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By Ryan Leggio | 12-17-2009 03:46 PM

Akre: The Three-Legged Stool of Investing

Chuck Akre says investors need to consider returns on capital, management and reinvestment before buying a stock.

Ryan Leggio: Hi. I'm Ryan Leggio. I'm a mutual fund analyst at Morningstar. And with me today is Chuck Akre, the current manager of Akre Focus Fund and the former manager of FBR Focus. Chuck, thanks so much for joining us.

Chuck Akre: Thanks, Ryan.

Leggio: I thought we'd talk a little bit about your new fund and what it was like starting a new fund.

Akre: Well, it was a great experience, and we were able to put together a prospectus and file it with the SEC in a short period of time, three weeks, and had a very quick turnaround from the SEC in August. It was approved by the end of August. I think we were in and out in 34 days.

And we've had a great deal of help by choosing to go with a multi-series trust that, in this case, is part of US Bancorp. And they were very helpful to us in doing all of the nuts and bolts as it relates to putting a mutual fund business in place. In the past, we had simply managed the assets of the FBR Focus fund.

Leggio: And I know you're going to be using the identical strategy that you used at your previous fund here. Can you talk a little bit about your strategy and how you go about finding great businesses?

Akre: Sure. We are both growth and value managers and think that the value in a given situation, growth is an integral part of that. And so we use a construct of the three-legged stool. We actually have a little 19th century three-legged milk stool in our office that just is out there as a visual prop for us.

The first leg has to do with the quality of the business enterprise, and we're looking for businesses that earn high returns in the owner's capital. We spent a lot of time trying to focus on what's causing that better-than-average result, return on capital, to occur, and is it getting better or worse.

The second leg of the stool goes to the issue of the people who manage the business. And not only are they terrific managers, but are they honest and do they have high integrity? Do they see that what's happening at the company level is happening identically at the per share level?

And then lastly, the third leg is the issue of reinvestment. We call it sometimes the glue that holds these together. That is, is there an opportunity that exists because of the skill of the manager, the nature of the business to reinvest what we presume is excess cash. To reinvest that in a way to continue to earn these above-average rates of return. And then to that, we apply our valuation overlay, which is our quantitative way of saying we're just not willing to pay very much for it.

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