Even veteran investment professionals, those who have been in the business for decades, are not shy to say that the 2001–2011 period was probably the worst time they have ever been through.
At the outset of a new decade, both the financial markets and the global economy still look tenuous. The European sovereign crisis is not resolved, the U.S. economy is fragile and inflation is on everyone’s cards as a top concern in the years to come.
Yet seasoned investment managers believe that it’s still possible to come out on top, and maybe even perform better in the decade to come, if they approach the market with dedication, discipline and devotion to the practice of investment management.
Here, investment veterans Chuck Akre, managing member and CEO of Akre Capital Management; Hank Herrmann, chairman and CEO of Waddell & Reed; Iain Clark, CIO of Henderson Global Investors; and Gene Needles, president and CEO of American Beacon and president of American Beacon Funds discuss what strategies have worked for them, what they believe will continue to work moving forward and what qualities they consider key for investment management in the future.
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Chuck Akre, (left), managing member and CEO of Akre Capital Management, credits the success of his 15-year-old FBR Focus, which he left to start his own fund (and that he ran in the same manner he now manages the Akre Focus Fund), and his 23-year track record in managing separate accounts for individual investors to the strict discipline he has always exercised in the investment process. That process, he firmly states, has never changed and will never change.
“We refer to the process internally, and we are known by it externally, as the ‘three legged stool,’” Akre says.
It’s an approach that requires identifying high-return businesses run by managers with equal parts of skill and integrity—businesses that have also generated enough excess cash to be fully reinvested and that can be bought at a good price.
“As long as it’s a great business that’s well-priced, with good people and opportunities to reinvest excess cash, we are keen to own it for a long time,” Akre says.
The past decade, in particular the three years following the 2008 market meltdown, has thrown up a number of lucrative opportunities for Akre that are not only the kinds of businesses he’s always invested in, but that “would, in the future, help us connect the dots in a better way to preserve our capital in adversity.”
The Akre Funds, for example, have an important exposure to off-price retailers—companies that, Akre says, not only post top records in robust economic times, but also work well in an environment “where the consumer needs to work hard to make sure he stretches every dollar.”
Akre also focuses on identifying businesses that have good pricing power and the ability to raise prices over time for their services regardless of the economic environment.
“We continue to own positions in American Tower, and we have recently added holdings in MasterCard,” he says. “These are both businesses that have built-in price escalators, and that’s what we want, particularly in a period of inflation.”
Inflation is definitely rearing its ugly head, and there is nothing investment managers can do except find a way around it. Right now, there’s no map for recovery in either the United States or Western Europe, which means that the markets will be rife with volatility, and investors will be grasping at any snippet of news, positive or negative, that comes their way.
While volatility will be treacherous for those who view the markets as just a short-term way of making a quick buck, it will also throw up great opportunities for long-term investors who, Akre says, have the right temperament to stay the course and not get discouraged.
“Investment managers have their work cut out for them, but there are a lot of businesses out there with terrific potential,” he says.
For Akre, getting hold of this potential means sticking with the three-legged stool approach and choosing to invest in businesses that can grow in the future, even if there is a change in the overall macro picture, the most likely being a rise in interest rates.
“Since they are at zero in the short term, one would think the next move would be up,” he says.
Businesses like TD Ameritrade, for instance, are currently undervalued, but their business model is such that rising interest rates would have a positive effect on their revenue streams.
Akre’s firm manages the Akre Focus Fund (AKREX), a $400 million public mutual fund, a couple of hedge funds and several separately managed accounts for individual investors.
Hank Herrmann, (left), chairman and CEO of Waddell & Reed, which manages approximately $90 billion in assets and launched some of the first mutual funds in the industry in 1940, has been in the investment business since 1963.
[The print edition of the January 2012 issue of Investment Advisor mistakenly listed Waddell & Reed's assets as $5 billion.]
He has been through many stressful and disappointing times, but the past decade, Herrmann says, was probably as bad as it gets. Yet he believes also that “we are finally approaching a time in which we are going to be forced to change our behavior, and that will set us on a more fiscally responsible course,” though he adds that “there will be a lot of pain for the economy and for the market.”
Herrmann believes that one of the greatest lessons investors and investment managers alike can take home from the past 10 years is that price-to-earnings ratios do matter. As a traditional, long-only, “buy ‘em and hold ‘em” investor, this has always been a top priority for Waddell & Reed, Herrmann says, but so many others forgot its importance, and this is what went against them.