UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-09607
Fairholme Funds, Inc.
(Exact name of registrant as specified in charter)
5966 South Dixie Highway, Suite 300
South Miami, FL 33143
(Address of principal executive offices) (Zip code)
Bruce R. Berkowitz
5966 South Dixie Highway, Suite 300
South Miami, FL 33143
(Name and address of agent for service)
Registrants telephone number, including area code: 1-866-202-2263
Date of fiscal year end: November 30
Date of reporting period: May 31, 2022
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (OMB) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
(a) | The Reports to Shareholders of each Fund are attached herewith. |
FAIRHOLME
Ignore the crowd.
The Fairholme Fund (FAIRX)
Seeking long-term growth of capital
Semi-Annual Report
May 31, 2022
Managed by Fairholme Capital Management
(866) 202-2263 ● fairholmefunds.com
THE FAIRHOLME FUND
May 31, 2022
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2
FUND PERFORMANCE (unaudited)
May 31, 2012 May 31, 2022
THE FAIRHOLME FUND vs. THE S&P 500 INDEX
INITIAL INVESTMENT OF $10,000
The Fairholme Fund (The Fairholme Fund) commenced operations on December 29, 1999. The chart above presents the performance of a hypothetical $10,000 investment for up to ten years to the latest semi-annual period ended May 31, 2022.
The following notes pertain to the chart above as well as to the performance table included in the Management Discussion & Analysis Report. Performance information in this report represents past performance and is not a guarantee of future results. The investment return and principal value of an investment in The Fairholme Fund will fluctuate, so that an investors shares when redeemed may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted within. The performance information does not reflect the taxes an investor would pay on distributions from The Fairholme Fund or upon redemption of shares of The Fairholme Fund. Most recent month-end performance and answers to any questions you may have can be obtained by calling Shareholder Services at 1-866-202-2263.
Data for both the S&P 500 Index and The Fairholme Fund are presented assuming all dividends and distributions have been reinvested and do not reflect any taxes that might have been incurred by a shareholder as a result of The Fairholme Fund distributions. The S&P 500 Index is a widely recognized, unmanaged index of 500 of the largest companies in the United States as measured by market capitalization and does not reflect any investment management fees or transaction expenses, nor the effects of taxes, fees or other charges. It is not possible to invest directly in an index.
3
MANAGEMENT DISCUSSION & ANALYSIS
For the six months ended May 31, 2022
The Fairholme Fund shares outstanding and unaudited net asset value per share (NAV) at May 31, 2022, the end of The Fairholme Funds semi-annual period, and NAVs at other pertinent dates, were as follows:
5/31/2022 Shares Outstanding |
05/31/2022 NAV (unaudited) |
11/30/2021 NAV (audited) |
05/31/2021 NAV (unaudited) | |||||
The Fairholme Fund |
43,840,379 | $ 30.82 | $ 29.29 | $ 30.22 |
At June 30, 2022, the unaudited NAV of The Fairholme Fund was $25.17.
Performance figures below are shown for The Fairholme Funds semi-annual period ended May 31, 2022, and do not match calendar year figures for the period ended June 30, 2022, cited in the Portfolio Managers report.
The Fairholme Fund Performance to 5/31/2022 (Unaudited) |
Six Months |
One Year |
Five Years |
Ten Years |
Fifteen Years |
Since Inception 12/29/1999 | ||||||||||||||||||
Cumulative: |
||||||||||||||||||||||||
The Fairholme Fund |
5.22% | 1.99% | 65.29% | 156.16% | 146.12% | 784.26% | ||||||||||||||||||
S&P 500 Index |
-8.85% | -0.30% | 87.39% | 283.77% | 266.42% | 332.74% | ||||||||||||||||||
Annualized: |
||||||||||||||||||||||||
The Fairholme Fund |
1.99% | 10.57% | 9.86% | 6.19% | 10.21% | |||||||||||||||||||
S&P 500 Index |
-0.30% | 13.38% | 14.40% | 9.04% | 6.75% |
For the six months ended May 31, 2022, The Fairholme Fund outperformed the S&P 500 Index (S&P 500) by 14.07 percentage points. Over the last fiscal year, The Fairholme Fund also outperformed the S&P 500 by 2.29 percentage points. From inception, The Fairholme Fund outperformed the S&P 500 by 3.46 percentage points per annum, or on a cumulative basis, 451.52 percentage points.
Fairholme Capital Management, L.L.C. (the Manager) believes performance over shorter periods is likely to be less meaningful than performance over longer periods. Investors are cautioned not to rely on short-term results. The fact that securities increase or decline in value does not always indicate that the Manager believes these securities to be more or less attractive in fact, the Manager believes that some price increases present selling opportunities and some price declines present buying opportunities.
Further, shareholders should note that the S&P 500 is unmanaged indices incurring no fees, expenses, or tax effects and are shown solely to compare The Fairholme Funds performance to that of unmanaged and diversified indices of securities. As of the prospectus dated March 30, 2022, the gross expense ratio for The Fairholme Fund is 1.00%. Shareholders are also cautioned that it is possible that some securities mentioned in this discussion may no longer be held by The Fairholme Fund subsequent to the end of the fiscal period, and that The Fairholme Fund may have made new investments that are not yet required to be disclosed. It is The Fairholme Funds general policy not to disclose portfolio holdings other than when required by relevant law or regulation. Portfolio holdings are subject to change without notice and are not a recommendation to buy or sell any security.
Not all The Fairholme Fund portfolio dispositions or additions are material, and, while The Fairholme Fund and the Manager have long-term objectives, it is possible that a security sold or purchased in one period will be purchased or sold in a subsequent period. Generally, the Manager determines to buy and sell based on its estimates of the, respectively, relative intrinsic values and the Managers assessment of certain attractive characteristics of a company, general market conditions and expected future returns of an investment.
The Manager invests The Fairholme Funds assets in securities to the extent the Manager finds reasonable investment opportunities in accordance with The Fairholme Funds investment strategies, policies and restrictions, as stated in The Fairholme Funds Prospectus and may invest a significant portion of The Fairholme Funds assets in cash and cash equivalents. The Manager views liquidity as a strategic advantage. Due to the continued uncertainty caused by the spread of COVID-19 and the corresponding market volatility and governmental responses to it, during the period ended May 31, 2022, the Manager
4
THE FAIRHOLME FUND
MANAGEMENT DISCUSSION & ANALYSIS (continued)
For the six months ended May 31, 2022
has continued to hold U.S. Treasury Bills as part of The Fairholme Funds investments. At May 31, 2022, cash and cash equivalents (consisting of cash, deposit accounts, U.S. Treasury Bills, and Treasury money-market funds) represented 9.6% of The Fairholme Funds total assets. Since inception, The Fairholme Fund has held varying levels of cash and cash equivalents for periods without, in the Managers view, negatively influencing performance.
The Fairholme Fund is considered to be non-diversified under the Investment Company Act of 1940. Accordingly, The Fairholme Fund can invest a greater percentage of its assets in fewer securities than a diversified fund, and can invest a significant portion of cash and liquid assets held by The Fairholme Fund in one or more higher-risk securities at any time, including periods when a market is weak or a particular security declines sharply. The Fairholme Fund may also have a greater percentage of assets invested in a particular sector than a diversified fund, exposing The Fairholme Fund to the risk of an unanticipated event or condition and risks affecting a single company, sector or security.
The commentary below provides details of The Fairholme Funds portfolio holdings by issuer and sector, as well as reporting the most significant positive and negative performance by investment for the six months ended May 31, 2022.
The most significant gains in The Fairholme Funds portfolio were related to positive developments in the Real Estate Management & Development, Oil & Gas Storage & Transportation, and Steel sectors. Investments in the Metals & Mining, Mortgage Finance, and Semiconductors sectors saw some losses during the six months ended May 31, 2022.
The Manager made no changes to the core investment strategies and techniques it employed during the six months ended May 31, 2022.
For the six months ended May 31, 2022, The Fairholme Fund investment that contributed to performance were The St. Joe Co., Enterprise Products Partners, LP., and Commercial Metals Co. The detractors to performance during the period were Imperial Metals Corp., Federal Home Loan Mortgage Corp. (Freddie), Intel Corp., and Federal National Mortgage Association (Fannie.) The following charts show the top holdings by issuer and sector in descending order of percentage of net assets as of May 31, 2022.
The Fairholme Fund Top Holdings by Issuer* (% of Net Assets) |
The Fairholme Fund Top Sectors (% of Net Assets) |
|||||||||
The St. Joe Co. |
78.1% | Real Estate Management & Development | 78.1% | |||||||
Enterprise Products Partners LP |
4.2% | Cash and Cash Equivalents** | 9.6% | |||||||
Commercial Metals Co. |
3.1% | Oil & Gas Storage & Transportation | 4.2% | |||||||
Imperial Metals Corp. |
1.4% | Steel | 3.1% | |||||||
Federal Home Loan Mortgage Corp. |
1.3% | Mortgage Finance | 2.5% | |||||||
Federal National Mortgage Association |
1.2% | Metals & Mining | 1.4% | |||||||
Intel Corp. |
1.0% | Semiconductors | 1.0% | |||||||
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90.3% | 99.9% | |||||||||
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* | Excludes cash, U.S. Treasury Bills and Treasury money market funds. |
** | Includes cash, U.S. Treasury Bills and Treasury money market funds. |
The Manager views the ability to focus on fewer investments than a diversified fund as a strategic advantage. However, such a strategy may negatively influence long-term performance.
A more complete discussion and description of the principal risks of investing in The Fairholme Fund can be found in its Prospectus and Statement of Additional Information.
5
THE FAIRHOLME FUND
MANAGEMENT DISCUSSION & ANALYSIS (continued)
For the six months ended May 31, 2022
Large cash inflows or outflows may adversely affect The Fairholme Funds performance. Such flows are monitored and actions deemed appropriate by the Manager are contemplated for when such flows could negatively impact performance.
Since inception, The Fairholme Fund has been advised by the Manager. Bruce Berkowitz, both the Chief Investment Officer of the Manager and Chairman of The Fairholme Funds Board of Directors (the Board or the Directors), and his affiliates beneficially own an aggregate 13,317,942 shares of The Fairholme Fund, at May 31, 2022. While there is no requirement that Mr. Berkowitz own shares of The Fairholme Fund, such holdings are believed to help align the interests of the Manager with the interests of the shareholders.
The Board, including the Independent Directors, continues to believe that it is in the best interests of The Fairholme Fund to have Mr. Berkowitz serve as Chairman of the Board given: his long-term relative performance; his experience, commitment, and significant personal investments in The Fairholme Fund; the present composition of the Board; and current rules and regulations. A Director and Officers of The Fairholme Fund are also Officers of the Manager. Nevertheless, at May 31, 2022, a majority of Directors were independent of the Manager, no stock option or restricted stock plans exist, Officers received no direct compensation from The Fairholme Fund, and the Director affiliated with the Manager received no compensation for being a Director.
For more complete information about The Fairholme Fund, or to obtain a current Prospectus, please visit www.fairholmefunds. com or call Shareholder Services at (866) 202-2263.
6
EXPENSE EXAMPLE
For the Six Month Period from December 1, 2021 through May 31, 2022 (unaudited)
As a shareholder of The Fairholme Fund, you incur two types of costs: (1) transaction costs including, but not limited to, transaction fees at some broker-dealers, custodial fees for retirement accounts, redemption fees (on The Fairholme Fund shares redeemed or exchanged within 60 days of purchase), and wire transfer fees; and (2) ongoing costs including, but not limited to, management fees paid to the Manager. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in The Fairholme Fund and to compare these costs with the ongoing costs of investing in other mutual fund.
These examples are based on an investment of $1,000 invested in The Fairholme Fund at December 1, 2021, and held for the entire six month period ending May 31, 2022.
Actual Expenses
The first line of the tables below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you had invested at the beginning of the period, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading Expenses Paid During the Period to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the tables below provides information about hypothetical account values and hypothetical expenses based on The Fairholme Funds actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not The Fairholme Funds actual return for the period presented. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses that you paid for the period presented. However, you may use this information to compare ongoing costs of investing in The Fairholme Fund with the ongoing costs of investing in other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees (if any), or other direct costs. Therefore, the second line of the tables is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your total costs would be higher.
Beginning Account Value December 1, 2021 |
Ending Account Value May 31, 2022 |
Annualized Expense Ratio* |
Expenses Paid During the Period December 1, 2021 Through May 31, 2022** |
|||||||||||||
The Fairholme Fund |
||||||||||||||||
Actual |
$1,000.00 | $1,052.20 | 0.80% | $4.09 | ||||||||||||
Hypothetical |
||||||||||||||||
(5% return before expenses) |
$1,000.00 | $1,020.94 | 0.80% | $4.03 |
* | Effective January 1, 2018, the Manager has agreed to waive, on a voluntary basis, a portion of the management fee of The Fairholme Fund to the extent necessary to limit the management fee paid to the Manager by The Fairholme Fund to an annual rate of 0.80% of The Fairholme Funds daily average net asset value. This undertaking may be terminated by the Manager upon 60 days written notice to The Fairholme Fund. |
** | Expenses are equal to The Fairholme Funds annualized expense ratio, multiplied by the average account value over the period, multiplied by 182 days/ 365 days (to reflect the one-half year period). |
7
SCHEDULE OF INVESTMENTS
May 31, 2022 (Unaudited)
Shares |
Value | |||||||
DOMESTIC EQUITY SECURITIES 86.4% |
| |||||||
OIL & GAS STORAGE & TRANSPORTATION 4.2% |
| |||||||
2,058,100 | Enterprise Products Partners LP |
$ | 56,433,102 | |||||
|
|
|||||||
REAL ESTATE MANAGEMENT & DEVELOPMENT 78.1% |
| |||||||
20,921,524 | The St. Joe Co.(a) |
1,056,327,747 | ||||||
|
|
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SEMICONDUCTORS 1.0% | ||||||||
298,300 | Intel Corp. |
13,250,486 | ||||||
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|
|||||||
STEEL 3.1% | ||||||||
1,051,700 | Commercial Metals Co. |
41,784,041 | ||||||
|
|
|||||||
|
TOTAL DOMESTIC EQUITY SECURITIES |
1,167,795,376 | ||||||
|
|
|||||||
FOREIGN EQUITY SECURITIES 1.4% |
| |||||||
CANADA 1.4% | ||||||||
METALS & MINING 1.4% | ||||||||
7,519,013 | Imperial Metals Corp.(a)(b) |
18,428,225 | ||||||
|
|
|||||||
|
TOTAL FOREIGN EQUITY SECURITIES |
18,428,225 | ||||||
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|
|||||||
DOMESTIC PREFERRED EQUITY SECURITIES 2.5% |
| |||||||
MORTGAGE FINANCE 2.5% |
| |||||||
5,243,913 | Federal Home Loan Mortgage Corp. 7.875%, Series Z(b)(c) |
17,934,183 | ||||||
4,371,977 | Federal National Mortgage Association 7.750%, |
16,001,436 | ||||||
|
|
|||||||
33,935,619 | ||||||||
|
|
|||||||
|
TOTAL DOMESTIC PREFERRED EQUITY |
33,935,619 | ||||||
|
|
Shares |
Value | |||||||
RIGHTS 0.0% | ||||||||
CANADA 0.0% | ||||||||
METALS & MINING 0.0% |
| |||||||
7,519,013 | Imperial Metals Corp., |
$ | 89,169 | |||||
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|
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TOTAL RIGHTS (COST $0) |
89,169 | |||||||
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Principal |
||||||||
U.S. GOVERNMENT OBLIGATIONS 8.1% |
| |||||||
U.S. Treasury Bills |
||||||||
$ 50,000,000 | 0.120%, 06/16/2022(d) |
49,987,838 | ||||||
25,000,000 | 0.168%, 09/08/2022(d) |
24,922,442 | ||||||
35,000,000 | 2.125%, 05/18/2023(d) |
34,316,021 | ||||||
|
|
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|
TOTAL U.S. GOVERNMENT |
109,226,301 | ||||||
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|
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Shares |
||||||||
MONEY MARKET FUNDS 1.5% |
| |||||||
20,574,106 | Fidelity Investments Money Market Treasury Portfolio - Class I, |
20,574,106 | ||||||
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TOTAL MONEY MARKET FUNDS |
20,574,106 | ||||||
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|
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TOTAL INVESTMENTS 99.9% |
1,350,048,796 | ||||||
OTHER ASSETS IN EXCESS OF LIABILITIES 0.1% |
1,287,719 | |||||||
|
|
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NET ASSETS 100.0% |
$ | 1,351,336,515 | ||||||
|
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(a) | Affiliated Company. See Note 7. |
(b) | Non-income producing security. |
(c) | Variable rate security. Rates shown are the effective rates as of May 31, 2022. |
(d) | Rates shown are the effective yields based on the purchase price. The calculation assumes the security is held to maturity. |
(e) | Annualized based on the 1-day yield as of May 31, 2022. |
The accompanying notes are an integral part of the financial statements
8
STATEMENT OF ASSETS & LIABILITIES
May 31, 2022 (unaudited)
Assets |
||||
Investments, at Fair Value: |
||||
Unaffiliated Issuers (Cost $263,551,340) |
$ | 275,203,656 | ||
Affiliated Issuers (Cost $615,324,524) |
1,074,845,141 | |||
Dividends and Interest Receivable |
2,214,776 | |||
Receivable for Capital Shares Sold |
345,074 | |||
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|
| ||
Total Assets |
1,352,608,647 | |||
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Liabilities |
||||
Accrued Management Fees |
902,941 | |||
Payable for Capital Shares Redeemed |
369,191 | |||
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Total Liabilities |
1,272,132 | |||
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NET ASSETS |
$ | 1,351,336,515 | ||
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|
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Net Assets consist of: |
||||
Paid-In Capital |
$ | 1,718,499,137 | ||
Total Accumulated Losses |
(367,162,622 | ) | ||
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NET ASSETS |
$ | 1,351,336,515 | ||
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|
| ||
Shares of Common Stock Outstanding* ($0.0001 par value) |
43,840,379 | |||
|
|
| ||
Net Asset Value, Offering and Redemption Price Per Share |
$ | 30.82 | ||
|
|
|
* 700,000,000 shares authorized in total.
The accompanying notes are an integral part of the financial statements.
9
STATEMENT OF OPERATIONS (Unaudited)
For the Six Months Ended May 31, 2022 |
||||||
Investment Income |
||||||
Interest Unaffiliated Issuers |
$ | 98,279 | ||||
Dividends Unaffiliated Issuers |
503,112 | |||||
Dividends Affiliated Issuers |
4,232,915 | |||||
|
|
| ||||
Total Investment Income |
4,834,306 | |||||
|
|
| ||||
Expenses |
||||||
Management Fees |
6,988,089 | |||||
|
|
| ||||
Total Expenses |
6,988,089 | |||||
|
|
| ||||
Less: Voluntary Reduction of Management Fees |
(1,397,334 | ) | ||||
|
|
| ||||
Net Expenses |
5,590,755 | |||||
|
|
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Net Investment Loss |
(756,449 | ) | ||||
|
|
| ||||
Realized and Unrealized Gain on Investments and Foreign Currency Related Transactions |
||||||
Net Realized Gain on: |
||||||
Investments - Unaffiliated Issuers |
140,603 | |||||
Investments - Affiliated Issuers |
12,771,319 | |||||
Net Change in Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Related Translations: |
||||||
Unaffiliated Investments |
18,822,401 | |||||
Affiliated Investments |
42,290,645 | |||||
|
|
| ||||
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Related Transactions |
74,024,968 | |||||
|
|
| ||||
NET INCREASE IN NET ASSETS FROM OPERATIONS |
$ | 73,268,519 | ||||
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|
|
The accompanying notes are an integral part of the financial statements.
