essays pieces of the puzzle
Thursday, February 21st, 2013
barbell strategy

13 0221 fairholme zSHLD zMBI

On January 29, the Fairholme Focused Income Fund (FOCIX) issued a most interesting and unusual report for the year ending December 31.  Actually, it’s more of a letter and expressly not the official annual report for the fund, according to the footnote.

While acknowledging that the fund trailed the Barclays Aggregate since inception (it now is ahead of it), Bruce Berkowitz wrote, “We expect 2013 to be a watershed year given our current focus on the debt of two companies, MBIA and Sears, which comprise 55.1% of the Fund’s assets.”  He then said that cash and equivalents totaled near forty percent, resulting in a “‘barbell’ strategy.”  Really there are two simple barbells at work here, a credit one and an interest rate one.

The first panel of the chart gives some perspective regarding performance.  The green line is AGG, the ETF that mimics the Barclays Aggregate.  The red line is the performance of FOCIX since inception, with an asterisk:  The starting level at the debut of the fund is indexed to AGG so that you can see the comparative performance from there.  As you’d expect, FOCIX has fluctuated broadly around the AGG.

In the middle are the returns on the common stocks of MBIA (MBI) and Sears (SHLD), which are owned in other Fairholme portfolios.  The stocks are up dramatically from their lows, but are still down more than forty percent from the end of 2007.

The last panel shows the yields on bonds of the two companies versus Treasuries.  According to the fund’s most recent filing, the MBI bond is in the portfolio, but the SHLD is not.  (I chose it to provide a good comparison as to spreads on the two credits to a single Treasury bond.)  If you are willing to take the credit risk (SHLD is Caa1/CCC+ and MBI is Caa/B-), there is yield to be had.

File this one away.  It looks like almost nothing else out there — and should you like to carry those barbells around with you, you’ll have to hurry.  The fund closes to new investors at the end of this month.  (Chart:  Bloomberg terminal.)

big research

There has been lots of talk (too much talk) about big data, but I added to the commentary with some thoughts about the big research that might result from the data explosion.  It’s part of an ongoing series about equity research.