Form N-CSR FAIRHOLME FUNDS INC For: Nov 30

February 6, 2020 2:37 PM EST

Get instant alerts when news breaks on your stocks. Claim your 1-week free trial to StreetInsider Premium here.

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)

2601 NE 2nd Avenue

                             Miami, FL 33137                            

(Address of principal executive offices) (Zip code)

Bruce R. Berkowitz

2601 NE 2nd Avenue

                             Miami, FL 33137                            

(Name and address of agent for service)

Registrant’s telephone number, including area code:  1-866-202-2263

Date of fiscal year end:  November 30

Date of reporting period:  November 30, 2019

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.

The Reports to Shareholders of each Fund are attached herewith.

 


 

LOGO

FAIRHOLME FUNDS, INC.

The Fairholme Fund (FAIRX)

Seeking long-term growth of capital

The Fairholme Focused Income Fund (FOCIX)

Seeking current income

The Fairholme Allocation Fund (FAAFX)

Seeking long-term total return

Annual Report

November 30, 2019

Managed by Fairholme Capital Management

(866) 202-2263 • fairholmefunds.com


FAIRHOLME FUNDS, INC.

 

 

 

TABLE OF CONTENTS

November 30, 2019

 

 

     Page  

MANAGEMENT DISCUSSION & ANALYSIS

FUND PERFORMANCE:

  

THE FAIRHOLME FUND

     3  

THE FAIRHOLME FOCUSED INCOME FUND

     4  

THE FAIRHOLME ALLOCATION FUND

     5  

MANAGEMENT DISCUSSION & ANALYSIS REPORT

     6  

EXPENSE EXAMPLE

     11  

THE FAIRHOLME FUND:

  

SCHEDULE OF INVESTMENTS

     12  

STATEMENT OF ASSETS & LIABILITIES

     15  

STATEMENT OF OPERATIONS

     16  

STATEMENTS OF CHANGES IN NET ASSETS

     17  

FINANCIAL HIGHLIGHTS

     18  

THE FAIRHOLME FOCUSED INCOME FUND:

  

SCHEDULE OF INVESTMENTS

     19  

STATEMENT OF ASSETS & LIABILITIES

     22  

STATEMENT OF OPERATIONS

     23  

STATEMENTS OF CHANGES IN NET ASSETS

     24  

FINANCIAL HIGHLIGHTS

     25  

THE FAIRHOLME ALLOCATION FUND:

  

SCHEDULE OF INVESTMENTS

     26  

STATEMENT OF ASSETS & LIABILITIES

     28  

STATEMENT OF OPERATIONS

     29  

STATEMENTS OF CHANGES IN NET ASSETS

     30  

FINANCIAL HIGHLIGHTS

     31  

NOTES TO FINANCIAL STATEMENTS

     32  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     42  

ADDITIONAL INFORMATION

     43  

 

2


FAIRHOLME FUNDS, INC.

 

 

 

FUND PERFORMANCE (unaudited)

November 30, 2009 — November 30, 2019

 

THE FAIRHOLME FUND VS. THE S&P 500 INDEX

INITIAL INVESTMENT OF $10,000

 

LOGO

The Fairholme Fund (“The Fairholme Fund”) commenced operations on December 29, 1999. The chart above presents the performance of a $10,000 investment for up to ten years to the latest annual period ending November 30, 2019.

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 investor’s 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.

 

3


FAIRHOLME FUNDS, INC.

 

 

 

FUND PERFORMANCE (unaudited)

Inception through November 30, 2019

 

THE INCOME FUND VS.

The BLOOMBERG BARCLAYS U.S. AGGREGATE BOND INDEX

INITIAL INVESTMENT OF $10,000

 

LOGO

The Fairholme Focused Income Fund (“The Income Fund”) commenced operations on December 31, 2009. The chart above presents the performance of a $10,000 investment from inception to the latest annual period ending November 30, 2019.

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 investor’s 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 Barclays 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 Barclays 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 Barclays U.S. Aggregate Bond Index does not reflect any investment management fees or transaction expenses, nor the effects of taxes, fees, or other charges.

 

4


FAIRHOLME FUNDS, INC.

 

 

 

FUND PERFORMANCE (unaudited)

Inception through November 30, 2019

 

THE ALLOCATION FUND VS. The BLOOMBERG BARCLAYS U.S.

AGGREGATE BOND INDEX AND THE S&P 500 INDEX

INITIAL INVESTMENT OF $10,000

 

LOGO

The Fairholme Allocation Fund (“The Allocation Fund”) commenced operations on December 31, 2010. The chart above presents the performance of a $10,000 investment from inception to the latest annual period ending November 30, 2019.

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 investor’s 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 Barclays 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 Barclays 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.

 

5


FAIRHOLME FUNDS, INC.

 

 

 

MANAGEMENT DISCUSSION & ANALYSIS

For the Fiscal Year Ended November 30, 2019

 

The Fairholme Fund, The Income Fund, and The Allocation Fund (each a “Fund” and collectively, the “Funds”) shares outstanding and unaudited net asset value per share (“NAV”) at November 30, 2019, the end of the Funds’ fiscal year, and NAVs at other pertinent dates, were as follows:

 

     11/30/2019
Shares
Outstanding
            11/30/2019
NAV
(unaudited)
        05/31/2019
NAV
(audited)
        11/30/2018
NAV
(unaudited)

The Fairholme Fund

     55,059,022                        $19.19                  $18.97                  $16.05

The Income Fund

     17,529,966         $10.23       $10.61       $  9.88

The Allocation Fund

     8,423,476         $  7.00       $  7.53       $  6.58

At December 31, 2019, the unaudited NAVs of The Fairholme Fund, The Income Fund, and The Allocation Fund were $19.83, $10.28, and $7.20, respectively.

Performance figures below are shown for the Funds’ fiscal year ended November 30, 2019, and do not match calendar year figures for the period ended December 31, 2019, cited in the Portfolio Manager’s report.

 

The Fairholme Fund
Performance to
11/30/2019 (Unaudited)

   Six
Months
           One
Year
           Five
Years
           Ten
Years
           Fifteen
Years
           Since
Inception
12/29/1999
 

Cumulative:

                                                              

The Fairholme Fund

     1.16        22.20        2.36        62.52        135.62        446.08%  

S&P 500 Index

     15.26        16.11        68.34        252.90        265.54        215.97%  

Annualized:

                           

The Fairholme Fund

          22.20        0.47        4.98        5.88        8.89%  

S&P 500 Index

          16.11        10.98        13.44        9.03        5.94%  

For the six months ended November 30, 2019, The Fairholme Fund was outperformed by the S&P 500 Index (“S&P 500”) by 14.1 percentage points, while over the last year The Fairholme Fund outperformed the S&P 500 by 6.09 percentage points. From inception, The Fairholme Fund outperformed the S&P 500 by 2.95 percentage points per annum, or on a cumulative basis, 230.11 percentage points over nineteen years and eleven months.

 

The Income Fund
Performance to
11/30/2019 (Unaudited)

   Six
Months
           One
Year
           Five
Year
           Since
Inception
12/31/2009
 

Cumulative:

                                      

The Income Fund

     -2.22        6.49        26.63        87.24

Bloomberg Barclays Bond Index

     3.81        10.79        16.40        44.55

Annualized:

                 

The Income Fund

          6.49        4.83        6.53

Bloomberg Barclays Bond Index

          10.79        3.08        3.79

 

6


FAIRHOLME FUNDS, INC.

 

 

 

MANAGEMENT DISCUSSION & ANALYSIS (continued)

For the Fiscal Year Ended November 30, 2019

 

 

For the six months ended November 30, 2019, The Income Fund was outperformed by the Bloomberg Barclays U.S. Aggregate Bond Index (“Bloomberg Barclays Bond Index”) by 6.03 percentage points, while over the last year The Income Fund was outperformed by the Bloomberg Barclays Bond Index by 4.30 percentage points. From inception, The Income Fund outperformed the Bloomberg Barclays Bond Index by 2.74 percentage points per annum, or on a cumulative basis, 42.69 percentage points over nine years and eleven months.

 

The Allocation Fund

Performance to

11/30/2019 (Unaudited)

   Six
Months
           One
Year
           Five
Year
           Since
Inception
12/31/2010
 

Cumulative:

                                      

The Allocation Fund

     -7.04        7.61        -19.39        1.98

Bloomberg Barclays Bond Index

     3.81        10.79        16.40        35.67

S&P 500 Index

     15.26        16.11        68.34        200.88

Annualized:

                 

The Allocation Fund

          7.61        -4.22        0.22

Bloomberg Barclays Bond Index

          10.79        3.08        3.48

S&P 500 Index

          16.11        10.98        13.15

For the six months ended November 30, 2019, The Allocation Fund was outperformed by the Bloomberg Barclays Bond Index and the S&P 500 by 10.85 and 22.30 percentage points, respectively, while over the last year The Allocation Fund was outperformed by the Bloomberg Barclays Bond Index by 3.18 percentage points and outperformed the S&P 500 by 8.50 percentage points. From inception, The Allocation Fund was outperformed by the Bloomberg Barclays Bond Index and the S&P 500 by 3.26 and 12.93 percentage points per annum, respectively, or on a cumulative basis, 33.69 and 198.90 percentage points over eight years and eleven months.

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 Barclays Bond Index are unmanaged indices incurring no fees, expenses, or tax effects and are shown solely to compare the Funds’ performance to that of unmanaged and diversified indices of securities. Shareholders are also cautioned that it is possible that some securities mentioned in this discussion may no longer be held by a Fund subsequent to the end of the fiscal period, and that a Fund may have made new investments that are not yet required to be disclosed. It is the 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.

Not all Fund portfolio dispositions or additions are material, and, while the Funds 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 Manager’s assessment of certain attractive characteristics of a company, general market conditions and expected future returns of an investment.

The Manager invests each Fund’s assets in securities to the extent the Manager finds reasonable investment opportunities in accordance with the Fund’s respective investment strategies, policies and restrictions, as stated in the Fund’s Prospectus and may invest a significant portion of each Fund’s assets in cash. The Manager views liquidity as a strategic advantage. At November 30, 2019, cash and cash equivalents (consisting of cash, commercial

 

7


FAIRHOLME FUNDS, INC.

 

 

 

MANAGEMENT DISCUSSION & ANALYSIS (continued)

For the Fiscal Year Ended November 30, 2019

 

 

paper, deposit accounts, U.S. Treasury Bills, and money-market funds) represented 41.3%, 86.9%, and 67.5% of The Fairholme Fund, The Income Fund, and The Allocation Fund total assets, respectively. Since inception, the Funds have held varying levels of cash and cash equivalents for periods without, in the Manager’s view, negatively influencing performance.

Each Fund is considered to be “non-diversified” under the Investment Company Act of 1940. Accordingly, each 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 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 Funds may also have a greater percentage of assets invested in a particular sector than a diversified fund, exposing the Funds to the risk of an unanticipated event or condition and risks affecting a single company, sector or security.