10
STATEMENTS OF CHANGES IN NET ASSETS
For the Six Months Ended May 31, 2022 (Unaudited) |
For the Fiscal Year Ended November 30, 2021 | |||||||||||||||
CHANGES IN NET ASSETS |
||||||||||||||||
From Operations |
||||||||||||||||
Net Investment Loss |
$ | (756,449 | ) | $ | (3,439,596 | ) | ||||||||||
Net Realized Gain (Loss) on Investments and Foreign Currency Related Transactions |
12,911,922 | (98,273,605 | ) | |||||||||||||
Net Change in Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Related Translations |
61,113,046 | 298,903,633 | ||||||||||||||
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|
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| |||||||||||
Net Increase in Net Assets from Operations |
73,268,519 | 197,190,432 | ||||||||||||||
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|
| |||||||||||
From Capital Share Transactions |
||||||||||||||||
Proceeds from Sale of Shares |
112,509,853 | 28,656,319 | ||||||||||||||
Redemption Fees |
35,145 | 41,445 | ||||||||||||||
Cost of Shares Redeemed |
(182,795,225 | ) | (146,780,920 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||
Net Decrease in Net Assets from Shareholder Activity |
(70,250,227 | ) | (118,083,156 | ) | ||||||||||||
|
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|
|
|
| |||||||||||
NET ASSETS |
||||||||||||||||
Net Increase in Net Assets |
3,018,292 | 79,107,276 | ||||||||||||||
Net Assets at Beginning of Period |
1,348,318,223 | 1,269,210,947 | ||||||||||||||
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| |||||||||||
Net Assets at End of Period |
$ | 1,351,336,515 | $ | 1,348,318,223 | ||||||||||||
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SHARES TRANSACTIONS |
||||||||||||||||
Issued |
3,850,436 | 1,002,528 | ||||||||||||||
Redeemed |
(6,045,558 | ) | (5,027,670 | ) | ||||||||||||
|
|
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|
|
| |||||||||||
Net Decrease in Shares |
(2,195,122 | ) | (4,025,142 | ) | ||||||||||||
Shares Outstanding at Beginning of Period |
46,035,501 | 50,060,643 | ||||||||||||||
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| |||||||||||
Shares Outstanding at End of Period |
43,840,379 | 46,035,501 | ||||||||||||||
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The accompanying notes are an integral part of the financial statements.
11
FINANCIAL HIGHLIGHTS
For the Fiscal Year Ended November 30, |
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For the Six Months Ended May 31, 2022 (Unaudited) |
2021 |
2020 |
2019 |
2018 |
2017 |
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PER SHARE OPERATING PERFORMANCE |
||||||||||||||||||||||||
NET ASSET VALUE, BEGINNING OF PERIOD |
$29.29 | $25.35 | $19.19 | $16.05 | $19.10 | $24.26 | ||||||||||||||||||
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Investment Operations |
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Net Investment Income (Loss)(1) |
(0.02 | ) | (0.07 | ) | (0.08 | ) | 0.16 | 0.29 | 0.23 | |||||||||||||||
Net Realized and Unrealized Gain (Loss) on Investments |
1.55 | 4.01 | 6.41 | 3.32 | (3.08 | ) | (3.81 | ) | ||||||||||||||||
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Total from Investment Operations |
1.53 | 3.94 | 6.33 | 3.48 | (2.79 | ) | (3.58 | ) | ||||||||||||||||
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Dividends and Distributions |
||||||||||||||||||||||||
From Net Investment Income |
| | (0.17 | ) | (0.34 | ) | (0.26 | ) | (0.40 | ) | ||||||||||||||
From Realized Capital Gains |
| | | | | (1.18 | ) | |||||||||||||||||
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Total Dividends and Distributions |
| | (0.17 | ) | (0.34 | ) | (0.26 | ) | (1.58 | ) | ||||||||||||||
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Redemption Fees(1) |
0.00 | (2) | 0.00 | (2) | 0.00 | (2) | 0.00 | (2) | 0.00 | (2) | 0.00 | (2) | ||||||||||||
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NET ASSET VALUE, END OF PERIOD |
$30.82 | $29.29 | $25.35 | $19.19 | $16.05 | $19.10 | ||||||||||||||||||
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TOTAL RETURN |
5.22 | %(3) | 15.54 | % | 33.19 | % | 22.20 | % | (14.85 | )% | (15.64 | )% | ||||||||||||
Ratio/Supplemental Data |
||||||||||||||||||||||||
Net Assets, End of Period (in 000s) |
$1,351,337 | $1,348,318 | $1,269,211 | $1,056,541 | $1,064,866 | $1,871,480 | ||||||||||||||||||
Ratio of Gross Expenses to Average Net Assets |
1.00 | %(4) | 1.00 | % | 1.01 | %(5) | 1.00 | %(6) | 1.00 | % | 1.02 | %(7) | ||||||||||||
Ratio of Net Expenses to Average Net Assets |
0.80 | %(4)(8) | 0.80 | %(8) | 0.81 | %(5)(8) | 0.80 | %(6)(8) | 0.82 | %(8) | 1.02 | %(7) | ||||||||||||
Ratio of Net Investment Income (Loss) to Average Net Assets |
(0.11 | )%(4) | (0.25 | )% | (0.41 | )% | 0.86 | % | 1.57 | % | 1.14 | % | ||||||||||||
Portfolio Turnover Rate |
1.29 | %(3) | 8.84 | % | 8.18 | % | 8.05 | % | 16.29 | % | 6.57 | % |
(1) | Based on average shares outstanding. |
(2) | Redemption fees represent less than $0.01. |
(3) | Not annualized. |
(4) | Annualized. |
(5) | 0.01% is attributable to legal expenses incurred outside of the 1.00% management fee. |
(6) | Less than 0.01% is attributable to legal expenses incurred outside of the 1.00% management fee. |
(7) | 0.02% is attributable to legal expenses incurred outside of the 1.00% management fee. |
(8) | Effective January 1, 2018, the Manager has agreed to waive, on a voluntary basis, a portion of the management fee of The Fairholme Fund to the extent necessary to limit the management fee paid to the Manager by The Fairholme Fund to an annual rate of 0.80% of the daily average net asset value of The Fairholme Fund. |
The accompanying notes are an integral part of the financial statements.
12
NOTES TO FINANCIAL STATEMENTS
May 31, 2022 (unaudited)
Note 1. Organization
Fairholme Funds, Inc. (the Company), a Maryland corporation, is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company. The Companys Articles of Incorporation permit the Board of Directors of the Company (the Board or the Directors) to issue 1,100,000,000 shares of common stock at $.0001 par value. 700,000,000 shares have been allocated to The Fairholme Fund (The Fairholme Fund). The Fairholme Fund is a non-diversified fund. The Fairholme Fund may have a greater percentage of its assets invested in particular securities than a diversified fund, exposing The Fairholme Fund to the risk of unanticipated industry conditions as well as risks specific to a single company or the securities of a single company. The Fairholme Fund has different objectives, capitalizations, and considerations that may or may not lead to differing compositions of issuers, securities within an issuer, and cash levels within The Fairholme Fund. The Board has the power to designate one or more separate and distinct series and/or classes of shares of common stock and to classify or reclassify any unissued shares with respect to such series.
The Fairholme Funds investment objective is to provide long-term growth of capital. Under normal circumstances, The Fairholme Fund seeks to achieve its investment objective by investing in a focused portfolio of equity and fixed-income securities. The proportion of The Fairholme Funds assets invested in each type of asset class will vary from time to time based upon Fairholme Capital Management, L.L.C.s (the Manager) assessment of general market and economic conditions. The Fairholme Fund may invest in, and may shift frequently among, the asset classes and market sectors. The equity securities in which The Fairholme Fund may invest include common and preferred stock (including convertible preferred stock), interests in publicly traded partnerships, business trust shares, interests in real estate investment trusts (REITs), rights and warrants to subscribe for the purchase of equity securities, and depository receipts. The Fairholme Fund may invest in equity securities without regard to the jurisdictions in which the issuers of the securities are organized or situated and without regard to the market capitalizations or sectors of such issuers. The fixed-income securities in which The Fairholme Fund may invest include U.S. corporate debt securities, non-U.S. corporate debt securities, bank debt (including bank loans and participations), U.S. government and agency debt securities (including U.S. Treasury bills), short-term debt obligations of foreign governments, and foreign money market instruments. Except for its investments in short-term debt obligations of foreign governments, The Fairholme Fund may invest in fixed-income securities regardless of maturity or the rating of the issuer of the security. The Fairholme Fund may also invest in special situations to achieve its objective. Special situation investments may include equity securities or fixed-income securities, such as corporate debt, which may be in a distressed position as a result of economic or company specific developments. Although The Fairholme Fund normally holds a focused portfolio of equity and fixed-income securities, The Fairholme Fund is not required to be fully invested in such securities and may maintain a significant portion of its total assets in cash and securities generally considered to be cash equivalents. The Manager serves as investment adviser to The Fairholme Fund.
There is no guarantee that The Fairholme Fund will meet its respective objectives.
Note 2. Significant Accounting Policies
As an investment company, The Fairholme Fund follows the investment company accounting and reporting guidance, which is part of U.S. generally accepted accounting principles (U.S. GAAP). The Fairholme Funds investments are reported at fair value as defined by U.S. GAAP. The Fairholme Fund calculates its net asset value as soon as practicable following the close of regular trading on the New York Stock Exchange (currently 4:00 p.m. Eastern Time) on each day the New York Stock Exchange is open.
A description of the valuation techniques applied to The Fairholme Funds securities measured at fair value on a recurring basis follows:
Security Valuation:
Equity securities (common and preferred stocks): Securities traded on a national securities exchange or reported on the NASDAQ national market are generally valued at the official closing price, or at the last reported sale price on the exchange or market on which the securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. To the extent these securities are actively traded and valuation adjustments are not applied,
13
THE FAIRHOLME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
they are classified in Level 1 of the fair value hierarchy. If these securities are not actively traded, they are classified in Level 2. Subject to the oversight of the Board, the Manager may determine the fair valuation of a security when market quotations are insufficient or not readily available, when securities are determined to be illiquid or restricted, or when in the judgment of the Manager the prices or values available do not represent the fair value of the instrument. In these situations, if the inputs are observable, the valuation will be classified in Level 2 of the fair value hierarchy, otherwise they would be classified in Level 3.
Fixed-income securities (U.S. government obligations, corporate bonds, convertible bonds, and asset backed securities): The fair value of fixed-income securities is determined using market quotations when readily available, but may also be estimated by various methods when no such market quotations exist and when the Manager believes these other methods reflect the fair value of such securities. These methods may consider recently executed transactions in securities of the issuer or comparable issuers and market price valuations from independent pricing services and/or brokers (where observable). Where the Manager deems it appropriate to do so (such as when independent prices are unavailable or not deemed to be representative of fair value) fixed income securities will be fair valued in good faith following consideration by, and conclusion of, the Managers Valuation and Liquidity Risk Management Committee. As of May 31, 2022, fixed-income securities are valued by the Manager utilizing observable market prices on the day of valuation or the average bid of independent broker/dealer quotes and/or the average of valuations from independent pricing services. Although fixed-income securities are classified in Level 2 of the fair value hierarchy at May 31, 2022, in instances where significant unobservable inputs are used, they would be classified in Level 3.
Open-end mutual fund: Investments in open-end mutual fund including money market fund are valued at their closing net asset value each business day and are classified in Level 1 of the fair value hierarchy.
Short-term securities: Investments in securities with maturities of less than sixty days when acquired, or which subsequently are within sixty days of maturity, shall be valued at prices supplied by an independent pricing source or by one of the Funds pricing agents based on broker or dealer supplied valuations or matrix pricing. To the extent the inputs are observable and timely, the values would be classified in Level 2 of the fair value hierarchy.
The Fairholme Fund uses several recognized industry third-party pricing services (TPPS), which are approved by the Board and unaffiliated with the Manager, to provide prices for some of The Fairholme Funds securities. The Fairholme Fund also uses other independent market trade data sources (such as TRACE, the FINRA developed mandatory reporting of over-the-counter secondary market transactions), as well as broker quotes provided by market makers. The data within these feeds is ultimately sourced from major stock exchanges and trading systems where these securities trade. If a price obtained from the pricing source is deemed unreliable, it may be discarded and/or challenged. In these cases the pricing decision is made by reference to the reliable market data from the other market data sources.
Subject to the oversight of the Board, the Manager may determine the fair valuation of a security when market quotations are insufficient or not readily available, when securities are determined to be illiquid or restricted, or when in the judgment of the Manager the prices or values available do not represent the fair value of the instrument. Factors which may cause the Manager to make such a judgment include the following: (a) only a bid price or an asked price is available; (b) the spread between bid and asked prices is substantial; (c) the liquidity of the securities; (d) the frequency of sales; (e) the thinness of the market; (f) the size of reported trades; (g) actions of the securities markets, such as the suspension or limitation of trading; and (h) local market closures. Among the factors to be considered to fair value a security are recent prices of comparable securities that are publicly traded, reliable prices of securities not publicly traded, the use of valuation models, current analyst reports, valuing the income or cash flow of the issuer, or cost if the preceding factors do not apply. The circumstances of fair valued securities are frequently monitored to determine if fair valuation measures continue to apply.
The Manager reports quarterly to the Board the results of the application of fair valuation policies and procedures.
14
THE FAIRHOLME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
The inputs and valuation techniques used to measure fair value of The Fairholme Funds investments are summarized into three levels as described in the hierarchy below:
|
Level 1 |
quoted prices in active markets for identical securities; | ||
|
Level 2 |
other significant observable inputs (including quoted prices for similar securities, quoted prices in inactive markets for identical securities, interest rates, prepayment speeds, credit risk, etc.); and | ||
|
Level 3 |
significant unobservable inputs (including the Managers determination as to the fair value of investments). |
The inputs or methodology used for valuing investments are not necessarily an indication of the level of risk associated with investing in those investments. The summary of The Fairholme Funds investments by inputs used to value The Fairholme Funds investments as of May 31, 2022, is as follows:
Valuation Inputs | ||||||||||||||||||||
Level 1 - Quoted Prices |
Level 2 - Other Significant Observable Inputs |
Level 3 - Significant Observable Inputs |
|
Total Fair Value at 05/31/22 |
||||||||||||||||
THE FAIRHOLME FUND |
||||||||||||||||||||
ASSETS: |
||||||||||||||||||||
INVESTMENTS (Fair Value): |
||||||||||||||||||||
Domestic Equity Securities* |
$ | 1,167,795,376 | $ | | $ | | $ | 1,167,795,376 | ||||||||||||
Foreign Equity Securities* |
18,428,225 | | | 18,428,225 | ||||||||||||||||
Domestic Preferred Equity Securities* |
33,935,619 | | | 33,935,619 | ||||||||||||||||
Rights* |
89,169 | | | 89,169 | ||||||||||||||||
U.S. Government Obligations |
| 109,226,301 | | 109,226,301 | ||||||||||||||||
Money Market Funds |
20,574,106 | | | 20,574,106 | ||||||||||||||||
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|
|
|
|
|
|
|
|||||||||||||
TOTAL INVESTMENTS |
$ | 1,240,822,495 | $ | 109,226,301 | $ | | $ | 1,350,048,796 | ||||||||||||
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|
|
|
|
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|
* | Industry classification for these categories are detailed in the Schedule of Investments. |
There were no Level 3 investments for The Fairholme Fund at May 31, 2022 or November 30, 2021.
Dividends and Distributions: The Fairholme Fund records dividends and distributions to its shareholders on the ex-dividend date. The Fairholme Fund intends to distribute substantially all of its net investment income (if any) as dividends to its respective shareholders on an annual basis in December. The Fairholme Fund intends to distribute any net long-term capital gains and any net short-term capital gains at least once a year. If the total dividends and distributions made in any tax year exceeds net investment income and accumulated realized capital gains, a portion of the total distribution may be treated as a tax return of capital.
Foreign Currency Translation: The books and records of The Fairholme Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (i) fair value of investment securities, assets, and liabilities at the current rate of exchange; and (ii) purchases and sales of investment securities, income, and expenses at the relevant rates of exchange prevailing on the respective dates of such transactions. The Fairholme Fund does not isolate that portion of gains and losses on investment securities which is due to changes in the foreign exchange rates from that which is due to changes in the market prices of such securities.
Estimates: The preparation of financial statements in conformity with U.S. GAAP requires The Fairholme Fund to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reported period. Actual results could differ from those estimates.
15
THE FAIRHOLME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
Redemption Fee: The Fairholme Fund assess a 2% fee on the proceeds of The Fairholme Fund shares that are redeemed or exchanged within 60 days of their purchase. The redemption fee is paid to The Fairholme Fund as applicable, for the benefit of remaining shareholders and is recorded as paid-in capital. The redemption fees retained by The Fairholme Fund during the six months ended May 31, 2022 and the year ended November 30, 2021, amounted to $35,145 and $41,445, respectively.
Other: The Fairholme Fund accounts for security transactions on the trade date for financial statement purposes. The specific identification method is used for determining gains or losses for financial statements and income tax purposes. Dividend income is recorded on the ex-dividend date net of foreign taxes withheld where recovery is uncertain and interest income is recorded on an accrual basis. Discounts and premiums on securities purchased are amortized over the life of the respective securities using the effective yield method. Securities denominated in currencies other than U.S. dollars are subject to changes in value due to fluctuation in exchange rates. The Fairholme Fund may invest in countries that require governmental approval for the repatriation of investment income, capital, or the proceeds of sales of securities by foreign investors. In addition, if there is deterioration in a countrys balance of payments or for other reasons, a country may impose temporary restrictions on foreign capital remittances abroad.
The Fairholme Fund paid commissions and other brokerage fees during the period.
Note 3. Related Party Transactions
The Manager is a Delaware limited liability company and is registered with the SEC as an investment adviser. The Managers principal business is to provide investment management and advisory services to individuals, corporations, and other institutions throughout the world. Pursuant to an Investment Management Agreement, The Fairholme Fund pays a management fee to the Manager for its provision of investment advisory and operating services to The Fairholme Fund. Subject to applicable waivers or limitations, the management fee is paid at an annual rate equal to 1.00% of the daily average net assets of The Fairholme Fund. Effective January 1, 2018, the Manager has agreed to waive, on a voluntary basis, a portion of the management fees of The Fairholme Fund to the extent necessary to limit the management fee of The Fairholme Fund to the annual rate of 0.80% of The Fairholme Funds daily average net asset value (Undertaking). This Undertaking may be terminated by the Manager upon 60 days written notice to The Fairholme Fund. The Manager is not responsible pursuant to the Investment Management Agreement for paying The Fairholme Funds expenses for the following services: transfer agency, fund accounting, fund administration, custody, legal, audit, compliance, directors fees, call center, fulfillment, travel, insurance, rent, printing, postage and other office supplies. The Manager is not responsible for paying for the following costs and expenses of The Fairholme Fund: commissions, brokerage fees, issue and transfer taxes, and other costs chargeable to The Fairholme Fund in connection with securities transactions or in connection with securities owned by The Fairholme Fund, taxes, interest, acquired fund fees and related expenses, expenses in connection with litigation by or against The Fairholme Fund, and any other extraordinary expenses.
