After 21 years in the securities business, the then 67-year-old Chuck Akre (Trades, Portfolio) launched the Akre Focus Fund in August of 2009. Since then, Akre Capital Management has grown to manage $13.6 billion in private fund, mutual fund and separately managed accounts as of Nov. 30, 2019, $12.3 billion of which are part of the Akre Focus Fund.
The fund has gained renown for consistently placing in the top third of mutual funds in the U.S. in terms of returns, beating the S&P 500 in nearly all measured periods. Below is a chart of the quarter-end average annual performance for the Akre Focus Fund over various timeframes as of Sep. 30.
Source: Akre Focus Fund Pitchbook – Third-Quarter 2019
An English major’s career
Charles T. “Chuck” Akre didn’t start his career like the typical fund manager. In college, he started out as a premed student but later switched to English, and he got into securities after graduating with his bachelor’s degree. He held several positions in Johnston, Lemon & Co., ranging from stock broker to CEO of the asset management division and director of research. In 1989, he established his own firm, Akre Capital Management, which operated under the umbrella of Friedman, Billings, Ramsey & Co. until gong independent in 2000.
In March 2017, Talks at Google hosted Akre for a video interview entitled “Chuck Akre: The Peregrinations of an English Major Trying to Solve the Investment Puzzle.” When asked about how he got into securities, Akre said, “I had, in effect, a clean canvas as to where I should go and what I should do, and so, since I knew nothing, my goal was to figure this out, and the investment puzzle started out with what makes a good investor and what makes a good investment.”
While managing the FBR Focus Fund, Akre moved his firm to the town of Middleburg, Virginia in 2002. Middleburg boasts one stoplight and a lot of farmland, and Akre considers the location to be a strong advantage for the firm, as it frees them from the distractions of a city. “We’re here because, in effect, quality of life issues,” Akre said in a podcast interview with Patrick O’Shaughnessy on “Invest Like the Best.”
The freedom of thought to formulate an investing strategy separate from the background of a business education proved an advantage for Akre. Under his management, the FBR Focus Fund frequently performed in the top 1% of small/mid-cap growth funds. When FBR brought in a new CEO who wanted to cut Akre’s fees by 20%, he had enough history of high returns to pack his bags and start his own fund.
Thus, in September of 2009, Akre launched the Akre Focus Fund. At the time, the fund had approximately $760 million in equities, while Akre Capital Management had about $800 million in total assets. Since then, the fund has grown to $10.14 billion in equities holdings as of the end of the third quarter of 2019, as shown in the chart below.
This growth defies a recent trend in the broader investing world. As the longest bull market in U.S. history has dragged on, more and more hedge funds and mutual funds have lost shareholders, and many have been forced to close their doors over the past five years as investors moved their money to cheaper and more profitable stock indexes, according to data from Hedge Fund Research Inc. The S&P 500 gained 28.9% in 2019 for a total return of 31.5% (including dividends), while the Nasdaq Composite was up 35.3% for the year. Meanwhile, the Bloomburg Equity Hedge Fund Index was up 10% over the same period. As of Aug. 31, passively managed U.S. equity funds have $4.27 trillion in assets, surpassing the $4.25 trillion held in actively managed funds according to data from Morningstar.
In this historically profitable year for the S&P 500 and other major U.S. stock indexes, the Akre Focus Fund has managed to keep pace, returning 30.59% year to date as of Sept. 30. Since inception, the fund has returned an average of 16.78% annually compared to the S&P 500’s 13.54%.
Akre’s success comes from a strategy that mostly ignores the bulls and bears, relying instead on finding and holding businesses with a high return of return. According to Akre, “volatility is only a risk in the short-term,” and his firm buys businesses with the intention of holding them for as long as they can, given that the factors that led them to buy don’t change. Investors who react strongly to the overall health of the stock market and quarterly earnings reports have “beat by a penny, miss by a penny” syndrome, causing them to often make hasty decisions based on reports from Wall Street:
“Wall Street in general has a completely different model than we have. Our business model is to compound our capital. Wall Street’s business model, generically, is to create transactions. Logically. Well what’s the best way to create a transaction? To create what we call false expectations. And what are false expectations? Well, the earning estimates.”
