FORTUNE -- Some splits in the mutual fund world are acrimonious, some aren't. This one fell somewhere in the middle. Larry Pitkowsky and Keith Trauner were happy working with Bruce Berkowitz at the Fairholme Fund. The fund's record was enviable through 2007, and it was attracting more and more new money by the day. If they continued picking winners and spotting trouble ahead -- Fairholme's annual reports fretted early about toxic bank holdings leading to a market shock -- Pitkowsky and Trauner might also be honored, as Berkowitz later was, as Morningstar's U.S. stock manager of the decade.
But a few years back Berkowitz took Fairholme in a new direction, one emphasizing private deals -- a recent example was Fairholme's deal with hedge fund manager Bill Ackman last year to pull General Growth Properties out of bankruptcy. Berkowitz hired an M&A whiz to help him, and he slowly phased out Pitkowsky and Trauner's work. The two sides agreed not to criticize each other and went separate ways.
Now Pitkowsky, 46, and Trauner, 54, are back. Their new mutual fund named GoodHaven opened for business in April. In a recent government filing, they disclosed $45 million in assets. Their stock picks reflect some of Fairholme's historical strategy, but what really stands out is that the managers were hoarding more than 50% of assets in cash, as of the filing. It's fallen some since then, the managers say, but it's still high.
"The Fed is pushing people to do what they don't want to do," Trauner says, referring as an example to older investors who might buy riskier stocks and bonds to compensate for zero percent interest rates. Stocks might not be overly expensive, he says, but because GoodHaven isn't finding the screaming buys of late 2008, the two are content to wait for possibilities. He deadpans, "We're really skeptical that zero percent interest rates will last forever."
It's one of the few macroeconomic predictions you can get out of them, if you can even call it that. Pitkowsky and Trauner are more likely to read 10-Ks over the weekend than pontificate about global economic themes.
Their biggest stock pick is Microsoft (MSFT). "If you just read the press, you would think that these guys are a disaster," says Trauner. Even easier, pull up a stock chart: Microsoft shares trade below their levels an entire decade ago. But for same reason Pitkowsky and Trauner avoided technology companies during the last boom -- preferring to buy stable businesses like Berkshire Hathaway -- they're buying some tech companies this time around.
First, they say, Microsoft doesn't have to beat Apple in cell phones and tablets for its stock to rise. PCs still dominate the world computing market, and it's a growing market outside of the U.S. and Western Europe. "Everyone's excited because Apple sold 20 million units last quarter," says Trauner. "Well, the PC replacement market is 300 million." Don't forget that Microsoft is entrenched in the business world, where switching from Windows is tremendously expensive. It also dominates office applications. Plus it bought 1.7% of Facebook before the social network's valuation exploded. Microsoft doesn't get any love from the market but these fund managers think that'll change. Its earnings per share can grow from $1.40 five years ago to $2.85 next year, they predict. Adjusted for Microsoft's cash hoard, the two estimate they bought shares for seven times Microsoft's operating earnings.
Another one of their favorites is Google (GOOG). The stock recently ran-up $100 from their purchases around $500. "Everyday we're plagued by the thought that we don't own enough of this stuff, " says Trauner. For Google, it's the ad business that makes the company great, he says. Forget the criticism about not making money with Android. "It's such a simplistic view," says Pitkowsky. The reason Google offers Android for free is because it helps grow Google's wide moat around digital advertising. Most importantly, it keeps competitors out. The stock jumped 20% this month after blowout earnings. But if you take out $100 a share in cash, and understand Google can soon earn $40 a share, investors are paying 12 times operating earnings. "It just seems way too low," says Trauner.
The obvious question for a couple value investors is how two tech stocks make it into their top holdings. Just a decade ago, almost a third of Fairholme's investors left during the tech bubble because they avoided the highflyers. The answer is about price. Google, and certainly Microsoft, don't command outsized valuations. It's also about the sector changing. "A decade ago or longer there was such radical change in marketplace," says Trauner, "it was hard to understand which companies or technologies would persist. Since then there's been tremendous consolidation."
Their only macro view seems to be that interest rates will rise sometime in the future. Its hardly noteworthy, except Federated Investors is a company that will surprise people when rates start rising. About 75% of its business comes from money market funds. It has been waiving fees on the funds to the tune of $200 million a year so it can offer investors at least a few basis points of interest. With only 100 million shares outstanding, that's real money, contend Pitkowsky and Trauner. "There's a good chance it will have a Lollapalooza effect," says Trauner. "The fee waivers go away, and assets increase at the same time." The stock is up 4% over the past year.
After helping lead the Fairholme Fund to superstar status last decade, the two stock pickers might be worth paying attention to.
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