The commentaries below provide details of each Fund’s portfolio holdings by issuer and sector, as well as reporting the most significant positive and negative performance by investment for the fiscal year ended November 30, 2019.

The most significant gains in each of the Funds’ portfolios related to positive developments in the Real Estate Management and Development, Mortgage Finance, and Metals & Mining sectors. Investments in the Retail Department Stores, Oil & Natural Gas Exploration and Leisure Products sectors saw some losses during the fiscal year.

The Manager made no changes to the core investment strategies and techniques it employed during the fiscal year ended November 30, 2019.

For the fiscal year ended November 30, 2019, The Fairholme Fund investments that were the biggest contributors to positive performance were the St. Joe Co. (“Joe”), Imperial Metals Corp. (“Imperial”), Federal Home Loan Mortgage Corp. (“Freddie”), and Federal National Mortgage Association (“Fannie”). There weren’t any significant contributors to negative performance during the period. The following charts show the top holdings by issuer and sector in descending order of net assets as of November 30, 2019.

 

       

The Fairholme Fund

Top Holdings by Issuer*

(% of Net Assets)

         

The Fairholme Fund

Top Sectors

(% of Net Assets)

      
     

The St. Joe Co.

     39.9%          Cash and Cash Equivalents**      41.3%      

Federal Home Loan Mortgage Corp.

     8.9%          Real Estate Management & Development      39.9%      

Federal National Mortgage Association

     8.9%          Mortgage Finance      17.8%      

Imperial Metals Corp.

     0.8%          Metals & Mining      0.8%      

Vista Outdoor, Inc.

     0.1%          Leisure Products      0.1%      

Sears Holdings Corp.

     0.1%          Retail Department Store      0.1%      
    

 

 

           

 

 

     
       58.7%               100.0%      
    

 

 

           

 

 

     
                                  

 

*

Excludes cash, U.S. Treasury Bills, commercial paper, and money market funds.

**

Includes cash, U.S. Treasury Bills, commercial paper, and money market funds.

 

8


FAIRHOLME FUNDS, INC.

 

 

 

MANAGEMENT DISCUSSION & ANALYSIS (continued)

For the Fiscal Year Ended November 30, 2019

 

 

For the fiscal year ended November 30, 2019, The Income Fund investments that were the biggest contributors to positive performance were Imperial and Freddie. The biggest contributor to negative performance during the period was investment in Chesapeake Energy Corp. The following charts show the top holdings by issuer and sector in descending order of net assets as of November 30, 2019.

 

         

The Income Fund

Top Holdings by Issuer*

(% of Net Assets)

               

The Income Fund

Top Sectors

(% of Net Assets)

       
                       

Federal Home Loan Mortgage Corp.

     4.2%              Cash and Cash Equivalents**      86.9%       

The Goldman Sachs Group, Inc.

     2.7%              Mortgage Finance      4.2%       

GMAC Capital Trust I, Inc.

     1.8%              Diversified Banks      3.0%       

Chesapeake Energy Corp.

     1.3%              Capital Markets      2.7%       

Bank of America Corp.

     1.2%              Consumer Finance      1.8%       

JP Morgan Chase & Co.

     1.1%              Oil & Natural Gas Exploration      1.3%       

Wells Fargo & Co.

     0.7%              Retail Department Stores      0.1%       

Sears Holdings Corp.

     0.1%                     
    

 

 

               

 

 

      
       13.1%                   100.0%       
    

 

 

               

 

 

      
                                          

 

*

Excludes cash, U.S. Treasury Bills, commercial paper, and money market funds.

**

Includes cash, U.S. Treasury Bills, commercial paper, and money market funds.

For the fiscal year ended November 30, 2019, The Allocation Fund investments that were the biggest contributors to positive performance were Freddie, Fannie, Joe, and Imperial. The biggest contributor to negative performance during the period was investment in Chesapeake Energy Corp. The following charts show the top holdings by issuer and sector in descending order of net assets as of November 30, 2019.

 

         

The Allocation Fund

Top Holdings by Issuer*

(% of Net Assets)

               

The Allocation Fund

Top Sectors

(% of Net Assets)

       
                       

The St. Joe Co.

     10.9%              Cash and Cash Equivalents**      67.5%       

Federal Home Loan Mortgage Corp.

     7.9%              Mortgage Finance      15.7%       

Federal National Mortgage Association

     7.8%              Real Estate Management & Development      10.9%       

Imperial Metals Corp.

     4.8%              Metals & Mining      4.8%       

Chesapeake Energy Corp.

     1.2%              Oil & Natural Gas Exploration      1.2%       
    

 

 

               

 

 

      
       32.6%                   100.1%       
    

 

 

               

 

 

      
                                       

 

*

Excludes cash, U.S. Treasury Bills, commercial paper, and money market funds.

**

Includes cash, U.S. Treasury Bills, commercial paper, and 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 Funds can be found in the Funds’ Prospectus and Statement of Additional Information.

Large cash inflows or outflows may adversely affect the Funds’ performance. Such flows are monitored and actions deemed appropriate by the Manager are contemplated for when such flows could negatively impact performance.

 

9


FAIRHOLME FUNDS, INC.

 

 

 

MANAGEMENT DISCUSSION & ANALYSIS (continued)

For the Fiscal Year Ended November 30, 2019

 

 

Since inception, the Funds have been advised by the Manager. Bruce Berkowitz, both the Chief Investment Officer of the Manager and Chairman of the Funds’ Board of Directors (the “Board” or the “Directors”), and his affiliates beneficially own an aggregate 10,784,408, 6,691,382, and 4,382,931 shares of The Fairholme Fund, The Income Fund, and The Allocation Fund, respectively, at November 30, 2019. While there is no requirement that Mr. Berkowitz own shares of the Funds, 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 Funds to have Mr. Berkowitz serve as Chairman of the Board given: his long-term relative performance; his experience, commitment, and significant personal investment in the Funds; the present composition of the Board; and current rules and regulations. A Director and Officers of the Funds are also Officers of the Manager. Nevertheless, at November 30, 2019, a majority of Directors were independent of the Manager, no stock option or restricted stock plans exist, Officers received no direct compensation from the Funds, and the Director affiliated with the Manager received no compensation for being a Director.

For more complete information about the Funds, or to obtain a current Prospectus, please visit www.fairholmefunds.com or call Shareholder Services at (866) 202-2263.

 

10


FAIRHOLME FUNDS, INC.

 

 

 

EXPENSE EXAMPLE

For the Six Month Period from June 1, 2019

through November 30, 2019 (unaudited)

 

As a shareholder of a 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 and 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 Funds 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 Funds at June 1, 2019, and held for the entire six month period ending November 30, 2019.

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 each Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 Funds 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
June 1, 2019
   Ending
Account Value
November 30, 2019
   Annualized
Expense
Ratio*
  Expenses Paid
During the Period
June 1, 2019
Through
November 30, 2019**

The Fairholme Fund

                  

Actual

     $ 1,000.00      $ 1,011.60        0.81 %     $ 4.08

Hypothetical
(5% return before expenses)

     $ 1,000.00      $ 1,021.01        0.81 %     $ 4.10
                                            

The Income Fund

                  

Actual

     $ 1,000.00      $ 977.80        0.82 %     $ 4.07

Hypothetical
(5% return before expenses)

     $ 1,000.00      $ 1,020.96        0.82 %     $ 4.15
                                            

The Allocation Fund

                  

Actual

     $ 1,000.00      $ 929.60        0.82 %     $ 3.97

Hypothetical
(5% return before expenses)

     $ 1,000.00      $ 1,020.96        0.82 %     $ 4.15
                                            

 

*

Effective January 1, 2018, the Manager has agreed to waive, on a voluntary basis, a portion of the management fee of The Fairholme Fund, The Income Fund and The Allocation Fund to the extent necessary to limit the management fee paid to the Manager by The Fairholme Fund, The Income Fund and The Allocation Fund, respectively, to an annual rate of 0.80% of that Fund’s daily average net asset value. This undertaking may be terminated by the Manager upon 60 days’ written notice to the applicable Fund.

**

Expenses are equal to each Fund’s annualized expense ratio, multiplied by the average account value over the period, multiplied by 183 days/365 days (to reflect the one-half year period).

 

11


THE FAIRHOLME FUND

 

 

 

SCHEDULE OF INVESTMENTS

November 30, 2019

 

 

  Shares  

         Value  
 

DOMESTIC EQUITY SECURITIES — 40.1%

 

  LEISURE PRODUCTS — 0.1%   
  152,790    

Vista Outdoor, Inc. (a)

   $ 1,265,101  
    

 

 

 
 

REAL ESTATE MANAGEMENT
& DEVELOPMENT — 40.0%

  
  22,208,024    

The St. Joe Co. (a)(b)

     421,952,456  
    

 

 

 
 

TOTAL DOMESTIC EQUITY SECURITIES
(COST $595,247,788)

     423,217,557  
    

 

 

 
 

FOREIGN EQUITY SECURITIES — 0.8%

 

  CANADA — 0.8%   
  METALS & MINING — 0.8%   
  6,865,767    

Imperial Metals Corp. (a)(b)

     8,787,024  
    

 

 

 
 

TOTAL FOREIGN EQUITY SECURITIES
(COST $64,630,492)

     8,787,024  
    

 

 

 
 

DOMESTIC PREFERRED EQUITY SECURITIES — 17.8%

 

  MORTGAGE FINANCE — 17.8%   
  8,955,013    

Federal Home Loan Mortgage Corp.

  
 

7.875%, Series Z (a)(c)

     94,027,637  
  8,784,077    

Federal National Mortgage Association

  
 

7.750%, Series S (a)(c)

     93,462,579  
    

 

 

 
           187,490,216  
    

 

 

 
 

TOTAL DOMESTIC PREFERRED
EQUITY SECURITIES
(COST $75,287,318)

     187,490,216  
    

 

 

 

Principal

            
  DOMESTIC CORPORATE
BONDS — 0.1%
  
  RETAIL DEPARTMENT
STORES — 0.1%
  
  $97,022,000    

Sears Holdings Corp.

  
 

8.000%, 12/15/2019 (d)

     1,144,860  
    

 

 

 
 

TOTAL DOMESTIC CORPORATE BONDS
(COST $97,385,904)

     1,144,860  
    

 

 

 

  Principal  

        Value  
 

COMMERCIAL PAPER — 35.6%

 
  APPAREL — 0.1%  
  $1,500,000    

VF Corp.

 
 

1.651%, 12/09/2019 (e)(f)

  $ 1,499,244  
   

 

 

 
  AUTO MANUFACTURERS — 2.2%  
 

Ford Motor Credit Co.

