In December 2020, Chuck Akre (1941 – today) concluded a 56-year investing career. During much of that time, he built an unassailable reputation for discipline, independence, and excellence. The core of his investment strategy was captured by “the three-legged stool.” He looked for (1) extraordinary business, (2) talented management, and (3) great reinvestment opportunities and histories. His goal was to provide above-average returns with below-average risk, and he was pretty sure he’d found a strategy to achieve that:

It just so happens that [the stock market’s average annual return of 9-10%] correlates with the rate of return on the owner’s capital and frequently with the growth in the book value per share of the typical U.S. company. We posited from this observation that our return on an asset would therefore approximate the return on the owner’s capital, absent any distributions, and assuming a constant valuation. And since our stated goal is to compound our clients’ (partners’ and shareholders’) capital at an above average rate while incurring a below average level of risk, we needed to identify this group of superior businesses which earn above average rates of return on their owner’s capital.

Like Ralph Wanger and other giants of their generation, investors chose to invest in Akre Focus and his earlier charges because of Chuck Akre. Their faith in him gave them strength to hold during turbulent times; his strength gave them occasion to celebrate during good ones.

Mr. Akre handed over the reins in 2020 to John Neff. Mr. Neff joined Akre Capital Management in 2009 as an analyst, became Mr. Akre’s co-manager in August 2014, and succeeded him as lead (now sole) manager on the fund at the end of 2020. Mr. Neff holds a degree in English from Colgate and an MBA from the University of Chicago.

After seeing modest fund outflows in the years since Mr. Akre’s retirement, Mr. Neff and his team made a bold business decision. They have put a proposal in front of shareholders to convert the fund into an actively managed, transparent ETF. If, on September 19, the shareholders endorse the change, the conversion will occur in late October 2025.

We approached Mr. Neff with two questions: (1) What’s up? And (2) what’s next?

What’s up

That is “why become an ETF?” Mr. Neff was blunt: “There is nothing level about the playing field between traditional open-end funds and exchange-traded funds.” Traditional funds bear expenses that ETFs are spared. The tax code imposes different tax treatment on the two, so that fund shareholders are taxed on “unrealized” capital gains – that is, capital gains generated by the manager’s sales rather than by the shareholder’s sales. If a manager is forced to sell shares, either because the quality of the investment changed or because they needed to raise cash, shareholders are on the hook for taxable gains. With an ETF, that’s not the case. For Akre shareholders, that’s a substantial issue since the fund has assets of $12.35 billion but a cost-basis of just $4.55 billion. That is, about $8 billion of the fund’s assets are capital gains.

Beyond unequal tax treatment, distributors such as Schwab “tax” funds through the imposition of fees that lead the fund to levy 12(b)1 fees. At least until tax law and Schwab’s practices change, Mr. Neff anticipates that shareholders will see lower expenses and lower taxes following the conversion.

What’s next?

The discipline lives on. Mr. Neff notes, “We are true believers in the three-legged stool that Chuck laid down in 1989. It works over time even though it doesn’t work all the time. The discipline is easy to describe but unbelievably discriminating in practice. Few firms meet our standards, and opportunities to buy those firms at rational prices are few and far between. So, we wait.” In the case of his most recent acquisition, that wait was almost four years.

Those claims are buttressed by the fund’s Active Share (96.69, which is extremely high) and its portfolio turnover ratio (5%, which is extremely low). The list of “serious” candidates for acquisition by the fund is only 8 – 12 names long.

We also asked, “Who, beyond yourself, is ready to step into the lead portfolio manager role when the time comes?”

Akre: The Next Generation. Trey Tickner and Andrew Millette were made partners in the firm on January 1, 2025. They support Mr. Neff, and he describes them as “integral to our work.” As a result, he considers them “the next generation” of portfolio leaders. Messrs Akre and Neff were looking for bright people with very specific professional experience: at least two years in investment banking and at least two years in private equity. The stint in investment banking means “they can do financial modeling in their sleep and are used to incredibly hard work.” The private equity piece, by contrast, reflects the fact that “we take a private equity approach to public markets, which implies very different criteria than folks trained narrowly in equity investing.” At base, the private equity people look at the company and its prospects. The equity people look at the stock and are attuned to issues of momentum, volatility, quarterly misses and beats, and analyst downgrades. None of which is material to the Akre discipline.

Bottom Line

John Neff faces the classic challenge of succeeding a legendary manager, but four years into his tenure, he’s proven his commitment to Chuck Akre’s principles while making smart business decisions to enhance shareholder value. The ETF conversion addresses real structural disadvantages that traditional funds face, potentially solving the modest outflow problem while preserving everything that made Akre Focus distinctive. With a deep bench now in place and a clear succession plan, this conversion may mark the successful transition from Chuck Akre’s personal legacy to an enduring institutional one.