The Manager earned, after the voluntary reduction of the management fees, $5,590,755, from The Fairholme Fund for its services during the six months ended May 31, 2022.
Bruce Berkowitz, both the Chief Investment Officer of the Manager and Chairman of The Fairholme Funds Board, and his affiliates beneficially own an aggregate 13,317,942 shares of The Fairholme Fund at May 31, 2022.
A Director and Officers of The Fairholme Fund are also Officers of the Manager or its affiliates.
16
THE FAIRHOLME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
Note 4. Investments
For the six months ended May 31, 2022, aggregated purchases and sales of investment securities other than short-term investments and U.S. government obligations were as follows:
Purchases | Sales | |||||||
The Fairholme Fund |
$ | 16,353,717 | $ | 45,870,422 |
Note 5. Tax Matters
Federal Income Taxes: The Fairholme Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. By so qualifying, The Fairholme Fund will not be subject to federal income taxes to the extent that it distributes all of its net investment income and any realized capital gains.
For U.S. federal income tax purposes, the cost of securities owned, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) of investments at May 31, 2022, were as follows:
Cost | Gross Unrealized Appreciation |
Gross Unrealized Depreciation |
Net Unrealized Appreciation/ (Depreciation) | |||||||||||||
The Fairholme Fund |
$880,283,709 | $527,779,298 | $(58,014,211 | ) | $469,765,087 |
The difference between book basis and tax basis for The Fairholme Fund net unrealized depreciation is attributable to the tax deferral of losses on wash sales and capitalized cost.
The Fairholme Funds tax basis capital gains are determined only at the end of each fiscal year. Therefore the components of distributable earnings will be included in the Annual Report for the fiscal year ended November 30, 2022
The Fairholme Fund is permitted to carry forward for an unlimited period capital losses incurred to reduce future required distributions of net capital gains to shareholders. Capital losses that are carried forward will retain their character as either short-term or long-term capital losses. As of November 30, 2021, net short-term and long-term capital loss carryforwards were as follows:
The Fairholme Fund |
||||
Short-term capital loss carryforward |
$ | |||
Long-term capital loss carryforward |
846,267,428 | |||
|
|
|||
Total |
$846,267,428 | |||
|
|
The Manager has analyzed The Fairholme Funds tax positions taken on tax returns for all open tax years (current and prior three tax years) and has concluded that there are no uncertain tax positions that require recognition of a tax liability. The Fairholme Funds federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired (the current year and prior three years) are subject to examination by the Internal Revenue Service and state departments of revenue. Additionally, The Fairholme Fund is not aware of any tax position for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months.
Note 6. Dividends and Distributions to Shareholders
Ordinary income and capital gain distributions are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP.
17
THE FAIRHOLME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
The tax character of dividends and distributions paid by The Fairholme Fund were as follows:
The Fairholme Fund | ||||||||
For the Six Months Ended May 31, 2022 |
For the Fiscal Year Ended November 30, 2021 |
|||||||
Dividends and Distributions paid from: |
||||||||
Ordinary Income |
$ | $ | ||||||
|
|
|
|
Note 7. Transactions in Shares of Affiliates
Portfolio companies in which The Fairholme Fund owns 5% or more of the outstanding voting securities of the issuer are considered affiliates of The Fairholme Fund. The aggregate fair value of all securities of affiliates held by The Fairholme Fund as of May 31, 2022 amounted to $1,074,845,141, representing approximately 79.54% of The Fairholme Fund net assets.
Transactions in The Fairholme Fund during the six months year ended May 31, 2022, in which the issuer of the security was an affiliate are as follows:
November 30, 2021 | Gross Additions | Gross Deductions | May 31, 2022 | |||||||||||||||||||||||||||||
Shares/ Par Value |
Shares/ Par Value |
Shares/ Par Value |
Shares/ Par Value |
Fair Value | Realized Gain (Loss) |
Investment Income |
Change in Unrealized Appreciation/ Depreciation |
|||||||||||||||||||||||||
Imperial Metals Corp. |
7,519,013 | | | 7,519,013 | $ | 18,428,225 | $ | | $ | | $ | (1,407,444) | ||||||||||||||||||||
Imperial Metals Corp., Expire 06/24/2022 |
| 7,519,013 | | 7,519,013 | 89,169 | | | 89,169 | ||||||||||||||||||||||||
The St. Joe Co. |
21,539,224 | | 617,700 | 20,921,524 | 1,056,327,747 | 12,771,319 | 4,232,915 | 43,608,920 | ||||||||||||||||||||||||
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|
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|
|
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|
|
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Total |
$ | 1,074,845,141 | $ | 12,771,319 | $ | 4,232,915 | $ | 42,290,645 | ||||||||||||||||||||||||
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|
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Note 8. Indemnifications
Under the Companys organizational documents, its Officers and Directors are indemnified against certain liabilities arising out of the performance of their duties to The Fairholme Fund. In the normal course of business the Company or The Fairholme Fund enters into contracts that contain a variety of representations and customary indemnifications. The Fairholme Funds maximum exposure under these arrangements is unknown as this would involve future claims that may be made against The Fairholme Fund that have not yet occurred. However, based on its experience to date, The Fairholme Fund expects the risk of loss to be remote.
Note 9. Legal-Proceedings
On April 17, 2019, Sears Holdings Corporation, Sears Roebuck and Co., Sears Development Co., Kmart Corporation and Kmart of Washington LLC commenced an adversary proceeding in the United States Bankruptcy Court for the Southern District of New York against Edward Scott Eddie Lampert; ESL Investments, Inc.; RBS Partners LP; CRK Partners LLC; SPE Master I L.P.; ESL Partners L.P.; SPE I Partners L.P.; RBS Investment Management LLC; ESL Institutional Partners L.P.; ESL Investors, L.L.C.; JPP LLC; JPP II LLC; Fairholme Capital Management, L.L.C.; Cesar L. Alvarez; Bruce Berkowitz; Alesia Haas; Kunal Kamlani; Steven Mnuchin; Thomas J. Tisch; Seritage Growth Properties, Inc.; Seritage Growth Properties, L.P.; Seritage KMT Mezzanine Finance LLC; Seritage SRC Mezzanine Finance LLC; Seritage KMT Finance LLC; Seritage SRC Finance LLC; Seritage GS Holdings LLC; Seritage SPS Holdings LLC; and Seritage MS Holdings LLC (the First Action). On November 25, 2019, the plaintiffs filed an amended complaint, adding the Company and other parties not affiliated with the Manager or the Company as additional defendants and asserting new causes of action against the defendants.
18
THE FAIRHOLME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
In the amended complaint, Plaintiffs assert avoidance and other claims against certain defendants, including the Manager, for participation in two Sears corporate transactions: (i) the Lands End spinoff; and (ii) the Seritage rights offering. The avoidance claims against the Manager include, among other things, claims for the avoidance of consideration received from Sears Holdings Corp. in connection with the Lands End spinoff and Seritage rights offering that were allegedly actual and/ or constructive fraudulent transfers. Plaintiffs also assert avoidance and other claims seeking to recover amounts allegedly received by the Company from alleged related-party transactions with Sears and seek to avoid the release received by certain of the defendants, including the Manager and the Company, in connection with the Seritage derivative action. Plaintiffs also assert claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty arising out of certain related-party transactions against certain defendants, including the Manager and Bruce Berkowitz, and seek to subordinate the bankruptcy claims of the Company, the Manager and Bruce Berkowitz.
On February 21, 2020, the Company moved to dismiss all of the claims against it, and all other defendants, including the Manager and Bruce Berkowitz, moved to dismiss all or parts of the compliant against them. The Court held extensive oral argument on the motions to dismiss, which are currently pending before the Court.
On October 15, 2020, Sears Holdings Corp., Sears, Roebuck and Co., and The Official Committee of Unsecured Creditors of Sears Holdings Corporation, et al. commenced a second adversary proceeding in the United States Bankruptcy Court for the Southern District of New York against certain former shareholders of Sears Holdings Corporation that were not named in the First Action (the Second Action). In the Second Action, the plaintiffs assert claims for the avoidance of alleged consideration received in connection with the Lands End spinoff and the Seritage rights offering. Certain defendants in the Second Action have moved to dismiss all claims against them, and the motions to dismiss are currently pending before the Court. On March 15, 2021, the Court consolidated the Second Action into the First Action. Pursuant to Order entered April 6, 2022, the parties have engaged in a mediation which, to date, has not resulted in resolution of the First or Second Actions.
Although the Manager and the Company believe that they have strong defenses to the foregoing complaint and intend to defend themselves vigorously against the allegations in the complaint, neither the Manager nor the Company is in a position to express an opinion about the ultimate outcome of the litigation or the range of potential loss, if any.
Note 10. Subsequent Events
Management has evaluated the impact on The Fairholme Fund of all subsequent events occurring through the date the financial statement was issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statement.
19
ADDITIONAL INFORMATION
May 31, 2022 (unaudited)
Operation and Effectiveness of the Funds Liquidity Risk Management Program (unaudited)
Pursuant to Rule 22e-4 under the Investment Company Act of 1940, The Fairholme Fund has adopted and implemented a liquidity risk management program (the Program) designed to assess and manage the risk that The Fairholme Fund could not meet requests to redeem The Fairholme Fund shares without significant dilution of remaining investors interests in The Fairholme Fund. In assessing, managing and reviewing liquidity risk under the Program, The Fairholme Fund considers a variety of factors, including its investment strategies, portfolio investments, portfolio concentration, cash flow projections, redemption policy and redemption history. In addition, the Program requires The Fairholme Fund to, among other things, classify its investments into specific liquidity categories and monitor compliance with its limit on illiquid investments.
During the one-year period ended November 30, 2021 (the Covered Period), The Fairholme Fund maintained a high level of liquidity and primarily held assets that were highly liquid investments (defined as cash and any investment reasonably expected to be convertible to cash in current market conditions in three business days or less without the conversion to cash significantly changing the market value of the investment). During the Covered Period, there were no liquidity events that materially affected The Fairholme Funds performance or ability to timely meet redemptions without dilution to remaining investors interests in The Fairholme Fund.
The Manager, which the Board has designated to administer the Program, prepared a written report that addressed the operation of the Program and assessed the Programs adequacy and effectiveness of implementation during the Covered Period (the Report). The Board reviewed and accepted the Report, which determined that the Program operated adequately and effectively in managing the liquidity risk of The Fairholme Fund during the Covered Period.
Proxy Voting Policies, Procedures and Records (unaudited)
The Company has adopted policies and procedures that provide guidance and set forth parameters for the voting of proxies relating to securities held in The Fairholme Funds portfolio. A description of these policies and procedures, and records of how The Fairholme Fund voted proxies relating to its portfolio securities during the most recent twelve month period ended June 30, 2021, are available to you upon request and free of charge by writing to the Fairholme Funds, Inc., c/o BNY Mellon Investment Servicing (US) Inc., P.O. Box 9692, Providence, RI, 02940 or by calling Shareholder Services at (866) 202-2263. They may also be obtained by visiting the SEC website at www.sec.gov. The Company shall respond to all shareholder requests for records within three business days of its receipt of such request by first-class mail or other means designed to ensure prompt delivery.
Quarterly Filing (unaudited)
The Company files a complete schedule of The Fairholme Funds portfolio holdings on Form N-PORT for the fiscal quarters ending February 28 (February 29 during leap year) and August 31. The Forms N-PORT are available on the SECs website at www.sec.gov.
20
FAIRHOLME FUNDS
Officers of Fairholme Funds, Inc.
BRUCE R. BERKOWITZ
President
FERNANDO M. FONT
Vice President
WAYNE KELLNER
Treasurer
ERICA K. KAPAHI
Chief Compliance Officer & Secretary
Board of Directors of Fairholme Funds, Inc.
TERRY L. BAXTER
BRUCE R. BERKOWITZ
STEVEN J. GILBERT, Esq.
LEIGH WALTERS, Esq.
Investment Manager
FAIRHOLME CAPITAL MANAGEMENT, L.L.C.
5966 South Dixie Highway, Suite 300, South Miami, FL 33143
Transfer Agent
BNY MELLON INVESTMENT SERVICING (US) INC.
4400 Computer Drive, Westborough, MA 01581-1722
Fund Accountant & Administrator
THE BANK OF NEW YORK MELLON
103 Bellevue Parkway, Wilmington, DE 19809
Custodian
THE BANK OF NEW YORK MELLON
240 Greenwich Street, New York, NY 10286
Independent Registered Public Accounting Firm
DELOITTE & TOUCHE LLP
200 Berkeley Street, Boston, MA 02116
Legal Counsel
SEWARD & KISSEL LLP
901 K Street NW, Washington, DC 20001
THIS REPORT IS PROVIDED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF FAIRHOLME FUNDS, INC. IT IS NOT INTENDED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUNDS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS, WHICH CONTAINS MORE INFORMATION ON FEES, CHARGES AND OTHER EXPENSES AND SHOULD BE READ CAREFULLY BEFORE INVESTING OR SENDING MONEY. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. SHARES OF THE FUNDS ARE DISTRIBUTED BY FORESIDE FUNDS DISTRIBUTORS LLC.
FAIRHOLME
Ignore the crowd.
The Fairholme Focused Income Fund (FOCIX)
Seeking current income
Semi-Annual Report
May 31, 2022
Managed by Fairholme Capital Management
(866) 202-2263 fairholmefunds.com
THE FAIRHOLME FOCUSED INCOME FUND
May 31, 2022
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2
THE FAIRHOLME FOCUSED INCOME FUND
May 31, 2012 May 31, 2022
THE INCOME FUND VS.
THE BLOOMBERG U.S. AGGREGATE BOND INDEX
INITIAL INVESTMENT OF $10,000
The Fairholme Focused Income Fund (The Income Fund) commenced operations on December 31, 2009. The chart above presents the performance of a hypothetical $10,000 investment for up to ten years to the latest semi-annual period ended May 31, 2022.
The following notes pertain to the chart above as well as to the performance table included in the Management Discussion & Analysis Report. Performance information in this report represents past performance and is not a guarantee of future results. The investment return and principal value of an investment in The Income Fund will fluctuate, so that an investors shares when redeemed may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted within. The performance information does not reflect the taxes an investor would pay on distributions from The Income Fund or upon redemption of shares of The Income Fund. Most recent month-end performance and answers to any questions you may have can be obtained by calling Shareholder Services at 1-866-202-2263.
Data for both the Bloomberg U.S. Aggregate Bond Index and The Income Fund are presented assuming all dividends and distributions have been reinvested and do not reflect any taxes that might have been incurred by a shareholder as a result of The Income Fund distributions. The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, and includes Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid adjustable-rate mortgage pass-throughs), asset-backed securities and commercial mortgage-backed securities (agency and non-agency). The Bloomberg U.S. Aggregate Bond Index does not reflect any investment management fees or transaction expenses, nor the effects of taxes, fees, or other charges. It is not possible to invest directly in an index.
3
THE FAIRHOLME FOCUSED INCOME FUND
MANAGEMENT DISCUSSION & ANALYSIS
For the six months ended May 31, 2022
The Income Fund shares outstanding and unaudited net asset value per share (NAV) at May 31, 2022, the end of The Income Funds semi-annual period, and NAVs at other pertinent dates, were as follows:
5/31/2022 | 05/31/2022 | 11/30/2021 | 05/31/2021 | |||||
Shares | NAV | NAV | NAV | |||||
Outstanding | (unaudited) | (audited) | (unaudited) | |||||
The Income Fund |
12,018,130 | $ 11.62 | $ 10.62 | $ 11.17 | ||||
At June 30, 2022, the unaudited NAV of The Income Fund was $10.51. |
Performance figures below are shown for The Income Funds semi-annual period ended May 31, 2022, and do not match calendar year figures for the period ended June 30, 2022, cited in the Portfolio Managers report.
The Income Fund | Since | |||||||||||||||||||
Performance to | Six | One | Five | Ten | Inception | |||||||||||||||
5/31/2022 (Unaudited) |
Months | Year | Years | Years | 12/31/2009 | |||||||||||||||
Cumulative: |
||||||||||||||||||||
The Income Fund |
10.03% | 5.35% | 18.19% | 92.18% | 118.42% | |||||||||||||||
Bloomberg Bond Index |
-9.15% | -8.22% | 6.02% | 18.44% | 39.26% | |||||||||||||||
Annualized: |
||||||||||||||||||||
The Income Fund |
5.35% | 3.40% | 6.75% | 6.50% | ||||||||||||||||
Bloomberg Bond Index |
-8.22% | 1.18% | 1.71% | 2.70% |
For the six months ended May 31, 2022, The Income Fund outperformed the Bloomberg U.S. Aggregate Bond Index (Bloomberg Bond Index) by 19.18 percentage points. Over the last fiscal year, The Income Fund also outperformed the Bloomberg Bond Index by 13.57 percentage points. From inception, The Income Fund outperformed the Bloomberg Bond Index by 3.80 percentage points per annum, or on a cumulative basis, 79.16 percentage points.
Fairholme Capital Management, L.L.C. (the Manager) believes performance over shorter periods is likely to be less meaningful than performance over longer periods. Investors are cautioned not to rely on short-term results. The fact that securities increase or decline in value does not always indicate that the Manager believes these securities to be more or less attractive in fact, the Manager believes that some price increases present selling opportunities and some price declines present buying opportunities.
Further, shareholders should note that the Bloomberg Bond Index is unmanaged index incurring no fees, expenses, or tax effects and are shown solely to compare The Income Funds performance to that of unmanaged and diversified index of securities. As of the prospectus dated March 30, 2022, the gross expense ratio for The Income Fund is 1.00%. Shareholders are also cautioned that it is possible that some securities mentioned in this discussion may no longer be held by The Income Fund subsequent to the end of the fiscal period, and that The Income Fund may have made new investments that are not yet required to be disclosed. It is The Income Funds general policy not to disclose portfolio holdings other than when required by relevant law or regulation. Portfolio holdings are subject to change without notice and are not a recommendation to buy or sell any security.
Not all Fund portfolio dispositions or additions are material, and, while The Income Fund and the Manager have long-term objectives, it is possible that a security sold or purchased in one period will be purchased or sold in a subsequent period. Generally, the Manager determines to buy and sell based on its estimates of the, respectively, relative intrinsic values and the Managers assessment of certain attractive characteristics of a company, general market conditions and expected future returns of an investment.
