Akre Capital's Akre Focus Fund 3rd-Quarter Commentary

Discussion of markets and holdings

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Oct 13, 2022
  • It is increasingly safe to say that 2022 will likely be the first negative performance year in the Fund’s 13-year history.
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Greetings and regards from Middleburg.

The Akre Focus Fund’s third quarter 2022 performance for the Institutional share class was -8.51% compared with S&P 500 Total Return at -4.88%. Performance for the trailing 12-month period ending September 30, 2022, for the Institutional share class was -24.39% compared with S&P 500 Total Return at -15.47%.

It is increasingly safe to say that 2022 will likely be the first negative performance year in the Fund’s 13-year history. It is also safe to say it will not be the only one. Bad years are an indelible part of any long-term track record of compounding. Prior to this year, the Fund enjoyed an exceptionally strong stretch of performance: 35.0% in 2019, 20.4% in 2020, and 24.2% in 2021. During this period of strong performance, we routinely wondered about the timing and extent of the weakness that was sure to follow. Valleys, after all, are found next to peaks. Although the ultimate bottom for stocks and the economy is yet to be determined, 2022 has provided a resounding answer to this question of timing.

Now, amid this bear market, we are starting to ask a different question: what will be the timing and extent of the recovery that should eventually follow? Of course, the answer is unknowable. But we think the change of question noteworthy given John Templeton’s adage about bull markets being born on pessimism. Pessimism is rampant. We see that reflected in the breadth and depth of the value that we perceive across the Fund’s holdings. Could that breadth and depth of value become even more extreme in the months ahead? Of course. However, we perceive compelling value in the Fund’s holdings at present.

What makes investing difficult is the emotional response that markets engender. Fear or greed, especially at extremes, make it difficult to take the right course of action. Until recently, greed made holding cash the least appealing option for investors. Today, with fear reigning supreme, cash is the investment of choice, while equities assume the mantle of most despised. Perfectly understandable—and thus to be resisted! Because whatever the timing of the eventual recovery, from whatever bottom it begins, one thing is certain: cash will not be how investors recoup bear market losses.

Investors will only recoup bear market losses the same way those losses were incurred: by owning equities. This truism has one caveat: losses suffered in profitless, newly-minted, and speculative “story stocks” may prove permanent in many cases. In stark contrast, we believe the holdings of the Fund comprise eminently durable and profitable business franchises that dominate important choke points of economic growth and opportunity, ranging from wireless data consumption to payments to capital formation to the digitization of enterprise and of real estate. We endeavor to own the most competitively-advantaged businesses, run by exceptional management teams, with long runways for reinvestment—the triumvirate we call our “three-legged stool.” Such businesses are hardly immune to sharp and painful drawdowns in valuation during bear markets (witness this year). But these businesses will remain the breed we want to own whatever the temporary course of the Federal Reserve or energy prices. Our North Star remains fixed whatever the weather.

The four positive contributors to performance during the quarter were O’Reilly Automotive (

ORLY, Financial), CoStar Group (CSGP, Financial), Snowflake (SNOW, Financial), and Danaher (DHR, Financial). Nothing noteworthy on which to elaborate.

The five largest detractors from performance this quarter were American Tower (

AMT, Financial), CarMax (KMX, Financial), Mastercard (MA, Financial), Moody’s (MCO, Financial), and Adobe (ADBE, Financial). American Tower (a more levered balance sheet, guilt by association as a REIT), CarMax (declining vehicle affordability), and Moody’s (lack of debt issuance to rate) have rising interest rates as a scourge in common. Mastercard (and Visa) has been subject to renewed regulatory scrutiny of the variety that helped provide our original buying opportunity in the name back in early 2010. Adobe announced a planned acquisition that was not only very expensive, but also highlighted an architectural vulnerability in the core software franchises, the import of which we continue to assess.

We are fond of cash when compelling equity valuations are not to be found. Such is not the case today. Our cash position at September 30, 2022, was 4.1%. We continue, appropriately if not enthusiastically, to manage cash defensively in the face of net outflows. Our desire to shift from a defensive to an offensive posture continues to mount.

We thank you for your continued support.

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 1.30% and 1.04% 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.

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I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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