Bruce Berkowitz's Fairholme Fund 2022 Annual Report

January 27, 2023

Dear Fellow Shareholders:

St. Joe (JOE, Financial) common stock composes the lion’s share of the Fund. Joe has made considerable progress over the past six years in building recurring cash flows by making every inch of owned-property count. Homesite unit sales have increased by ten times. Subdivisions sell when platted. The Latitude Margaritaville Watersound retirement community sold 1,000 homes in its first nineteen months! Hospitality operations expanded at the Watersound Beach Club, Watercolor Inn, Camp Creek Club, Sharks Tooth Club on Lake Powell, and Pearl in Rosemary Beach. Commercial operations diversified into apartment rentals, flagged-hotels, and commercial centers. Camp Creek Inn, Embassy Suites at Pier Park, The Lodge on Historic Route 30A, Hotel Indigo on Panama City’s St. Andrews Bay, Home2Suites, Watersound Fountains, Mexico Beach Crossings, and West Bay Center are all expected to open this year. The FSU Health Campus has been under construction since August. An 80,000 square foot facility for primary and urgent care should open next year. The first 100 beds of a teaching hospital are expected in 2027. Joe is growing with Florida. Florida is now the third most populous state and has the largest population growth rate.1 Supply delays that slowed last year’s progress are beginning to ease. Dozens of residential, hospitality, and commercial projects are in various planning stages.

Covid-19, the weaponization of natural gas, and geopolitical conflicts have dramatically weakened confidence in global supply chains. The Infrastructure Act of 2022 and The Inflation Reduction Act of 2022 were enacted to accelerate national independence in the manufacturing and distribution of vital products from energy to semiconductors.

Enterprise Products Partners L.P. (EPD, Financial) owns integrated energy infrastructure that separates, transports, and stores natural gas, natural gas liquids, crude oil, refined products, and petrochemicals. The company links North American producers with domestic consumers and international markets. Annual cash returns have varied between 10% and 15%. 2022 marked the 24th year of Enterprise increasing its cash distributions. Today, it is dramatically more expensive to put pipes in the ground and more is needed to meet growing domestic supply and demand.

Commercial Metals Company (CMC, Financial) is the technological leader in the recycling of steel scrap into reinforcing steel bars and wires that provide structural strength and stability to concrete structures such as buildings, bridges, and roads. Rebar is a critical component for safety and longevity. Much more will be required to re-shore supply chains.

Cash is 10% of the Fund’s assets and is invested in U.S. Treasury Bills and a Treasury money market fund.

I and affiliates own 31% of the Fund’s shares.

Respectfully submitted,

Bruce R. Berkowitz

Chief Investment Officer

The Fairholme Fund (Trades, Portfolio) (the “Fund”) commenced operations on December 29, 1999. The chart above presents the performance of a hypothetical $10,000 investment for the ten-year period ended November 30, 2022.

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 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 Fund or upon redemption of shares of the 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 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 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. It is not possible to invest directly in an index.

The Fairholme Fund (Trades, Portfolio) (the “Fund”) shares outstanding and audited net asset value per share (“NAV”) at November 30, 2022, the end of the Fund’s fiscal year, and NAVs at other pertinent dates, were as follows:

At December 31, 2022, the unaudited NAV of the Fund was $24.75.

Performance figures below are shown for the Fund’s fiscal year ended November 30, 2022, and do not match calendar year figures for the period ended December 31, 2022, cited in the Portfolio Manager’s report.

For the six months ended November 30, 2022, the Fund was outperformed by the S&P 500 Index (“S&P 500”) by 19.30 percentage points. Over the last fiscal year, the Fund was also outperformed by the S&P 500 by 6.29 percentage points. From inception, the Fund outperformed the S&P 500 by 2.35 percentage points per annum, or on a cumulative basis, 279.09 percentage points.

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 is unmanaged indices incurring no fees, expenses, or tax effects and are shown solely to compare the Fund’s performance to that of unmanaged and diversified indices of securities. As of the prospectus dated March 30, 2022, the gross expense ratio for the Fund is 1.00%. Shareholders are also cautioned that it is possible that some securities mentioned in this discussion may no longer be held by the Fund subsequent to the end of the fiscal period, and that the Fund may have made new investments that are not yet required to be disclosed. It is the Fund’s general policy not to disclose portfolio holdings other than when required by relevant law or regulation. Portfolio holdings are subject to change without notice and are not a recommendation to buy or sell any security.

Not all Fund portfolio dispositions or additions are material, and, while the Fund 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 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 the Fund’s assets in securities to the extent the Manager finds reasonable investment opportunities in accordance with the Fund’s investment strategies, policies and restrictions, as stated in its Prospectus and may, from time to time, invest a significant portion of the Fund’s assets in cash and cash equivalents. The Manager views liquidity as a strategic advantage. At November 30, 2022, cash and cash equivalents (consisting of cash, deposit accounts, U.S. Treasury Bills, and Treasury money-market funds) represented 10.0% of total assets. Since inception, the Fund has held varying levels of cash and cash equivalents for periods without, in the Manager’s view, negatively influencing performance.

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

The commentary below provides details of the 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, 2022.

The most significant decreases in the value of the Fund’s portfolio during the period were related to negative developments in the Real Estate Management & Development, Mortgage Finance, and Metals & Mining sectors. The Fund’s investments in the Steel and Oil & Gas Storage & Transportation sectors saw some increases in value during the period.

The Manager made no changes to the core investment strategies and techniques it employed during the fiscal year ended November 30, 2022.

For the fiscal year ended November 30, 2022, the Fund investments that contributed to performance were securities of Commercial Metals Co. and Enterprise Products Partners, LP. The detractors to performance during the period were securities of The St. Joe Co., Imperial Metals Corp., Federal Home Loan Mortgage Corp. (“Freddie”), and Federal National Mortgage Association (“Fannie”). The following tables show the top holdings by issuer and sector in descending order of percentage of net assets as of November 30, 2022.

However, such a strategy may negatively influence long-term performance.

A more complete discussion and description of the principal risks of investing in the Fund can be found in its Prospectus and Statement of Additional Information.

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

Since inception, the Fund has been advised by the Manager. Bruce Berkowitz (Trades, Portfolio) is the Chief Investment Officer of the Manager and Chairman of the Fund's Board of Directors (the “Board” or the “Directors”). As of November 30, 2022, Mr. Berkowitz and his affiliates owned an aggregate 13,309,401 shares of the Fund. While there is no requirement that Mr. Berkowitz own shares of the Fund, 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 Fund to have Mr. Berkowitz serve as Chairman of the Board given: his long-term relative performance; his experience, commitment, and significant personal investments in series of the Company; the present composition of the Board; and current rules and regulations. A Director and Officers of the Fund are also Officers of the Manager. Nevertheless, at November 30, 2022, a majority of Directors were independent of the Manager, no stock option or restricted stock plans exist, Officers received no direct compensation from the Fund, and the Director affiliated with the Manager received no compensation for being a Director.

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

Please consider the investment objectives, risks and charges and expenses of the Fund carefully before investing. The prospectus and summary prospectus contain this and other information about the Fund and are available at www.fairholmefunds.com or by calling Shareholder Services at 866-202-2263. The prospectus and summary prospectus should be read carefully before investing.