 
  14,000,000    

2.512%, 01/02/2020 (e)(f)

    13,965,582  
  8,900,000    

2.358%, 01/03/2020 (e)(f)

    8,877,442  
   

 

 

 
          22,843,024  
   

 

 

 
  BEVERAGES — 5.4%  
 

Anheuser-Busch Inbev NV

 
  11,000,000    

1.732%, 12/09/2019 (e)(f)

    10,994,671  
  19,000,000    

1.752%, 12/18/2019 (e)(f)

    18,982,321  
 

Constellation Brands, Inc.

 
  17,000,000    

1.922%, 12/16/2019 (e)(f)

    16,979,666  
  10,000,000    

2.007%, 01/24/2020 (e)(f)

    9,959,136  
   

 

 

 
          56,915,794  
   

 

 

 
  CHEMICALS — 2.8%  
 

Albemarle Corp.

 
  11,000,000    

1.782%, 12/03/2019 (e)(f)

    10,997,573  
  6,000,000    

1.781%, 12/05/2019 (e)(f)

    5,998,461  
  8,000,000    

1.782%, 12/06/2019 (e)(f)

    7,996,904  
  2,000,000    

1.781%, 12/09/2019 (e)(f)

    1,998,892  
  3,000,000    

1.835%, 01/06/2020 (e)(f)

    2,991,871  
   

 

 

 
          29,983,701  
   

 

 

 
 

DIVERSIFIED
TELECOMMUNICATIONS — 1.6%

 
 

AT&T, Inc.

 
  1,000,000    

1.811%, 12/02/2019 (e)(f)

    999,860  
  10,000,000    

1.903%, 12/04/2019 (e)(f)

    9,997,621  
  5,550,000    

1.803%, 12/11/2019 (e)(f)

    5,546,615  
   

 

 

 
          16,544,096  
   

 

 

 
  ENERGY — 2.7%  
 

Berkshire Hathaway Energy Co.

 
  12,850,000    

1.712%, 12/03/2019 (e)(f)

    12,847,322  
  10,000,000    

1.732%, 12/10/2019 (e)(f)

    9,994,338  
  6,000,000    

1.742%, 12/13/2019 (e)(f)

    5,995,700  
   

 

 

 
          28,837,360  
   

 

 

 
  ENERGY SERVICES — 0.9%  
  8,970,000    

Duke Energy Corp.

 
 

1.741%, 12/03/2019 (e)(f)

    8,968,243  
   

 

 

 
 

 

The accompanying notes are an integral part of the financial statements.

 

12


THE FAIRHOLME FUND

 

 

 

SCHEDULE OF INVESTMENTS (continued)

November 30, 2019

 

 

Principal

         Value  
 

COMMERCIAL PAPER
(CONTINUED) — 35.6%

  
  FOOD PRODUCTS — 2.2%

 

 

Mondelez International, Inc.

  
  $8,000,000    

1.792%, 12/10/2019 (e)(f)

   $ 7,995,705  
  10,000,000    

1.812%, 12/13/2019 (e)(f)

     9,993,043  
  5,000,000    

1.793%, 12/26/2019 (e)(f)

     4,993,100  
    

 

 

 
       22,981,848  
    

 

 

 
  HOTEL, RESORTS & CRUISE LINES — 4.8%

 

  20,000,000    

Marriott International, Inc.

  
 

2.078%, 12/20/2019 (e)(f)

     19,978,767  
 

Royal Caribbean Cruises Ltd.

  
  8,000,000    

1.951%, 12/03/2019 (e)(f)

     7,998,400  
  22,000,000    

2.004%, 12/27/2019 (e)(f)

     21,968,464  
  1,000,000    

2.054%, 01/06/2020 (e)(f)

     997,795  
    

 

 

 
       50,943,426  
    

 

 

 
  MULTIMEDIA — 2.9%   
     

Viacom, Inc.

      
  2,000,000    

1.911%, 12/10/2019 (e)(f)

     1,998,908  
  19,000,000    

1.912%, 12/12/2019 (e)(f)

     18,987,698  
  10,000,000    

1.902%, 12/13/2019 (e)(f)

     9,993,012  
    

 

 

 
       30,979,618  
    

 

 

 
 

OIL & GAS STORAGE &
TRANSPORTATION — 3.0%

  
  2,000,000    

Energy Transfer Operating LP

  
 

2.051%, 12/04/2019 (e)(f)

     1,999,266  
 

Enterprise Products Partners LP

  
  15,000,000    

1.801%, 12/02/2019 (e)(f)

     14,997,800  
  15,000,000    

1.801%, 12/05/2019 (e)(f)

     14,995,575  
    

 

 

 
       31,992,641  
    

 

 

 
 

OIL & NATURAL GAS
EXPLORATION — 0.9%

  
  10,000,000     Canadian Natural Resources Ltd.   
 

1.841%, 12/11/2019 (e)(f)

     9,994,780  
    

 

 

 
  PACKAGED FOODS — 3.5%   
  Campbell Soup Co.   
  11,000,000    

2.145%, 12/06/2019 (e)(f)

     10,995,945  
  10,000,000    

2.156%, 12/09/2019 (e)(f)

     9,994,750  
  10,000,000    

1.882%, 12/10/2019 (e)(f)

     9,994,231  
  Tyson Foods, Inc.   
  5,000,000    

1.752%, 12/02/2019 (e)(f)

     4,999,207  
  1,000,000    

1.782%, 12/16/2019 (e)(f)

     999,114  
    

 

 

 
           36,983,247  
    

 

 

 

Principal

         Value  
 

COMMERCIAL PAPER
(CONTINUED) —35.6%

  
 

RAILROADS — 1.4%

  
 

Canadian Pacific Railway Ltd.

 

  $ 6,000,000    

1.752%, 12/12/2019 (e)(f)

   $ 5,996,115  
  9,000,000    

1.855%, 01/21/2020 (e)(f)

     8,974,878  
    

 

 

 
       14,970,993  
    

 

 

 
 

RETAIL DRUG STORE —0.4%

 

  4,000,000    

Walgreens Boots Alliance, Inc.

  
 

2.025%, 01/13/2020 (e)(f)

     3,989,875  
    

 

 

 
    
 

TECHNOLOGY HARDWARE &
EQUIPMENT — 0.5%

 

  5,000,000    

Arrow Electronics, Inc.

  
 

1.903%, 12/03/2019 (e)(f)

     4,998,525  
    

 

 

 
 

WIRELESS COMMUNICATION
SERVICES — 0.3%

 

  3,000,000    

Bell Canada

  
 

1.906%, 01/06/2020 (e)(f)

     2,994,018  
    

 

 

 
 

TOTAL COMMERCIAL PAPER
(COST $376,474,448)

     376,420,433  
    

 

 

 
 

U.S. GOVERNMENT
OBLIGATIONS — 4.7%

 

 

U.S. Treasury Bills

  
  50,000,000    

1.666%, 12/17/2019 (f)

     49,967,109  
    

 

 

 
 

TOTAL U.S. GOVERNMENT
OBLIGATIONS
(COST $49,963,078)

     49,967,109  
    

 

 

 

  Shares  

            
 

MONEY MARKET FUNDS — 1.0%

  
  10,371,371    

Fidelity Investments Money Market Treasury Portfolio - Class I, 1.53% (g)

     10,371,371  
    

 

 

 
 

TOTAL MONEY MARKET FUNDS
(COST $10,371,371)

     10,371,371  
    

 

 

 
 

TOTAL INVESTMENTS — 100.1%
(COST $1,269,360,399)

     1,057,398,570  
 

LIABILITIES IN EXCESS OF OTHER ASSETS — (0.1)%

     (858,030
    

 

 

 
 

NET ASSETS — 100.0%

   $ 1,056,540,540  
    

 

 

 
 

 

 

The accompanying notes are an integral part of the financial statements.

 

13


THE FAIRHOLME FUND

 

 

 

SCHEDULE OF INVESTMENTS (continued)

November 30, 2019

 

 

(a)

Non-income producing security.

(b)

Affiliated Company. See Note 8.

(c) 

Variable rate security. Rates shown are the effective rates as of November 30, 2019.

(d)

Security in default and no interest was accrued as of November 30, 2019.

(e) 

Restricted security as set forth in Rule 144(a) under the Securities Act of 1933. The value of these investments totals $376,420,433, which represents 35.63% of The Fairholme Fund’s net assets.

(f) 

Rates shown are the effective yields based on the purchase price. The calculation assumes the security is held to maturity.

(g)

Annualized based on the 1-day yield as of November 30, 2019.

 

The accompanying notes are an integral part of the financial statements.

 

14


THE FAIRHOLME FUND

 

 

 

STATEMENT OF ASSETS & LIABILITIES

November 30, 2019

 

 

Assets

  

Investments, at Fair Value:

  

Unaffiliated Issuers (Cost — $611,526,290)

   $ 626,659,090  

Affiliated Issuers (Cost — $657,834,109)

     430,739,480  

Interest Receivable

     181,235  

Receivable for Capital Shares Sold

     10,388  
  

 

 

 

Total Assets

     1,057,590,193  
  

 

 

 

Liabilities

  

Accrued Management Fees

     689,013  

Payable for Capital Shares Redeemed

     360,640  
  

 

 

 

Total Liabilities

     1,049,653  
  

 

 

 

NET ASSETS

   $ 1,056,540,540  
  

 

 

 

Net Assets Consist of:

  

Paid-In Capital

   $ 2,008,134,487  

Total Accumulated Losses

     (951,593,947
  

 

 

 

NET ASSETS

   $ 1,056,540,540  
  

 

 

 

Shares of Common Stock Outstanding* ($0.0001 par value)

     55,059,022  
  

 

 

 

Net Asset Value, Offering and Redemption Price Per Share ($1,056,540,540 / 55,059,022 shares)

   $ 19.19  
  

 

 

 

* 700,000,000 shares authorized in total.

 

 

The accompanying notes are an integral part of the financial statements.

 

15


THE FAIRHOLME FUND

 

 

 

STATEMENT OF OPERATIONS

 

 

     For the
Fiscal Year Ended
November 30, 2019
 

Investment Income

                 

Interest — Unaffiliated Issuers

                  $ 10,120,431  

Interest — Affiliated Issuers

                    7,897,101  

Dividends — Unaffiliated Issuers

                    158,400  
                 

 

 

 

Total Investment Income

                    18,175,932  
                 

 

 

 

Expenses

                 

Management Fees

                    10,940,735  

Legal Expenses

                    44,395  
                 

 

 

 

Total Expenses

                    10,985,130  
                 

 

 

 

Less: Voluntary Reduction of Management Fees

                    (2,188,147
                 

 

 

 

Net Expenses

                    8,796,983  
                 

 

 

 

Net Investment Income

                    9,378,949  
                 

 

 

 

Realized and Unrealized Gain on Investments, Foreign

                 

Currency Related Transactions and Redemption In-Kind

                 

Net Realized Gain on Investments and Foreign Currency

                 

Related Transactions*

                 

Unaffiliated Issuers

                    3,272,103  

Affiliated Issuers

                    1,335  

Net Realized Gain on Redemption In-Kind

                 

Unaffiliated Issuers

                    1,021,307  

Affiliated Issuers

                    313,156  

Net Change in Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Related Translations

                    202,650,238  
                 

 

 

 

Net Realized and Unrealized Gain on Investments, Foreign Currency Related Transactions and Redemption In-Kind

                    207,258,139  
                 

 

 

 

NET INCREASE IN NET ASSETS FROM OPERATIONS

                  $ 216,637,088  
                 

 

 

 

* Realized gain includes $5,666,801 related to amounts received from a class action settlement for a security previously held by the Fund.

