Charles T. Akre, known as "Chuck" to those in the know, founded Akre Capital Management in 1989 after spending 21 years in the securities industry at Johnston, Lemon & Co. where he managed various parts of the business, including branch office management, research and asset management.

From June 1993, Chuck co-managed Akre Capital Management under Friedman, Billings and Ramsey before taking over the lead in 2000 when he moved the company to the rural village of Middleburg, Virginia, away from the frenzy of Wall Street, much like Warren Buffett who moved to Omaha.

Today, Akre Capital Management has become a highly regarded and recognized asset management firm with now $15 billion in assets in private partnerships, mutual funds (the Akre Focus Fund) and separately managed accounts. The portfolio managers of the Akre Focus Fund (whose management, composition and performance we will detail) are Mr. John Neff and Mr. Chris Cerrone.

Chuck Akre and Warren Buffett

Chuck Akre has been largely influenced by the writings of Warren Buffett and in particular his perception of shareholder value creation. Warren Buffett believes that every company has a value determined by its financial statements and his goal has always been to buy profitable companies below their intrinsic value. These companies are ultimately identified by their high returns on assets and capital. When these high returns appear, Buffett argues that there is some sort of economic royalty and that the value of the company is far greater than what the balance sheet reveals. Chuck reasons in the same way, focusing on the growth of the company's book value and cash flow. This means finding highly profitable businesses with the right capital allocation to reinvest the money generated over the course of the year to continue to grow and increase the value of the business.

The management team led by Chuck looks for companies that can perform in any macroeconomic environment. They make few investment decisions each year. They prefer to take time to form an opinion and understand the quality of the company. It can sometimes take years to analyze a business.

Akre has personally invested alongside Warren Buffett. He bought about 40 shares of Berkshire Hathaway (BRK.A) in 1977 - when he was a young broker - for $120. The stock is now worth 3928 times what he paid at the time. Unfortunately for him, he sold 39 of his 40 shares at $500 to finance a conversion project and get into real estate sometime in the 1980s. That $19,500 would have become more than $18 million today.

Fortunately for him, he has had many other successes. Take American Tower (AMT), one of the most successful real estate ventures in the United States in the last 20 years. Chuck took a stake in its IPO following its spin-off from American Radio in 1998. He paid about 80 cents for his AMT shares. The stock is now trading around $230.

Investment Philosophy

Chuck and his firm Akre Capital Management's investment philosophy is based on compound interest (the power of compounding). To understand it, I'll tell you the story of the Native Americans selling the island of Manhattan.

The story goes that the selling party in the transaction, which took place in 1626, collected beads and trinkets worth an estimated $20. Let's assume that the sellers invested their initial $20 at a rate of 9% per year and maintained that investment program for the next 380 years.

Today, their initial $20 would be worth more than $3,335,000,000,000,000,000.

This example shows us that the rate of return on an investment does not have to be extraordinary to produce extraordinary results. What is crucial is to have the ability to maintain an investment program without interruption over a very long period of time. In the real world of investing, life sometimes gets in the way. It is rare that an investor can enjoy decades of compounding in an investment without being interrupted by the need to sell positions in order to finance a project or a real estate purchase (and thus pay taxes on their capital gains). This story is simply a reminder that the pursuit of sustained, uninterrupted compounded returns over long periods of time is smart investing, and that is precisely what Akre is all about.

Many people consider Akre's teams to be "value investors" while others wonder if they are "growth investors". However, in any investment thesis, there is an expected value at a certain time horizon and a projected growth expected. Trying to permanently oppose the two is illusory and limiting. And by the way, Akre's teams claim to be on neither side. They are compound investors, which means that they try to invest in companies that have the ability to generate compound interest over several years. Thinking like a compounding investor is very natural for private investors, corporate executives or business angels with a long-term vision. The owner wants to focus carefully on a few business investments and hopes that the accountants will report regularly at the end of each year that the equity per share has increased. It does not think about trying to move investments in and out on a daily or monthly basis. It buys and holds.

This approach is so fundamental but it is often overlooked. it has become all too easy to get distracted by hour-to-hour market fluctuations and all the macro-economic turmoil with short-term news. To be a compounding investor, you have to tune out the short-term noise.

Yet in the real world, companies change. So you have to be constantly vigilant about those changes. Some companies deteriorate over the years, while others improve, and Akre's investment portfolio therefore evolves progressively.