The Manager invests The Income Funds assets in securities to the extent the Manager finds reasonable investment opportunities in accordance with The Income Funds investment strategies, policies and restrictions, as stated in The Income Funds Prospectus and may invest a significant portion of The Income Funds assets in cash and cash equivalents. The Manager views liquidity as a strategic advantage. Due to the continued uncertainty caused by the spread of COVID-19 and the corresponding market
4
THE FAIRHOLME FOCUSED INCOME FUND
MANAGEMENT DISCUSSION & ANALYSIS (continued)
For the six months ended May 31, 2022
volatility and governmental responses to it, during the period ended May 31, 2022, the Manager has continued to hold U.S. Treasury Bills as part of The Income Funds investments. At May 31, 2022, cash and cash equivalents (consisting of cash, deposit accounts, U.S. Treasury Bills, and Treasury money-market funds) represented 31.8% of The Income Fund total assets. Since inception, The Income Fund has held varying levels of cash and cash equivalents for periods without, in the Managers view, negatively influencing performance.
The Income Fund is considered to be non-diversified under the Investment Company Act of 1940. Accordingly, The Income Fund can invest a greater percentage of its assets in fewer securities than a diversified fund, and can invest a significant portion of cash and liquid assets held by The Income Fund in one or more higher-risk securities at any time, including periods when a market is weak or a particular security declines sharply. The Income Fund may also have a greater percentage of assets invested in a particular sector than a diversified fund, exposing The Income Fund to the risk of an unanticipated event or condition and risks affecting a single company, sector or security.
The commentary below provides details of The Income Funds portfolio holdings by issuer and sector, as well as reporting the most significant positive and negative performance by investment for the six months ended May 31, 2022.
The most significant gains in The Income Funds portfolio were related to positive developments in the Oil & Gas Storage & Transformation and Steel sectors. Investments in Semiconductors and Diversified Banks sectors saw some losses during the six months ended May 31, 2022.
The Manager made no changes to the core investment strategies and techniques it employed during the six months ended May 31, 2022.
For the six months ended May 31, 2022, The Income Fund investments that contributed to performance were Enterprise Products Partners, LP, Commercial Metals Co., and Energy Transfer, LP. The detractors to performance during the period were Intel Corp. and Citigroup, Inc. The following charts show the top holdings by issuer and sector in descending order of percentage of net assets as of May 31, 2022.
The Income Fund |
The Income Fund | |||||||||||||
Top Holdings by Issuer* | Top Sectors | |||||||||||||
(% of Net Assets)
|
(% of Net Assets)
| |||||||||||||
Enterprise Products Partners LP |
25.7% | Cash and Cash Equivalents** |
31.8% | |||||||||||
Commercial Metals Co. |
19.2% | Oil & Gas Storage & Transportation |
25.7% | |||||||||||
Old Republic International Corp. |
6.4% | Steel |
19.2% | |||||||||||
Intel Corp. |
4.5% | Insurance - Property & Casualty |
6.4% | |||||||||||
Citigroup, Inc. |
4.2% | Semiconductors |
4.5% | |||||||||||
DR Horton, Inc. |
3.8% | Diversified Banks |
4.2% | |||||||||||
Walgreens Boots Alliance, Inc. |
2.2% | Homebuilding |
3.8% | |||||||||||
Federal Home Loan Mortgage Corp. |
1.6% | Drug Retail |
2.2% | |||||||||||
Federal National Mortgage Association |
0.5% | Mortgage Finance |
2.1% | |||||||||||
|
|
|
|
|||||||||||
68.1% | 99.9% | |||||||||||||
|
|
|
|
|||||||||||
|
* | Excludes cash, U.S. Treasury Bills and Treasury money market funds. |
** | Includes cash, U.S. Treasury Bills and Treasury money market funds. |
The Manager views the ability to focus on fewer investments than a diversified fund as a strategic advantage. However, such a strategy may negatively influence long-term performance.
5
THE FAIRHOLME FOCUSED INCOME FUND
MANAGEMENT DISCUSSION & ANALYSIS (continued)
For the six months ended May 31, 2022
A more complete discussion and description of the principal risks of investing in The Income Fund can be found in its Prospectus and Statement of Additional Information.
Large cash inflows or outflows may adversely affect The Income Funds performance. Such flows are monitored and actions deemed appropriate by the Manager are contemplated for when such flows could negatively impact performance.
Since inception, The Income Fund has been advised by the Manager. Bruce Berkowitz, both the Chief Investment Officer of the Manager and Chairman of The Income Funds Board of Directors (the Board or the Directors), and his affiliates beneficially own an aggregate 4,584,728, shares of The Income Fund at May 31, 2022. While there is no requirement that Mr. Berkowitz own shares of The Income Fund, such holdings are believed to help align the interests of the Manager with the interests of the shareholders.
The Board, including the Independent Directors, continues to believe that it is in the best interests of The Income Fund to have Mr. Berkowitz serve as Chairman of the Board given: his long-term relative performance; his experience, commitment, and significant personal investments in The Income Fund; the present composition of the Board; and current rules and regulations. A Director and Officers of the Fund are also Officers of the Manager. Nevertheless, at May 31, 2022, a majority of Directors were independent of the Manager, no stock option or restricted stock plans exist, Officers received no direct compensation from The Income Fund, and the Director affiliated with the Manager received no compensation for being a Director.
For more complete information about The Income Fund, or to obtain a current Prospectus, please visit www.fairholmefunds. com or call Shareholder Services at (866) 202-2263.
6
THE FAIRHOLME FOCUSED INCOME FUND
For the Six Month Period from December 1, 2021 through May 31, 2022 (unaudited)
As a shareholder of The Income Fund, you incur two types of costs: (1) transaction costs including, but not limited to, transaction fees at some broker-dealers, custodial fees for retirement accounts, and wire transfer fees; and (2) ongoing costs including, but not limited to, management fees paid to the Manager. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in The Income Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested in The Income Fund at December 1, 2021, and held for the entire six month period ending May 31, 2022.
Actual Expenses
The first line of the tables below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you had invested at the beginning of the period, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading Expenses Paid During the Period to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the tables below provides information about hypothetical account values and hypothetical expenses based on The Income Funds actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not The Income Funds actual return for the period presented. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses that you paid for the period presented. However, you may use this information to compare ongoing costs of investing in The Income Fund with the ongoing costs of investing in other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees (if any), or other direct costs. Therefore, the second line of the tables is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your total costs would be higher.
Beginning Account Value December 1, 2021 |
Ending Account Value May 31, 2022 |
Annualized Expense Ratio* |
Expenses Paid During the Period December 1, 2021 Through May 31, 2022** |
|||||||||||||
The Income Fund |
||||||||||||||||
Actual |
$1,000.00 | $1,100.30 | 0.80% | $4.19 | ||||||||||||
Hypothetical |
$1,000.00 | $1,020.94 | 0.80% | $4.03 |
* | Effective January 1, 2018, the Manager has agreed to waive, on a voluntary basis, a portion of the management fee of The Income Fund to the extent necessary to limit the management fee paid to the Manager by The Income Fund to an annual rate of 0.80% of The Income Funds daily average net asset value. This undertaking may be terminated by the Manager upon 60 days written notice to The Income Fund. |
** | Expenses are equal to The Income Funds annualized expense ratio, multiplied by the average account value over the period, multiplied by 182 days/ 365 days (to reflect the one-half year period). |
7
THE FAIRHOLME FOCUSED INCOME FUND
May 31, 2022 (unaudited)
Shares |
Value | |||||||
DOMESTIC EQUITY SECURITIES 66.0% |
||||||||
DIVERSIFIED BANKS 4.2% |
| |||||||
110,600 | Citigroup, Inc. |
$ | 5,907,146 | |||||
|
|
|||||||
DRUG RETAIL 2.2% | ||||||||
69,000 | Walgreens Boots Alliance, Inc. |
3,024,270 | ||||||
|
|
|||||||
HOMEBUILDING 3.8% | ||||||||
71,000 | DR Horton, Inc. |
5,335,650 | ||||||
|
|
|||||||
INSURANCE - PROPERTY & |
||||||||
371,100 | Old Republic International |
8,876,712 | ||||||
|
|
|||||||
OIL & GAS STORAGE & TRANSPORTATION 25.7% |
| |||||||
1,307,700 | Enterprise Products Partners LP |
35,857,134 | ||||||
|
|
|||||||
SEMICONDUCTORS 4.5% |
| |||||||
141,100 | Intel Corp. |
6,267,662 | ||||||
|
|
|||||||
STEEL 19.2% | ||||||||
676,600 | Commercial Metals Co. |
26,881,318 | ||||||
|
|
|||||||
|
TOTAL DOMESTIC EQUITY SECURITIES |
92,149,892 | ||||||
|
|
|||||||
DOMESTIC PREFERRED |
| |||||||
MORTGAGE FINANCE 2.1% |
| |||||||
Federal Home Loan Mortgage Corp. |
||||||||
302,300 | 5.100%, Series H(a) |
1,511,500 | ||||||
260,924 | 6.550%, Series Y(a) |
785,381 | ||||||
180,000 | Federal National Mortgage Association |
|||||||
7.750%, Series S(a)(b) |
658,800 | |||||||
|
|
|||||||
2,955,681 | ||||||||
|
|
|||||||
|
TOTAL DOMESTIC PREFERRED EQUITY |
2,955,681 | ||||||
|
|
|||||||
Principal |
||||||||
U.S. GOVERNMENT OBLIGATIONS 27.5% |
||||||||
U.S. Treasury Bills |
||||||||
$ 13,000,000 | 1.273%, 10/20/2022(c) |
12,932,705 | ||||||
13,000,000 | 1.497%, 03/23/2023(c) |
12,809,280 |
Principal |
Value | |||||||
U.S. GOVERNMENT OBLIGATIONS 27.5% (CONTINUED) |
||||||||
U.S. Treasury Bills |
||||||||
$ 13,000,000 | 2.125%, 05/18/2023(c) |
$ | 12,745,951 | |||||
|
|
|||||||
|
TOTAL U.S.
GOVERNMENT |
38,487,936 | ||||||
|
|
|||||||
Shares |
||||||||
MONEY MARKET FUNDS 4.3% |
||||||||
6,019,715 | Fidelity Investments Money Market Treasury Portfolio - Class I, 0.62%(d) |
6,019,715 | ||||||
|
|
|||||||
|
TOTAL MONEY MARKET FUNDS |
6,019,715 | ||||||
|
|
|||||||
|
TOTAL INVESTMENTS 99.9% |
139,613,224 | ||||||
OTHER ASSETS IN EXCESS OF LIABILITIES 0.1% |
88,121 | |||||||
|
|
|||||||
NET ASSETS 100.0% |
$ | 139,701,345 | ||||||
|
|
The accompanying notes are an integral part of the financial statements.
8
THE FAIRHOLME FOCUSED INCOME FUND
SCHEDULE OF INVESTMENTS (continued)
May 31, 2022 (unaudited)
(a) | Non-income producing security. |
(b) | Variable rate security. Rates shown are the effective rates as of May 31, 2022. |
(c) | Rates shown are the effective yields based on the purchase price. The calculation assumes the security is held to maturity. |
(d) | Annualized based on the 1-day yield as of May 31, 2022. |
The accompanying notes are an integral part of the financial statements.
9
THE FAIRHOLME FOCUSED INCOME FUND
STATEMENT OF ASSETS & LIABILITIES
May 31, 2022 (unaudited)
Assets |
||||
Investments, at Fair Value (Cost $132,729,999) |
$ | 139,613,224 | ||
Dividends and Interest Receivable |
88,951 | |||
Receivable for Capital Shares Sold |
91,955 | |||
|
|
|||
Total Assets |
139,794,130 | |||
|
|
|||
Liabilities |
||||
Accrued Management Fees |
92,785 | |||
|
|
|||
Total Liabilities |
92,785 | |||
|
|
|||
NET ASSETS |
$ | 139,701,345 | ||
|
|
|||
Net Assets consist of: |
||||
Paid-In Capital |
$ | 153,896,030 | ||
Total Accumulated Losses |
(14,194,685) | |||
|
|
|||
NET ASSETS |
$ | 139,701,345 | ||
|
|
|||
Shares of Common Stock Outstanding* ($0.0001 par value) |
12,018,130 | |||
|
|
|||
Net Asset Value, Offering and Redemption Price Per Share |
$ | 11.62 | ||
|
|
* 200,000,000 shares authorized in total.
The accompanying notes are an integral part of the financial statements.
10
THE FAIRHOLME FOCUSED INCOME FUND
STATEMENT OF OPERATIONS (unaudited)
For the Six Months Ended May 31, 2022 |
||||||
Investment Income |
||||||
Interest |
$ | 76,015 | ||||
Dividends |
762,424 | |||||
|
|
| ||||
Total Investment Income |
838,439 | |||||
|
|
| ||||
Expenses |
||||||
Management Fees |
650,099 | |||||
|
|
| ||||
Total Expenses |
650,099 | |||||
|
|
| ||||
Less: Voluntary Reduction of Management Fees |
(130,032 | ) | ||||
|
|
| ||||
Net Expenses |
520,067 | |||||
|
|
| ||||
Net Investment Income |
318,372 | |||||
|
|
| ||||
Realized and Unrealized Gain (Loss) on Investments and |
||||||
Net Realized Gain (Loss) on: |
||||||
Investments |
7,208,123 | |||||
Foreign Currency Related Transactions |
(1,526 | ) | ||||
Net Change in Unrealized Appreciation (Depreciation) on: |
||||||
Investments |
4,756,465 | |||||
Foreign Currency Related Transactions |
1,204 | |||||
|
|
| ||||
Net Realized and Unrealized Gain (Loss) on Investments and |
11,964,266 | |||||
|
|
| ||||
NET INCREASE IN NET ASSETS FROM OPERATIONS |
$ | 12,282,638 | ||||
|
|
|
The accompanying notes are an integral part of the financial statements.
11
THE FAIRHOLME FOCUSED INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Six Months Ended May 31, 2022 (Unaudited) |
For the Fiscal Year Ended November 30, 2021 |
|||||||||||||||
CHANGES IN NET ASSETS |
||||||||||||||||
From Operations |
||||||||||||||||
Net Investment Income |
$ | 318,372 | $ | 1,449,440 | ||||||||||||
Net Realized Gain (Loss) on Investments and Foreign Currency Related Transactions |
7,206,597 | (15,954,749 | ) | |||||||||||||
Net Change in Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Related Translations |
4,757,669 | 19,497,503 | ||||||||||||||
|
|
|
|
|
| |||||||||||
Net Increase in Net Assets from Operations |
12,282,638 | 4,992,194 | ||||||||||||||
|
|
|
|
|
| |||||||||||
From Dividends and Distributions to Shareholders |
||||||||||||||||
Net Decrease in Net Assets from Dividends and Distributions |
(753,757 | ) | (1,325,088 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||
From Capital Share Transactions |
||||||||||||||||
Proceeds from Sale of Shares |
24,450,350 | 16,173,086 | ||||||||||||||
Shares Issued in Reinvestment of Dividends and Distributions |
382,247 | 739,562 | ||||||||||||||
Cost of Shares Redeemed |
(15,547,555 | ) | (8,801,077 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||
Net Increase in Net Assets from Shareholder Activity |
9,285,042 | 8,111,571 | ||||||||||||||
|
|
|
|
|
| |||||||||||
NET ASSETS |
||||||||||||||||
Net Increase in Net Assets |
20,813,923 | 11,778,677 | ||||||||||||||
Net Assets at Beginning of Period |
118,887,422 | 107,108,745 | ||||||||||||||
|
|
|
|
|
| |||||||||||
Net Assets at End of Period |
$ | 139,701,345 | $ | 118,887,422 | ||||||||||||
|
|
|
|
|
| |||||||||||
SHARES TRANSACTIONS |
||||||||||||||||
Issued |
2,186,234 | 1,553,599 | ||||||||||||||
Reinvested |
33,760 | 69,514 | ||||||||||||||
Redeemed |
(1,399,296 | ) | (817,841 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||
Net Increase in Shares |
820,698 | 805,272 | ||||||||||||||
Shares Outstanding at Beginning of Period |
11,197,432 | 10,392,160 | ||||||||||||||
|
|
|
|
|
| |||||||||||
Shares Outstanding at End of Period |
12,018,130 | 11,197,432 | ||||||||||||||
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
12
THE FAIRHOLME FOCUSED INCOME FUND
For the | For the Fiscal Year Ended November 30, | |||||||||||||||||||||||
Six Months | ||||||||||||||||||||||||
Ended | ||||||||||||||||||||||||
May 31, 2022 | ||||||||||||||||||||||||
(Unaudited) |
2021 |
2020 |
2019 |
2018 |
2017 |
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PER SHARE OPERATING PERFORMANCE |
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NET ASSET VALUE, BEGINNING OF PERIOD |
$10.62 | $10.31 | $10.23 | $9.88 | $11.33 | $12.38 | ||||||||||||||||||
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Investment Operations |
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Net Investment Income(1) |
0.03 | 0.13 | 0.07 | 0.30 | 0.49 | 0.60 | ||||||||||||||||||
Net Realized and Unrealized Gain (Loss) on Investments |
0.99 | 0.30 | 0.11 | (2) | 0.34 | (0.91 | ) | (0.99 | ) | |||||||||||||||
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Total from Investment Operations |
1.02 | 0.43 | 0.18 | 0.64 | (0.42 | ) | (0.39 | ) | ||||||||||||||||
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Dividends and Distributions |
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From Net Investment Income |
(0.02 | ) | (0.12 | ) | (0.10 | ) | (0.29 | ) | (0.51 | ) | (0.61 | ) | ||||||||||||
From Realized Capital Gains |
| | | | (0.52 | ) | (0.05 | ) | ||||||||||||||||
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Total Dividends and Distributions |
(0.02 | ) | (0.12 | ) | (0.10 | ) | (0.29 | ) | (1.03 | ) | (0.66 | ) | ||||||||||||
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NET ASSET VALUE, END OF PERIOD |
$11.62 | $10.62 | $10.31 | $10.23 | $9.88 | $11.33 | ||||||||||||||||||
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TOTAL RETURN |
10.03 | %(3) | 4.16 | % | 1.78 | % | 6.49 | % | (4.19 | )% | (3.35 | )% | ||||||||||||
Ratio/Supplemental Data |
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Net Assets, End of Period (in 000s) |
$139,701 | $118,887 | $107,109 | $179,351 | $188,500 | $223,432 | ||||||||||||||||||
Ratio of Gross Expenses to Average Net Assets |
1.00 | %(4) | 1.00 | % | 1.02 | %(5) | 1.02 | %(5) | 1.00 | % | 1.00 | % | ||||||||||||
Ratio of Net Expenses to Average Net Assets |
0.80 | %(4)(6) | 0.80 | %(6) | 0.82 | %(5)(6) | 0.82 | %(5)(6) | 0.82 | %(6) | 1.00 | % | ||||||||||||
Ratio of Net Investment Income to Average Net Assets |
0.49 | %(4) | 1.20 | % | 0.74 | % | 2.94 | % | 4.56 | % | 5.02 | % | ||||||||||||
Portfolio Turnover Rate |
40.96 | %(3) | 118.05 | % | 100.67 | % | 16.70 | % | 45.78 | % | 36.05 | % |
(1) | Based on average shares outstanding. |
(2) | The amount shown for a share outstanding does not correspond with the aggregate net gain (loss) on investments for the period due to the timing of sales and redemptions of shares in relation to fluctuating market values of the investments of The Income Fund. |
(3) | Not annualized. |
(4) | Annualized. |
(5) | 0.02% is attributable to legal expenses incurred outside the management fee. |
(6) | Effective January 1, 2018, the Manager has agreed to waive, on a voluntary basis, a portion of the management fee of The Income Fund to the extent necessary to limit the management fee paid to the Manager by The Income Fund to an annual rate of 0.80% of the daily average net asset value of The Income Fund. |
The accompanying notes are an integral part of the financial statements.
