By Mark Jewell, AP Personal Finance Writer
BOSTON (AP) — With mutual funds, sometimes less is more.
A fund holding just a couple dozen stocks might succeed in maximizing returns, with the manager's strong conviction behind each pick yielding better performance. The trade-off? Investors sacrifice the relative safety of the hundred or more stocks that many funds hold.
Of course, it doesn't always turn out that way for so-called "focused" or "concentrated" funds: Betting big on a few favorites can backfire if the picks are lousy.
But the approach has sure worked for Bruce Berkowitz, whose Fairholme Fund (FAIRX) has just 26 holdings. Morningstar on Tuesday named Berkowitz "Domestic-Stock Fund Manager of the Decade," noting that Fairholme beat the Standard & Poor's 500 by 14 percentage points over the past 10 years. As if that weren't enough, Berkowitz also won stock fund manager of the year honors for his terrific 2009.
Now, Berkowitz is trying to use his stock-picking reputation as a springboard into bonds, with this month's launch of another fund he's simultaneously managing: Fairholme Focused Income Fund (FOCIX).
It's an attempt to defy convention by a man who's lived by a concentrated portfolio manager's "less is more" mantra. Only a handful of bond funds have fewer than 80 holdings, according to Morningstar. But Fairholme Focused Income aims to hold just 15 to 50.
"Why in the world should I want to invest in my 30th best idea, if I can buy more of my best idea?," reasons Berkowitz, who started his career in fixed income before switching to stocks in the late 1980s.
That statement may sound like heresy to bond investors who typically seek safety and the reliable income generation that they can't get from stocks.
That's why many fixed-income funds hold hundreds of bonds. By spreading investments across many companies and bond categories, a fund and its investors take only a small hit in case of a default or collapse at one or two bond issuers.