New Firm, Post-Fairholme

New Firm, Post-Fairholme

By ELEANOR LAISE
Two mutual-fund managers who helped steer the Fairholme Fund to market-beating returns for a decade are setting up a new money-management firm.

The managers, Larry Pitkowsky and Keith Trauner, plan in the coming days to make a regulatory filing for their first mutual fund. They say they aim to use the same value-oriented approach at GoodHaven Capital Management LLC that helped Fairholme become the large-cap-value category's third-best performer for the decade ending in December, delivering 11.5% annualized returns.

The question is whether they can replicate Fairholme's success on their own. The two worked for years beside Fairholme Capital Management LLC founder Bruce Berkowitz, who remains manager of the Fairholme fund and last year was named U.S. stock-fund manager of the decade by investment-research firm Morningstar Inc.

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Keith Trauner, left, and Larry Pitkowsky are launching GoodHaven
.Mr. Pitkowsky and Mr. Trauner joined Fairholme in 1999, the year the mutual fund was launched, and served as co-managers of the fund from 2002-07 and 2005-08, respectively. But Fairholme, which often concentrates its holdings in just a few sectors, has moved toward using more outside research in recent years, says Michael Breen, a fund analyst at Morningstar. Messrs. Pitkowsky and Trauner provided research-consulting services until last year, when "it just seemed like it was time to get less involved," Mr. Pitkowsky said.

Mr. Berkowitz will have no involvement in the new firm. "We wish them well in their new endeavor," Mr. Berkowitz said in a statement.

Messrs. Pitkowsky and Trauner are following a path well established by other managers who have used lessons learned alongside a star stock-picker to strike out on their own. These include managers like Charles de Vaulx and Charles de Lardemelle, who worked with well-known value investor Jean-Marie Eveillard at First Eagle funds before teaming up at International Value Advisers LLC, launched in 2007. And managers who worked with value-investing guru Michael Price at the Mutual Series funds have gone on to launch a number of successful ventures, including the Wintergreen fund managed by David Winters.

GoodHaven expects to start offering separately managed accounts, with a minimum investment of $1 million, in the coming weeks. The mutual fund is expected to launch around the start of the second quarter.

It already has lined up one outside investor: Markel Corp., a property-and-casualty insurance company that has made a "significant" minority investment in the new firm. Markel, which was a Fairholme portfolio holding in the early days of the fund, will also become GoodHaven's first client, investing through a separate account.

The GoodHaven fund will be highly concentrated, like Fairholme, with roughly 15 or 20 holdings, the managers say. And it will follow Fairholme's example of looking for bargains among companies that are under stress. "We're the kind of people who want to run toward a fire, instead of away from it," Mr. Trauner says. At Fairholme, Mr. Berkowitz has lately loaded up on financial-services firms such as American International Group Inc. and Citigroup Inc. that were beaten down during the financial crisis.

But Messrs. Pitkowsky and Trauner won't stick strictly to the Fairholme playbook. One difference: They are eager to look at smaller companies, whereas Fairholme has generally gravitated toward larger-cap holdings.

Despite the personnel changes, Fairholme doesn't show signs of faltering, delivering a return of 25.5% in 2010. And though investors have generally yanked money out of U.S. stock funds in recent years, Fairholme took in $1.1 billion of new money in 2009 and an additional $4.3 billion in 2010, ending the year with nearly $19 billion in assets, according to Morningstar.

Write to Eleanor Laise at eleanor.laise@wsj.com