13
THE FAIRHOLME FOCUSED INCOME FUND
May 31, 2022 (unaudited)
Note 1. Organization
Fairholme Funds, Inc. (the Company), a Maryland corporation, is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company. The Companys Articles of Incorporation permit the Board of Directors of the Company (the Board or the Directors) to issue 1,100,000,000 shares of common stock at $.0001 par value. 200,000,000 shares have been allocated to The Fairholme Focused Income Fund (The Income Fund). The Income Fund is a non-diversified fund. The Income Fund may have a greater percentage of its assets invested in particular securities than a diversified fund, exposing The Income Fund to the risk of unanticipated industry conditions as well as risks specific to a single company or the securities of a single company. The Income Fund has different objectives, capitalizations, and considerations that may or may not lead to differing compositions of issuers, securities within an issuer, and cash levels within The Income Fund. The Board has the power to designate one or more separate and distinct series and/or classes of shares of common stock and to classify or reclassify any unissued shares with respect to such series.
The Income Funds investment objective is to seek current income. Under normal circumstances, The Income Fund seeks to achieve its investment objective by investing in a focused portfolio of cash distributing securities. To maintain maximum flexibility, the securities in which The Income Fund may invest include corporate bonds and other corporate debt securities of issuers in the U.S. and foreign countries, bank debt (including bank loans and loan participations), government and agency debt securities of the U.S. and foreign countries (including U.S. Treasury bills), convertible bonds and other convertible securities, and equity securities, including preferred and common stock of issuers in the U.S. and foreign countries, interests in publicly traded partnerships, and interests in real estate investment trusts. Although The Income Fund normally holds a focused portfolio of securities, The Income Fund is not required to be fully invested in such securities and may maintain a significant portion of its total assets in cash and securities generally considered to be cash equivalents. Fairholme Capital Management, L.L.C. (the Manager) serves as investment adviser to The Income Fund.
There is no guarantee that The Income Fund will meet its objectives.
Note 2. Significant Accounting Policies
As an investment company, The Income Fund follows the investment company accounting and reporting guidance, which is part of U.S. generally accepted accounting principles (U.S. GAAP). The Income Funds investments are reported at fair value as defined by U.S. GAAP. The Income Fund calculates its net asset values as soon as practicable following the close of regular trading on the New York Stock Exchange (currently 4:00 p.m. Eastern Time) on each day the New York Stock Exchange is open.
A description of the valuation techniques applied to The Income Funds securities measured at fair value on a recurring basis follows:
Security Valuation:
Equity securities (common and preferred stocks): Securities traded on a national securities exchange or reported on the NASDAQ national market are generally valued at the official closing price, or at the last reported sale price on the exchange or market on which the securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified in Level 1 of the fair value hierarchy. If these securities are not actively traded, they are classified in Level 2. Subject to the oversight of the Board, the Manager may determine the fair valuation of a security when market quotations are insufficient or not readily available, when securities are determined to be illiquid or restricted, or when in the judgment of the Manager the prices or values available do not represent the fair value of the instrument. In these situations, if the inputs are observable, the valuation will be classified in Level 2 of the fair value hierarchy, otherwise they would be classified in Level 3.
Fixed-income securities (U.S. government obligations, corporate bonds, convertible bonds, and asset backed securities): The fair value of fixed-income securities is determined using market quotations when readily available, but may also be estimated by various methods when no such market quotations exist and when the Manager believes these other methods reflect the fair value of such securities. These methods may consider recently executed transactions in securities of the issuer or comparable issuers and market price valuations from independent pricing services and/or brokers (where observable). Where the Manager deems it appropriate to do so (such as when independent prices are unavailable or not deemed to be representative of fair value)
14
THE FAIRHOLME FOCUSED INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
fixed income securities will be fair valued in good faith following consideration by, and conclusion of, the Managers Valuation and Liquidity Risk Management Committee. As of May 31, 2022, fixed-income securities are valued by the Manager utilizing observable market prices on the day of valuation or the average bid of independent broker/dealer quotes and/or the average of valuations from independent pricing services. Although fixed-income securities are classified in Level 2 of the fair value hierarchy at May 31, 2022, in instances where significant unobservable inputs are used, they would be classified in Level 3.
Open-end mutual funds: Investments in open-end mutual funds including money market funds are valued at their closing net asset value each business day and are classified in Level 1 of the fair value hierarchy.
Short-term securities: Investments in securities with maturities of less than sixty days when acquired, or which subsequently are within sixty days of maturity, shall be valued at prices supplied by an independent pricing source or by one of the Funds pricing agents based on broker or dealer supplied valuations or matrix pricing. To the extent the inputs are observable and timely, the values would be classified in Level 2 of the fair value hierarchy.
The Income Fund uses several recognized industry third-party pricing services (TPPS), which are approved by the Board and unaffiliated with the Manager, to provide prices for some of The Income Funds securities. The Income Fund also uses other independent market trade data sources (such as TRACE, the FINRA developed mandatory reporting of over-the-counter secondary market transactions), as well as broker quotes provided by market makers. The data within these feeds is ultimately sourced from major stock exchanges and trading systems where these securities trade. If a price obtained from the pricing source is deemed unreliable, it may be discarded and/or challenged. In these cases the pricing decision is made by reference to the reliable market data from the other market data sources.
Subject to the oversight of the Board, the Manager may determine the fair valuation of a security when market quotations are insufficient or not readily available, when securities are determined to be illiquid or restricted, or when in the judgment of the Manager the prices or values available do not represent the fair value of the instrument. Factors which may cause the Manager to make such a judgment include the following: (a) only a bid price or an asked price is available; (b) the spread between bid and asked prices is substantial; (c) the liquidity of the securities; (d) the frequency of sales; (e) the thinness of the market; (f) the size of reported trades; (g) actions of the securities markets, such as the suspension or limitation of trading; and (h) local market closures. Among the factors to be considered to fair value a security are recent prices of comparable securities that are publicly traded, reliable prices of securities not publicly traded, the use of valuation models, current analyst reports, valuing the income or cash flow of the issuer, or cost if the preceding factors do not apply. The circumstances of fair valued securities are frequently monitored to determine if fair valuation measures continue to apply.
The Manager reports quarterly to the Board the results of the application of fair valuation policies and procedures.
The inputs and valuation techniques used to measure fair value of The Income Funds investments are summarized into three levels as described in the hierarchy below:
|
Level 1 |
quoted prices in active markets for identical securities; | ||
|
Level 2 |
other significant observable inputs (including quoted prices for similar securities, quoted prices in inactive markets for identical securities, interest rates, prepayment speeds, credit risk, etc.); and | ||
|
Level 3 |
significant unobservable inputs (including the Managers determination as to the fair value of investments). |
The inputs or methodology used for valuing investments are not necessarily an indication of the level of risk associated with investing in those investments. The summary of The Income Funds investments by inputs used to value The Income Funds investments as of May 31, 2022, is as follows:
15
THE FAIRHOLME FOCUSED INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
Valuation Inputs | ||||||||||||||||
Level 2 - Other | Level 3 - | |||||||||||||||
Significant | Significant | Total | ||||||||||||||
Level 1 - | Observable | Observable | Fair Value | |||||||||||||
Quoted Prices | Inputs | Inputs | at 05/31/22 | |||||||||||||
THE INCOME FUND |
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ASSETS: |
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INVESTMENTS (Fair Value): |
||||||||||||||||
Domestic Equity Securities* |
$ | 92,149,892 | $ | | $ | | $ | 92,149,892 | ||||||||
Domestic Preferred Equity Securities* |
2,955,681 | | | 2,955,681 | ||||||||||||
U.S. Government Obligations |
| 38,487,936 | | 38,487,936 | ||||||||||||
Money Market Funds |
6,019,715 | | | 6,019,715 | ||||||||||||
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TOTAL INVESTMENTS |
$ | 101,125,288 | $ | 38,487,936 | $ | | $ | 139,613,224 | ||||||||
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* | Industry classification for these categories are detailed in the Schedule of Investments. |
There were no Level 3 investments for The Income Fund at May 31, 2022 or November 30, 2021.
Dividends and Distributions: The Income Fund records dividends and distributions to its shareholders on the ex-dividend date. The Income Fund intends to declare and pay net investment income distributions, if any, quarterly in March, June, September, and December. The Income Fund intends to distribute any net long-term capital gains and any net short-term capital gains at least once a year. If the total dividends and distributions made in any tax year exceeds net investment income and accumulated realized capital gains, a portion of the total distribution may be treated as a tax return of capital.
Foreign Currency Translation: The books and records of The Income Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (i) fair value of investment securities, assets, and liabilities at the current rate of exchange; and (ii) purchases and sales of investment securities, income, and expenses at the relevant rates of exchange prevailing on the respective dates of such transactions. The Income Fund does not isolate that portion of gains and losses on investment securities which is due to changes in the foreign exchange rates from that which is due to changes in the market prices of such securities.
Estimates: The preparation of financial statements in conformity with U.S. GAAP requires The Income Fund to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reported period. Actual results could differ from those estimates.
Other: The Income Fund accounts for security transactions on the trade date for financial statement purposes. The specific identification method is used for determining gains or losses for financial statements and income tax purposes. Dividend income is recorded on the ex-dividend date net of foreign taxes withheld where recovery is uncertain and interest income is recorded on an accrual basis. Discounts and premiums on securities purchased are amortized over the life of the respective securities using the effective yield method. Securities denominated in currencies other than U.S. dollars are subject to changes in value due to fluctuation in exchange rates. The Income Fund may invest in countries that require governmental approval for the repatriation of investment income, capital, or the proceeds of sales of securities by foreign investors. In addition, if there is deterioration in a countrys balance of payments or for other reasons, a country may impose temporary restrictions on foreign capital remittances abroad.
The Income Fund paid commissions and other brokerage fees during the period.
Note 3. Related Party Transactions
The Manager is a Delaware limited liability company and is registered with the SEC as an investment adviser. The Managers principal business is to provide investment management and advisory services to individuals, corporations, and other institutions throughout the world. Pursuant to an Investment Management Agreement, The Income Fund pays a management fee to the Manager for its provision of investment advisory and operating services to The Income Fund. Subject to applicable waivers or
16
THE FAIRHOLME FOCUSED INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
limitations, the management fee is paid at an annual rate equal to 1.00% of the daily average net assets of The Income Fund. Effective January 1, 2018, the Manager has agreed to waive, on a voluntary basis, a portion of the management fees of The Income Fund to the extent necessary to limit the management fee of The Income Fund to the annual rate of 0.80% of The Income Funds daily average net asset value (Undertaking). This Undertaking may be terminated by the Manager upon 60 days written notice to The Income Fund. The Manager is not responsible pursuant to the Investment Management Agreement for paying The Income Funds expenses for the following services: transfer agency, fund accounting, fund administration, custody, legal, audit, compliance, directors fees, call center, fulfillment, travel, insurance, rent, printing, postage and other office supplies. The Manager is not responsible for paying for the following costs and expenses of The Income Fund: commissions, brokerage fees, issue and transfer taxes, and other costs chargeable to The Income Fund in connection with securities transactions or in connection with securities owned by The Income Fund, taxes, interest, acquired fund fees and related expenses, expenses in connection with litigation by or against The Income Fund, and any other extraordinary expenses.
The Manager earned, after the voluntary reduction of the management fees $520,067 from The Income Fund for its services during the six months ended May 31, 2022.
Bruce Berkowitz, both the Chief Investment Officer of the Manager and Chairman of The Income Funds Board, and his affiliates beneficially own an aggregate 4,584,728 shares of The Income Fund at May 31, 2022.
A Director and Officers of The Income Fund are also Officers of the Manager or its affiliates.
Note 4. Investments
For the six months ended May 31, 2022, aggregated purchases and sales of investment securities other than short-term investments and U.S. government obligations were as follows:
Purchases | Sales | |||||||
The Income Fund |
$ | 54,128,045 | $ | 32,570,340 |
Note 5. Tax Matters
Federal Income Taxes: The Income Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. By so qualifying, The Income Fund will not be subject to federal income taxes to the extent that it distributes all of its net investment income and any realized capital gains.
For U.S. federal income tax purposes, the cost of securities owned, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) of investments at May 31, 2022, were as follows:
Gross | Gross | Net Unrealized | ||||||||||||||
Unrealized | Unrealized | Appreciation/ | ||||||||||||||
Cost | Appreciation | Depreciation | (Depreciation) | |||||||||||||
The Income Fund |
$132,729,999 | $11,153,426 | $(4,270,201) | $6,883,225 |
The difference between book basis and tax basis for The Income Funds net unrealized depreciation is attributable to capitalized cost and basis adjustments on investments in partnerships.
The Income Funds tax basis capital gains are determined only at the end of each fiscal year. Therefore the components of distributable earnings will be included in the Annual Report for the fiscal year ended November 30, 2022.
The Income Fund is permitted to carry forward for an unlimited period capital losses incurred to reduce future required distributions of net capital gains to shareholders. Capital losses that are carried forward will retain their character as either
17
THE FAIRHOLME FOCUSED INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
short-term or long-term capital losses. As of November 30, 2021, net short-term and long-term capital loss carryforwards were as follows:
The Income | ||||
Fund | ||||
Short-term capital loss carryforward |
$ | |||
Long-term capital loss carryforward |
27,988,050 | |||
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|
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Total |
$27,988,050 | |||
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The Manager has analyzed The Income Funds tax positions taken on tax returns for all open tax years (current and prior three tax years) and has concluded that there are no uncertain tax positions that require recognition of a tax liability. The Income Funds federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired (the current year and prior three years) are subject to examination by the Internal Revenue Service and state departments of revenue. Additionally, The Income Fund is not aware of any tax position for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months.
Note 6. Dividends and Distributions to Shareholders
Ordinary income and capital gain distributions are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP.
The tax character of dividends and distributions paid by The Income Fund were as follows:
The Income Fund | ||||||||
For the | ||||||||
For the | Fiscal Year | |||||||
Six Months | Ended | |||||||
Ended | November 30, | |||||||
May 31, 2022 | 2021 | |||||||
Dividends and Distributions paid from: |
||||||||
Ordinary Income |
$ | 213,274 | $ | 1,325,088 | ||||
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Note 7. Indemnifications
Under the Companys organizational documents, its Officers and Directors are indemnified against certain liabilities arising out of the performance of their duties to The Income Fund. In the normal course of business the Company or The Income Fund enter into contracts that contain a variety of representations and customary indemnifications. The Income Funds maximum exposure under these arrangements is unknown as this would involve future claims that may be made against The Income Fund that have not yet occurred. However, based on its experience to date, The Income Fund expects the risk of loss to be remote.
Note 8. Legal-Proceedings
On April 17, 2019, Sears Holdings Corporation, Sears Roebuck and Co., Sears Development Co., Kmart Corporation and Kmart of Washington LLC commenced an adversary proceeding in the United States Bankruptcy Court for the Southern District of New York against Edward Scott Eddie Lampert; ESL Investments, Inc.; RBS Partners LP; CRK Partners LLC; SPE Master I L.P.; ESL Partners L.P.; SPE I Partners L.P.; RBS Investment Management LLC; ESL Institutional Partners L.P.; ESL Investors, L.L.C.; JPP LLC; JPP II LLC; Fairholme Capital Management, L.L.C.; Cesar L. Alvarez; Bruce Berkowitz; Alesia Haas; Kunal Kamlani; Steven Mnuchin; Thomas J. Tisch; Seritage Growth Properties, Inc.; Seritage Growth Properties, L.P.; Seritage KMT Mezzanine Finance LLC; Seritage SRC Mezzanine Finance LLC; Seritage KMT Finance LLC; Seritage SRC Finance LLC; Seritage GS Holdings LLC; Seritage SPS Holdings LLC; and Seritage MS Holdings LLC (the First Action).
18
THE FAIRHOLME FOCUSED INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
On November 25, 2019, the plaintiffs filed an amended complaint, adding the Company and other parties not affiliated with the Manager or the Company as additional defendants and asserting new causes of action against the defendants.
In the amended complaint, Plaintiffs assert avoidance and other claims against certain defendants, including the Manager, for participation in two Sears corporate transactions: (i) the Lands End spinoff; and (ii) the Seritage rights offering. The avoidance claims against the Manager include, among other things, claims for the avoidance of consideration received from Sears Holdings Corp. in connection with the Lands End spinoff and Seritage rights offering that were allegedly actual and/ or constructive fraudulent transfers. Plaintiffs also assert avoidance and other claims seeking to recover amounts allegedly received by the Company from alleged related-party transactions with Sears and seek to avoid the release received by certain of the defendants, including the Manager and the Company, in connection with the Seritage derivative action. Plaintiffs also assert claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty arising out of certain related-party transactions against certain defendants, including the Manager and Bruce Berkowitz, and seek to subordinate the bankruptcy claims of the Company, the Manager and Bruce Berkowitz.
On February 21, 2020, the Company moved to dismiss all of the claims against it, and all other defendants, including the Manager and Bruce Berkowitz, moved to dismiss all or parts of the compliant against them. The Court held extensive oral argument on the motions to dismiss, which are currently pending before the Court.
On October 15, 2020, Sears Holdings Corp., Sears, Roebuck and Co., and The Official Committee of Unsecured Creditors of Sears Holdings Corporation, et al. commenced a second adversary proceeding in the United States Bankruptcy Court for the Southern District of New York against certain former shareholders of Sears Holdings Corporation that were not named in the First Action (the Second Action). In the Second Action, the plaintiffs assert claims for the avoidance of alleged consideration received in connection with the Lands End spinoff and the Seritage rights offering. Certain defendants in the Second Action have moved to dismiss all claims against them, and the motions to dismiss are currently pending before the Court. On March 15, 2021, the Court consolidated the Second Action into the First Action. Pursuant to Order entered April 6, 2022, the parties have engaged in a mediation which, to date, has not resulted in resolution of the First or Second Actions.
Although the Manager and the Company believe that they have strong defenses to the foregoing complaint and intend to defend themselves vigorously against the allegations in the complaint, neither the Manager nor the Company is in a position to express an opinion about the ultimate outcome of the litigation or the range of potential loss, if any.
Note 9. Subsequent Events
Management has evaluated the impact on The Income Fund of all subsequent events occurring through the date the financial statement was issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
19
THE FAIRHOLME FOCUSED INCOME FUND
May 31, 2022 (unaudited)
Operation and Effectiveness of the Funds Liquidity Risk Management Program (unaudited)
Pursuant to Rule 22e-4 under the Investment Company Act of 1940, The Income Fund has adopted and implemented a liquidity risk management program (the Program) designed to assess and manage the risk that The Income Fund could not meet requests to redeem The Income Fund shares without significant dilution of remaining investors interests in The Income Fund. In assessing, managing and reviewing liquidity risk under the Program, The Income Fund considers a variety of factors, including its investment strategies, portfolio investments, portfolio concentration, cash flow projections, redemption policy (if any), and redemption history. In addition, the Program requires The Income Fund to, among other things, classify its investments into specific liquidity categories and monitor compliance with its limit on illiquid investments.
