Legacies and New Beginnings

Managers of start-up funds are usually as green as the funds themselves. But here’s one new offering that boasts a veteran manager who’s already established himself as one of the industry’s greats.

At this stage in his career, Charles Akre is an unlikely candidate to be at the helm of a brand new fund. Having been in the business since 1968, he’s worked in a variety of roles but perhaps the biggest feather in his cap was his able stewardship of FBR Focus (FBRVX) from its inception in 1997. During his tenure, Akre steered the fund into the top 1 percent of mid-cap growth funds over the past decade.

But that changed in August when he made the decision to strike out on his own and launch Akre Focus (AKREX). Akre didn’t leave his former charge without a capable management team; three of Akre’s analysts who had worked with him, David Rainey, Ira Rothberg and Brian Mcauley, decided to stay on with FBR as the new management team of FBR Focus.

Although Akre left a substantial part of his team behind, the loss hasn’t slowed his transition. He quickly brought on two new analysts and operates the fund with a seven-member staff out of an office in picturesque Middleburg, VA.

Like everyone else, Akre learned some hard lessons from the recent market crisis, particularly the value of open lines of communication. Asked about his decision to leave FBR, Akre said, “It was time to move on. We were the sub-advisor, and, as a result, we had limited access to our shareholders. The experience of the last 18 months reinforced how important it is to have contact with shareholders, to be able to reinforce and reaffirm what we were doing and why we were doing it. That was just as important for us as it was for them.”

This new fund features Akre’s extremely successful bottom-up approach and, ultimately, a greater flow of information.

Akre uses the example of a three-legged stool to describe his process. “The first leg is to find businesses that have much better returns on capital. That leads us to identify businesses with enduring business models and competitive advantages. Leg number two goes to the issue of the people who run the businesses. We look for management that has demonstrated that they’re better at running the businesses than others, but, more important, have a history of acting in the best interest of all shareholders. The third leg is what I call the glue. Given the nature of the business and the skill of management, is there the opportunity for excess cash to be reinvested in a way that earns above-average returns?”

What differentiates Akre from other managers is that although most of the companies he owns have real assets, commodities plays rarely appear in his portfolio–a seeming anomaly given his worries about inflation.

“In my mind, one of the results of the enormous debt being taken on at the federal level is a dollar that’s worth less than it is today,” says Akre. “There could be some level of inflation, though it hasn’t happened yet–nor do I expect it to occur in the next 12 months. But I think that is a risk and owning ’things’ is good to do if you have inflation in the economy. At the same time, another thing to do in such an environment would be to own businesses that have pricing power.”

“Businesses with pricing power, unlike direct commodity plays, are less dependent on supply and demand issues than pure commodity plays,” Akre continues. “I think Warren Buffet made that very point when he bought Burlington Northern–he recognizes that the price of oil-based fuels is going higher and that railroads have a big advantage there.”

This avoidance of commodities makes Akre’s performance all the more impressive; many a managers’ track record has been bolstered by positive moves in commodity prices. That speaks volumes about Akre’s stock-picking acumen and has spared his shareholders from high levels of volatility.

And Akre plans to invest somewhat cautiously in the near term though he’s never been known to go out on a limb. “If you looked at the market last week you can see that prevailing attitude among investors was fear of missing out on a rising market as opposed to fear of losing capital,” he notes. “I’m not suggesting that we’re in a bubble–I don’t think that’s the case. I’m just saying that it’s important not to lose sight of margin of safety and that one needs to tread carefully in the market. I think the way the market has behaved in the last month or two suggests to some people that there’s nothing to be concerned about–I don’t think that’s exactly the case: It’s still time to be cautious and careful.”

FBR Focus is still an excellent fund that’s in excellent hands–a testament to Akre’s legacy. The question is whether the team will bring their own style and flavor to their work and how closely they’ll hew to Akre’s lessons. But it’s always tough to improve upon an original; we have every expectation that Akre will build the same solid long-term track record at his latest endeavor.

 

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