The Way Forward for FBR Focus

Ryan Leggio: Hi, my name is Ryan Leggio. I'm a mutual fund analyst here at Morningstar. With me today is Brian Macauley, one of the co-portfolio managers at FBR Focus Fund. He and his team took over recently for their departing boss, Chuck Akre, and three co-portfolio managers have worked together on the fund for the past five years. Thanks for joining me today, Brian.

Brian Macauley: Thank you Ryan, glad to be here.

Leggio: Brian, my first question is on the forefront of a lot of the shareholders of your fund and that is now that you as analysts are transitioning into the management role, are there going to be any significant changes to the fund's strategy or philosophy going forward?

Macauley: Well, Ryan, I had been with Akre Capital for seven years. David Rainey had been there for 11 years and Ira Rothberg had been there for five years, so the three of us have a combined 23 years' experience working on the FBR Focus Fund. It was really a collaborative process that we used running the fund. So when we look at the fund today, it very much represents where we would like it to be in terms of its portfolio construction, in terms of the names that we own. I would tell our shareholders that the investment philosophy, the investment process, is going to be unchanged going forward.

<TRANSCRIPT>

Leggio: You and your team really focus on great businesses and I think you've described it to me as a three-legged stool with a fantastic business with a durable competitive advantage, fantastic opportunities to reinvest that capital, and maybe, something special whether it be management or something else. Can you give an example of maybe what you would consider the premier business or one of the premier businesses in the portfolio right now?

Macauley: Certainly. One name that is relatively new to the portfolio is T. Rowe Price, which is an asset manager based in Baltimore. T. Rowe Price really measures up wonderfully on a lot of our metrics. It has a terrific business model that doesn't require much capital to grow. They have a very nice platform where they have distribution through defined contribution plans and they have a direct-to-consumer approach as well. Their scale enables them to reach out to those consumers and those DC plans whereas some small asset managers cannot get to those markets.

It's a business that over the last 15 years has compounded value at about 15 or 18% per year. As we look across the asset management spectrum, we really like the T. Rowe Price management team and their philosophy, the culture that they've instilled in the business really focusing on investment as opposed to marketing, and focusing on doing well by the shareholders of their funds as opposed to focusing on the shareholders of their business. We think that over the long term that really yields dividends, and it's a name that we're very excited about.

Leggio: One name that you own, which is a little bit larger position, which some other prominent value investors own, is the insurance company Markel. I know you guys are very excited about that company. Can you tell us a little bit about your investment thesis for that company and why you became attracted to Markel?

Macauley: Well Markel is a longtime holding for the fund. We've owned it for north of 10 years at this point. We've gotten to know the management team and the business very well. Historically, Markel has traded at somewhere between one and a half and two times book value. Now because of the environment today, you've got a very soft property and casualty insurance market. Insurance companies are having a difficult time, and that's just on the insurance side. The investment side, as everyone knows, has been very difficult for everyone out there.

So, what we see here is we see a business that has terrific management, really is specialized in some niche markets that allow them to have a nice little franchise where they participate, and we're going through a macroeconomic environment that makes it unattractive in the short term, but nothing about the long-term opportunity has been diminished. So today you can buy Markel at about 1.2 times book value as we calculate it. We think that this is just the right type of opportunity for our fund.

Leggio: Well thank you Brian for joining us today.

Macauley: Thank you, Ryan.

Ryan: And thank you for joining us. This is Ryan Leggio for Morningstar.