Greetings from Middleburg. We hope this update finds you and your families well. While there is no distinct timeline for a return to normal life, we are pleased to report that the business continuity plans we implemented in March in response to COVID-19 continue to work well, and there has been virtually no discernable impact on our operations.
The Akre Focus Fund’s second quarter 2020 performance for the Institutional share class was 21.66% compared with S&P 500 Total Return at 20.54%. Year-to-date performance for the Institutional share class was 8.11% compared with the S&P 500 Total Return at -3.08%. Performance for the trailing 12-month period ending June 30, 2020, for the Institutional share class was 15.63% as compared with 7.51% for the S&P 500 Total Return.
The year 2020 should (but will not) dispel any faith still remaining in market forecasts. Who predicted the coronavirus? Or, having successfully predicted the arrival of the coronavirus in early 2020, what would have been your forecast for the stock market this year? Let us re-frame the question: if you knew in advance that the unemployment rate in the United States would go from 3.5% in February to 11.1% in June (with a stop at 14.7% in April) what would be your prediction for the stock market? Down 30%? Down 40%? Down 50% or more? Instead, through June 30, the S&P 500 Total Return is down just over 3%.
This example underscores why market forecasts play no role in our investment process. Our focus is on individual businesses: their quality, prospects, and the valuations at which we would consider initiating or adding to positions. We endeavor to manage the fund in such a way that our decisions to buy or sell are entirely specific to each individual business without regard or reference to general market conditions and forecasts. The focus on individual businesses informed our active buying in March, which resulted in our cash weighting dropping from 17% at calendar year-end to 10% by the end of the first quarter. With the rapid recovery off of the March 23 bottom, we were much less active buyers in the second quarter. However, we did put cash to work opportunistically in several names which, in combination with the strong recovery, helped reduce our cash weighting to just over 8% by the end of June.
| Performance | Total Annualized Returns % as of 06/30/2020 | Since Inception | |||||
| Net Assets | QTD | YTD | 1 YR | 3 YR | 5 YR | 10 YR | 8/31/09 |
| Retail Share Class (AKREX) | 21.58 | 7.96 | 15.35 | 21.74 | 16.31 | 18.01 | 16.72 |
| Institutional Share Class (AKRIX) | 21.66 | 8.11 | 15.63 | 22.06 | 16.62 | 18.33 | 17.03 |
| S&P 500 TR | 20.54 | -3.08 | 7.51 | 10.73 | 10.73 | 13.99 | 13.12 |
It is also important to highlight something we did not do during the recent market plunge: namely, seek opportunities among the hardest-hit names and industry sectors without regard to quality (for example: airlines and cruise lines). There undoubtedly was deeply discounted value to be had in some instances. However, we did not relax our quality standards and long-term compounding approach in order to rent beaten-up stocks with one eye on the exit. As Warren Buffett (Trades, Portfolio) said, “If you aren't thinking about owning a stock for ten years, don't even think about owning it for ten minutes.” Such was our approach, with its attendant emphasis on what we believe are exceptional businesses rather than cheap stocks.
The largest five positive contributors to performance during the quarter were Moody’s (MCO, Financial), Mastercard (MA, Financial), CarMax (KMX, Financial), American Tower (AMT, Financial), and O’Reilly Automotive (ORLY, Financial). Moody’s business has shown impressive resilience in 2020 thus far, as healthier borrowers have aggressively tapped debt capital markets to shore up liquidity and need debt ratings to do that.
The only two (and very marginal) detractors from performance this quarter were Live Nation Entertainment (LYV, Financial) and Markel (MKL, Financial). Nothing new to highlight here.
With COVID-19 persisting and a divisive election looming, the outlook for the remainder of 2020 and beyond feels as unpredictable as ever, and we remain as market agnostic as ever. But, being market agnostic does not mean a lack of conviction. It just means that our convictions relate to the individual businesses we own and the valuations needed to generate the returns we aspire to. In that regard, we remain prepared.
Thank you for your continued support. Be safe and be well.
Chuck, John, & Chris
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Fund performance current to the most recent month-end may be lower or higher than the performance quoted and can be obtained by calling 1-877-862-9556. The Fund’s annual operating expense (gross) for the Retail Class shares is 1.32% and 1.05% for the Institutional Class shares. The Fund imposes a 1.00% redemption fee on shares held less than 30 days. Performance data does not reflect the redemption fee, and if reflected, total returns would be reduced.
Mutual fund investing involves risk. Principal loss is possible. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. The Fund invests in small- and medium- capitalization companies, which involve additional risks such as limited liquidity and greater volatility than larger capitalization companies.