A different process

The management teams invest in a small number of companies that they consider extraordinary and that are led by talented and honest managers who reinvest free cash flow wisely. Their investment objective is to "compound" investors' capital at above-average rates of return over extended periods of time, while incurring a below-average level of risk.

Just as a good recipe requires good ingredients, Akre's management teams have been looking at the essential ingredients for a company to create value.

These key ingredients are :

  • An ability to generate above-average returns on shareholder capital
  • Opportunities to deploy additional capital at above-average returns
  • A management team with the skills and judgment to sustain the capitalization process over a long period of time in a competitive environment

They called this triptych "the three-legged stool". This metaphor describes what they look for in an investment:

  • An extraordinary company
  • Talented management
  • Great reinvestment opportunities
  • A track record of investment success

Chuck has an old three-foot milking stool that he stores in the conference room of Akre's Middleburg building. Clearly, three legs are both essential (two legs are a downer) and sufficient (the fourth leg is optional).

Asset management at Akre Capital is different in two main ways:

First, their decision to buy or sell a company's stock is based on the same fundamental criteria. They do not set sales price targets when buying a stock because they do not seek to trade stocks simply on the basis of their price performance. Rather, they seek to compound the capital they manage and initiate sales discussions when one or more of the legs of the stool are "broken."

Their track record over the years proves them right.

Second, Wall Street's obsession with what fund managers call the "beat by a penny, miss by a penny" syndrome often gives them the opportunity to make investments at attractive valuations. They focus on the growth in underlying economic value per share - often defined as book value per share - over time. Their time horizon is set at five or ten years, and quarterly "misses" often create opportunities for the capital they manage.

Most investors seek information about companies by reading annual reports, attending trade shows, meeting with management, and studying key financial metrics. For many, their investment theses closely follow management's rhetoric and are fooled by colorful company presentations and complex but highly uncertain financial models.

Their approach, instead, emphasizes the importance of wisdom by subtraction. They strive to get beyond the non-essential details and ignore the often deafening noise. They want to identify the "essence", the substance of each company, to understand their true business model and their competitive advantages.

I invite you to practice this if you are a long-term investor. It is a difficult process but the rewards are worth it. Once armed with this deep understanding, you can focus on what really matters and not be too alarmed about what doesn't. Quarterly reports or Fed minutes, for example, become much less of an "event" all of a sudden. I really appreciate this long term approach and that's why I wanted to focus on Akre Capital Management.

Coming back to the investment process (called "the three-legged stool"), let's go into detail about the three steps. These three steps allow us to filter (Charlie Munger-style logic of subtraction) almost all listed companies so that only companies qualified as "extraordinary" remain.

  • Business model filter: The management team looks for companies with (1) high, consistent and predictable free cash flow generation and return on equity (ROE); (2) identified sustainable competitive advantages; (3) pricing power above costs (which is a protection against inflation); (4) a business model that is easy to understand by avoiding over-regulated companies; (5) having a strong balance sheet (low debt and low cost of debt).
  • Management filter: The management team looks for companies with (6) a competent, honest and passionate management team (7) that treat shareholders as partners and (8) that are not too preoccupied by the will of Wall Street; (9) a corporate culture that fosters accountability and independence of mind; and (10) rational compensation packages.
  • Reinvestment filter: The management team looks for companies with (11) a track record of success in reinvesting FCF.

Akre Capital Management's portfolio

Akre's teams manage a concentrated portfolio (Akre Focus Fund) with a low turnover. The portfolio is focused where warranted and positions are weighted according to confidence in the investment thesis.

It is comprised of 19 stocks but the top 10 positions account for nearly 74% of the portfolio, and has significant exposure to technology (42.8%), financials (21.4%), real estate (11.3%) and consumer discretionary (10.7%).

Here are their "Top 10 holdings", the ten companies for which they have the greatest conviction in terms of quality, business risk, reinvestment opportunity and valuation

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Source: Akre Capital Management

The portfolio has an annualized performance of more than 15% per year since its inception on August 31, 2009 (compared to 13.7% for the S&P 500) through July 31, 2022

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Source : Akre Capital Management

To complete the reading, I invite you to read these three articles:

Return on Investment (ValueInvestor) Value for the Money (ValueInvestor) The Oracle of Middleburg (AGORA Financial)