In an episode of Wealthrack that aired in November, host Consuelo Mack interviewed Akre Capital Management founder Chuck Akre and partner John Neff about their firm’s stock picking strategy that has managed to outperform its passive rivals over the last ten years and attract assets amidst the broader exodus to passive investing.
The firm’s Akre Focus Fund, launched 10 years ago, has generated an average annualized return of 17%, outperforming both the S&P 500 and the Russell 1000 Growth Index by a substantial margin. It has done so with a highly concentrated portfolio of holdings, which today consists of only 17 large-cap companies.
Here are highlights from the interview:
Akre described his investment approach as one that focuses on the rate of return a business can generate: “Whatever return the business itself has will be reflected in the share price over time.”
The firm evaluates businesses based on a “three-legged stool” approach by analyzing the following:
- The nature of the business–What kind of returns it generates on owner’s capital and does it have the ability to sustain those returns?
- Management—The firm looks for highly skilled managers with a track record of acting in the best interests of shareholders;
- Reinvestment—How has the business invested free cash flow in the past and what have the results looked like? Further, how will it ensure the compounding effect of such reinvestment strategies going forward?
Neff said he respected the integrity inherent in Akre’s investment approach, recalling Akre’s mantra, “We aren’t speculators in the price movement of shares. We own businesses.” He added that Akre operates independently and doesn’t subscribe to some of the “institutional imperatives” that seem to govern other money managers. According to Neff, the firm has an edge in understanding the qualitative attributes of businesses.
Akre agrees. “What we bring to the process,” he says, “is judgement. Good judgement comes from experience, and experience comes from bad judgement.”