Chuck Akre is an iconic investor, the sort of guy whose very existence vexes the efficient market advocates. Some years ago, Mr. Akre managed FBR Focus. After a dispute with the parent company (they, incorrectly, didn’t think he was worth what they were paying him), Mr. Akre left to found his own adviser and launch his own fund.
Akre Focus (AKREX) launched on August 31, 2009. Against all conventional wisdom, it’s grown to nearly $14 billion and continues to generate exceptional absolute and risk-adjusted returns for its shareholders. It’s done that by capturing almost all of the upside of the S&P 500 (96%) but only two-thirds of its downside (67%). Morningstar notes that it pairs low risk with above-average returns. MFO recognizes it as a Great Owl fund, one which has posted top 20% risk-adjusted returns over the past 3-, 5- and 10-year periods.
|Annual return||Maximum drawdown||Downside deviation||Sharpe ratio|
Over the past decade, that’s the highest Sharpe ratio of any fund in its 150 fund Lipper multi-cap growth peer group. No one has offered a better balance of risk and returns.
Investors and potential investors might have been a bit anxious at the news that Mr. Akre intends to step away from the day-to-day management of his fund on December 31, 2020.
They need not be.
At base, the announcement merely formalizes the status quo. Mr. Akre has been preparing an orderly transition for several years. We walked through the team’s evolution in a February 2020 report on a manager change at the fund. That announcement formalized the position of John Neff and Chris Cerrone as managers of the fund. Messrs. Neff and Cerrone have been handling the day-to-day operations of the fund for quite a while. Mr. Akre is a daily presence, “our North Star,” at the office: reading, talking, thinking, and, often enough, sleeping there. (In a remodel a couple of years ago, Mr. Akre had a bedroom built for himself so that he wouldn’t have to manage the hour-long commute after a late night at work.) In a long conversation with the managers, it was quite clear that they expect no change in the environment or relationships they’ve had in place for years.
They do, however, remain in a state of heightened vigilance about the market. Mr. Cerrone notes that
We had about a 20% cash stake back in February, quickly deployed $2 billion in market fall but were whipsawed again as the market made a record rebound. This is behavior that’s characteristic of a greed-dominated market environment – stocks that split trade up by double digits, IPO market is robust, and things are valued highly even on “the new metrics.”
We’re quite a way from where we’d be comfortable. Depending on where you look, things are 20-40% higher than where we’d be comfortable putting capital to work. And it’s not just stocks. The art market is heating up and the luxury yacht market is at 40-50 year highs.
Both managers kept returning to Mr. Akre’s core discipline, enshrined in the notion of the three-legged stool. They’re committed to finding (1) extraordinary business with (2) talented management and (3) a history of great capital allocation decisions. Even in the best of times, they note, “these businesses are rare.” Their success in finding rare businesses is reflected in their extraordinarily high active share, 92.9%. And their faith in them is similarly reflected in their extraordinarily low turnover rate, 4%.
Change is inevitable. It’s healthy for a firm when it’s well-managed; that is when the people chosen to lead have the habits of heart and mind that created the firm’s success in the first place. Some firms – Mairs & Power and T. Rowe Price come immediately to mind – have proven that these transitions can be seamless, painless, and productive. From the evidence available to us, that’s true at Akre Focus as well.