NEW YORK ( TheStreet ) -- In recent years, Fairholme Fund ( FAIRX) has swung wildly up and down. In 2010, Fairholme returned 25.5%, outdoing the S&P 500 by 10.4 percentage points and topping 99% of its large value peers, according to Morningstar.The next year, Fairholme lost 32.4% and finished dead last of the 373 competitors in its category. In 2012, the fund came in first. Long-term investors have little reason to complain. During the past 10 years, Fairholme has outdone 99% of its peers. But masses of shareholders have dumped the fund, unnerved by the volatility. Assets have dropped from $18.8 billion in 2010 to $7.6 billion now. Fairholme portfolio manager Bruce Berkowitz has achieved the high returns and extreme volatility by maintaining a concentrated portfolio. While the average large value fund holds a diversified portfolio with more than 100 stocks, Berkowitz keeps most of his portfolio in 10 unloved stocks. The fund has 49% of its assets in two stocks, American International Group ( AIG) and Bank of America ( BAC). If one of those names sinks, the fund can suffer badly. Fairholme belongs to a shrinking breed of focused funds that put most of their assets in fewer than 30 stocks. By making big bets on a few holdings, the focused managers aim to deliver results that vary from the benchmarks. A generation ago, dozens of funds followed the concentrated approach. But because of the risks of placing big bets, the largest fund companies have abandoned the strategy. Today most portfolio managers aim to stay broadly diversified and avoid the kind of bumps that unhinge shareholders. The remaining focused funds are run by entrepreneurs and smaller companies. Survivors include CGM Focus ( CGMFX), Longleaf Partners ( LLPFX) and Marsico Focus ( MFOCX).
Because they suffer "off" years, typical focused funds may not be suitable for cautious investors. But there are a handful of focused managers who have produced winning results while giving shareholders relatively steady rides. The best choices emphasize rock-solid companies that can avoid big losses in downturns. Top funds include Akre Focus ( AKREX), Oakmark Select ( OAKLX) and Yacktman Focused ( YAFFX). Among the steadiest performers is Hennessy Focus ( HFCSX). During the past five years, Hennessy returned 10.9% annually, outdoing 98% of competitors in the mid growth category. The fund seeks leading companies that can increase their intrinsic value consistently at double-digit rates. Such predictable performers are hard to find. Hennessy portfolio manager Ira Rothberg stays away from materials and energy companies because such cyclicals tend to sink during recessions. He also avoids biotechnology businesses that could sputter if their research efforts fail.
Weitz likes to snap up stocks after they have fallen out of favor. A holding is CACI International ( CACI), which provides cyber security and information systems for the U.S. Department of Defense and other government clients. The shares sank last fall as investors worried that government cutbacks would hurt revenue. That provided a buying opportunity for Weitz. "We came to the conclusion that the company would generate a substantial amount of free cash flow over the next three to five years--even if demand from the Department of Defense declined," says co-manager Andrew Weitz. Another holding is TransDigm ( TDG), a maker of aircraft parts. The company can generate reliable cash flows because there is steady demand for replacement parts, says Andrew Weitz. Follow @StanLuxenberg This article was written by an independent contributor, separate from TheStreet's regular news coverage.