How Chuck Akre Beat the Market in 2015 and How He Is Positioned for 2016
When market volatility beset a number of mutual funds last year, Chuck Akre managed to beat the market and large cap value indexes.
Middleburg, Virginia-based Akre Capital Management’s Akre Focus Fund ended the year up 2.53%, a not-insubstantial amount in a period when the average of large cap value indexes lost 2.2%, their worst performance since the crash of 2008. The S&P 500 Index, buoyed by a 5.2% average return in growth indexes enjoying a period in the sun, edged up 1.38% for the year.
Akre and the fund’s two other managers, Tom Saberhagen and John Neff, do not consider their style either value or growth, exactly. While they wait for modest valuations and prices to buy, they choose companies based on strong growth potential using a “three-legged stool” approach. In a nutshell, the individual legs stand for good businesses that have compounded book value or shareholders’ equity per share at high rates, skilled and shareholder-oriented management, and disciplined reinvestment of free cash flow.
The largest positioning in Akre’s portfolio that withstood the year’s market turbulence has been little changed for several years. His team had started the top five holdings, which make up almost half of the total 30 by size, more than five years ago.
“We want to own businesses which are growing in real economic value per share, year in and year out,” Akre said in his fourth quarter letter last week. “Even in this turbulent environment, we believe the majority of our chosen businesses are growing in this real economic sense!”
Last year, except one with a modest decline, each of Akre Capital Management’s biggest positions advanced: MasterCard (NYSE:MA) by 12.7%, Markel Corp. (NYSE:MKL) by 29.5%, Moody’s (NYSE:MCO) by 3.2% and Dollar Tree Stores (NASDAQ:DLTR) by 11.6%.
Akre’s largest, American Tower (NYSE:AMT), declined 1.9%. The Akre Focus Fund began a small position in the company at its inception in 2009, and increased it on a price dip in early 2014. The $ 37.2 billion market cap real estate investment trust is the largest independent owner of cellphone towers in the U.S. Revenue and earnings grow as it adds more towers, clients per tower, leases and price increases. This takes place against a backdrop of escalating demand for 4G and wireless broadband data globally.
Akre also had one significant detractor. Colfax Corp. (CFX), a $ 2.61 billion market cap manufacturing and engineering company, saw its shares tumble roughly 56% last year. The company was Akre’s seventh largest position as of the third quarter, and he commented on it in his shareholder letter:
“Colfax is a company which we describe as an ‘asset allocator.’ Their model is to acquire critically important industrial businesses which they can improve operationally and reinvest all the excess cash they generate stemming from the improvements they have instituted. True to their mission, management has made important improvements, especially in the welding business in terms of margin improvement. Our belief continues to be that the company’s shares are likely set up for a rebound in the coming year or two,” he said.
Akre will release his firm’s portfolio for the fourth quarter in upcoming weeks. His Akre Focus Fund, however, contained the same top five holdings going into 2016, together composing more than 40% of it.