For Akre Capital Management Founder Charles Akre, investment success is all about the power of compounding. As Akre puts it, “Many people think of us as a ‘value investor’ and others ask whether we are a value or a growth investor. We’ve started to say, we’re neither, we are a compounding investor.” Whatever you call it, Akre’s strategy has worked exceptionally well for a long time. Akre Capital’s 13F portfolio has averaged a 14.61% return since 2001, more than doubling the S&P 500’s average total return.
“Chuck” Akre runs his namesake fund, $13.7B Akre Capital, out of Middleburg, Virginia. There, Chuck and his team spend their days searching for undervalued “compounding machines” — rare businesses that are the foundation of Akre’s long history of market beating returns.
The “three-legged stool” is the foundation for Akre Capital’s consistently good performance
The compounding machines Akre’s team looks for have three core components: 1) an ability to generate above average returns on shareholders’ capital, 2) a management team with the skill and judgment to sustain the process of compounding over a long period of time in the face of competition, and 3) opportunities to deploy additional capital at above average returns. Akre calls it the “three-legged stool” approach: Business, Management, Reinvestment.
Akre says:
We strive to invest in businesses with these three ingredients of compounding, and to buy them at reasonable prices. If we do this, there is no reason or need to trade in and out of these businesses to achieve above average returns. We don’t want to rely primarily on our contrarian instincts or our ability to play market volatility in order to generate returns. Like the private investor, we want the businesses we buy to be growing in real economic value each day.
We like to hold investments for many years to allow their internal compounding to do its work. It’s a wonderful thing not to have to realize a taxable gain. The tax deferral available by investing in businesses that compound internally is an enormous and often under-appreciated advantage.
Akre Capital’s13F portfolio added Live Nation and Adobe Systems in Q1
Indeed, a look at Akre Capital’s Q1 13F portfolio shows that of the 28 positions held by the fund, 16 were first bought in 2014 or earlier. The funds top two positions as of Q1, American Tower (AMT) and Mastercard (MA), were first purchased in 2001
However, the plunge in equities during Q1 did spur the fund to add two new positions: Live Nation Entertainment (LYV) and Adobe Systems (ADBE).
Commenting on the volatile quarter in his Akre Focus Fund Letter, Chuck Akre said:
We believe all three “shock absorbers” were firmly in place when the coronavirus hit the market’s collective consciousness. In absolutely no way does that mean our Fund has been or will be immune to the downturn. We will take our lumps. But, we hope that our three “shock absorbers”enable our portfolio to decline less than the broad market, recover faster, and allow us to capitalize by putting substantial cash to work at advantageous valuations.
The pandemic’s impact on the market has supplied buying opportunities in both existing and several long-coveted names. Accordingly, our cash weighting declined from 17% at year-end to just over 10% as of March 31st. Since neither we nor anyone else knows where or when stocks will see their bottom, we have spooned rather than shoveled cash into select positions, mindful of the extremes to which price and value can become decoupled in times like this.
As I write, equities appear to be heading south again after a major bounce from March’s panic low. Now may be a great time to zero-in on a few of the stocks in Chuck Akre’s portfolio that may be “shock absorbers” if volatility escalates once again.
You can follow 13Fs, insider buying and other SEC filings at WhaleWisdom.com.
Contact Mark about investing based on SEC filings and smart money disclosures.
Disclaimer:
This investment blog (the “Blog”) is created and authored by Mark W. Gaffney (the “Content Creator”) and is published and provided for informational and entertainment purposes only (collectively, the “Blog Service”). The information in the Blog constitutes the Content Creator’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You understand that the Content Creator is not advising, and will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in the Blog may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.
From time to time, the Content Creator or its affiliates may hold positions or other interests in securities mentioned in the Blog and may trade for their own account(s) based on the information presented. The Content Creator may also take positions inconsistent with the views expressed in its messages on the Blog.
The Content Creator may hold licenses with FINRA, the SEC or states securities authorities and these licenses may or may not be disclosed by the Content Creator in the Blog.
Investing in the investments discussed in the Blog may be risky and speculative. The companies may have limited operating histories, little available public information, and the stocks they issue may be volatile and illiquid. Trading in such securities can result in immediate and substantial losses of the capital invested. You should use invest risk capital, and not capital required for other purposes, such as retirement savings, student loans, mortgages or education.
