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.