“The bottom line of all investing is rate of return. And we believe that’s in our DNA, and so everything we do about’s like the investment, goes to the issue about how can we best understand what the rate of return opportunity is in that investment?” Akre said in a November 2019 WealthTrack interview. “The bottom line of all investing is rate of return,” is one of the slogans written in the crown molding of Akre Capital Management’s conference room.
The three-legged stool
In addition to a higher-than-average rate of return, Akre looks for business that have a below-average level of risk and that are trading at an attractive valuation. This forms the first leg of the “three-legged stool” investment approach. The other “legs” of the stool are the quality of a company’s management and demonstrated success in reinvesting free cash flow.
The three-legged stool itself is an old milking stool that came into Akre’s possession through the friend of a friend. The advantage of a three-legged stool is that it’s more stable than a four-legged one, implying that adding another leg to the firm’s basic investing approach could destabilize it.
The second leg of the stool, the quality of a company’s management team, is something that Akre and his associates determine largely through interaction, and by observing how they treat shareholders with whom they have no previously established relationship. They look for managers who consider the shareholders to be their business partners, as managers with this kind of view are more likely to create value for shareholders. “Once a guy sticks his hand in your pocket, he’ll do it again,” Akre said in regard to management teams who reward themselves at the expense of shareholders.
The third leg of the stool is the reinvestment of free cash flow. What does management do with the company’s free cash flow? Does it spend too much on a high dividend instead of using that money to grow the business? Does it waste the money on acquisitions that are harmful to profitability, or is it acquiring businesses that contribute to its success?
Together, these three components form the three-legged stool, and businesses that meet these requirements are called “compounding machines.”
Akre acknowledges that the compounding machines he looks for are rare. This is why the Akre Focus Fund has always held shares in only a small number of companies. As of the end of the third quarter, the fund has positions in 25 companies, with a turnover rate of 3%.
The Fund has held shares of American Tower since its 2009 opening. As of Jan. 2, it owns 7,186,492 shares, accounting for 1.62% of total shares outstanding. It is Akre’s largest holding, making up 15.67% of the equity portfolio.
Soaring from Akre’s average purchase price of below $30 to approximately $218 in the third quarter of 2019, American Tower has been a 100-bagger for the firm.
American Tower was a slight exception to Akre’s investing strategy, as its balance sheet wasn’t pretty when he first bought shares. However, the company is in the highly profitable business of buying cell phone towers. Due to zoning laws and other regulations, cell phone towers can’t be built too close to each other, meaning that each tower is essentially a monopoly; if a cell phone company wants to provide service to that area, it has no choice but to pay the tower-owner’s rate. This results in a guaranteed ability to generate high return on capital.
Another of Akre’s most successful investments is Mastercard, which it first bought shares of in 2010. As of Jan. 2, the Fund owns 5,327,144 shares, making it the second-largest position in the equity portfolio at 14.26%.
The holding was originally established when Mastercard shares were trading around $24.30, and the average price during the third quarter of 2019 was $275.62. The following is an excerpt about Mastercard from the Akre Focus Fund’s pitchbook:
“Approximately 85% of the world’s purchase transactions today are done using cash and checks. This presents an enormous market opportunity for Mastercard - perhaps the largest imaginable if one thinks of Gross Domestic Product as the summation of all the purchase transactions in an economy. In Mastercard, we believe we own a business with increasing odds of profiting from the growth and secular movement of those purchase transactions to electronic means of payment, earning a small piece on the trillions of dollars transacted over its network.”
Another big capital compounder for Akre and his team was Moody’s, which they purchased in 2012 when shares were trading at an average price of $36.25. As of Jan. 2, the fund owns 5,681,803 shares, making up 11.47% of the equity portfolio and accounting for 3.01% of Moody’s total shares outstanding.