During the one-year period ended November 30, 2021 (the Covered Period), The Income Fund maintained a high level of liquidity and primarily held assets that were highly liquid investments (defined as cash and any investment reasonably expected to be convertible to cash in current market conditions in three business days or less without the conversion to cash significantly changing the market value of the investment). During the Covered Period, there were no liquidity events that materially affected The Income Funds performance or ability to timely meet redemptions without dilution to remaining investors interests in The Income Fund.
The Manager, which the Board has designated to administer the Program, prepared a written report that addressed the operation of the Program and assessed the Programs adequacy and effectiveness of implementation during the Covered Period (the Report). The Board reviewed and accepted the Report, which determined that the Program operated adequately and effectively in managing the liquidity risk of The Income Fund during the Covered Period.
Proxy Voting Policies, Procedures and Records (unaudited)
The Company has adopted policies and procedures that provide guidance and set forth parameters for the voting of proxies relating to securities held in The Income Funds portfolio. A description of these policies and procedures, and records of how The Income Fund voted proxies relating to its portfolio securities during the most recent twelve month period ended June 30, 2021, are available to you upon request and free of charge by writing to the Fairholme Funds, Inc., c/o BNY Mellon Investment Servicing (US) Inc., P.O. Box 9692, Providence, RI, 02940 or by calling Shareholder Services at (866) 202-2263. They may also be obtained by visiting the SEC website at www.sec.gov. The Company shall respond to all shareholder requests for records within three business days of its receipt of such request by first-class mail or other means designed to ensure prompt delivery.
Quarterly Filing (unaudited)
The Company files a complete schedule of The Income Funds portfolio holdings on Form N-PORT for the fiscal quarters ending February 28 (February 29 during leap year) and August 31. The Forms N-PORT are available on the SECs website at www.sec.gov.
20
FAIRHOLME FUNDS
Officers of Fairholme Funds, Inc.
BRUCE R. BERKOWITZ
President
FERNANDO M. FONT
Vice President
WAYNE KELLNER
Treasurer
ERICA K. KAPAHI
Chief Compliance Officer & Secretary
Board of Directors of Fairholme Funds, Inc.
TERRY L. BAXTER
BRUCE R. BERKOWITZ
STEVEN J. GILBERT, Esq.
LEIGH WALTERS, Esq.
Investment Manager
FAIRHOLME CAPITAL MANAGEMENT, L.L.C.
5966 South Dixie Highway, Suite 300, South Miami, FL 33143
Transfer Agent
BNY MELLON INVESTMENT SERVICING (US) INC.
4400 Computer Drive, Westborough, MA 01581-1722
Fund Accountant & Administrator
THE BANK OF NEW YORK MELLON
103 Bellevue Parkway, Wilmington, DE 19809
Custodian
THE BANK OF NEW YORK MELLON
240 Greenwich Street, New York, NY 10286
Independent Registered Public Accounting Firm
DELOITTE & TOUCHE LLP
200 Berkeley Street, Boston, MA 02116
Legal Counsel
SEWARD & KISSEL LLP
901 K Street NW, Washington, DC 20001
THIS REPORT IS PROVIDED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF FAIRHOLME FUNDS, INC. IT IS NOT INTENDED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUNDS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS, WHICH CONTAINS MORE INFORMATION ON FEES, CHARGES AND OTHER EXPENSES AND SHOULD BE READ CAREFULLY BEFORE INVESTING OR SENDING MONEY. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. SHARES OF THE FUNDS ARE DISTRIBUTED BY FORESIDE FUNDS DISTRIBUTORS LLC.
FAIRHOLME
Ignore the crowd.
The Fairholme Allocation Fund (FAAFX)
Seeking long-term total return
Semi-Annual Report
May 31, 2022
Managed by Fairholme Capital Management
(866) 202-2263 fairholmefunds.com
THE FAIRHOLME ALLOCATION FUND
May 31, 2022
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2
THE FAIRHOLME ALLOCATION FUND
May 31, 2012 May 31, 2022
THE ALLOCATION FUND VS. THE BLOOMBERG U.S.
AGGREGATE BOND INDEX AND THE S&P 500 INDEX
INITIAL INVESTMENT OF $10,000
The Fairholme Allocation Fund (The Allocation Fund) commenced operations on December 31, 2010. The chart above presents the performance of a hypothetical $10,000 investment for up to ten years to the latest semi-annual period ending May 31, 2022.
The following notes pertain to the chart above as well as to the performance table included in the Management Discussion & Analysis Report. Performance information in this report represents past performance and is not a guarantee of future results. The investment return and principal value of an investment in The Allocation Fund will fluctuate, so that an investors shares when redeemed may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted within. The performance information does not reflect the taxes an investor would pay on distributions from The Allocation Fund or upon redemption of shares of The Allocation Fund. Most recent month-end performance and answers to any questions you may have can be obtained by calling Shareholder Services at 1-866-202-2263.
Data for the Bloomberg U.S. Aggregate Bond Index, the S&P 500 Index and The Allocation Fund are presented assuming all dividends and distributions have been reinvested and do not reflect any taxes that might have been incurred by a shareholder as a result of The Allocation Fund distributions. The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar- denominated, fixed-rate taxable bond market, and includes Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid adjustable-rate mortgage pass-throughs), asset-backed securities and commercial mortgage-backed securities (agency and non-agency). The S&P 500 Index is a widely recognized, unmanaged index of 500 of the largest companies in the United States as measured by market capitalization. These index returns do not reflect any investment management fees or transaction expenses, nor the effects of taxes, fees or other charges. It is not possible to invest directly in an index.
3
THE FAIRHOLME ALLOCATION FUND
MANAGEMENT DISCUSSION & ANALYSIS
For the six months ended May 31, 2022
The Allocation Fund shares outstanding and unaudited net asset value per share (NAV) at May 31, 2022, the end of The Allocation Funds semi-annual period, and NAVs at other pertinent dates, were as follows:
5/31/2022 | 05/31/2022 | 11/30/2021 | 05/31/2021 | |||||||||||||
Shares | NAV | NAV | NAV | |||||||||||||
Outstanding | (unaudited) | (audited) | (unaudited) | |||||||||||||
The Allocation Fund |
6,374,427 | $ 8.87 | $ 8.32 | $ 9.46 |
At June 30, 2022, the unaudited NAV of The Allocation Fund was $7.76.
Performance figures below are shown for The Allocation Funds semi-annual period ended May 31, 2022, and do not match calendar year figures for the period ended June 30, 2022, cited in the Portfolio Managers report.
The Allocation Fund | Since | |||||||||||||||||||
Performance to | Six | One | Five | Ten | Inception | |||||||||||||||
5/31/2022 (Unaudited) |
Months | Year | Years | Years | 12/31/2010 | |||||||||||||||
Cumulative: |
||||||||||||||||||||
The Allocation Fund |
7.04% | -5.86% | 18.56% | 50.83% | 31.82% | |||||||||||||||
Bloomberg Bond Index |
-9.15% | -8.22% | 6.02% | 18.44% | 30.71% | |||||||||||||||
S&P 500 Index |
-8.85% | -0.30% | 87.39% | 283.77% | 312.08% | |||||||||||||||
Annualized: |
||||||||||||||||||||
The Allocation Fund |
-5.86% | 3.46% | 4.20% | 2.45% | ||||||||||||||||
Bloomberg Bond Index |
-8.22% | 1.18% | 1.71% | 2.37% | ||||||||||||||||
S&P 500 Index |
-0.30% | 13.38% | 14.40% | 13.21% |
For the six months ended May 31, 2022, The Allocation Fund outperformed the Bloomberg U.S. Aggregate Bond Index (Bloomberg Bond Index) and the S&P 500 (S&P 500) by 16.19 and 15.89 percentage points, respectively. Over the last fiscal year, The Allocation Fund outperformed the Bloomberg Bond Index by 2.36 percentage points, but was outperformed by the S&P 500 by 5.56 percentage points. From inception, The Allocation Fund outperformed the Bloomberg Bond Index by 0.08, but was outperformed by the S&P 500 by 10.76 percentage points per annum, or on a cumulative basis, 1.11 and 280.26 percentage points, respectively.
Fairholme Capital Management, L.L.C. (the Manager) believes performance over shorter periods is likely to be less meaningful than performance over longer periods. Investors are cautioned not to rely on short-term results. The fact that securities increase or decline in value does not always indicate that the Manager believes these securities to be more or less attractive in fact, the Manager believes that some price increases present selling opportunities and some price declines present buying opportunities.
Further, shareholders should note that the S&P 500 and the Bloomberg Bond Indices are unmanaged indices incurring no fees, expenses, or tax effects and are shown solely to compare The Allocation Funds performance to that of unmanaged and diversified indices of securities. As of the prospectus dated March 30, 2022, the gross expense ratio for The Allocation Fund is 1.00%. Shareholders are also cautioned that it is possible that some securities mentioned in this discussion may no longer be held by The Allocation Fund subsequent to the end of the fiscal period, and that The Allocation Fund may have made new investments that are not yet required to be disclosed. It is The Allocation Funds general policy not to disclose portfolio holdings other than when required by relevant law or regulation. Portfolio holdings are subject to change without notice and are not a recommendation to buy or sell any security.
Not all The Allocation Fund portfolio dispositions or additions are material, and, while The Allocation Fund and the Manager have long-term objectives, it is possible that a security sold or purchased in one period will be purchased or sold in a subsequent period. Generally, the Manager determines to buy and sell based on its estimates of the, respectively, relative intrinsic values and the Managers assessment of certain attractive characteristics of a company, general market conditions and expected future returns of an investment.
4
THE FAIRHOLME ALLOCATION FUND
MANAGEMENT DISCUSSION & ANALYSIS (continued)
For the six months ended May 31, 2022
The Manager invests The Allocation Funds assets in securities to the extent the Manager finds reasonable investment opportunities in accordance with The Allocation Funds investment strategies, policies and restrictions, as stated in The Allocation Funds Prospectus and may invest a significant portion of The Allocation Funds assets in cash and cash equivalents. The Manager views liquidity as a strategic advantage. Due to the continued uncertainty caused by the spread of COVID-19 and the corresponding market volatility and governmental responses to it, during the period ended May 31, 2022, the Manager has continued to hold U.S. Treasury Bills as part of The Allocation Funds investments. At May 31, 2022, cash and cash equivalents (consisting of cash, deposit accounts, U.S. Treasury Bills, and Treasury money-market funds) represented 19.5% of The Allocation Fund total assets. Since inception, The Allocation Fund has held varying levels of cash and cash equivalents for periods without, in the Managers view, negatively influencing performance.
The Allocation Fund is considered to be non-diversified under the Investment Company Act of 1940. Accordingly, The Allocation Fund can invest a greater percentage of its assets in fewer securities than a diversified fund, and can invest a significant portion of cash and liquid assets held by The Allocation Fund in one or more higher-risk securities at any time, including periods when a market is weak or a particular security declines sharply. The Allocation Fund may also have a greater percentage of assets invested in a particular sector than a diversified fund, exposing The Allocation Fund to the risk of an unanticipated event or condition and risks affecting a single company, sector or security.
The commentary below provides details of The Allocation Funds portfolio holdings by issuer and sector, as well as reporting the most significant positive and negative performance by investment for the six months May 31, 2022.
The most significant gains in The Allocation Funds portfolio were related to positive developments in the Steel and Real Estate Management & Development sectors. Investments in the Metals & Mining sector saw some losses during the six months ended May 31, 2022.
The Manager made no changes to the core investment strategies and techniques it employed during the six months ended May 31, 2022.
For the six months ended May 31, 2022, The Allocation Fund investments that contributed to performance were Commercial Metals, Co. and The St. Joe Co. The detractor to performance during the period was Imperial Metals Corp. The following charts show the top holdings by issuer and sector in descending order of percentage of net assets as of May 31, 2022.
The Allocation Fund |
The Allocation Fund | |||||||||||||
Top Holdings by Issuer* | Top Sectors | |||||||||||||
(% of Net Assets)
|
(% of Net Assets)
|
|||||||||||||
The St. Joe Co. |
30.3% | Real Estate Management & Development |
30.3% | |||||||||||
Imperial Metals Corp. |
10.5% | Cash and Cash Equivalents** |
19.5% | |||||||||||
Commercial Metals Co. |
8.9% | Oil & Gas Storage & Transportation |
15.8% | |||||||||||
Enterprise Products Partners LP |
6.0% | Metals & Mining |
10.5% | |||||||||||
Energy Transfer LP |
5.6% | Steel |
8.9% | |||||||||||
Intel Corp. |
4.6% | Semiconductors |
4.6% | |||||||||||
Kinder Morgan, Inc. |
4.2% | Diversified Banks |
3.9% | |||||||||||
Citigroup, Inc. |
3.9% | Mortgage Finance |
3.1% | |||||||||||
Alibaba Group Holding Ltd. |
2.0% | Internet & Direct Marketing Retail |
2.0% | |||||||||||
Federal Home Loan Mortgage Corp. |
1.7% | Insurance - Property & Casualty |
1.3% | |||||||||||
|
|
|
|
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77.7% | 99.9% | |||||||||||||
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|
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|
* | Excludes cash, U.S. Treasury Bills and Treasury money market funds. |
** | Includes cash, U.S. Treasury Bills and Treasury money market funds. |
5
THE FAIRHOLME ALLOCATION FUND
MANAGEMENT DISCUSSION & ANALYSIS (continued)
For the six months ended May 31, 2022
The Manager views the ability to focus on fewer investments than a diversified fund as a strategic advantage. However, such a strategy may negatively influence long-term performance.
A more complete discussion and description of the principal risks of investing in The Allocation Fund can be found in its Prospectus and Statement of Additional Information.
Large cash inflows or outflows may adversely affect The Allocation Funds performance. Such flows are monitored and actions deemed appropriate by the Manager are contemplated for when such flows could negatively impact performance.
Since inception, The Allocation Fund has been advised by the Manager. Bruce Berkowitz, both the Chief Investment Officer of the Manager and Chairman of The Allocation Funds Board of Directors (the Board or the Directors), and his affiliates beneficially own an aggregate 4,388,234 shares of The Allocation Fund at May 31, 2022. While there is no requirement that Mr. Berkowitz own shares of The Allocation Fund, such holdings are believed to help align the interests of the Manager with the interests of the shareholders.
The Board, including the Independent Directors, continues to believe that it is in the best interests of The Allocation Fund to have Mr. Berkowitz serve as Chairman of the Board given: his long-term relative performance; his experience, commitment, and significant personal investments in The Allocation Fund; the present composition of the Board; and current rules and regulations. A Director and Officers of The Allocation Fund are also Officers of the Manager. Nevertheless, at May 31, 2022, a majority of Directors were independent of the Manager, no stock option or restricted stock plans exist, Officers received no direct compensation from The Allocation Fund, and the Director affiliated with the Manager received no compensation for being a Director.
For more complete information about The Allocation Fund, or to obtain a current Prospectus, please visit www.fairholmefunds. com or call Shareholder Services at (866) 202-2263.
6
THE FAIRHOLME ALLOCATION FUND
For the Six Month Period from December 1, 2021 through May 31, 2022 (unaudited)
As a shareholder of The Allocation Fund, you incur two types of costs: (1) transaction costs including, but not limited to, transaction fees at some broker-dealers, custodial fees for retirement accounts, redemption fees (on The Allocation Fund shares redeemed or exchanged within 60 days of purchase), and wire transfer fees; and (2) ongoing costs including, but not limited to, management fees paid to the Manager. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in The Allocation Fund and to compare these costs with the ongoing costs of investing in other mutual fund.
These examples are based on an investment of $1,000 invested in The Allocation Fund at December 1, 2021, and held for the entire six month period ending May 31, 2022.
Actual Expenses
The first line of the tables below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you had invested at the beginning of the period, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading Expenses Paid During the Period to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the tables below provides information about hypothetical account values and hypothetical expenses based on The Allocation Funds actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not The Allocation Funds actual return for the period presented. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses that you paid for the period presented. However, you may use this information to compare ongoing costs of investing in The Allocation Fund with the ongoing costs of investing in other fund. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other fund.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees (if any), or other direct costs. Therefore, the second line of the tables is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different fund. In addition, if these transactional costs were included, your total costs would be higher.
Beginning Account Value December 1, 2021 |
Ending Account Value May 31, 2022 |
Annualized Expense Ratio* |
Expenses Paid During the Period December 1, 2021 Through May 31, 2022** |
|||||||||||||
The Allocation Fund |
||||||||||||||||
Actual |
$1,000.00 | $1,070.40 | 0.80% | $4.13 | ||||||||||||
Hypothetical |
||||||||||||||||
(5% return before expenses) |
$1,000.00 | $1,020.94 | 0.80% | $4.03 |
* | Effective January 1, 2018, the Manager has agreed to waive, on a voluntary basis, a portion of the management fee of The Allocation Fund to the extent necessary to limit the management fee paid to the Manager by The Allocation Fund to an annual rate of 0.80% of The Allocation Funds daily average net asset value. This undertaking may be terminated by the Manager upon 60 days written notice to The Allocation Fund. |
** | Expenses are equal to The Allocation Funds annualized expense ratio, multiplied by the average account value over the period, multiplied by 182 days/ 365 days (to reflect the one-half year period). |
7
THE FAIRHOLME ALLOCATION FUND
May 31, 2022 (Unaudited)
Shares |
Value | |||
DOMESTIC EQUITY SECURITIES 64.8% |
||||
DIVERSIFIED BANKS 3.9% |
||||
41,300 |
Citigroup, Inc. |
$ 2,205,833 | ||
| ||||
INSURANCE PROPERTY & CASUALTY 1.3% |
||||
30,000 |
Old Republic International Corp. |
717,600 | ||
| ||||
OIL & GAS STORAGE & TRANSPORTATION 15.8% |
||||
121,600 |
Kinder Morgan, Inc. |
2,394,304 | ||
268,700 |
Energy Transfer LP |
3,133,042 | ||
124,000 |
Enterprise Products Partners LP |
3,400,080 | ||
| ||||
8,927,426 | ||||
| ||||
REAL ESTATE MANAGEMENT & DEVELOPMENT 30.3% |
||||
348,267 |
The St. Joe Co.(a) |
17,152,150 | ||
| ||||
SEMICONDUCTORS 4.6% |
||||
58,600 |
Intel Corp. |
2,603,012 | ||
| ||||
STEEL 8.9% |
||||
125,900 |
Commercial Metals Co. |
5,002,007 | ||
|
| |||
TOTAL DOMESTIC EQUITY SECURITIES |
36,608,028 | |||
| ||||
FOREIGN EQUITY SECURITIES 12.5% |
||||
CAYMAN ISLANDS 2.0% |
||||
INTERNET & DIRECT MARKETING RETAIL 2.0% |
||||
Alibaba Group Holding Ltd., |
||||
12,000 |
ADR(b) |
1,152,600 | ||
| ||||
CANADA 10.5% |
||||
METALS & MINING 10.5% |
||||
2,412,125 |
Imperial Metals Corp.(b) |
5,911,837 | ||
| ||||
TOTAL FOREIGN EQUITY SECURITIES |
7,064,437 | |||
|
Shares |
Value | |||
DOMESTIC PREFERRED EQUITY SECURITIES 3.1% |
||||
MORTGAGE FINANCE 3.1% |
||||
282,295 |
Federal Home Loan Mortgage Corp. |
$ 965,449 | ||
216,265 |
Federal National Mortgage Association |
791,530 | ||
| ||||
1,756,979 | ||||
| ||||
TOTAL DOMESTIC PREFERRED EQUITY SECURITIES (COST $2,038,289) |
1,756,979 | |||
| ||||
RIGHTS 0.1% |
||||
CANADA 0.1% |
||||
METALS & MINING 0.1% |
||||
2,412,125 |
Imperial Metals Corp., Expire |
28,606 | ||
| ||||
TOTAL RIGHTS (COST $0) |
28,606 | |||
| ||||
Principal |
||||
U.S. GOVERNMENT OBLIGATIONS 12.2% |
||||
U.S. Treasury Bills |
||||
$ 2,000,000 |
0.120%, 06/16/2022(d) |
1,999,513 | ||
5,000,000 |
2.125%, 05/18/2023(d) |
4,902,289 | ||
| ||||
TOTAL U.S. GOVERNMENT OBLIGATIONS |
6,901,802 | |||
| ||||
Shares |
||||
MONEY MARKET FUNDS 7.3% | ||||
4,134,964 |
Fidelity Investments Money Market Treasury Portfolio - Class I, 0.62%(e) |
4,134,964 | ||
| ||||
TOTAL MONEY MARKET FUNDS |
4,134,964 | |||
| ||||
TOTAL INVESTMENTS 100.0% |
56,494,816 | |||
OTHER ASSETS IN EXCESS |
19,961 | |||
| ||||
NET ASSETS 100.0% |
$ 56,514,777 | |||
|
The accompanying notes are an integral part of the financial statements
8
THE FAIRHOLME ALLOCATION FUND
SCHEDULE OF INVESTMENTS (continued)
May 31, 2022 (Unaudited)
(a) | Restricted/controlled security. The value of this security totals $17,152,150, which represents 30.35% of The Allocation Funds net assets. Informationrelated to this security is as follows: |
Shares | Issuer |
Acquisition Date(s) |
Acquisition Cost |
5/31/2022 Value Per Share | ||||||||
348,267 | The St. Joe Co. |
08/09/2017-09/01/2017 | $6,615,792 | $49.25 |
(b) | Non-income producing security. |
(c) | Variable rate security. Rates shown are the effective rates as of May 31, 2022. |
(d) | Rates shown are the effective yields based on the purchase price. The calculation assumes the security is held to maturity. |
(e) | Annualized based on the 1-day yield as of May 31, 2022. |
The accompanying notes are an integral part of the financial statements.
