that the large size makes trading difficult. Consider that the fund now has $19.3 billion in assets. A large holding is Toll Brothers (TOL), a homebuilder that accounts for 1.3% of the fund's assets. Now suppose that the Magellan portfolio manager wants to double his position in the homebuilder. To do that, he must spend $207 million to buy 12.8 million shares. But Toll Brothers only has 168 million shares outstanding, and 2.8 million trade each day on average. So the Magellan manager will not be able to make his trade right away. Instead, he'll have to spend weeks slowly accumulating shares. And as he places bids with brokers, the fund's purchases will put upward pressure on share prices. The manager may start buying at $16 and complete the position only when the price has climbed to $18. In contrast, a small fund could take a position in a day.

Like Magellan, Fairholme must make its trades gradually. But Fairholme has a big advantage because it only holds a few positions and often does little trading. While Magellan owns 229 stocks, Fairholme only owns 22. Top holdings include American International Group (AIG), Bank of America (BAC) and Morgan Stanley (MS) . Berkowitz aims to buy unloved stocks and then hold for years. At the moment he is lagging because financial stocks are out of favor--not because his fund has high trading costs. Berkowitz claims that Fairholme's large size actually provides an advantage. Because the fund buys in bulk, it can sometimes negotiate special deals and influence the managements of the portfolio holdings.

Despite the poor recent performance, Fairholme continues to maintain a stellar long-term record. During the past 10 years, the fund has returned 8% annually and outdone 99% of its competitors.

Among the biggest funds is American Funds Growth Fund of America, which has $151 billion in assets. For years, advisors warned that the fund had gotten too big. Undoubtedly the bulk has slowed trading, but the fund has still maintained a strong long-term record. During the past ten years, Growth Fund of America has returned 3.2% annually and outperformed 79% of competitors in the large growth category.

2 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,810.06 +91.06 0.51%
S&P 500 2,063.50 +10.75 0.52%
NASDAQ 4,712.97 +11.1030 0.24%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs