Summary of Interviews with Fairholme Manager

Bruce Berkowitz relies on his team’s bottom-up research efforts to construct the Fairholme portfolio and, as such, he makes no claims about being able to predict what will happen at a macroeconomic level. He is, however, acutely aware of some macroeconomic headwinds that many companies are subject to. “We are going through a de-risking—a deleveraging not just at the individual level, but at the corporate level,” he notes. One example he offers is insurance companies, whose investment portfolios are worth much less than they used to be. As a result, Berkowitz explains, insurance companies are being forced to reduce equity exposure at the worst possible time because of capital ratio requirements, which, in his view, has created tremendous pressure in the markets. He also believes that this forced deleveraging will continue for companies and municipalities with defined benefit plans, many of which now have very large unfunded liabilities, as they cannot afford to maintain equity exposures at past levels.

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