Morningstar readers share how they're approaching this beleaguered offering.
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By Christine Benz | 10-23-11 | 06:00 AM | Email Article

Fairholme Fund , one of the best-performing mutual funds of the past decade, has fallen hard in 2011. Owing in large part to losses in its financials holdings, the fund has shed more than a fourth of its value so far this year and places in the lower reaches of the large-value category for 2011 to date.

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

Yet more news rocked Fairholme fund-watchers' worlds on Tuesday, when the firm announced that comanager Charlie Fernandez had left the firm. (Analyst Kevin McDevitt has since posted an analysis that discusses Fernandez's departure as well as the arrival of two additional investment professionals at the firm.)

Given the recent headlines as well as the fund's popularity among many Morningstar.com readers, I decided to take the pulse of our Discuss forum participants on this now-controversial fund. Have investors been adding to Fairholme at this juncture, dumping it, or simply standing pat? And what factors have motivated their decisions?

A thought-provoking thread ensued, illustrating the conundrum that owners of truly active funds face when their managers struggle. While a healthy contingent of readers believes that the risk profile of the fund has changed due to manager Bruce Berkowitz's heavy emphasis on the financials sector, other posters argued that selling out now is short-sighted: If they liked Berkowitz when his charge was flying high, they should like him even more when his holdings could be on sale.

To read the complete thread or chime in with your own thoughts on Fairholme's fortunes, click click here.

'Too Much on His Plate'
At least a few posters noted that Fernandez's departure gives them trepidation about the fund's future.

Lanibay is one such investor, writing, "I just sold my shares on the news that Fernandez departed. I have deep respect for Bruce; however, there is no in-house contrarian voice that could tell Bruce that he may be wrong. Financials will eventually have their days in the sun, but I am selling on principle, in the view that I am no longer comfortable with a solo skipper, however brilliant."

BillGun's concern is that Berkowitz could have "too much on his plate." He noted, "In my opinion, he was already stretched too far after taking on double duties, 'joining' the board of directors of St. Joe Co. (probably an ill-advised move on his part...). Perhaps his abundance of good press overly inflated his better judgment [regarding] assessing his personal capacity, abilities, and infallibility. The loss of Mr. Fernandez only makes matters worse, and may prove devastating."

Glasshalffull, too, grew concerned when Berkowitz stepped into the St. Joe fray. "I dumped all of my FAIRX earlier this year when it became apparent Berkowitz had more interest in using the fund's money to pursue his personal interests with St. Joe. (I prefer a fund manager for my fund--not a corporate raider, ego-centric power seeker, whatever.) Haven't regretted that move one day since."

JillBill, while standing pat with shares of Fairholme Fund, concurred that Berkowitz could be doing too much at once: "I agree with other posters that Bruce may be overextended. Honestly, I am uncomfortable when a manager becomes a star and attracts so much attention."

Fmulder agreed that too much hype can be a negative, especially when it's perpetuated by the fund company itself. "I think whenever a company and/or mutual fund does a full-page ad in The Wall Street Journal touting their performance, it is an indicator to sell."

Fairholme's size--certainly much less of a concern now than it once was because of the fund's massive redemptions recently--is on dclemons' mind. "The problem with Fairholme is that it was allowed to get too large. The large cash position told me [Bruce Berkowitz] was having a hard time deploying capital. I just knew that was going to be a problem eventually. I too sold early on in the year because of the over weighting of financials."

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Christine Benz has a position in the following securities mentioned above: OAKLX LLPFX Find out about Morningstar's editorial policies.
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