Greetings and regards from Middleburg. We hope you enjoyed the holiday season.
The Akre Focus Fund’s fourth quarter 2021 performance for the Institutional share class was 6.98% compared with S&P 500 Total Return at 11.03%. Performance for the 2021 calendar year for the Institutional share class was 24.52% compared with S&P 500 Total Return at 28.71%.
Each calendar year’s results become its own unit of record. The year 2021 was additive to our long-term record of compounding, for which we are grateful. But compounding does not, and cannot, happen over the course of a year or two or even five. Compounding requires decades. Our approach strives to match, as closely as we can, the durability of the Fund’s investments with the duration necessary for compounding to work. Accordingly, we are not frequent “lane changers” when it comes to investing.
But, every year in the life of a mutual fund has its points of interest, and 2021 was no exception. From our perspective, one of the interesting aspects of 2021 were “headwinds” presented by the share price movements of three of our top-five holdings. Specifically, as of December 31, 2020, the five largest positions in the Fund were Mastercard (MA, Financial), Moody’s (MCO, Financial), American Tower (AMT, Financial), Visa (V, Financial), and CoStar Group (CSGP, Financial). Combined, Mastercard, Visa, and CoStar Group represented 24.4% of net assets at the start of 2021, or nearly one quarter of the portfolio. In 2021, the net contribution from these three names to the Fund’s total return was negative 0.5%. Despite the share price performance of these three top holdings, the Fund’s resulting performance was, to us, a notable positive for the year.
The more important question is whether the tepid 2021 share price performances of Mastercard, Visa, and CoStar were a fair indictment of the operating performance and/or long -term worthiness of these businesses. We believe the answer is a resounding “No.” We believe all three to be among the most rapidly growing and competitively advantaged businesses the Fund owns. The fourth quarter financial results for the Fund’s portfolio companies have yet to be reported, but we expect Mastercard, Visa, and CoStar, on average, to have grown revenue and free cash flow per share in 2021 at approximately 20% and 17%, respectively. We believe the combination of strong fundamentals and weak share price performance over 2021 makes for more value and perhaps several “loaded springs” among our top holdings.
The largest five positive contributors to performance during the fourth quarter were KKR & Co. (KKR, Financial), Moody’s, American Tower, Constellation Software (TSX:CSU, Financial), and Dollar Tree (DLTR, Financial). There is nothing to call out for these names.
The largest five detractors from performance during the fourth quarter were Topicus.com (TSXV:TOI, Financial), Costar Group, Salesforce (CRM, Financial), Visa, and Adobe (ADBE, Financial). Again, nothing noteworthy.
As usual, we have no predictions about financial markets or the short-term behavior of share prices. What we can say with confidence is that we believe the Fund owns very profitable businesses with strong balance sheets, run by capable managements, with extensive reinvestment opportunities. The software businesses the Fund owns trade at multiples of earnings, not multiples of profitless revenue. The cell tower REITs the Fund owns are not dividend “yield plays” especially susceptible to rising interest rates.
None of this is to say that our Fund is or should be immune to rough patches—far from it! As we have said before: real boats rock, and valuations in many instances have been high. Rough markets and share price declines do not have to be enjoyed. But to compound, they must be endured.
Thank you for your continued support and Happy New Year.
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 1.31% 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.
The composition of the sector weightings and fund holdings are subject to change and are not recommendations to buy or sell any securities. Cash and Equivalents include asset backed bonds, corporate bonds, municipal bonds, investment purchased with cash proceeds for securities lending, and other assets in excess of liabilities.
The S&P 500 TR is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. It is not possible to invest directly in an index.
The Fund’s investment objectives, risks, charges, and expenses must be considered carefully before investing. The summary and statutory prospectus contains this and other important information about the investment company and it may be obtained by calling (877) 862-9556 or visiting www.akrefund.com. Read it carefully before investing.