 

The accompanying notes are an integral part of the financial statements.

 

16


THE FAIRHOLME FUND

 

 

 

STATEMENTS OF CHANGES IN NET ASSETS

 

 

     For the Fiscal Year
Ended
November 30, 2019
    For the Fiscal Year
Ended
November 30, 2018
 

CHANGES IN NET ASSETS

                            

From Operations

                            

Net Investment Income

               $ 9,378,949                 $ 23,034,554  

Net Realized Gain (Loss) on Investments, Redemption In-Kind and Foreign Currency Related Transactions

                 4,607,901                   (745,845,681

Net Change in Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Related Translations

                 202,650,238                   524,777,058  
              

 

 

               

 

 

 

Net Increase (Decrease) in Net Assets from Operations

                 216,637,088                   (198,034,069
              

 

 

               

 

 

 

From Dividends and Distributions to Shareholders

                            

Net Decrease in Net Assets from Dividends and Distributions

                 (22,052,477                 (24,854,774
              

 

 

               

 

 

 

From Capital Share Transactions

                            

Proceeds from Sale of Shares

                 27,873,325                   90,282,215  

Shares Issued in Reinvestment of Dividends and Distributions

                 20,660,229                   23,181,634  

Redemption Fees

                 37,027                   33,620  

Cost of Shares Redeemed

                 (238,279,392                 (697,223,062

Cost of Shares Redeemed In-Kind

                 (13,200,907                  
              

 

 

               

 

 

 

Net Decrease in Net Assets from Shareholder Activity

                 (202,909,718                 (583,725,593
              

 

 

               

 

 

 

NET ASSETS

                            

Net Decrease in Net Assets

                 (8,325,107                 (806,614,436

Net Assets at Beginning of Year

                 1,064,865,647                   1,871,480,083  
              

 

 

               

 

 

 

Net Assets at End of Year

               $ 1,056,540,540                 $ 1,064,865,647  
              

 

 

               

 

 

 

SHARES TRANSACTIONS

                            

Issued

                 1,583,280                   4,864,645  

Reinvested

                 1,352,111                   1,184,549  

Redeemed

                 (13,466,927                 (37,685,937

Redeemed In-Kind

                 (761,812                  
              

 

 

               

 

 

 

Net Decrease in Shares

                 (11,293,348                 (31,636,743

Shares Outstanding at Beginning of Year

                 66,352,370                   97,989,113  
              

 

 

               

 

 

 

Shares Outstanding at End of Year

                 55,059,022                   66,352,370  
              

 

 

               

 

 

 

 

The accompanying notes are an integral part of the financial statements.

 

17


THE FAIRHOLME FUND

 

 

 

FINANCIAL HIGHLIGHTS

 

 

     For the Fiscal Year Ended November 30,  
     2019     2018     2017     2016     2015  

PER SHARE OPERATING PERFORMANCE

          

NET ASSET VALUE, BEGINNING OF YEAR

     $16.05       $19.10       $24.26       $34.24       $37.96  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment Operations

          

Net Investment Income(1)

     0.16       0.29       0.23       0.33       0.46  

Net Realized and Unrealized Gain (Loss) on Investments

     3.32       (3.08     (3.81     2.60       (1.10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total from Investment Operations

     3.48       (2.79     (3.58     2.93       (0.64
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends and Distributions

          

From Net Investment Income

     (0.34     (0.26     (0.40     (0.60      

From Realized Capital Gains

                 (1.18     (12.31     (3.08
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Dividends and Distributions

     (0.34     (0.26     (1.58     (12.91     (3.08
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Redemption Fees(1)

     0.00 (2)       0.00 (2)       0.00 (2)       0.00 (2)       0.00 (2)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET ASSET VALUE, END OF YEAR

     $19.19       $16.05       $19.10       $24.26       $34.24  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL RETURN

     22.20     (14.85 )%      (15.64 )%      18.93     (1.95 )% 

Ratio/Supplemental Data

          

Net Assets, End of Year (in 000’s)

     $1,056,541       $1,064,866       $1,871,480       $3,155,709       $4,612,354  

Ratio of Gross Expenses to Average Net Assets

     1.00 %(3)       1.00     1.02 %(4)       1.02 %(4)       1.03 %(5)  

Ratio of Net Expenses to Average Net Assets

     0.80 %(3)(6)       0.82 %(6)       1.02 %(4)       1.02 %(4)       1.03 %(5)  

Ratio of Net Investment Income (Loss) to Average Net Assets

     0.86     1.57     1.14     1.79     1.31

Portfolio Turnover Rate

     8.05     16.29     6.57     19.19     40.46

 

(1) 

Based on average shares outstanding.

(2) 

Redemption fees represent less than $0.01.

(3) 

Less than 0.01% is attributable to legal expenses incurred outside of the 1.00% management fee.

(4) 

0.02% is attributable to legal expenses incurred outside of the 1.00% management fee.

(5) 

0.03% is attributable to legal expenses incurred outside of the 1.00% management fee and less than 0.01% is attributable to registration fees and miscellaneous expenses incurred outside of the 1.00% 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 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.

 

18


THE FAIRHOLME FOCUSED INCOME FUND

 

 

 

SCHEDULE OF INVESTMENTS

November 30, 2019

 

 

  Shares  

         Value  
 

DOMESTIC PREFERRED EQUITY
SECURITIES — 7.2%

 

 

CONSUMER FINANCE — 1.8%

 

  123,700    

GMAC Capital Trust I, Inc. 7.695%, Series 2 (a)

   $ 3,207,541  
    

 

 

 
 

MORTGAGE FINANCE — 4.2%

 

 

Federal Home Loan Mortgage Corp.

  
  302,300    

5.100%, Series H (a)(b)

     5,139,100  
  260,924    

6.550%, Series Y (a)(b)

     2,374,408  
    

 

 

 
       7,513,508  
    

 

 

 
 

OIL & NATURAL GAS EXPLORATION — 1.2%

  
 

Chesapeake Energy Corp.

  
  42,416    

5.000%

     752,884  
  6,083    

5.750%

     909,104  
  3,350    

5.750%

     496,169  
  600    

5.750% (c)

     89,670  
  100    

5.750% (c)

     14,811  
    

 

 

 
       2,262,638  
    

 

 

 
 

TOTAL DOMESTIC PREFERRED
EQUITY SECURITIES
(COST $15,409,950)

     12,983,687  
    

 

 

 

  Principal  

            
 

DOMESTIC CORPORATE
BONDS — 5.9%

  
 

CAPITAL MARKETS — 2.7%

  
  $4,823,000    

The Goldman Sachs Group, Inc.

  
 

5.785%, Series L (d)(e)

     4,843,739  
    

 

 

 
 

DIVERSIFIED BANKS — 3.1%

  
  2,000,000    

Bank of America Corp.

  
 

5.200%, Series U (d)(f)

     2,090,800  
  2,000,000    

JPMorgan Chase & Co.

  
 

5.300%, Series Z (d)(f)

     2,024,000  
  1,318,000    

Wells Fargo & Co. (3 mo. LIBOR + 3.770%)

  
 

5.889%, Series K (d)(e)

     1,336,716  
    

 

 

 
       5,451,516  
    

 

 

 

Principal

         Value  
 

DOMESTIC CORPORATE BONDS
(CONTINUED) — 5.9%

 

 

RETAIL DEPARTMENT
STORES — 0.1%

 

  $17,595,500    

Sears Holdings Corp.

  
 

8.000%, 12/15/2019 (g)

   $ 207,627  
    

 

 

 
 

TOTAL DOMESTIC CORPORATE BONDS
(COST $26,988,480)

     10,502,882  
    

 

 

 
 

COMMERCIAL PAPER — 80.5%

 

 

APPAREL — 3.1%

  
 

VF Corp.

  
  1,500,000    

1.651%, 12/03/2019 (h)(i)

     1,499,699  
  4,000,000    

1.651%, 12/05/2019 (h)(i)

     3,998,794  
    

 

 

 
       5,498,493  
    

 

 

 
 

AUTO MANUFACTURERS — 3.9%

 

  7,000,000    

Ford Motor Credit Co.

  
 

2.514%, 01/02/2020 (h)(i)

     6,982,791  
    

 

 

 
 

AUTOMOTIVE RETAIL — 3.2%

 

  5,800,000    

AutoZone, Inc.

  
 

1.721%, 12/04/2019 (h)(i)

     5,798,577  
    

 

 

 
 

BEVERAGES — 5.6%

  
 

Anheuser-Busch Inbev NV

  
  4,000,000    

1.732%, 12/09/2019 (h)(i)

     3,998,062  
  1,000,000    

1.732%, 12/16/2019 (h)(i)

     999,170  
  5,000,000    

Constellation Brands, Inc.

  
 

2.007%, 01/13/2020 (h)(i)

     4,983,813  
    

 

 

 
       9,981,045  
    

 

 

 
 

CHEMICALS — 5.6%

  
  5,000,000    

Albemarle Corp.

  
 

1.781%, 12/09/2019 (h)(i)

     4,997,231  
  5,000,000    

Sherwin-Williams Co.

  
 

1.931%, 12/04/2019 (h)(i)

     4,998,919  
    

 

 

 
       9,996,150  
    

 

 

 
 

DIVERSIFIED
TELECOMMUNICATIONS — 7.2%

 

 

AT&T, Inc.

  
  1,000,000    

1.811%, 12/02/2019 (h)(i)

     999,860  
  5,000,000    

1.803%, 12/11/2019 (h)(i)

     4,996,950  
 

 

The accompanying notes are an integral part of the financial statements.

 

19


THE FAIRHOLME FOCUSED INCOME FUND

 

 

 

SCHEDULE OF INVESTMENTS (continued)

November 30, 2019

 

 

Principal

         Value  
 

COMMERCIAL PAPER
(CONTINUED) — 80.5%

  
 

DIVERSIFIED TELECOMMU-NICATIONS (continued)

  
  $7,000,000    

TELUS Corp.

  
 

1.804%, 12/17/2019 (h)(i)

   $ 6,993,665  
    

 

 

 
       12,990,475  
    

 

 

 
 

ENERGY — 2.8%

  
 

Berkshire Hathaway Energy Co.