9
THE FAIRHOLME ALLOCATION FUND
STATEMENT OF ASSETS & LIABILITIES
May 31, 2022 (unaudited)
Assets |
||||
Investments, at Fair Value (Cost $64,299,407) |
$ | 56,494,816 | ||
Dividends and Interest Receivable |
58,010 | |||
|
|
|||
Total Assets |
56,552,826 | |||
|
|
|||
Liabilities |
||||
Accrued Management Fees |
38,049 | |||
|
|
|||
Total Liabilities |
38,049 | |||
|
|
|||
NET ASSETS |
$ | 56,514,777 | ||
|
|
|||
Net Assets consist of: |
||||
Paid-In Capital |
$ | 111,122,023 | ||
Total Accumulated Losses |
(54,607,246 | ) | ||
|
|
|||
NET ASSETS |
$ | 56,514,777 | ||
|
|
|||
Shares of Common Stock Outstanding* ($0.0001 par value) |
6,374,427 | |||
|
|
|||
Net Asset Value, Offering and Redemption Price Per Share |
$ | 8.87 | ||
|
|
* 200,000,000 shares authorized in total.
The accompanying notes are an integral part of the financial statements.
10
THE FAIRHOLME ALLOCATION FUND
STATEMENT OF OPERATIONS (unaudited)
For the Six Months Ended May 31, 2022 |
||||||||
Investment Income |
||||||||
Interest |
$ | 4,162 | ||||||
Dividends |
240,112 | |||||||
|
|
|||||||
Total Investment Income |
244,274 | |||||||
|
|
|||||||
Expenses |
||||||||
Management Fees |
280,517 | |||||||
|
|
|||||||
Total Expenses |
280,517 | |||||||
|
|
|||||||
Less: Voluntary Reduction of Management Fees |
(56,100 | ) | ||||||
|
|
|||||||
Net Expenses |
224,417 | |||||||
|
|
|||||||
Net Investment Income |
19,857 | |||||||
|
|
|||||||
Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Related Transactions |
||||||||
Net Realized Gain (Loss) on: |
||||||||
Investments |
2,079,258 | |||||||
Foreign Currency Related Transactions |
(574 | ) | ||||||
Net Change in Unrealized Appreciation (Depreciation) on: |
||||||||
Investments |
1,600,470 | |||||||
Foreign Currency Related Transactions |
453 | |||||||
|
|
|||||||
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Related Transactions |
3,679,607 | |||||||
|
|
|||||||
NET INCREASE IN NET ASSETS FROM OPERATIONS |
$ | 3,699,464 | ||||||
|
|
The accompanying notes are an integral part of the financial statements.
11
THE FAIRHOLME ALLOCATION FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Six Months Ended May 31, 2022 (Unaudited) |
For the Fiscal Year Ended November 30, 2021 |
|||||||||||||||
CHANGES IN NET ASSETS |
||||||||||||||||
From Operations |
||||||||||||||||
Net Investment Income |
$ | 19,857 | $ | 270,604 | ||||||||||||
Net Realized Gain on Investments and Foreign Currency Related Transactions |
2,078,684 | 499,331 | ||||||||||||||
Net Change in Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Related Translations |
1,600,923 | 1,838,378 | ||||||||||||||
|
|
|
|
|||||||||||||
Net Increase in Net Assets from Operations |
3,699,464 | 2,608,313 | ||||||||||||||
|
|
|
|
|||||||||||||
From Dividends and Distributions to Shareholders |
||||||||||||||||
Net Decrease in Net Assets from Dividends and Distributions |
(208,700 | ) | (144,235 | ) | ||||||||||||
|
|
|
|
|||||||||||||
From Capital Share Transactions |
||||||||||||||||
Proceeds from Sale of Shares |
931,713 | 469,490 | ||||||||||||||
Shares Issued in Reinvestment of Dividends and Distributions |
72,640 | 51,335 | ||||||||||||||
Redemption Fees |
1,077 | 516 | ||||||||||||||
Cost of Shares Redeemed |
(1,119,810 | ) | (6,108,144 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Net Decrease in Net Assets from Shareholder Activity |
(114,380 | ) | (5,586,803 | ) | ||||||||||||
|
|
|
|
|||||||||||||
NET ASSETS |
||||||||||||||||
Net Increase (Decrease) in Net Assets |
3,376,384 | (3,122,725 | ) | |||||||||||||
Net Assets at Beginning of Period |
53,138,393 | 56,261,118 | ||||||||||||||
|
|
|
|
|||||||||||||
Net Assets at End of Period |
$ | 56,514,777 | $ | 53,138,393 | ||||||||||||
|
|
|
|
|||||||||||||
SHARES TRANSACTIONS |
||||||||||||||||
Issued |
104,332 | 52,919 | ||||||||||||||
Reinvested |
8,869 | 5,768 | ||||||||||||||
Redeemed |
(127,980 | ) | (681,783 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Net Decrease in Shares |
(14,779 | ) | (623,096 | ) | ||||||||||||
Shares Outstanding at Beginning of Period |
6,389,206 | 7,012,302 | ||||||||||||||
|
|
|
|
|||||||||||||
Shares Outstanding at End of Period |
6,374,427 | 6,389,206 | ||||||||||||||
|
|
|
|
The accompanying notes are an integral part of the financial statements.
12
THE FAIRHOLME ALLOCATION FUND
For the Six Months |
For the Fiscal Year Ended November 30, | |||||||||||||||||||||||
Ended May 31, 2022 (Unaudited) |
2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||
PER SHARE OPERATING PERFORMANCE |
||||||||||||||||||||||||
NET ASSET VALUE, BEGINNING OF PERIOD |
$8.32 | $8.02 | $7.00 | $6.58 | $7.44 | $9.65 | ||||||||||||||||||
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Investment Operations |
||||||||||||||||||||||||
Net Investment Income(1) |
0.00 | (2) | 0.04 | 0.02 | 0.09 | 0.09 | 0.10 | |||||||||||||||||
Net Realized and Unrealized Gain (Loss) on Investments |
0.58 | 0.28 | 1.10 | 0.40 | (0.83 | ) | (1.71 | ) | ||||||||||||||||
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Total from Investment Operations |
0.58 | 0.32 | 1.12 | 0.49 | (0.74 | ) | (1.61 | ) | ||||||||||||||||
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Dividends and Distributions |
||||||||||||||||||||||||
From Net Investment Income |
(0.03 | ) | (0.02 | ) | (0.10 | ) | (0.07 | ) | (0.12 | ) | (0.17 | ) | ||||||||||||
From Realized Capital Gains |
| | | | | (0.43 | ) | |||||||||||||||||
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|
|
|
|
|||||||||||||
Total Dividends and Distributions |
(0.03 | ) | (0.02 | ) | (0.10 | ) | (0.07 | ) | (0.12 | ) | (0.60 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Redemption Fees(1) |
0.00 | (3) | 0.00 | (3) | 0.00 | (3) | 0.00 | (3) | 0.00 | (3) | 0.00 | (3) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
NET ASSET VALUE, END OF PERIOD |
$8.87 | $8.32 | $8.02 | $7.00 | $6.58 | $7.44 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
TOTAL RETURN |
|
7.04 |
%(4) |
3.98 | % | 16.13 | % | 7.61 | % | (10.18 | )% | (17.59 | )% | |||||||||||
Ratio/Supplemental Data |
||||||||||||||||||||||||
Net Assets, End of Period (in 000s) |
$56,515 | $53,138 | $56,261 | $58,983 | $72,387 | $114,190 | ||||||||||||||||||
Ratio of Gross Expenses to Average Net Assets |
|
1.00 |
%(5) |
1.00 | % | |
1.02 |
%(6) |
|
1.02 |
%(6) |
1.00 | % | 1.00 | % | |||||||||
Ratio of Net Expenses to Average Net Assets |
0.80 | %(5)(7) | |
0.80 |
%(7) |
0.82 | %(6)(7) | 0.82 | %(6)(7) | |
0.82 |
%(7) |
1.00 | % | ||||||||||
Ratio of Net Investment Income to Average Net Assets |
|
0.07 |
%(5) |
0.46 | % | 0.24 | % | 1.21 | % | 1.32 | % | 1.19 | % | |||||||||||
Portfolio Turnover Rate |
|
9.74 |
%(4) |
41.20 | % | 32.15 | % | 15.58 | % | 23.52 | % | 31.01 | % |
(1) | Based on average shares outstanding. |
(2) | Amount represents less than $0.005 per share. |
(3) | Redemption fees represent less than $0.01. |
(4) | Not annualized. |
(5) | Annualized. |
(6) | 0.02% is attributable to legal expenses incurred outside the management fee. |
(7) | Effective January 1, 2018, the Manager has agreed to waive, on a voluntary basis, a portion of the management fee of The Allocation Fund to the extent necessary to limit the management fee paid to the Manager by The Allocation Fund to an annual rate of 0.80% of the daily average net asset value of The Allocation Fund. |
The accompanying notes are an integral part of the financial statements.
13
THE FAIRHOLME ALLOCATION FUND
May 31, 2022 (unaudited)
Note 1. Organization
Fairholme Funds, Inc. (the Company), a Maryland corporation, is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company. The Companys Articles of Incorporation permit the Board of Directors of the Company (the Board or the Directors) to issue 1,100,000,000 shares of common stock at $.0001 par value. 200,000,000 shares have been allocated to The Fairholme Allocation Fund (The Allocation Fund). The Allocation Fund is a non-diversified fund. The Allocation Fund may have a greater percentage of its assets invested in particular securities than a diversified fund, exposing The Allocation Fund to the risk of unanticipated industry conditions as well as risks specific to a single company or the securities of a single company. The Allocation Fund has different objectives, capitalizations, and considerations that may or may not lead to differing compositions of issuers, securities within an issuer, and cash levels within The Allocation Fund. The Board has the power to designate one or more separate and distinct series and/or classes of shares of common stock and to classify or reclassify any unissued shares with respect to such series.
The Allocation Fund investment objective is to seek long-term total return. Under normal circumstances, The Allocation Fund seeks to achieve its investment objective by investing opportunistically in a focused portfolio of investments in the equity, fixed-income and cash, and cash-equivalent asset classes. The proportion of The Allocation Fund portfolio invested in each asset class will vary from time to time based on Fairholme Capital Management, L.L.C.s (the Manager) assessment of relative fundamental values of securities and other investments in the asset class, the attractiveness of investment opportunities within each asset class, general market and economic conditions, and expected future returns of other investment opportunities. The Allocation Fund seeks to capitalize on anticipated fluctuations in the financial markets by changing the mix of its holdings in the targeted asset classes. The Allocation Fund may maintain a significant portion of its assets in cash and cash-equivalent securities and investments. The Manager serves as investment adviser to The Allocation Fund.
There is no guarantee that The Allocation Fund will meet its respective objectives.
Note 2. Significant Accounting Policies
As an investment company, The Allocation Fund follows the investment company accounting and reporting guidance, which is part of U.S. generally accepted accounting principles (U.S. GAAP). The Allocation Funds investments are reported at fair value as defined by U.S. GAAP. The Allocation Fund calculates its net asset values as soon as practicable following the close of regular trading on the New York Stock Exchange (currently 4:00 p.m. Eastern Time) on each day the New York Stock Exchange is open.
A description of the valuation techniques applied to The Allocation Funds securities measured at fair value on a recurring basis follows:
Security Valuation:
Equity securities (common and preferred stocks): Securities traded on a national securities exchange or reported on the NASDAQ national market are generally valued at the official closing price, or at the last reported sale price on the exchange or market on which the securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified in Level 1 of the fair value hierarchy. If these securities are not actively traded, they are classified in Level 2. Subject to the oversight of the Board, the Manager may determine the fair valuation of a security when market quotations are insufficient or not readily available, when securities are determined to be illiquid or restricted, or when in the judgment of the Manager the prices or values available do not represent the fair value of the instrument. In these situations, if the inputs are observable, the valuation will be classified in Level 2 of the fair value hierarchy, otherwise they would be classified in Level 3.
Fixed-income securities (U.S. government obligations, corporate bonds, convertible bonds, and asset backed securities): The fair value of fixed-income securities is determined using market quotations when readily available, but may also be estimated by various methods when no such market quotations exist and when the Manager believes these other methods reflect the fair value of such securities. These methods may consider recently executed transactions in securities of the issuer or comparable issuers and market price valuations from independent pricing services and/or brokers (where observable). Where the Manager deems it appropriate to do so (such as when independent prices are unavailable or not deemed to be representative of fair value)
14
THE FAIRHOLME ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
fixed income securities will be fair valued in good faith following consideration by, and conclusion of, the Managers Valuation and Liquidity Risk Management Committee. As of May 31, 2022, fixed-income securities are valued by the Manager utilizing observable market prices on the day of valuation or the average bid of independent broker/dealer quotes and/or the average of valuations from independent pricing services. Although fixed-income securities are classified in Level 2 of the fair value hierarchy at May 31, 2022, in instances where significant unobservable inputs are used, they would be classified in Level 3.
Open-end mutual funds: Investments in open-end mutual fund including money market fund are valued at their closing net asset value each business day and are classified in Level 1 of the fair value hierarchy.
Short-term securities: Investments in securities with maturities of less than sixty days when acquired, or which subsequently are within sixty days of maturity, shall be valued at prices supplied by an independent pricing source or by one of the Funds pricing agents based on broker or dealer supplied valuations or matrix pricing. To the extent the inputs are observable and timely, the values would be classified in Level 2 of the fair value hierarchy.
Restricted securities: The Manager is deemed to be an affiliate of The St. Joe Co. (Joe) for purposes of the Securities Act of 1933 and Rule 144. This determination was made based on a number of factors, including the collective ownership of Joe by The Allocation Fund and other advisory clients advised by the Manager. Shares of Joe owned by The Allocation Fund are considered control securities under Rule 144 and are treated as restricted securities for purposes of The Allocation Fund valuation procedures. Due to the restrictions on resale, the securities are generally valued at a discount to similar publicly traded securities. Depending on the relative significance of valuation inputs, these instruments may be classified in either Level 2 or Level 3 of the fair value hierarchy. Joe was classified as Level 2 at May 31, 2022.
The Allocation Fund uses several recognized industry third-party pricing services (TPPS), which are approved by the Board and unaffiliated with the Manager, to provide prices for some of The Allocation Funds securities. The Allocation Fund also uses other independent market trade data sources (such as TRACE, the FINRA developed mandatory reporting of over-the-counter secondary market transactions), as well as broker quotes provided by market makers. The data within these feeds is ultimately sourced from major stock exchanges and trading systems where these securities trade. If a price obtained from the pricing source is deemed unreliable, it may be discarded and/or challenged. In these cases the pricing decision is made by reference to the reliable market data from the other market data sources.
Subject to the oversight of the Board, the Manager may determine the fair valuation of a security when market quotations are insufficient or not readily available, when securities are determined to be illiquid or restricted, or when in the judgment of the Manager the prices or values available do not represent the fair value of the instrument. Factors which may cause the Manager to make such a judgment include the following: (a) only a bid price or an asked price is available; (b) the spread between bid and asked prices is substantial; (c) the liquidity of the securities; (d) the frequency of sales; (e) the thinness of the market; (f) the size of reported trades; (g) actions of the securities markets, such as the suspension or limitation of trading; and (h) local market closures. Among the factors to be considered to fair value a security are recent prices of comparable securities that are publicly traded, reliable prices of securities not publicly traded, the use of valuation models, current analyst reports, valuing the income or cash flow of the issuer, or cost if the preceding factors do not apply. The circumstances of fair valued securities are frequently monitored to determine if fair valuation measures continue to apply.
The Manager reports quarterly to the Board the results of the application of fair valuation policies and procedures.
