After a miserable 2011, Bruce Berkowitz’s fund has bounced back sharply this year. But we still think it’s too risky for most investors. By Nellie S. Huang, Senior Associate Editor March 27, 2012 Value investors are often wrong -- until, of course, they're right. Case in point: Bruce Berkowitz and his flagship Fairholme Fund (symbol FAIRX). SEE ALSO: A Guide to Our 25 Favorite No-Load Funds In 2011, as the fund's top holding, American International Group (AIG), dropped 52%, Berkowitz, a contrarian if there ever was one, continued to buy. He did the same with Bank of America (BAC) and Sears Holding (SHLD) as those stocks peeled back 58% and 57%, respectively. Some shareholders decided the heat in Miami had finally gotten the better of Berkowitz, and they pulled billions from his fund. Fairholme finished 2011 with a 32% decline, lagging Standard & Poor's 500-stock index by a stunning 35 percentage points. Advertisement Then came 2012, and Fairholme and Berkowitz underwent a remarkable reversal. Year to date through March 23, the fund has posted a return of 28.5%, beating the S&P 500 by nearly 17 points. AIG stock has gained 22% over that period; Bank of America, a whopping 77%; Sears, 136%. Now what? Is it time to buy shares of Fairholme again? We pose the question that way because last year we scratched Fairholme from the Kiplinger 25, the list of our favorite no-load mutual funds. Poor performance wasn't the reason -- we ditched Fairholme in our May issue, which started to get to subscribers in mid March, well before the fund began to implode. We removed the fund because its assets had grown enormously; because financial stocks dominated the concentrated portfolio; and because Berkowitz had created two new funds and was running all three with a limited team. All three factors posed higher risks for investors, in our view. And we were right. Since late 2010, the fund has shed half its size -- it had just over $8 billion in assets in February 2012 -- but we still have doubts about the wisdom of buying shares now. For starters, there's been a string of staff departures. Fairholme co-manager Charles Fernandez abruptly resigned in mid-October for personal reasons. The parting follows the exits in 2008 of co-managers Larry Pitkowsky and Keith Trauner. Both had been with the firm since 1999; the pair have since launched the GoodHaven Fund (GOODX). Berkowitz declined to talk with us for this story, but he said in a February 2012 in-house video interview that this kind of turnover is "good for the company. People change and companies change and our investment focus changes." That may be true, but Fernandez's resignation came during the worst spell in the fund's history. Advertisement Berkowitz has since hired two new executives. Dan Schmerin, a former U.S. Treasury Department official, joined as director of special situations, and Fred Fraenkel, former chairman of investment policy at money manager Beacon Trust, stepped in as head of research. Neither is listed as a fund co-manager, but both have some experience with financial companies -- a bonus given that at last report, 71% of Fairholme Fund's assets was invested in financial-services firms. Which leads us to our final caveat: that still-outsize stake in financials. A bet like that isn't out of character for Fairholme -- in 2000, nearly 70% of the fund was invested in that sector. And Berkowitz said in the recent video interview that financial-services companies are "what I know best" and that the sector is on the verge of a turnaround. In time, the fund may tilt toward a different industry, depending on wherever Berkowitz deems there's value. Whatever sector Berkowitz homes in on, it's likely that his bet will be big. Indeed, Fairholme sells itself as a non-diversified, concentrated fund. At last report, just 15 stocks and a smattering of bonds filled the portfolio. Advertisement Before Fairholme's 2011 implosion, it had been a spectacular performer. From 2000, its first full calendar year, through 2010, Fairholme beat the S&P 500 ten years out of 11. The fund's long-term record remains superb -- over the past ten years, it gained 8.8% annualized, topping the S&P 500 by an average of 4.8 points per year. We were once among Berkowitz's biggest fans. But after his nerve-wracking flop in 2011, our confidence in him has shattered. He may go on to post strong performance in the years to come. But is that worth suffering through another potential double-digit decline? For most investors, we think the answer is, no.