  
  3,000,000    

1.711%, 12/05/2019 (h)(i)

     2,999,065  
  2,000,000    

1.712%, 12/11/2019 (h)(i)

     1,998,767  
    

 

 

 
       4,997,832  
    

 

 

 
 

ENERGY SERVICES — 2.2%

  
 

Duke Energy Corp.

  
  3,000,000    

1.751%, 12/03/2019 (h)(i)

     2,999,412  
  1,000,000    

1.751%, 12/09/2019 (h)(i)

     999,505  
    

 

 

 
       3,998,917  
    

 

 

 
 

FOOD PRODUCTS — 2.8%

  
 

Mondelez International, Inc.

  
  4,000,000    

1.751%, 12/03/2019 (h)(i)

     3,999,253  
  1,000,000    

1.803%, 12/26/2019 (h)(i)

     998,620  
    

 

 

 
       4,997,873  
    

 

 

 
 

GENERAL MERCHANDISE
STORES — 2.8%

  
  5,000,000    

Dollar General Corp.

  
 

1.731%, 12/02/2019 (h)(i)

     4,999,267  
    

 

 

 
 

HOTEL, RESORTS & CRUISE
LINES — 5.5%

  
  5,000,000    

Marriott International, Inc.

  
 

1.856%, 01/24/2020 (h)(i)

     4,985,207  
  5,000,000    

Royal Caribbean Cruises Ltd.

  
 

2.004%, 12/27/2019 (h)(i)

     4,992,833  
    

 

 

 
       9,978,040  
    

 

 

 
 

MANAGED HEALTH
CARE — 3.9%

 

  7,000,000    

Humana, Inc.

  
 

2.059%, 01/15/2020 (h)(i)

     6,980,900  
    

 

 

 
 

MULTIMEDIA — 2.8%

  
  5,000,000    

Viacom, Inc.

  
 

1.831%, 12/06/2019 (h)(i)

     4,998,276  
    

 

 

 

Principal

         Value  
 

COMMERCIAL PAPER
(CONTINUED) — 80.5%

  
 

OIL & GAS STORAGE &
TRANSPORTATION — 5.6%

  
  $5,000,000    

Energy Transfer Operating LP

  
 

2.051%, 12/04/2019 (h)(i)

   $ 4,998,165  
  5,000,000    

Enterprise Products Partners LP

  
 

1.801%, 12/02/2019 (h)(i)

     4,999,267  
    

 

 

 
       9,997,432  
    

 

 

 
 

OIL & NATURAL GAS EXPLORATION — 2.8%

  
  5,000,000    

Canadian Natural Resources Ltd.

  
 

1.841%, 12/11/2019 (h)(i)

     4,997,390  
    

 

 

 
 

PACKAGED FOODS — 8.4%

  
 

Campbell Soup Co.

  
  2,650,000    

1.832%, 12/04/2019 (h)(i)

     2,649,301  
  2,500,000    

1.882%, 12/10/2019 (h)(i)

     2,498,558  
 

General Mills, Inc.

  
  3,500,000    

1.984%, 12/04/2019 (h)(i)

     3,499,141  
  1,500,000    

1.771%, 12/13/2019 (h)(i)

     1,498,952  
  5,000,000    

Tyson Foods, Inc.

  
 

1.751%, 12/09/2019 (h)(i)

     4,997,375  
    

 

 

 
       15,143,327  
    

 

 

 
 

RAILROADS — 2.8%

  
 

Canadian Pacific Railway Ltd.

  
  3,100,000    

2.006%, 12/11/2019 (h)(i)

     3,098,150  
  2,000,000    

1.855%, 01/21/2020 (h)(i)

     1,994,417  
    

 

 

 
       5,092,567  
    

 

 

 
 

RETAIL DRUG STORE — 2.8%

  
  5,000,000    

Walgreens Boots Alliance, Inc.

  
 

2.079%, 02/12/2020 (h)(i)

     4,979,635  
    

 

 

 
 

TECHNOLOGY HARDWARE &
EQUIPMENT — 2.8%

 

  5,000,000    

Arrow Electronics, Inc.

  
 

1.800%, 12/02/2019 (h)(i)

     4,998,890  
    

 

 

 
 

WIRELESS COMMUNICATION
SERVICES — 3.9%

 

 

Bell Canada

  
  2,000,000    

1.886%, 01/03/2020 (h)(i)

     1,996,341  
  5,000,000    

1.906%, 01/06/2020 (h)(i)

     4,990,030  
    

 

 

 
       6,986,371  
    

 

 

 
 

TOTAL COMMERCIAL PAPER
(COST $144,413,429)

     144,394,248  
    

 

 

 
 

 

The accompanying notes are an integral part of the financial statements.

 

20


THE FAIRHOLME FOCUSED INCOME FUND

 

 

 

SCHEDULE OF INVESTMENTS (continued)

November 30, 2019

 

 

Principal

         Value  
 

U.S. GOVERNMENT
OBLIGATIONS — 5.0%

 

 

U.S. Treasury Bills

  
  $9,000,000    

1.540%, 12/10/2019 (h)

   $ 8,996,830  
    

 

 

 
    
 

TOTAL U.S. GOVERNMENT
OBLIGATIONS (COST $8,996,549)

     8,996,830  
    

 

 

 

  Shares  

            
 

MONEY MARKET
FUNDS — 1.4%

  
  2,413,600    

Fidelity Investments Money
Market Treasury Portfolio - Class I, 1.53% (j)

     2,413,600  
    

 

 

 
 

TOTAL MONEY MARKET FUNDS
(COST $2,413,600)

     2,413,600  
    

 

 

 
         Value  

TOTAL INVESTMENTS — 100.0%
(COST $198,222,008)

   $ 179,291,247  
              

OTHER ASSETS IN
EXCESS OF LIABILITIES — 0.0%

     59,822  
    

 

 

 
 

NET ASSETS — 100.0%

   $ 179,351,069  
    

 

 

 
 

 

(a) 

Variable rate security. Rates shown are the effective rates as of November 30, 2019.

(b) 

Non-income producing security.

(c) 

Restricted security as set forth in Rule 144A under the Securities Act of 1933. The value of these investments totals $104,481, which represents 0.06% of The Income Fund’s net assets.

(d)

Security is perpetual in nature and has no stated maturity date.

(e)

Floating rate security. Rate shown is the effective rate as of November 30, 2019.

(f)

Security is a fix-to-float security, which carries a fixed coupon until a certain date, upon which it switches to a floating rate. Rate shown is the fixed rate.

(g) 

Security in default and no interest was accrued as of November 30, 2019.

(h)

Rates shown are the effective yields based on the purchase price. The calculation assumes the security is held to maturity.

(i)

Restricted security as set forth in Rule 144(a) under the Securities Act of 1933. The value of these investments totals $144,394,248, which represents 80.51% of The Income Fund’s net assets.

(j) 

Annualized based on the 1-day yield as of November 30, 2019.

 

The accompanying notes are an integral part of the financial statements.

 

21


THE FAIRHOLME FOCUSED INCOME FUND

 

 

 

STATEMENT OF ASSETS & LIABILITIES

November 30, 2019

 

 

Assets

  

Investments, at Fair Value (Cost — $198,222,008)

   $ 179,291,247  

Interest Receivable

     103,784  

Receivable for Investments Sold

     124,514  
  

 

 

 

Total Assets

 

     179,519,545  
  

 

 

 

Liabilities

  

Accrued Management Fees

     118,476  

Payable for Capital Shares Redeemed

     50,000  
  

 

 

 

Total Liabilities

     168,476  
  

 

 

 

 

NET ASSETS

 

   $ 179,351,069  
  

 

 

 

 

Net Assets Consist of:

  

Paid-In Capital

   $ 203,668,681  

Total Accumulated Losses

     (24,317,612
  

 

 

 

 

NET ASSETS

 

   $ 179,351,069  
  

 

 

 

Shares of Common Stock Outstanding* ($0.0001 par value)

     17,529,966  
  

 

 

 

Net Asset Value, Offering and Redemption Price Per Share ($179,351,069 / 17,529,966 shares)

   $ 10.23  
  

 

 

 

* 200,000,000 shares authorized in total.

 

The accompanying notes are an integral part of the financial statements.

 

22


THE FAIRHOLME FOCUSED INCOME FUND

 

 

 

STATEMENT OF OPERATIONS

 

 

     For the
Fiscal Year Ended
November 30, 2019
 

Investment Income

                 

Interest

                  $ 5,769,326  

Dividends

                    1,273,406  
                 

 

 

 

Total Investment Income

                    7,042,732  
                 

 

 

 

Expenses

                 

Management Fees

                    1,874,109  

Legal Expenses

                    39,410  
                 

 

 

 

Total Expenses

                    1,913,519  
                 

 

 

 

Less: Voluntary Reduction of Management Fees

                    (374,822
                 

 

 

 

Net Expenses

                    1,538,697  
                 

 

 

 

Net Investment Income

                    5,504,035  
                 

 

 

 

Realized and Unrealized Gain on Investments

                 

Net Realized Gain on Investments

                    1,878,813  

Net Change in Unrealized Appreciation (Depreciation) on Investments

                    4,512,746  
                 

 

 

 

Net Realized and Unrealized Gain on Investments

                    6,391,559  
                 

 

 

 

NET INCREASE IN NET ASSETS FROM OPERATIONS

                 

 

$

 

11,895,594

 

 

                 

 

 

 

 

The accompanying notes are an integral part of the financial statements.

 

23


THE FAIRHOLME FOCUSED INCOME FUND

 

 

 

STATEMENTS OF CHANGES IN NET ASSETS

 

 

     For the Fiscal Year
Ended
November 30, 2019
    For the Fiscal Year
Ended
November 30, 2018
 

CHANGES IN NET ASSETS

                                  

From Operations

                                  

Net Investment Income

                  $ 5,504,035                    $ 10,275,115  

Net Realized Gain (Loss) on Investments

                    1,878,813                      (7,956,448

Net Change in Unrealized Appreciation (Depreciation) on Investments and

                                  

Foreign Currency Related Translations

                    4,512,746                      (11,226,394
                 

 

 

                  

 

 

 

Net Increase (Decrease) in Net Assets from Operations

                    11,895,594                      (8,907,727
                 

 

 

                  

 

 

 

From Dividends and Distributions to Shareholders

                                  

Net Decrease in Net Assets from Dividends and Distributions

                    (5,286,649                    (20,470,612
                 

 

 

                  

 

 

 

From Capital Share Transactions

                                  

Proceeds from Sale of Shares

                    9,617,338                      82,350,172  

Shares Issued in Reinvestment of Dividends and Distributions

                    4,659,430                      18,536,050  

Cost of Shares Redeemed

                    (30,034,524                    (106,440,303
                 

 

 

                  

 

 

 

Net Decrease in Net Assets from Shareholder Activity

                    (15,757,756                    (5,554,081
                 

 

 

                  

 

 

 

NET ASSETS

                                  

Net Decrease in Net Assets

                    (9,148,811                    (34,932,420

Net Assets at Beginning of Year

                    188,499,880                      223,432,300  
                 

 

 

                  

 

 

 

Net Assets at End of Year

                  $ 179,351,069                    $ 188,499,880  
                 

 

 

                  

 

 

 

SHARES TRANSACTIONS

                                  

Issued

                    939,727                      7,580,742  

Reinvested

                    451,601                      1,734,291  

Redeemed

                    (2,932,519                    (9,968,013
                 

 

 

                  

 

 

 

Net Decrease in Shares

                    (1,541,191                    (652,980

Shares Outstanding at Beginning of Year

                    19,071,157                      19,724,137  
                 

 

 

                  

 

 

 

Shares Outstanding at End of Year

                    17,529,966                      19,071,157  
                 

 

 

                  

 

 

 

 

The accompanying notes are an integral part of the financial statements.

