A growth maverick shares his ideas.
We talked with Chuck Akre who built an outstanding record subadvising FBR Focus before the two split and Akre launched a new fund, Akre Focus AKREX. He runs a concentrated growth style that really is unlike anything else you'll find.
Russ Kinnel: Can you tell us a little about how you built the team up and who is there?
Chuck Akre: I started off Akre Capital Management in 1989. So, we do have a new fund, which became effective Aug. 31 of 2009. The analysts who had worked with me on the fund and other things and the prior fund left, and we built a new team. In October of 2009, we added Tom Saberhagen, who had been a senior analyst at the Aegis Value fund. In November of 2009, we added John Neff who had been a senior analyst on the sell-side at William Blair. Then in September of 2010, we added Andrew Osborne, who falls in sort of the rookie category. I thought he had great instincts and done quite a lot of work in the investment business as an independent thinker.
Kinnel: Does each analyst have sector specialties or are they generalists?
Akre: Well, they are indeed generalists, but quite naturally their areas of expertise are slightly different. Tom has an undergraduate degree from Rice and an MBA from Stanford. Tom's background in the fund business was deep-value shop, and John's undergraduate study was at Colgate and then he attended Booth School at the University of Chicago. He came from a growth shop at William Blair. So, the stocks they follow tend to fall into the value and growth camps, respectively. The more richly valued companies are typically little higher growers, faster growth rates, and those are generally things that John is involved in, and Tom has been involved in things which are a little bit more modestly valued and more traditional in their nature.
Kinnel: You've said you look for "compounding machines." Would you explain what that means?
Akre: When I started in the investment business a good while ago, I was not trained for it in a traditional sense. I had been a pre-med major, and then I was an English major. So, I quite naturally had all kinds of questions about the investment business, and among them were the questions of what makes a good investor and what makes a good investment, and taking a look and studying different asset classes using data from what is now your subsidiary Ibbotson and other places. I came across the well-known piece of information that over the last roughly 90 years common stocks in the United States have had an annualized return that's in the neighborhood of 10%.
So, my question naturally was, well, what's important about 10%? What I concluded was that it had a correlation with what I believe was the real return on the owners' capital of all those businesses across all those years, all kinds of different balance sheets and business models--i.e., that the real return on owners' capital was a number that was probably in the low teens and therefore that kind of 10%-ish return correlated with that, and it caused me to posit that my return in an asset would approximate the ROE of a business given the absence of any distributions and given constant valuation. So, then, we say, well, if our goal is to have returns which are better than average, while assuming what we believe is the below-average level of risk, then the obvious way to get there is to have businesses that have returns on the owners' capital which are above that.