(PUB) Morningstar FundInvestor

5

Morningstar FundInvestor

July 2 013

Data through June 30, 2013 Fairholme Focused Income

Ticker Status Yield SEC Yield Total Assets Mstar Category FOCIX Closed 7.1% . $243 mil High Yield Bond

Morningstar Analyst Rating 06-14-13

Investment Style Fixed Income Income Rtn %Rank Cat

Historical Profile Return Risk Rating High High Above Avg

1

1

6

´

Manager Change Partial Manager Change

Morningstar Pillars Process Performance

10.0 11.0 12.0 13.0 14.0

Positive Neutral Positive Positive Negative

Growth of $10,000

¶

Investment Values of Fund Investment Values of BC Agg Bnd Performance Quartile (within Category) History

People Parent Price

§

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 06-13

Morningstar Analyst Rating Morningstar evaluates mutual funds based on five key pillars, which its analysts believe lead to funds that are more likely to outperform over the long term on a risk-adjusted basis. Analyst Rating Spectrum Œ „ ´ˇ ¨

NAV 9.91 10.71 . . . . . . . . Total Return % 24.46 5.19 11.44 9.47

-0.72 . . . . . . . . . +/-BC Agg Bnd 26.90 0.98 -8.56 . . . . . . . . . +/-BofAML HY Master 22.96 -10.40 -5.10 . . . . . . . . . Income Return % 3.48 10.14 6.94 . . . . . . . . . Capital Return % 20.98 -4.95 -7.66 . . . . . . . . . Total Rtn % Rank Cat 1 99 88 . . . . . . . . . Income $ 0.33 0.97 0.73

Pillar Spectrum Positive

0.36 . . . . . . . . Capital Gains $ 0.00 0.00 0.00 0.04 . . . . . . . . Expense Ratio % . 0.91 0.67 0.50 . . . . . . . . Income Ratio % . 9.53 5.96 4.69 . . . . . . . . Turnover Rate % . 8 92 77 . . . . . . . . Net Assets $mil 243 241 298 352 . . . . . . . .

§ Negative

¶ Neutral

Performance 06-30-13 1st Qtr 2nd Qtr

3rd Qtr

4th Qtr

Total

2009 2010 2011 2012 2013

. . . . . . -0.29 4.38 2.99 . 4.93 -1.37 -9.41 5.90 -0.72 5.98 0.48 3.50 -4.55 5.19 7.48 15.79 . . . *

Portfolio Analysis 02-28-13

Rating and Risk Time Load-Adj

Date of Maturity

Amount

Value % Net $000 Assets

Morningstar

Morningstar Risk vs Cat

Morningstar Risk-Adj Rating

Period Return % Rtn vs Cat

Total Fixed-Income:10

$000

1 Yr 3 Yr 5 Yr

22.94 11.80

Trailing

Total

+/- BC +/- BofAML %Rank Growth of

Sears Hldgs 6.625%

10-15-18 44,000 42,350 17.00 07-15-27 49,716 39,713 15.94 10-01-28 47,500 36,257 14.56 01-15-33 60,600 17,901 7.19 08-15-22 8,486 6,774 2.72 12-15-25 7,105 5,675 2.28 20,148 20,148 8.09

Return% Agg Bnd HY Master 15.79 18.11 17.10 24.46 26.90 22.96 22.94 23.63 13.35

Cat

$10,000

High

High

Mbia 7.15% Mbia 6.625%

3 Mo 6 Mo 1 Yr

1 11,579 1 12,446 1 12,294

. . . . . . . .

10 Yr Incept

Fidelity Instl MM Fds Mo

11.13

Mbia Ins 144A FRN

3 Yr Avg 5 Yr Avg 10 Yr Avg 15 Yr Avg 5 13,974 . . . . . . . . . . . . . . . Tax Analysis Tax-Adj Rtn% %Rank Cat Tax-Cost Rat %Rank Cat 11.80 8.29 1.37

Other Measures

Standard Index Best Fit Index BC Agg Bnd BofAML Convert Bd

Mbia 6.4%

Mbia 7%

Alpha

17.7 -1.67

1.7

Amer Intl Grp ([Wts/Rts]