 

24


THE FAIRHOLME FOCUSED INCOME FUND

 

 

 

FINANCIAL HIGHLIGHTS

 

 

     For the Fiscal Year Ended November 30,  
     2019     2018     2017     2016     2015  

PER SHARE OPERATING PERFORMANCE

          

NET ASSET VALUE, BEGINNING OF YEAR

     $9.88       $11.33       $12.38       $10.72       $10.82  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment Operations

          

Net Investment Income(1)

     0.30       0.49       0.60       0.57       0.45  

Net Realized and Unrealized Gain (Loss) on Investments

     0.34       (0.91     (0.99     1.72       0.03  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total from Investment Operations

     0.64       (0.42     (0.39     2.29       0.48  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends and Distributions

          

From Net Investment Income

     (0.29     (0.51     (0.61     (0.56     (0.43

From Realized Capital Gains

           (0.52     (0.05     (0.07     (0.15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Dividends and Distributions

     (0.29     (1.03     (0.66     (0.63     (0.58
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET ASSET VALUE, END OF YEAR

     $10.23       $9.88       $11.33       $12.38       $10.72  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL RETURN

     6.49     (4.19 )%      (3.35 )%      22.77     4.60

Ratio/Supplemental Data

          

Net Assets, End of Year (in 000’s)

     $179,351       $188,500       $223,432       $240,195       $243,072  

Ratio of Gross Expenses to Average Net Assets:

     1.02 %(2)       1.00     1.00     1.00     1.00

Ratio of Net Expenses to Average Net Assets

     0.82 %(2)(3)      0.82 %(3)       1.00     1.00     1.00

Ratio of Net Investment Income to Average Net Assets

     2.94     4.56     5.02     5.48     4.14

Portfolio Turnover Rate

     16.70     45.78     36.05     28.81     67.05

 

(1) 

Based on average shares outstanding.

(2) 

0.02% is attributable to legal expenses incurred outside the management fee.

(3) 

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.

 

25


THE FAIRHOLME ALLOCATION FUND

 

 

 

SCHEDULE OF INVESTMENTS

November 30, 2019

 

 

Shares

        Value  
  

DOMESTIC EQUITY
SECURITIES — 10.9%

  
   REAL ESTATE MANAGEMENT & DEVELOPMENT — 10.9%   
348,267   

The St. Joe Co. (a)(b)

   $     6,404,630  
     

 

 

 

TOTAL DOMESTIC EQUITY SECURITIES (COST $6,615,792)

     6,404,630  
     

 

 

 
   FOREIGN EQUITY SECURITIES — 4.7%

 

   CANADA — 4.7%   
   METALS & MINING — 4.7%   
2,192,841   

Imperial Metals Corp. (a)

     2,806,467  
     

 

 

 

TOTAL FOREIGN EQUITY SECURITIES
(COST $25,958,539)

     2,806,467  
     

 

 

 
   DOMESTIC PREFERRED EQUITY SECURITIES — 16.9%   
   MORTGAGE FINANCE — 15.7%   
444,095   

Federal Home Loan Mortgage Corp.

  
  

7.875%, Series Z (a)(c)

     4,662,998  
432,465   

Federal National Mortgage Association

  
  

7.750%, Series S (a)(c)

     4,601,428  
     

 

 

 
        9,264,426  
     

 

 

 
   OIL & NATURAL GAS EXPLORATION — 1.2%   
4,779   

Chesapeake Energy Corp.

  
  

5.750%

     714,222  
     

 

 

 

TOTAL DOMESTIC PREFERRED
EQUITY SECURITIES
(COST $6,422,016)

     9,978,648  
     

 

 

 

Principal

        Value  
   COMMERCIAL PAPER —58.8%   
   APPAREL — 3.4%   
$2,000,000   

VF Corp.

  
  

1.651%, 12/09/2019 (d)(e)

   $     1,998,992  
     

 

 

 
  

AUTO
MANUFACTURERS — 3.4%

  
2,000,000   

Ford Motor Credit Co.

  
  

2.358%, 01/03/2020 (d)(e)

     1,994,931  
     

 

 

 
   BEVERAGES — 6.8%   
2,000,000   

Anheuser-Busch Inbev NV

  
  

1.732%, 12/09/2019 (d)(e)

     1,999,031  
2,000,000   

Constellation Brands, Inc.

  
  

2.007%, 01/24/2020 (d)(e)

     1,991,827  
     

 

 

 
        3,990,858  
     

 

 

 
   CHEMICALS — 4.2%   
2,500,000   

Albemarle Corp.

  
  

1.853%, 12/04/2019 (d)(e)

     2,499,310  
     

 

 

 
   ENERGY — 3.4%   
2,000,000   

Berkshire Hathaway Energy Co.

  
  

1.712%, 12/03/2019 (d)(e)

     1,999,583  
     

 

 

 
   ENERGY SERVICES — 3.4%   
2,000,000   

Duke Energy Corp.

  
  

1.751%, 12/03/2019 (d)(e)

     1,999,608  
     

 

 

 
   FOOD PRODUCTS — 3.4%   
2,000,000   

Mondelez International, Inc.

  
  

1.792%, 12/10/2019 (d)(e)

     1,998,926  
     

 

 

 
  

HOTEL, RESORTS & CRUISE LINES — 2.9%

  
1,700,000   

Royal Caribbean Cruises Ltd.

  
  

1.951%, 12/03/2019 (d)(e)

     1,699,660  
     

 

 

 
  

MANAGED HEALTH
CARE — 4.2%

  
2,500,000   

Humana, Inc.

  
  

2.059%, 01/15/2020 (d)(e)

     2,493,178  
     

 

 

 
   MULTIMEDIA — 3.4%   
2,000,000   

Viacom, Inc.

  
  

1.831%, 12/06/2019 (d)(e)

     1,999,311  
     

 

 

 
 

 

The accompanying notes are an integral part of the financial statements.

 

26


THE FAIRHOLME ALLOCATION FUND

 

 

 

SCHEDULE OF INVESTMENTS (continued)

November 30, 2019

 

 

Principal

        Value  
  

COMMERCIAL PAPER (CONTINUED) — 58.8%

  
  

OIL & GAS STORAGE & TRANSPORTATION — 3.4%

  
$2,000,000   

Energy Transfer Operating LP

  
  

2.051%, 12/04/2019 (d)(e)

   $ 1,999,266  
     

 

 

 
  

OIL & NATURAL GAS EXPLORATION — 2.5%

  
1,500,000   

Canadian Natural Resources Ltd.

  
  

1.841%, 12/11/2019 (d)(e)

     1,499,217  
     

 

 

 
   PACKAGED FOODS — 11.0%   
2,500,000   

Campbell Soup Co.

  
  

2.156%, 12/09/2019 (d)(e)

     2,498,688  
2,000,000   

General Mills, Inc.

  
  

1.771%, 12/13/2019 (d)(e)

     1,998,602  
  

Tyson Foods, Inc.

  
1,000,000   

1.752%, 12/06/2019 (d)(e)

     999,631  
1,000,000   

1.782%, 12/16/2019 (d)(e)

     999,114  
     

 

 

 
        6,496,035  
     

 

 

 
   RETAIL DRUG STORE — 3.4%   
2,000,000   

Walgreens Boots Alliance, Inc.

  
  

2.025%, 01/13/2020 (d)(e)

     1,994,937  
     

 

 

 

TOTAL COMMERCIAL PAPER
(COST $34,670,133)

     34,663,812  
     

 

 

 

Principal

      Value  
 

U.S. GOVERNMENT
OBLIGATIONS — 5.1%

 
$3,000,000  

U.S. Treasury Bills

 
 

1.536%, 12/10/2019 (e)

  $ 2,998,943  
   

 

 

 

TOTAL U.S. GOVERNMENT
OBLIGATIONS
(COST $2,998,850)

    2,998,943  
   

 

 

 

Shares

         
 

MONEY MARKET
FUNDS — 3.6%

 
2,152,344  

Fidelity Investments Money Market Treasury Portfolio - Class I, 1.53% (f)

    2,152,344  
   

 

 

 

TOTAL MONEY MARKET FUNDS
(COST $2,152,344)

    2,152,344  
   

 

 

 

TOTAL INVESTMENTS — 100.0%
(COST $78,817,674)

    59,004,844  
 

LIABILITIES IN EXCESS
OF OTHER ASSETS — 0.0%

    (21,717
   

 

 

 

NET ASSETS — 100.0%

  $  58,983,127  
   

 

 

 
 

 

(a) 

Non-income producing security.

(b) 

Restricted/controlled security. The value of this security totals $6,404,630, which represents 10.86% of The Allocation Fund’s net assets. Information related to this security is as follows:

 

Shares

  

Issuer

   Acquisition
Date(s)
     Acquisition
Cost
     11/30/2019
Carrying Value
Per Unit

348,267

   The St. Joe Co.      08/09/2017-09/01/2017      $ 6,615,792      $18.39

 

(c) 

Variable rate security. Rates shown are the effective rates as of November 30, 2019.

(d) 

Restricted security as set forth in Rule 144(a) under the Securities Act of 1933. The value of these investments totals $34,663,812, which represents 58.77% of The Allocation Fund’s net assets.

(e) 

Rates shown are the effective yields based on the purchase price. The calculation assumes the security is held to maturity.

(f) 

Annualized based on the 1-day yield as of November 30, 2019.

 

The accompanying notes are an integral part of the financial statements.