Since 2012, Moody’s shares have risen to $209.60 apiece, a remarkable recovery from the blow that the credit rating agency took for its role in the 2008 financial crisis.
Originally, Akre did not want to invest in Moody’s because of the financial crisis, holding that the management team was not one that took shareholder value into consideration. In a 2019 WealthTrack interview, he and John Neff, a partner at Akre Capital Management, told the story of how Neff presented Moody’s as his stock pick for his interview. Akre rejected the idea but hired Neff anyway, since he made a good argument about the company’s reputation being able to survive and thrive once the economy recovered. Since the sticking point for buying shares was the management team, Akre and Neff later went to meet with Moody’s management, and afterwards, Moody’s became one of their most profitable investments.
Overall, the Akre Focus Fund has been a hard-to-find success in the arena of large-cap mutual funds, but like any fund, it has done its fair share of buying companies that failed and selling good companies too early.
For example, Akre bought 300,000 shares of Sears Holdings Corp. (SHLDQ, Financial), and Sears’ cash was on fire until it finally filed for Chapter 11 in October 2018. However, Akre did not stick around for that, selling out of his shares a year later at a slightly lower price than what he bought them for. All three legs of the stool must be present in order for the Akre Focus Fund to hold a company, and when they realized that Sears couldn’t maintain its rate of return, it was out of the portfolio.
As Akre said it the GuruFocus Value Conference in 2018, “Good judgement is from experience, experience is from bad judgement.” There is no way to learn without making some mistakes.
Letters to shareholders
Akre Capital Management’s website has a lot of information compared to many other mutual funds and hedge funds. In addition to covering the basics of the firm’s investing strategy, the website also provides shareholders with fund literature such as quarterly fact sheets and commentaries, as well as a regularly updated pitchbook detailing fees, disclosures, updates, team biographies and investment theses on profitable investments.
Outside of fund literature on large and successful holdings, Akre does not talk much about the reasoning behind his fund’s investment decisions. “We try not to talk very much about the companies in our portfolio… and we certainly never talk about ones that are coming in or going out,” he said in a podcast interview on “Invest Like the Best” after being asked to describe the reasoning behind some of his recent investments. Though this answer may seem disappointing to those wishing to learn more about Akre’s investing strategy, it helps avoid the potential problem of causing other investors to follow in his footsteps when he himself is not certain that his most recent investment decisions will turn out for the best.
For the Akre Focus Fund’s shareholders, the firm hosts semi-annual conference calls, which are announced on the annual and semi-annual reports.
“Effective January 1, 2020, Chris Cerrone will be added to the Akre Focus Fund investment team as a Portfolio Manager,” reads the fund’s most recent summary prospectus update, dated Nov. 28, 2019. Cerrone will join Akre and Neff as a partner managing the equity portfolio.
According to an October 2019 interview with the Wall Street Journal, the Fund’s cash levels stood at 16.4% of total capital mid-year and have been gradually increasing since. Though they do not consider themselves bearish, Neff said, “we are letting the cash build up, we are hard pressed in today’s markets to find valuations that are compelling enough to put that cash to work.”
The problem stems from the increasing difficulty of finding “undiscovered” value in a strong and long-lasting bull market. Never before has the U.S. stock market been valued so highly for so long. According to the ratio of U.S. total market cap to gross domestic product, Warren Buffett (Trades, Portfolio)’s favorite indicator for market valuation, indicates that stocks are valued at 153.1% of the nation’s gross domestic product. Thus, even companies that are out of the limelight are often trading at fair or high valuations if their earnings are attractive.
The increasing cash position has cut into the fund’s potential returns, but it also means that it is in a good position to buy when shares become available at a more attractive valuation. When the next recession hits, the Akre Focus Fund will be ready for it.
To read more about Chuck Akre's stock picks, be sure to check out his GuruFocus page here. You can also tab over to his current portfolio holdings, as well as his undervalued holdings, profile performance, sector weightings and more.
Disclosure: Author owns no shares in any of the stocks mentioned.
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