Manager’s trek into bonds worth watching, not buying

Whenever one of the few bona fide stars of the fund world announces a new fund, savvy investors take notice.

That's what happened last week when Bruce Berkowitz, the man behind the hugely successful Fairholme Fund, filed paperwork to start a new bond fund. Fairholme Focused Income will invest across the entire spectrum of the bond world, from government bonds to corporates, convertibles, preferred shares and more. It's the kind of multisector fund that can be 100 percent of an investor's fixed-income allocation.

The question is whether investors want to hop on board with Berkowitz as he journeys into bonds; the answer is not as simple as "follow your star."

The Fairholme fund has been an undeniable success since its debutnearly 10 years ago. The fund holds Lipper Inc.'s top ranking for total return and consistent return. For the first 9½ years of its existence, it has an annualized gain of more than 12 percent, compared with a loss of more than 3 percent for the Standard & Poor's 500.

Berkowitz runs a focused portfolio, concentrating on finding deeply undervalued stocks and/or companies with great managers.

But there's a big difference between being a brilliant stock investor and a fabulous bond investor, because it's hard to be great on both sides of the ledger. There may be a reason why no one asks PIMCO's Bill Gross for his stock picks, or why many of the best balanced funds are team-managed, with specialists for each component.

Whether Berkowitz can be as great a bond fund manager as he has been a stock manager is an open question.

That said, Berkowitz' story is a bit different from several other star managers who have broken out new funds over the past decade.

The last new fund to generate this kind of hype was the Wintergreen fund run by David Winters, who cut his teeth working with two famed value investors, Max Heine and Michael Price, and taking over Mutual Series when Price left. When he broke away to start his own fund, many investors followed, and they were rewarded for that move with a five-star rated large-cap blend fund that has been in the top 15 percent of its peer group over the past three years.

For every guy like Winters, however, there's a Garrett Van Wagoner, who left Govett Smaller Companies and got off to a hot start in several new funds, peaking as the industry's top performer in 1999. But investors clearly confused the bull market for brilliance, and when the bull turned to bear, Van Wagoner's record turned to mud. His funds raced each other to the bottom of the performance charts, and a combination of mismanagement and stupidity resulted in one of the worst records in mutual fund history until the plug was pulled.

The bond fund does have some drawbacks, not the least of which is a $25,000 minimum initial investment. This is hardly the kind of fund that average fund investors can dip their toe in, staking an early claim and planning to go deeper if Berkowitz proves the fund.

There's also an expense ratio that may double when the fund hits its first birthday. Thanks to an expense waiver, Fairholme Focused Income -- not yet assigned a ticker symbol -- will charge just 0.5 percent in expenses when it starts, but the waiver is set to expire after a year, which would push costs up to 1.0 percent, slightly above average for multisector bond funds.

Charles A. Jaffe is senior columnist at MarketWatch. He can be reached at or at Box 70, Cohasset, MA 02025-0070.