 

27


THE FAIRHOLME ALLOCATION FUND

 

 

 

STATEMENT OF ASSETS & LIABILITIES

November 30, 2019

 

 

Assets

  

Investments, at Fair Value (Cost — $78,817,674)

   $ 59,004,844  

Interest Receivable

     17,383  
  

 

 

 

Total Assets

     59,022,227  
  

 

 

 

Liabilities

  

Accrued Management Fees

     39,100  
  

 

 

 

Total Liabilities

     39,100  
  

 

 

 

NET ASSETS

   $ 58,983,127  
  

 

 

 

Net Assets Consist of:

  

Paid-In Capital

   $ 126,234,356  

Total Accumulated Losses

     (67,251,229
  

 

 

 

NET ASSETS

   $ 58,983,127  
  

 

 

 

Shares of Common Stock Outstanding* ($0.0001 par value)

     8,423,476  
  

 

 

 

Net Asset Value, Offering and Redemption Price Per Share ($58,983,127 / 8,423,476 shares)

   $ 7.00  
  

 

 

 

* 200,000,000 shares authorized in total.

 

The accompanying notes are an integral part of the financial statements.

 

28


THE FAIRHOLME ALLOCATION FUND

 

 

 

STATEMENT OF OPERATIONS

 

 

     For the
Fiscal Year Ended
November 30, 2019
 

Investment Income

           

Interest

            $ 1,168,430  

Dividends

              298,741  
           

 

 

 

Total Investment Income

              1,467,171  
           

 

 

 

Expenses

           

Management Fees

              721,273  

Legal Expenses

              15,218  
           

 

 

 

Total Expenses

              736,491  
           

 

 

 

Less: Voluntary Reduction of Management Fees

              (144,255
           

 

 

 

Net Expenses

              592,236  
           

 

 

 

Net Investment Income

              874,935  
           

 

 

 

Realized and Unrealized Gain on Investments, Redemption In-Kind and Foreign Currency Related Transactions

           

Net Realized Gain on Investments and Foreign Currency Related Transactions

              363,076  

Net Realized Gain on Redemption In-Kind

              1,061,539  

Net Change in Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Related Translations

              3,765,875  
           

 

 

 

Net Realized and Unrealized Gain on Investments, Redemption In-Kind and Foreign Currency Related Transactions

              5,190,490  
           

 

 

 

NET INCREASE IN NET ASSETS FROM OPERATIONS

            $ 6,065,425  
           

 

 

 

 

The accompanying notes are an integral part of the financial statements.

 

29


THE FAIRHOLME ALLOCATION FUND

 

 

 

STATEMENTS OF CHANGES IN NET ASSETS

 

 

     For the
Fiscal Year Ended
November 30, 2019
    For the
Fiscal Year Ended
November 30, 2018
 

CHANGES IN NET ASSETS

    

From Operations

    

Net Investment Income

   $ 874,935     $ 1,223,907  

Net Realized Gain (Loss) on Investments, Redemption In-Kind and Foreign Currency Related Transactions

     1,424,615       (48,412,833

Net Change in Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Related Translations

     3,765,875       38,497,966  
  

 

 

   

 

 

 

Net Increase (Decrease) in Net Assets from Operations

     6,065,425       (8,690,960
  

 

 

   

 

 

 

From Dividends and Distributions to Shareholders

    

Net Decrease in Net Assets from Dividends and Distributions

     (791,785     (1,817,020
  

 

 

   

 

 

 

From Capital Share Transactions

    

Proceeds from Sale of Shares

     1,417,681       1,433,796  

Shares Issued in Reinvestment of Dividends and Distributions

     757,745       1,779,557  

Redemption Fees

     2,187       285  

Cost of Shares Redeemed

     (16,966,140     (34,508,769

Cost of Shares Redeemed In-Kind

     (3,889,024     —    
  

 

 

   

 

 

 

Net Decrease in Net Assets from Shareholder Activity

     (18,677,551     (31,295,131
  

 

 

   

 

 

 

NET ASSETS

    

Net Decrease in Net Assets

     (13,403,911     (41,803,111

Net Assets at Beginning of Year

     72,387,038       114,190,149  
  

 

 

   

 

 

 

Net Assets at End of Year

   $ 58,983,127     $ 72,387,038  
  

 

 

   

 

 

 

SHARES TRANSACTIONS

    

Issued

     202,579       197,013  

Reinvested

     118,029       234,152  

Redeemed

     (2,229,510     (4,778,281

Redeemed In-Kind

     (675,384     —    
  

 

 

   

 

 

 

Net Decrease in Shares

     (2,584,286     (4,347,116

Shares Outstanding at Beginning of Year

     11,007,762       15,354,878  
  

 

 

   

 

 

 

Shares Outstanding at End of Year

     8,423,476       11,007,762  
  

 

 

   

 

 

 

 

The accompanying notes are an integral part of the financial statements.

 

30


THE FAIRHOLME ALLOCATION FUND

 

 

 

FINANCIAL HIGHLIGHTS

 

 

     For the Fiscal Year Ended November 30,  
    

2019

   

2018

   

2017

   

2016

   

2015

 

PER SHARE OPERATING PERFORMANCE

          

NET ASSET VALUE, BEGINNING OF YEAR

     $6.58       $7.44       $9.65       $10.40       $12.57  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment Operations

          

Net Investment Income(1)

     0.09       0.09       0.10       0.14       0.35  

Net Realized and Unrealized Gain (Loss) on Investments

     0.40       (0.83     (1.71     0.75       (1.38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total from Investment Operations

     0.49       (0.74     (1.61     0.89       (1.03
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends and Distributions

          

From Net Investment Income

     (0.07     (0.12     (0.17     (0.31      

From Realized Capital Gains

                 (0.43     (1.33     (1.14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Dividends and Distributions

     (0.07     (0.12     (0.60     (1.64     (1.14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Redemption Fees(1)

     0.00 (2)       0.00 (2)       0.00 (2)       0.00 (2)       0.00 (2)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET ASSET VALUE, END OF YEAR

     $7.00       $6.58       $7.44       $9.65       $10.40  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL RETURN

     7.61     (10.18 )%      (17.59 )%      11.06     (8.88 )% 

Ratio/Supplemental Data

          

Net Assets, End of Year (in 000’s)

   $ 58,983     $ 72,387     $ 114,190     $ 259,501     $ 297,527  

Ratio of Gross Expenses to Average Net Assets:

     1.02 %(3)      1.00     1.00     1.00     1.00

Ratio of Net Expenses to Average Net Assets

     0.82 %(3)(4)      0.82 %(4)      1.00     1.00     1.00

Ratio of Net Investment Income (Loss) to Average Net Assets

     1.21     1.32     1.19     1.81     3.09

Portfolio Turnover Rate

     15.58     23.52     31.01     13.65     39.24

 

(1) 

Based on average shares outstanding.

(2) 

Redemption fees represent less than $0.01.

(3) 

0.02% is attributable to legal expenses incurred outside the management fee.

(4) 

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.

 

31


FAIRHOLME FUNDS, INC.

 

 

 

NOTES TO FINANCIAL STATEMENTS

November 30, 2019

 

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 Company’s 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”), 200,000,000 shares have been allocated to The Fairholme Focused Income Fund (“The Income Fund”), and 200,000,000 shares have been allocated to The Fairholme Allocation Fund (“The Allocation Fund”). The Fairholme Fund, The Income Fund, and The Allocation Fund (each a “Fund” and collectively the “Funds”) are non-diversified funds. The Funds may have a greater percentage of their assets invested in particular securities than a diversified fund, exposing the Funds to the risk of unanticipated industry conditions as well as risks specific to a single company or the securities of a single company. Each 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 each 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 Fund’s 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 Fund’s 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), partnership interests, 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.

The Income Fund’s 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 and interests in REITs. 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. The Manager serves as investment adviser to The Income Fund.

The Allocation Fund’s 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’s portfolio invested

 

32


FAIRHOLME FUNDS, INC.

 

 

 

NOTES TO FINANCIAL STATEMENTS (continued)

November 30, 2019

 

 

in each asset class will vary from time to time based on the Manager’s 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 Funds will meet their respective objectives.

Note 2. Significant Accounting Policies

As investment companies, the Funds follow the investment company accounting and reporting guidance, which is part of U.S. generally accepted accounting principles (“U.S. GAAP”). The Funds’ investments are reported at fair value as defined by U.S. GAAP. The Funds calculate their 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.

New Accounting Pronouncements: To improve the effectiveness of fair value disclosure requirements, the Financial Accounting Standards Board issued Accounting Standard Update (ASU) 2018-13, Fair Value Measurement Disclosure Framework –Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), which adds, removes, and modifies certain aspects relating to fair value disclosure. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption of the additions relating to ASU 2018-13 is not required, even if early adoption is elected for the removals and modifications under ASU 2018-13. Management has early adopted the removals and modifications set forth in ASU 2018-13 in these financial statements and has not early adopted the additions set forth in ASU 2018-13.

A description of the valuation techniques applied to the 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) fixed income securities will be fair valued in good faith following consideration by, and conclusion of, the Manager’s Valuation and Liquidity Risk Management Committee. As of November 30, 2019, 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 November 30, 2019, in instances where significant unobservable inputs are used, they would be classified in Level 3.

 

33


FAIRHOLME FUNDS, INC.

 

 

 

NOTES TO FINANCIAL STATEMENTS (continued)

November 30, 2019

 

 

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.

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 certain of the Funds 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’s 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 November 30, 2019.

Warrants: The Funds may invest in warrants, which may be acquired either through a direct purchase, included as part of a private placement, or pursuant to corporate actions. Warrants entitle, but do not obligate, the holder to buy equity securities at a specific price for a specific period of time. Warrants may be considered more speculative than certain other types of investments in that they do not entitle a holder to dividends or voting rights with respect to the underlying securities that may be purchased nor do they represent any rights in the assets of the issuing company. Also, the value of a warrant does not necessarily change with the value of the underlying securities and a warrant ceases to have value if it is not exercised prior to its expiration date. Warrants traded on a security exchange are valued at the official closing price on the valuation date and are classified as Level 1 of the fair value hierarchy. Over the counter (OTC) warrants are valued using simulation models utilizing market value of the underlying security, expiration date of the warrants, volatility of the underlying security, strike price of the warrants, risk-free interest rate at the valuation date, and are classified as Level 2 or Level 3 of the fair value hierarchy depending on the observability of the inputs used.

The Funds use several recognized industry third-party pricing services (TPPS) – approved by the Board and unaffiliated with the Manager – to provide prices for some of the Funds’ securities. The Funds also use 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.

 

34


FAIRHOLME FUNDS, INC.

 

 

 

NOTES TO FINANCIAL STATEMENTS (continued)

November 30, 2019

 

 

The inputs and valuation techniques used to measure fair value of the 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 Manager’s 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 Funds’ investments by inputs used to value the Funds’ investments as of November 30, 2019, is as follows:

 

     Valuation Inputs     
     Level 1 –
Quoted Prices
   Level 2 – Other
Significant
Observable Inputs
  Level 3 -
Significant
Unobservable
Inputs
   Total
Fair Value
at 11/30/19

THE FAIRHOLME FUND ASSETS:

                  

INVESTMENTS (Fair Value):

                  

Domestic Equity Securities*

     $ 423,217,557      $     $      $ 423,217,557

Foreign Equity Securities*

       8,787,024                     8,787,024

Domestic Preferred Equity Securities*

       187,490,216                     187,490,216

Domestic Corporate Bonds*

              1,144,860              1,144,860

Commercial Paper*

              376,420,433              376,420,433

U.S. Government Obligations

              49,967,109              49,967,109

Money Market Funds

       10,371,371                     10,371,371
    

 

 

      

 

 

     

 

 

      

 

 

 

TOTAL INVESTMENTS

     $ 629,866,168      $ 427,532,402     $      $ 1,057,398,570
    

 

 

      

 

 

     

 

 

      

 

 

 

* Industry classifications for these categories are detailed in the Schedule of Investments.

