By Daisy Maxey 

A mutual fund that reaped big gains in American International Group Inc. has been selling shares of the insurer, producing a sizable taxable distribution for investors.

The $4.8 billion Fairholme Fund said it expects to pay out between $11 to $11.75 a share in capital gains on Dec. 11, equal to 32% to 34% of the fund's net asset value as of Friday. In announcing the expected distribution, Fairholme Capital Management LLC pointed specifically to its investment in AIG, the insurance conglomerate that was bailed out by the U.S. government in 2008. The company is now under pressure from some critics to break up through spin-offs or sales of some of its operations.

The fund purchased AIG common stock in 2010 and 2011--"at a fraction of the company's estimated book value at the time," Fairholme said--and received a distribution of warrants in 2011. As the insurer rebounded, AIG stock and warrants grew to be nearly 50% of Fairholme Fund's portfolio, according to researcher Morningstar Inc.

AIG had generated more than $2 billion in gains for Fairholme Fund shareholders through June 20, Fairholme Capital Management said in a Q&A on its website. "We determined that it was an opportune time to realize the gain and began to reduce the position in AIG common stock," it said.

The large-cap value Fairholme Fund has been managed by deep-value investor Bruce Berkowitz since its launch in 1999.

Fairholme Fund has been extremely concentrated and volatile. It had just 10 stock holdings and 30 other holdings as of May 31, according to Morningstar. As of that date, 65% of its assets were in its top five holdings, and nearly 73.6% of its assets were in the financial-services sector, with more than 19% each in AIG and Bank of America Corp., Morningstar said.

It is unusual to have mutual-fund companies discuss specific holdings that triggered capital-gains distributions in their disclosures of the payouts to shareholders, said Mark Wilson, chief investment officer of Tarbox Group, a wealth-management firm in Newport Beach, Calif., who tracks mutual funds' capital-gains payouts.

"If you have really big bets like Bruce does, when you take profits and make money, it's going to be really costly," Mr. Wilson said.

When mutual funds sell securities in their portfolios, they are required to distribute the net gains to fund shareholders, who then may owe taxes on those gains if the shares are held in taxable accounts. Tax rates can be as high as 23.8% on long-term capital gains.

Fairholme Fund's performance has been mixed, with big swings from year to year. But the fund still has a strong long-term record. In the 15 years through Nov. 20, it gained an annualized 9.6%, while its peers gained 5.9% a year on average and the S&P 500 index rose 5%, according to Morningstar. The fund is down 2.2% this year through Nov. 20, while the S&P 500 has gained 3.4%, Morningstar said.

Fairholme Capital Management LP sold nearly 18.1 million shares of AIG in the third quarter, leaving it with about 743,000 shares, according to regulatory filing made by the firm. In addition, the firm sold nearly 48 million shares of Bank of America, leaving it with 27.5 million shares, according to the same filing.

Write to Daisy Maxey at daisy.maxey@wsj.com

 

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(END) Dow Jones Newswires

November 23, 2015 16:21 ET (21:21 GMT)

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