Morningstar Advisor - February/March 2012 - (Page 57)

Pitkowsky and Trauner say that they formed GoodHaven because they wanted the flexibility to invest anywhere, which Fairholme had enjoyed before assets swelled in 2009 and 2010. But there’s likely more to it than that. Although Pitkowsky, Trauner, and Berkowitz won’t discuss the circumstances, disruptions to Fairholme’s investment team probably played a role in their departures, too. As related in an October article in Barron’s, a former Fairholme analyst claims that Berkowitz made Charlie Fernandez head of the investment team shortly after he joined the firm in late 2007, even though Fernandez did not have any prior investment management experience. Fernandez was then named a comanager on the fund in January 2008, with Pitkowsky and Trauner then removed as comanagers later that year. (Fernandez left Fairholme in October.) That experience could only fuel the duo’s desire to prove themselves on their own. Fairholme’s performance hit a wall after Pitkowsky and Trauner cut their ties in late 2010, but it’s difficult to determine precisely how much they contributed to the fund’s prior success or how much their departure hurt. Pitkowsky, Trauner, and Berkowitz are reluctant to talk about who was responsible for what. Trauner has said that in 2000 he recommended Barrick Gold ABX, a stock that has nearly tripled since then. But it was never more than a small position in the portfolio. Looking for an Angel investment in their firm, as well as becoming the firm’s first separate-account client. Beyond providing capital, Markel’s investment would be a powerful endorsement for an unproven management team. That’s because Gayner is a highly accomplished investor in his own right. Under his leadership, Markel’s equity portfolio gained 7.6% annualized over the 10 years through Dec. 31, 2010, versus a return of just 2.7% for the S&P 500 Index. A Warren Buffett disciple, Gayner built this record by sticking to blue-chip companies such as Buffett’s own Berkshire Hathaway BRK.B, as well as insurer Fairfax Financial FRFHF and spirits maker Diageo DEO. Pitkowsky, Trauner, and Gayner’s relationship stretches to Fairholme’s early days, as Markel was one of the fund’s first investments in 2000. Based on their long association, Gayner was eager to invest with them. His high comfort level came from having watched how the duo went about their business for more than 10 years. “There’s no substitute for knowing someone for an extended period of time,” Gayner says. Plus, he had seen enough to be assured of their competence. “I had talked with them about investment ideas, and I could tell by the types of questions they were asking that they knew what they were doing,” Gayner says. Markel invested in the firm in late 2010. This capital infusion gave GoodHaven breathing room from day one. It also helped the firm limit the fund’s expense ratio to a reasonable 1.1%. The firm’s minimal infrastructure helps keep costs in check, too. There is only one junior analyst on the investment team (although more may be added in the future), and the back-office operations are outsourced to US Bank. More in Common Than Similar Sounding Names is another. While the duo would like to grow the firm’s asset base, they would rather do so through capital appreciation than through massive inflows. Size shouldn’t be a problem anytime soon, though, as the fund’s assets are currently a modest $91 million. Importantly, they have already committed to closing the fund once firmwide assets reach $3 billion to $5 billion. Pitkowsky and Trauner want to maintain the flexibility to make meaningful investments in small-cap companies, which are about a third of the equity portfolio. Their go-anywhere value philosophy depends on having the freedom to invest in companies of any size, across the capital structure. Pitkowsky and Trauner took a tangible step in aligning their interests with shareholders’ when they each invested $1 million in the fund. This partnership mentality showed in the fund’s first semiannual report, too, which included a fairly thorough discussion of their investment philosophy as well as the thesis behind several holdings. The fund is run in a similarly aggressive fashion to Fairholme. In fact, there are a number of carryover stocks from Pitkowsky and Trauner’s days at Fairholme. Six of the fund’s 18 holdings are past or present Fairholme positions, including Berkshire Hathaway, Sears Holdings SHLD, White Mountains Insurance WTM, Barrick Gold, Jefferies Group JEF, and Mohawk Industries MHK. Pitkowsky and Trauner also embrace deeply out-of-favor companies. They are happy to invest in companies that are cheap because they are going through operational challenges (“fallen angels”), such as Sears. The duo also likes so-called orphans such as top holding Spectrum Brands SPB. Few Wall Street analysts picked up coverage of the consumer goods company after it pulled out of bankruptcy in 2009. Trauner and Pitkowsky believe that it will pay off a large chunk of its high-cost debt over the next year, creating substantial free cash flow. With such unanswered questions in the air, Pitkowsky and Trauner knew that it might be a slog attracting assets, especially considering investors’ aversion to U.S. equity funds in recent years. Pitkowsky and Trauner tried to sidestep the need for a big marketing push by pursuing a lead investor instead. They approached Tom Gayner, who is the CIO at highly respected insurance company Markel MKL, as well as chairman of the Davis Funds, about making an A lean approach to infrastructure is one of several traits GoodHaven shares with Fairholme. Treating shareholders well MorningstarAdvisor.com 57 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2012

Morningstar Advisor - February/March 2012
Contents
Contributors
Letter From the Editor
Make a Difference Stories, Not Debates
How Concerned Are You About Europe?
Analytical and Independent
What to Ask When a Fund Manager Leaves
Past, Present, Future
Have Financials Gotten Cheap Enough?
Four Picks for the Present
Investment Briefs
Tactical Funds Miss Their Chance
Specialty Retail: Ad Hoc Opportunity
How Europe Is Making Its Crisis Worse
Impact on U.S. Economy Will Be Minimal
European Banks: Bargains or Value Traps?
Don’t Count the Euro Out Yet
Europe on the Brink
GoodHaven Realizes Its Vision
How Index Trading Increases Market Vulnerability
Nonlisted REITS: Handle With Care
Safety Picks for the Many Moods of Mr. Market
On the Prowl for Large- Blend Index-Beaters
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The Math That Matters

Morningstar Advisor - February/March 2012