The inputs and valuation techniques used to measure fair value of The Allocation Funds investments are summarized into three levels as described in the hierarchy below:
|
Level 1 |
quoted prices in active markets for identical securities; | ||
|
Level 2 |
other significant observable inputs (including quoted prices for similar securities, quoted prices in inactive markets for identical securities, interest rates, prepayment speeds, credit risk, etc.); and | ||
|
Level 3 |
significant unobservable inputs (including the Managers determination as to the fair value of investments). |
15
THE FAIRHOLME ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
The inputs or methodology used for valuing investments are not necessarily an indication of the level of risk associated with investing in those investments. The summary of The Allocation Funds investments by inputs used to value The Allocation Funds investments as of May 31, 2022, is as follows:
Valuation Inputs | ||||||||||||||||
Level 2 - Other | Level 3 - | |||||||||||||||
Significant | Significant | Total | ||||||||||||||
Level 1 - | Observable | Observable | Fair Value | |||||||||||||
Quoted Prices | Inputs | Inputs | at 05/31/22 | |||||||||||||
THE ALLOCATION FUND |
||||||||||||||||
ASSETS: |
||||||||||||||||
INVESTMENTS (Fair Value): |
||||||||||||||||
Domestic Equity Securities |
||||||||||||||||
Real Estate Management & Development |
$ | | $ | 17,152,150 | $ | | $ | 17,152,150 | ||||||||
Other Industries* |
19,455,878 | | | 19,455,878 | ||||||||||||
Foreign Equity Securities* |
7,064,437 | | | 7,064,437 | ||||||||||||
Domestic Preferred Equity Securities* |
1,756,979 | | | 1,756,979 | ||||||||||||
Rights* |
28,606 | | | 28,606 | ||||||||||||
U.S. Government Obligations |
| 6,901,802 | | 6,901,802 | ||||||||||||
Money Market Funds |
4,134,964 | | | 4,134,964 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
TOTAL INVESTMENTS |
$ | 32,440,864 | $ | 24,053,952 | $ | | $ | 56,494,816 | ||||||||
|
|
|
|
|
|
|
|
* | Industry classification for these categories are detailed in the Schedule of Investments. |
There were no Level 3 investments for The Allocation Fund at May 31, 2022 or November 30, 2021.
Dividends and Distributions: The Allocation Fund records dividends and distributions to its shareholders on the ex-dividend date. The Allocation Fund intends to distribute substantially all of its net investment income (if any) as dividends to its respective shareholders on an annual basis in December. The Allocation Fund intends to distribute any net long-term capital gains and any net short-term capital gains at least once a year. If the total dividends and distributions made in any tax year exceeds net investment income and accumulated realized capital gains, a portion of the total distribution may be treated as a tax return of capital.
Foreign Currency Translation: The books and records of The Allocation Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (i) fair value of investment securities, assets, and liabilities at the current rate of exchange; and (ii) purchases and sales of investment securities, income, and expenses at the relevant rates of exchange prevailing on the respective dates of such transactions. The Allocation Fund does not isolate that portion of gains and losses on investment securities which is due to changes in the foreign exchange rates from that which is due to changes in the market prices of such securities.
Estimates: The preparation of financial statements in conformity with U.S. GAAP requires The Allocation Fund to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reported period. Actual results could differ from those estimates.
Redemption Fee: The Allocation Fund assess a 2% fee on the proceeds of The Allocation Fund shares that are redeemed or exchanged within 60 days of their purchase. The redemption fee is paid to The Allocation Fund, as applicable, for the benefit of remaining shareholders and is recorded as paid-in capital. The redemption fees retained by The Allocation Fund during the six months ended May 31, 2022 and the year ended November 30, 2021, amounted to $1,077 and $516, respectively.
16
THE FAIRHOLME ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
Other: The Allocation Fund accounts for security transactions on the trade date for financial statement purposes. The specific identification method is used for determining gains or losses for financial statements and income tax purposes. Dividend income is recorded on the ex-dividend date net of foreign taxes withheld where recovery is uncertain and interest income is recorded on an accrual basis. Discounts and premiums on securities purchased are amortized over the life of the respective securities using the effective yield method. Securities denominated in currencies other than U.S. dollars are subject to changes in value due to fluctuation in exchange rates. The Allocation Fund may invest in countries that require governmental approval for the repatriation of investment income, capital, or the proceeds of sales of securities by foreign investors. In addition, if there is deterioration in a countrys balance of payments or for other reasons, a country may impose temporary restrictions on foreign capital remittances abroad.
The Allocation Fund paid commissions and other brokerage fees during the period.
Note 3. Related Party Transactions
The Manager is a Delaware limited liability company and is registered with the SEC as an investment adviser. The Managers principal business is to provide investment management and advisory services to individuals, corporations, and other institutions throughout the world. Pursuant to an Investment Management Agreement, The Allocation Fund pays a management fee to the Manager for its provision of investment advisory and operating services to The Allocation Fund. Subject to applicable waivers or limitations, the management fee is paid at an annual rate equal to 1.00% of the daily average net assets of The Allocation Fund. Effective January 1, 2018, the Manager has agreed to waive, on a voluntary basis, a portion of the management fees of The Allocation Fund to the extent necessary to limit the management fee of The Allocation Fund to the annual rate of 0.80% of The Allocation Funds daily average net asset value (Undertaking). This Undertaking may be terminated by the Manager upon 60 days written notice to The Allocation Fund. The Manager is not responsible pursuant to the Investment Management Agreement for paying The Allocation Fund expenses for the following services: transfer agency, fund accounting, fund administration, custody, legal, audit, compliance, directors fees, call center, fulfillment, travel, insurance, rent, printing, postage and other office supplies. The Manager is not responsible for paying for the following costs and expenses of The Allocation Fund: commissions, brokerage fees, issue and transfer taxes, and other costs chargeable to The Allocation Fund in connection with securities transactions or in connection with securities owned by The Allocation Fund, taxes, interest, acquired fund fees and related expenses, expenses in connection with litigation by or against The Allocation Fund, and any other extraordinary expenses.
The Manager earned, after the voluntary reduction of the management fees $224,417 from The Allocation Fund for its services during the six months ended May 31, 2022.
Bruce Berkowitz, both the Chief Investment Officer of the Manager and Chairman of The Allocation Funds Board, and his affiliates beneficially own an aggregate 4,388,234 shares of The Allocation Fund at May 31, 2022.
A Director and Officers of The Allocation Fund are also Officers of the Manager or its affiliates.
Note 4. Investments
For the six months ended May 31, 2022, aggregated purchases and sales of investment securities other than short-term investments and U.S. government obligations were as follows:
Purchases | Sales | |||||||
The Allocation Fund |
$ | 4,316,336 | $ | 4,535,985 |
Note 5. Tax Matters
Federal Income Taxes: The Allocation Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. By so qualifying, The Allocation Fund will not be subject to federal income taxes to the extent that it distributes all of its net investment income and any realized capital gains.
17
THE FAIRHOLME ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
For U.S. federal income tax purposes, the cost of securities owned, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) of investments at May 31, 2022, were as follows:
Gross | Gross | Net Unrealized | ||||||||||||||
Unrealized | Unrealized | Appreciation/ | ||||||||||||||
Cost | Appreciation | Depreciation | (Depreciation) | |||||||||||||
The Allocation Fund |
$ | 64,299,407 | $15,000,894 | $(22,805,485) | $(7,804,591) |
The difference between book basis and tax basis for The Allocation Fund net unrealized depreciation is attributable to capitalized cost and basis adjustments on investments in partnerships.
The Allocation Funds tax basis capital gains are determined only at the end of each fiscal year. Therefore the components of distributable earnings will be included in the Annual Report for the fiscal year ended November 30, 2022.
The Allocation Fund is permitted to carry forward for an unlimited period capital losses incurred to reduce future required distributions of net capital gains to shareholders. Capital losses that are carried forward will retain their character as either short-term or long-term capital losses. As of November 30, 2021, net short-term and long-term capital loss carryforwards were as follows:
The Allocation | ||||
Fund | ||||
Short-term capital loss carryforward |
$ | |||
Long-term capital loss carryforward |
48,880,365 | |||
|
|
|||
Total |
$48,880,365 | |||
|
|
The Manager has analyzed The Allocation Funds tax positions taken on tax returns for all open tax years (current and prior three tax years) and has concluded that there are no uncertain tax positions that require recognition of a tax liability. The Allocation Funds federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired (the current year and prior three years) are subject to examination by the Internal Revenue Service and state departments of revenue. Additionally, The Allocation Fund is not aware of any tax position for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months.
Note 6. Dividends and Distributions to Shareholders
Ordinary income and capital gain distributions are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP.
The tax character of dividends and distributions paid by The Allocation Fund were as follows:
The Allocation Fund | ||||||||
For the | ||||||||
For the | Fiscal Year | |||||||
Six Months | Ended | |||||||
Ended | November 30, | |||||||
May 31, 2022 | 2021 | |||||||
Dividends and Distributions paid from: |
||||||||
Ordinary Income |
$ | 208,700 | $ | 144,235 | ||||
|
|
|
|
18
THE FAIRHOLME ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
Note 7. Indemnifications
Under the Companys organizational documents, its Officers and Directors are indemnified against certain liabilities arising out of the performance of their duties to The Allocation Fund. In the normal course of business the Company or The Allocation Fund enter into contracts that contain a variety of representations and customary indemnifications. The Allocation Funds maximum exposure under these arrangements is unknown as this would involve future claims that may be made against The Allocation Fund that have not yet occurred. However, based on its experience to date, The Allocation Fund expects the risk of loss to be remote.
Note 8. Legal-Proceedings
On April 17, 2019, Sears Holdings Corporation, Sears Roebuck and Co., Sears Development Co., Kmart Corporation and Kmart of Washington LLC commenced an adversary proceeding in the United States Bankruptcy Court for the Southern District of New York against Edward Scott Eddie Lampert; ESL Investments, Inc.; RBS Partners LP; CRK Partners LLC; SPE Master I L.P.; ESL Partners L.P.; SPE I Partners L.P.; RBS Investment Management LLC; ESL Institutional Partners L.P.; ESL Investors, L.L.C.; JPP LLC; JPP II LLC; Fairholme Capital Management, L.L.C.; Cesar L. Alvarez; Bruce Berkowitz; Alesia Haas; Kunal Kamlani; Steven Mnuchin; Thomas J. Tisch; Seritage Growth Properties, Inc.; Seritage Growth Properties, L.P.; Seritage KMT Mezzanine Finance LLC; Seritage SRC Mezzanine Finance LLC; Seritage KMT Finance LLC; Seritage SRC Finance LLC; Seritage GS Holdings LLC; Seritage SPS Holdings LLC; and Seritage MS Holdings LLC (the First Action). On November 25, 2019, the plaintiffs filed an amended complaint, adding the Company and other parties not affiliated with the Manager or the Company as additional defendants and asserting new causes of action against the defendants.
In the amended complaint, Plaintiffs assert avoidance and other claims against certain defendants, including the Manager, for participation in two Sears corporate transactions: (i) the Lands End spinoff; and (ii) the Seritage rights offering. The avoidance claims against the Manager include, among other things, claims for the avoidance of consideration received from Sears Holdings Corp. in connection with the Lands End spinoff and Seritage rights offering that were allegedly actual and/ or constructive fraudulent transfers. Plaintiffs also assert avoidance and other claims seeking to recover amounts allegedly received by the Company from alleged related-party transactions with Sears and seek to avoid the release received by certain of the defendants, including the Manager and the Company, in connection with the Seritage derivative action. Plaintiffs also assert claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty arising out of certain related-party transactions against certain defendants, including the Manager and Bruce Berkowitz, and seek to subordinate the bankruptcy claims of the Company, the Manager and Bruce Berkowitz.
On February 21, 2020, the Company moved to dismiss all of the claims against it, and all other defendants, including the Manager and Bruce Berkowitz, moved to dismiss all or parts of the compliant against them. The Court held extensive oral argument on the motions to dismiss, which are currently pending before the Court.
On October 15, 2020, Sears Holdings Corp., Sears, Roebuck and Co., and The Official Committee of Unsecured Creditors of Sears Holdings Corporation, et al. commenced a second adversary proceeding in the United States Bankruptcy Court for the Southern District of New York against certain former shareholders of Sears Holdings Corporation that were not named in the First Action (the Second Action). In the Second Action, the plaintiffs assert claims for the avoidance of alleged consideration received in connection with the Lands End spinoff and the Seritage rights offering. Certain defendants in the Second Action have moved to dismiss all claims against them, and the motions to dismiss are currently pending before the Court. On March 15, 2021, the Court consolidated the Second Action into the First Action. Pursuant to Order entered April 6, 2022, the parties have engaged in a mediation which, to date, has not resulted in resolution of the First or Second Actions.
Although the Manager and the Company believe that they have strong defenses to the foregoing complaint and intend to defend themselves vigorously against the allegations in the complaint, neither the Manager nor the Company is in a position to express an opinion about the ultimate outcome of the litigation or the range of potential loss, if any.
19
THE FAIRHOLME ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS (continued)
May 31, 2022 (unaudited)
Note 9. Subsequent Events
Management has evaluated the impact on The Allocation Fund of all subsequent events occurring through the date the financial statement was issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statement.
20
THE FAIRHOLME ALLOCATION FUND
May 31, 2022 (unaudited)
Operation and Effectiveness of the Fund Liquidity Risk Management Program (unaudited)
Pursuant to Rule 22e-4 under the Investment Company Act of 1940, The Allocation Fund has adopted and implemented a liquidity risk management program (the Program) designed to assess and manage the risk that The Allocation Fund could not meet requests to redeem The Allocation Fund shares without significant dilution of remaining investors interests in The Allocation Fund. In assessing, managing and reviewing liquidity risk under the Program, The Allocation Fund considers a variety of factors, including its investment strategies, portfolio investments, portfolio concentration, cash flow projections, redemption policy and redemption history. In addition, the Program requires The Allocation Fund to, among other things, classify its investments into specific liquidity categories and monitor compliance with its limit on illiquid investments.
During the one-year period ended November 30, 2021 (the Covered Period), The Allocation Fund maintained a high level of liquidity and primarily held assets that were highly liquid investments (defined as cash and any investment reasonably expected to be convertible to cash in current market conditions in three business days or less without the conversion to cash significantly changing the market value of the investment). During the Covered Period, there were no liquidity events that materially affected The Allocation Funds performance or ability to timely meet redemptions without dilution to remaining investors interests in The Allocation Fund.
The Manager, which the Board has designated to administer the Program, prepared a written report that addressed the operation of the Program and assessed the Programs adequacy and effectiveness of implementation during the Covered Period (the Report). The Board reviewed and accepted the Report, which determined that the Program operated adequately and effectively in managing the liquidity risk of The Allocation Fund during the Covered Period.
Proxy Voting Policies, Procedures and Records (unaudited)
The Company has adopted policies and procedures that provide guidance and set forth parameters for the voting of proxies relating to securities held in The Allocation Funds portfolio. A description of these policies and procedures, and records of how The Allocation Fund voted proxies relating to its portfolio securities during the most recent twelve month period ended June 30, 2021, are available to you upon request and free of charge by writing to the Fairholme Funds, Inc., c/o BNY Mellon Investment Servicing (US) Inc., P.O. Box 9692, Providence, RI, 02940 or by calling Shareholder Services at (866) 202-2263. They may also be obtained by visiting the SEC website at www.sec.gov. The Company shall respond to all shareholder requests for records within three business days of its receipt of such request by first-class mail or other means designed to ensure prompt delivery.
Quarterly Filing (unaudited)
The Company files a complete schedule of The Allocation Fund portfolio holdings on Form N-PORT for the fiscal quarters ending February 28 (February 29 during leap year) and August 31. The Forms N-PORT are available on the SECs website at www.sec.gov.
21
FAIRHOLME FUNDS
Officers of Fairholme Funds, Inc.
BRUCE R. BERKOWITZ
President
FERNANDO M. FONT
Vice President
WAYNE KELLNER
Treasurer
ERICA K. KAPAHI
Chief Compliance Officer & Secretary
Board of Directors of Fairholme Funds, Inc.
TERRY L. BAXTER
BRUCE R. BERKOWITZ
STEVEN J. GILBERT, Esq.
LEIGH WALTERS, Esq.
Investment Manager
FAIRHOLME CAPITAL MANAGEMENT, L.L.C.
5966 South Dixie Highway, Suite 300, South Miami, FL 33143
Transfer Agent
BNY MELLON INVESTMENT SERVICING (US) INC.
4400 Computer Drive, Westborough, MA 01581-1722
Fund Accountant & Administrator
THE BANK OF NEW YORK MELLON
103 Bellevue Parkway, Wilmington, DE 19809
Custodian
THE BANK OF NEW YORK MELLON
240 Greenwich Street, New York, NY 10286
Independent Registered Public Accounting Firm
DELOITTE & TOUCHE LLP
200 Berkeley Street, Boston, MA 02116
Legal Counsel
SEWARD & KISSEL LLP
901 K Street NW, Washington, DC 20001
THIS REPORT IS PROVIDED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF FAIRHOLME FUNDS, INC. IT IS NOT INTENDED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUNDS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS, WHICH CONTAINS MORE INFORMATION ON FEES, CHARGES AND OTHER EXPENSES AND SHOULD BE READ CAREFULLY BEFORE INVESTING OR SENDING MONEY. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. SHARES OF THE FUNDS ARE DISTRIBUTED BY FORESIDE FUNDS DISTRIBUTORS LLC.
(b) | Not applicable |
Item 2. Code of Ethics.
Not applicable.
Item 3. Audit Committee Financial Expert.
Not applicable.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
(a) | Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1(a) of this Form. |
(b) | Not applicable. |
Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrants board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.
Item 11. Controls and Procedures.
(a) | The registrants principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrants disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the 1940 Act) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
(b) | There were no changes in the registrants internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d))) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrants internal control over financial reporting. |
Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
Not applicable.
Item 13. Exhibits.
(a)(1) | Not applicable. | |
(a)(2) | Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto as Exhibits (a)(2)(i) and (a)(2)(ii). | |
(a)(3) | Not applicable. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Fairholme Funds, Inc. |
By (Signature and Title)* | /s/ Bruce R. Berkowitz | |
Bruce R. Berkowitz, President | ||
(principal executive officer) | ||
Date July 29, 2022 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title)* | /s/ Bruce R. Berkowitz | |
Bruce R. Berkowitz, President | ||
(principal executive officer) | ||
Date July 29, 2022 | ||
By (Signature and Title)* | /s/ Wayne Kellner | |
Wayne Kellner, Treasurer | ||
(principal financial officer) | ||
Date July 29, 2022 |
* Print the name and title of each signing officer under his or her signature.
Exhibit (a)(2)(i)
Certification Pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act
I, Bruce R. Berkowitz, certify that:
1. | I have reviewed this report on Form N-CSR of Fairholme Funds, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: July 29, 2022 | /s/ Bruce R. Berkowitz | |
Bruce R. Berkowitz, President | ||
(principal executive officer) |
Exhibit (a)(2)(ii)
Certification Pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act
I, Wayne Kellner, certify that:
1. | I have reviewed this report on Form N-CSR of Fairholme Funds, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: July 29, 2022 | /s/ Wayne Kellner | |
Wayne Kellner, Treasurer | ||
(principal financial officer) |
Exhibit (b)
Certifications Pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act
I, Bruce R. Berkowitz, President of Fairholme Funds, Inc. (the Registrant), certify that:
1. | The Form N-CSR of the Registrant (the Report) for the period ended May 31, 2022 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
Date: July 29, 2022 | /s/ Bruce R. Berkowitz | |
Bruce R. Berkowitz, President | ||
(principal executive officer) |
I, Wayne Kellner, Treasurer of Fairholme Funds, Inc. (the Registrant), certify that:
1. | The Form N-CSR of the Registrant for the period ended May 31, 2022 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
Date: July 29, 2022 | /s/ Wayne Kellner | |
Wayne Kellner, Treasurer | ||
(principal financial officer) |
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