From the October 2009 issue of Investment Advisor • Subscribe!

October 1, 2009

Mutual Fund Spotlight: Firm Foundation

Chuck Akre will use the three-legged strategy he used to great effect at FBR Focus for his new eponymous fund

A manager who has consistently delivered above average returns to investors in one of the best performing stock mutual funds on the market (the FBR Focus Fund, which he managed for nearly 13 years), Charles Akre's reputation will undoubtedly precede him as his newly minted mutual fund, the Akre Focus Fund, gets off the ground--not least because he intends to employ the very same investment strategy that he has used for more than a decade.

Choosing businesses that deliver above average returns on capital, that are run by stellar managers, and that generate a reinvestment opportunity form the cornerstone of Akre's approach to the markets. They are also the reason why the $1 billion FBR Focus Fund has never trailed the S&P 500 Index in any rolling five-year period, and why the fund has annualized returns of 13% since its inception in December 1996.

Akre--who also manages money in separately managed accounts and long/short hedge funds--says he's keen to engage more closely with his shareholders in the new mutual fund. Given his track record, there's little doubt that shareholders will want the same.

Why did you decide to start your own mutual fund?

I served as subadvisor to the fund that I ran for more than 13 years and there were a number of reasons why that relationship was less than optimal. The most important was that we wanted to have a closer and more direct relationship with our shareholders--something we didn't have as subadvisors--and we also wanted to have better control of our destiny.

Will your new fund, the Akre Focus Fund, differ in any way from the FBR Focus Fund?

If you examine both prospectuses, there would be some differences, but over the past 20 years that I have been in the investment management business, I have found that I have been able to deliver better-than-average returns from the small- and mid-cap segment of the market, and I would expect the same to be true going forward with this fund, by using a process that is very repeatable that I have been using for a lot of years.

Can you describe that process?

In the old days, a farmer milking his cows had this stool that he could put down even on uneven ground because it had three legs, which are sturdier than four legs. I call our approach 'the three-legged stool' because it has three components to it that work in any market. The first 'leg' is the business model: Looking for businesses that have, for a long period of time earned above-average returns on capital for their owners. We are looking for free cash flow that is available to managers after all the maintenance capex [capital expenditures necessary to run the business]. The second 'leg' is what we call the people model: We want to see that the people running the business are way above average. They need to be killers, but they also need to be people of great integrity, who in the history of the business, have always acted in the interest of the shareholders and treated public shareholders as partners even though they don't know them. The third 'leg' is what we call the reinvestment opportunity, which means that if the business is earning above-average returns on capital and has great people running it, we want to see if it has an opportunity to reinvest the excess profits it generates in a way to continue generating above-average rates of return. Once you have these three components in place, you have established a compounding machine and the overlay is simply valuation.

Would you say that you are a value investor?

We are often described as value investors but we are really growth investors as well. The value comes in because we say we want great investments but we don't want to pay much for them, and if our judgment has been good about those three stool legs, we will have bought stocks that we will be able to hold for a very long time, as long as those three legs remain intact. If one of those legs or components goes asunder, if a company's business model changes or there is a change in the people running the business or the reinvestment opportunity has gone away, then we will reevaluate the business and perhaps sell it. But I have been in this business long enough to know that this method or process is what delivers above average results, including for the fund I just quit managing, which was a five-star fund for so many years.

Doesn't your investment process require constant and rigorous monitoring of your holdings to ensure that the three legs of your stool are still standing strong?

Yes, but we are not concerned with looking at whether a company's earnings are up or down a penny. We avoid what I call 'the nonsense.' Of course you have to always pay attention to how a business is doing because nothing in the world works perfectly all the time, and business is never a straight line. But managing a portfolio is an issue of judgment so theoretically, if we have misunderstood one of the three stool legs, then there is risk: volatility risk and exposure to the risk of capital loss.


Chuck Akre's Record

Until the summer of 2009, Chuck Akre was the subadvisor for nearly 13 years on the FBR Focus Fund. Below are the metrics on his performance while managing that fund. Akre says he will continue to manage money in a very similar way in the new Akre Focus Fund (AKRIX).

For more information on the Akre Focus Fund, click here or call 877-862-9556.


With all that has happened, isn't it harder to see which businesses are strong and which aren't?

That is a very appropriate question. We have discovered over the past 10 years that some business models we thought were enduring have actually begun to come apart. Take newspapers, for example. Ten years ago, thoughtful investors began to have some concerns about newspapers because their generation wasn't reading papers the way their parents were and traditional advertisers like department stores were disappearing. In the last few years, the Internet has decimated newspapers and dramatically changed their business models for the worst. The takeaway from this, though, is that business models are typically getting either better or worse at any point in time. It is sometimes hard to figure out in which direction they are going, so the trick is watching companies all the time and seeing how they reinvent themselves. IBM, for instance, has been in three or four separate businesses in its lifetime. American Tower is also a wonderful business model that has expanded well out of the company and Markel is another example of a great company that is run by a great team.

You manage assets in the mutual fund, separately managed accounts (SMAs), and hedge funds. Do you follow the same investment strategy for all?

There are some differences between the three platforms. The SMAs typically have 12 to 15 securities and we typically tend to have those portfolios dominated by securities about which we have no questions. We've served clients well for long periods of time in this way. We use the same investment philosophy for the partnerships, but we do more things around the edge, like we can and do have a short position and may occasionally use options or leaps to enhance the position. The partnerships are designed to have a client experience a result similar to the returns on capital that the underlying businesses are earning.

What are the overall challenges that the market faces and what should investment managers be aware of?

The simple answer is that in 2007 and 2008 and in the first quarter of 2009, both managers and investors faced challenges that by and large, they and the entire universe did not fully anticipate, and going forward, our economy is not going to be less robust than it was. Since the beginning of March, of course, we have had a pretty big recovery in share prices, but the biggest challenge for a manager should be to manage a portfolio in a way to diminish wild market swings in market valuations as we experienced. The past 18 to 20 months have caused us to think that we should pay a bit more attention to over valuation than we have in the past (we rarely have sold businesses because we thought they were overvalued). On the other hand, though, it is very hard to find good businesses, so I would rather own very good businesses even if they are overvalued.

What's your take on financial advisors and their role?

Their role is extremely important for ordinary investors who are confronted with 8,000 stocks in the U.S., the same amount elsewhere in the world, and who knows how many mutual funds. Many are not equipped to make good judgments, so an advisor has an extremely important role in being able to parse through all the choices and show their judgment in places that have value.


Savita Iyer-Ahrestani is a freelance business journalist currently based in New Jersey. She can be reached at siyerwriter@yahoo.com.
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