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Akre Focus: A Bet on Charles Akre, Jr., John Neff and Thomas Saberhagen
01/31/2018 5:00 am EST
The three managers of Akre Focus Retail Class (AKRE) liken their investment process to a “three-legged stool” based on business, management, and reinvestment, notes Walter Frank, mutual fund expert and editor of MoneyLetter.
What Charles Akre, Jr., John Neff, and Thomas Saberhagen aim to do is invest in great businesses that have high returns on capital and high free cash flow, in large part thanks to having significant barriers to entry and pricing power.
Under the business leg, the managers look for enduring and predictable returns on equity and free cash flow; identifiable and sustainable competitive advantage; and strong pricing power and balance sheets. Management must have exceptional skill, integrity, and passion; rational compensation; and be indifferent to the short-term focus of Wall Street.
And for the reinvestment leg, the managers target a pattern of disciplined reinvestment and opportunities for the reinvestment of free cash flow to grow the business. Stock pricing also matters, as purchase valuations significantly affect compounded returns.
One theme in the portfolio is what Neff terms “bottleneck” or “toll-bridge” businesses. These are companies that operate at a “choke-point” in the economy. Two prime examples are MasterCard (MA) and Moody’s (MCO).
MasterCard should benefit from growth in the volume of electronic payments. This shift will be propelled by the growth in e-commerce, new acceptance of cards in various locations/categories, increasing use of prepaid cards, and other factors.
Moody’s is a global provider of credit rating opinions. Its ratings are critical to the issuance of bonds and other securities. Akre Focus managers note, “We consider Moody’s ratings business a quintessential ‘toll bridge,’ earning fees from debt issuers of all kinds to provide efficient access to the debt capital markets.”
Meanwhile, top holding American Tower (AMT) is a key example of a “bottleneck business.” Organized as a real estate investment trust, American Tower is the largest independent US-based owner of cell phone towers, and has 72% of its towers outside the US.
This fund’s portfolio is highly concentrated, with only 23 holdings. It consists of core positions (highest conviction, usually a top ten holding) and workbench holdings (newer buys, and those being monitored as the investment thesis develops). And as long as its investment thesis remains intact and viable, the fund will hold portfolio holdings indefinitely; meaning turnover is a low 10% annually.
In every calendar year since 2010, the fund has ranked within the top 30% of Morningstar’s large growth category. In 2017 the fund gained 30.5%, compared to 27.7% for the category average and 21.8% for the S&P 500. Its top four holdings notably outpaced the S&P 500, contributing markedly to results.
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