01-19-21

23

321 0.13

Beta

0.88

R-Squared

11

34

3 Yr (estimated) 5 Yr (estimated) 10 Yr (estimated)

8.82 79 . . . . . . . . 6 2.66

Standard Deviation

14.11 11.80

Mean

Sharpe Ratio

0.85

Potential Capital Gain Exposure: 3% of assets

Morningstar’s Take by Kevin McDevitt, CFA 06-14-13 Fairholme Focused Income is free to live on its own terms. This fund closed to new investors at the end of February, making it less vulnerable to disruptive asset flows. Investors have pulled about $300 million from the fund over the past two years. This forced manager Bruce Berkowitz to sell positions in 2011 and 2012 that he would rather have held on to. With the hot money largely shaken out, the existing shareholder base is likely more stable. This should make it easier for Berkowitz to make the big contrarian bets that have driven his superb long-term results at equity sibling Fairholme FAIRX. But those long-term rewards are composed of lumpy returns, as this fund recently showed. In May 2013, a 43% position in MBIA MBI bonds took off after the company won a $1.7 billion settlement with Bank of America BAC, which Berkowitz had long predicted, over misrepresentations on mortgages. Up until that point, the fund’s returns had been among the high-yield category’s worst since its 2010 inception. But after the

fund’s 18.2% gain in May alone, its now 12.1% annualized return since inception is in the category’s top decile. With the portfolio down to just two issuers, MBIA and Sears Holdings SHLD, such feast-or-famine performance will likely continue. The fund’s defenses, though, are stronger than they have been in some time. Berkowitz built the fund’s cash cushion to a whopping 40% of assets in February--its highest level since August 2010--both through maturing holdings and by selling former top-holding Emigration Bancorp’s bonds. Beyond providing substantial ballast, this pile of cash dramatically decreases the odds of having to sell positions to meet future redemptions. Plus, it gives Berkowitz flexibility should buying opportunities arise. With its ultraconcentrated portfolio, this fund remains suitable for a small minority. But with its doors closed to newbies, Berkowitz has more freedom to follow his muse.

Sector Breakdown

% of assets

Current Investment Style

Government

0

Duration Ltd Mod Ext

Corporate Bond

60

Quality High Med Low

Bank Loan Convertible

0 0 0

Preferred

figure provided by fund

1

Agency MBS 0 Non-Agency Residential MBS 0 Commercial MBS 0 Asset-Backed 0 Covered Bond 0 Municipal 0 Cash & Equivalents 40 Other 0

1 Avg Eff Duration Avg Eff Maturity Avg Credit Quality Avg Wtd Coupon Avg Wtd Price Coupon Range

. . .

7.66%

77.61% of par

% of Bonds Rel Cat

0% PIK 0% to 8% 8% to 11% 11% to 14%

0.0 0.0 88.0 1.5 0.0 0.0 12.0 2.4 0.0 0.0

Composition - Net Cash 40.2

Bonds 59.7

More than 14%

Stocks 0.1

Other

0.0

Address:

Fairholme Funds Inc Miami, FL 33137 866-202-2263

Minimum Purchase: Min Auto Inv Plan:

Closed Closed No-load 1.00% 3Yr:$322 Quarterly

Add: . Add: .

IRA: .

1.00=Category Average

Credit Analysis

Special Securities Restricted/Illiquid Secs Exotic Mortgage-Backed Emerging-Markets Secs Options/Futures/Warrants

% bonds 02-28-13

Sales Fees:

BB

AAA

7 0 0

. . . .

. . . .

Web Address: Inception: Advisor: Subadvisor: NTF Plans:

www.fairholmefunds.com

Management Fee:

B

AA

01-04-10

Actual Fees:

Mgt:1.00% Dist: .

Fairholme Capital Management LLC

Expense Projections: Income Distribution:

5Yr:$558 10Yr:$1236

Below B NR/NA

A

None

No

BBB

N/A

Mutual Funds ß ®

© 2013Morningstar, Inc.All rights reserved. The information herein isnot represented orwarranted to be accurate, correct, complete or timely. Pastperformance isnoguarantee of future results.Access updated reports at To order reprints, call 312-696-6100. mfb.morningstar.com.

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