Keeping cash on hand has helped Fairholme fund seize opportunities in bear and bull markets. By Andrew Tanzer, Senior Associate Editor August 13, 2007 Cash is king in times of market stress like these. Holding a wad of cash means a fund manager won't be coerced into selling holdings to meet redemptions from panicky investors. Cash-rich funds can take advantage of fear in the markets, opportunistically snapping up temporarily under-priced stocks. "The value of liquidity multiplies in times of real stress," says Keith Trauner, co-manager of Fairholme fund, a member of the Kiplinger 25.As of May 31, Fairholme's cash pile amounted to 22% of assets, or more than $1 billion. Fairholme's managers -- Trauner, Bruce Berkowitz and Larry Pitkowsky -- don't claim credit for anticipating a market downturn. Instead of worrying about the big picture, they spend their time looking for companies that meet their exacting valuation standards. As a matter of policy, they keep a fair amount of cash on hand so they can use sharp share-price declines to add to existing holdings in the concentrated Fairholme portfolio or to initiate new positions. Such flexibility has made Fairholme a consistent performer through bull and bear markets. Through August 10, the fund had returned 8% year to date, double the performance of Standard & Poors 500-stock index. From its inception in December 1999, the fund (symbol FAIRX) has returned an annualized 18%, compared with less than 2% a year for the S&P index. The Fairholme managers are some of the best, most disciplined and successful value investors in the fund industry. They excel at measuring the intrinsic values of companies and waiting patiently until the stocks that they fancy sell at large discounts to those intrinsic values. Related, they are shrewd judges of company managements, focusing as much on the jockey as the horse, as they like to say. Advertisement One especially impressive feature about these managers is how much they seem to learn from the businesses in which they invest: Fairholme's strategy of stockpiling cash (20% of assets on average) to seize opportunity is straight out of the playbook of some of their favorite businessmen. The fund's largest holding is Berkshire Hathaway (BRK-A), which holds more than $40 billion of cash. Berkshire's Warren Buffett has made a career of devouring undervalued assets in times of duress. Another large position is Leucadia National Corp. (LUC), a stock that has climbed 59% this year. Cash-rich Leucadia has similarly invested in distressed assets over the years. Fairholme's second largest holding is Canadian Natural Resources (CNQ), a huge performer that scooped up oil-sands acreage in Alberta in the late 1990s when the land was cheap. Fairholme looks for businesses with robust cash flows run by managers skilled at investing that cash. As is the case today, if asset prices fall in the market, the value of that cash rises. "Most great companies have strong balance sheets," says Trauner. Executives at the companies Fairholme invests in, says Trauner, "are genetically wired for tough times." They often, he adds, generate superior returns by buying assets at distressed fire-sale prices. It looks like the Fairholme trio is made with similar circuitry.