Morningstar Advisor - February/March 2012 - (Page 58)

Undiscovered Managers Larry Pitkowsky Keith Trauner Trauner say it will likely be closer to the 15%–25% range that Fairholme maintained for years. The fund’s current large cushion reflects Pitkowsky and Trauner’s conviction in only buying stocks with a solid margin of safety. While they will be willing to hold on as prices appreciate, they are adamant about not overpaying for stocks. Going Their Own Way management reside in low-yielding money market funds. Federated has offered fee waivers since yields are below the cost of operating these funds, hurting profitability. It may be a while before profitability improves, too, given the Fed’s commitment to keep rates close to zero through mid-2013. A second major difference with Fairholme is GoodHaven’s affection for technology companies. Although it briefly held a position in Cisco CSCO last summer, Fairholme generally avoids tech. Berkowitz considers that sector beyond his circle of competence. On the other hand, Trauner’s experience as a programmer early in his career gives him more comfort in this space. In addition to Hewlett-Packard, the fund owns stakes in both Google GOOG and Microsoft MSFT. Although Microsoft is sometimes dismissed as a dinosaur, Pitkowsky and Trauner believe that its business has in many ways grown stronger since the early-2000s’ tech bust. Trauner argues that the Office franchise’s resilience in the face of competition from free, open-source software and other threats demonstrates its underlying strength. Their Chance to Show the World GoodHaven GOODX $11K 10 S&P 500 TR Although there are similarities, the fund isn’t a carbon copy of Fairholme. One notable difference is its smaller exposure to financials. To be sure, the fund did have 26.6% of its August equity portfolio in financials versus 18.1% for the large-value category average. But this is far below Fairholme’s 91% financials stake. Plus, GoodHaven’s positions are not nearly as concentrated; Berkshire Hathaway is the biggest holding at 4.6% of assets. Meanwhile, Fairholme has close to 22% of its assets in insurer American International Group AIG alone. Neither does GoodHaven hold any banks, which, along with AIG, were the greatest sources of Fairholme’s terrible 2011 performance. Although Pitkowsky and Trauner are not against owning a bank, they’re reluctant to do so since the Financial Accounting Standards Board eased mark-to-market accounting rules on illiquid mortgage assets in April 2009. This ruling made it difficult to determine a bank’s true tangible book value. Plus, higher capital requirements and declining net interest margins could prevent banks from earning decent returns on their capital. That’s not to say that the fund’s financials holdings don’t have issues of their own. For example, Walter Investment Management WAC leveraged its balance sheet to acquire Green Tree Financial’s subprime-mortgageservicing business this past March. The company is now working to reduce its debt load, but its balance sheet could be at risk in the meantime. Money manager Federated Investors FII has a stronger balance sheet but about three fourths of its assets under 9 05/ 11 07/ 11 09/ 11 11/ 11 01/ 12 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Category Large Value Fee Level Above Average Morningstar Rating — Minimum Investment $10,000 Data as of Dec. 31, 2011 6-Mo Anl Total Rtn (%) –1.12 6-Mo Anl TR % Rank Cat 11 But even when bought at reasonable prices, these stocks can be highly volatile. Poor results at Sears’ rapidly deteriorating retail stores, for example, have pounded its share price. Although Jefferies’ shares have recovered recently, its exposure to European sovereign debt has been a cloud over the company. Finally, after enduring management upheaval, Hewlett-Packard HPQ shares have dropped by more than a third since March as it struggled to transition away from its lowmargin PC business. GoodHaven’s large stores of cash and bonds help alleviate these risks to some extent. Its combined cash/bond stake was 36% of assets at the end of August, but Pitkowsky and For Pitkowsky and Trauner, the task is now to show that they were more than just along for the ride at Fairholme. Although the fund has been around only since April, it hasn’t stumbled in a difficult equity environment. Its returns for the year were roughly flat versus a 7.7% loss for its average peer. Much of this superior showing, though, owes to the fund’s big cash and bond stake. GoodHaven’s journey is still just beginning. But it will have to get used to being measured not only against its benchmark but also against its former partner. K Kevin McDevitt is an editorial director with Morningstar’s fund research department. 58 Morningstar Advisor February/March 2012

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