 

        

THE INCOME FUND ASSETS:

                  

INVESTMENTS (Fair Value):

                  

Domestic Preferred Equity Securities

                  

Oil & Natural Gas Exploration

     $ 752,884      $ 1,509,754     $      $ 2,262,638

Other Industries*

       10,721,049                     10,721,049

Domestic Corporate Bonds*

              10,502,882              10,502,882

Commercial Paper*

              144,394,248              144,394,248

U.S. Government Obligations

              8,996,830              8,996,830

Money Market Funds

       2,413,600                     2,413,600
    

 

 

      

 

 

     

 

 

      

 

 

 

TOTAL INVESTMENTS

     $ 13,887,533      $ 165,403,714     $      $ 179,291,247
    

 

 

      

 

 

     

 

 

      

 

 

 

* Industry classifications for these categories are detailed in the Schedule of Investments.

 

        

 

35


FAIRHOLME FUNDS, INC.

 

 

 

NOTES TO FINANCIAL STATEMENTS (continued)

November 30, 2019

 

 

 

     Valuation Inputs          
     Level 1 –
Quoted Prices
        Level 2 –Other
Significant
Observable Inputs
        Level 3 -
Significant
Unobservable
Inputs
        Total
Fair Value
at 11/30/19

THE ALLOCATION FUND ASSETS:

                                  

INVESTMENTS (Fair Value):

                                                       

Domestic Equity Securities

                                  

Real Estate Management & Development

     $           $ 6,404,630           $           $  6,404,630

Foreign Equity Securities*

       2,806,467                                     2,806,467

Domestic Preferred Equity Securities

                                  

Mortgage Finance

       9,264,426                                     9,264,426

Oil & Natural Gas Exploration

                   714,222                         714,222

Commercial Paper*

                   34,663,812                         34,663,812

U.S. Government Obligations

                   2,998,943                         2,998,943

Money Market Funds

       2,152,344                                     2,152,344
    

 

 

           

 

 

           

 

 

           

 

 

 

TOTAL INVESTMENTS

     $ 14,223,237           $ 44,781,607           $           $ 59,004,844
    

 

 

           

 

 

           

 

 

           

 

 

 

* Industry classifications for these categories are detailed in the Schedule of Investments.

There were no Level 3 investments for any of the Funds at November 30, 2019.

Dividends and Distributions: Each Fund records dividends and distributions to its shareholders on the ex-dividend date. The Fairholme Fund and The Allocation Fund intend to distribute substantially all of their net investment income (if any) as dividends to their respective shareholders on an annual basis in December. The Income Fund intends to declare and pay net investment income distributions, if any, quarterly in March, June, September, and December. The Funds intend 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 Funds 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 Funds do 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 Funds 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 Fairholme Fund and The Allocation Fund assess a 2% fee on the proceeds of The Fairholme Fund and The Allocation Fund shares that are redeemed or exchanged within 60 days of their purchase. The redemption fee is paid to The Fairholme Fund and The Allocation Fund, as applicable, for the benefit of remaining shareholders and is recorded as paid-in capital. The redemption fees retained by The Fairholme Fund and The Allocation Fund during the fiscal years ended November 30, 2019 and 2018, amounted to $37,027 and $33,620, and $2,187 and $285, respectively.

 

36


FAIRHOLME FUNDS, INC.

 

 

 

NOTES TO FINANCIAL STATEMENTS (continued)

November 30, 2019

 

 

During the year ended November 30, 2019, The Fairholme Fund and The Fairholme Allocation Fund delivered portfolio securities and cash in exchange for shares redeemed by shareholders in in-kind redemptions. For financial reporting purposes, the Fund recognized a net gain on the transfer of securities; however, for tax purposes the transaction was treated as a tax free exchange and the gain has been reclassified from undistributed realized gain (loss) to paid-in capital. The Fairholme Fund and The Fairholme Allocation Fund realized $1,334,463 and $1,061,539 of net gains attributable to the in-kind redemption, respectively.

Other: The Funds account 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 Funds 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 country’s balance of payments or for other reasons, a country may impose temporary restrictions on foreign capital remittances abroad.

The Funds paid commissions and other brokerage fees during the period. The Funds also paid legal expenses in connection with certain of their investments.

Note 3. Related Party Transactions

The Manager is a Delaware limited liability company and is registered with the SEC as an investment adviser. The Manager’s 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, each Fund pays a management fee to the Manager for its provision of investment advisory and operating services to the 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 each 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, The Income Fund, and The Allocation Fund to the extent necessary to limit the management fee of each Fund to the annual rate of 0.80% of that Fund’s daily average net asset value (“Undertaking”). This Undertaking may be terminated by the Manager upon 60 days’ written notice to the applicable Fund. The Manager is responsible pursuant to the Investment Management Agreement for paying each Fund’s 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 each Fund: commissions, brokerage fees, issue and transfer taxes, and other costs chargeable to the Fund in connection with securities transactions or in connection with securities owned by each Fund, taxes, interest, acquired fund fees and related expenses, expenses in connection with litigation by or against each Fund, and any other extraordinary expenses.

The Manager earned, after the voluntary reduction of the management fees, $8,752,588, $1,499,287, and $577,018, from The Fairholme Fund, The Income Fund, and The Allocation Fund, respectively, for its services during the fiscal year ended November 30, 2019.

Bruce Berkowitz, both the Chief Investment Officer of the Manager and Chairman of the Funds’ Board, and his affiliates beneficially own an aggregate 10,784,408 shares, 6,691,382 shares, and 4,382,931 shares of The Fairholme Fund, The Income Fund, and The Allocation Fund, respectively, at November 30, 2019.

A Director and Officers of the Funds are also Officers of the Manager or its affiliates.

Note 4. Investments

For the fiscal year ended November 30, 2019, aggregated purchases and sales of investment securities other than short-term investments, redemptions in-kind of Fund shares and U.S. government obligations were as follows:

 

37


FAIRHOLME FUNDS, INC.

 

 

 

NOTES TO FINANCIAL STATEMENTS (continued)

November 30, 2019

 

 

     Purchases             Sales  

The Fairholme Fund

   $ 54,775,873                      $ 206,839,163  

The Income Fund

     9,254,225           62,819,267  

The Allocation Fund

     3,879,690           8,562,546  

Note 5. Tax Matters

Federal Income Taxes: Each 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, each 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 depreciation of investments at November 30, 2019, were as follows:

 

     Cost             Gross Unrealized
Appreciation
            Gross Unrealized
Depreciation
            Net Unrealized
Depreciation
 

The Fairholme Fund

   $ 1,271,004,168                    $ 112,207,788                    $ (325,813,386)                    $ (213,605,598)  

The Income Fund

     198,231,032           4,494,780           (23,434,565)           (18,939,785)  

The Allocation Fund

     78,838,838           5,537,669           (25,371,663)           (19,833,994)  

The difference between book basis and tax basis for The Fairholme Fund’s net unrealized depreciation is attributable to the tax deferral of losses on wash sales and capitalized cost. The difference between book basis and tax basis for The Income Fund’s and The Allocation Fund’s net unrealized depreciation is attributable to capitalized cost.

The Funds’ tax basis capital gains are determined only at the end of each fiscal year. As of November 30, 2019 the components of distributable earnings on a tax basis were as follows:

 

     The Fairholme Fund         The Income Fund         The Allocation Fund

Undistributed Ordinary Income

     $ 9,052,579           $ 619,274                    $ 796,310

Capital Loss carryforwards

       (747,040,928)                      (5,997,101)             (48,213,545)

Net Unrealized Appreciation/(Depreciation) on Investments and Foreign Currency Related Transactions

       (213,605,598)             (18,939,785)             (19,833,994)
    

 

 

           

 

 

           

 

 

 

Total

     $ (951,593,947)           $ (24,317,612)           $ (67,251,229)
    

 

 

           

 

 

           

 

 

 

The Funds are 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, 2019, net short-term and long-term capital loss carryforwards were as follows:

 

     The Fairholme Fund         The Income Fund         The Allocation Fund

Short-term capital loss carryforward

     $ 771,446                                             $ 287,406

Long-term capital loss carryforward

       746,269,482           $ 5,997,101             47,926,139
    

 

 

           

 

 

           

 

 

 

Total

     $ 747,040,928           $ 5,997,101           $ 48,213,545
    

 

 

           

 

 

           

 

 

 

For the fiscal year ended November 30, 2019, The Fairholme Fund, The Income Fund, and The Allocation Fund utilized capital loss carryforwards of $4,371,254, $1,965,235, and $450,101, respectively.

The Manager has analyzed the 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 Funds’ federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired

 

38


FAIRHOLME FUNDS, INC.

 

 

 

NOTES TO FINANCIAL STATEMENTS (continued)

November 30, 2019

 

 

(the current year and prior three years) are subject to examination by the Internal Revenue Service and state departments of revenue. Additionally, the Funds are 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 each Fund were as follows:

 

     The Fairholme Fund
     For the
Fiscal Year Ended
November 30, 2019
                           For the
Fiscal Year Ended
November 30, 2018

Dividends and Distributions paid from:

              

Ordinary Income

     $ 22,053,111*           $ 24,854,774
    

 

 

           

 

 

 

 

*

Total distributions paid differs from the Statement of Changes in Net Assets due to the utilization of equalization.

 

     The Income Fund
     For the
Fiscal Year Ended
November 30, 2019
                           For the
Fiscal Year Ended
November 30, 2018

Dividends and Distributions paid from:

              

Ordinary Income

     $ 5,286,649           $ 11,237,769 *

Long-Term Capital Gain

                   9,232,843
    

 

 

           

 

 

 
     $ 5,286,649           $ 20,470,612
    

 

 

           

 

 

 

 

*

Inclusive of short-term capital gains.

 

     The Allocation Fund
     For the
Fiscal Year Ended
November 30, 2019
                           For the
Fiscal Year Ended
November 30, 2018

Dividends and Distributions paid from:

              

Ordinary Income

     $ 791,785           $ 1,817,020
    

 

 

           

 

 

 

The Funds declared and made payable the following distributions on December 13, 2019.

 

     The Fairholme Fund              The Income Fund              The Allocation Fund

Dividends and Distributions paid from: