How Chuck Akre Is Repeating His Success

The U.S. economy may be limping toward a recovery, and employment numbers may look slightly better today than they did a year ago, but that has had little impact on the portfolio of Akre Focus (symbol AKREX). That's because manager Chuck Akre says his big-picture view of the world is the same as it was in 2012. "Today we see no essential change in the nature of the financial issues confronting the U.S.," Akre says. With "a world full of uncertainties," Akre says, he is staying the course. "We retreat to our much loved three-legged stool."

Akre's not talking about an actual perch that he and his colleagues sit on at his firm's Middleburg, Va., office. Rather, he is referring to the three-pronged criteria he uses to find promising investments. A company that can meet all three measures, he says, becomes a "compounding machine" that increases its intrinsic value consistently over time, as measured by book value (assets minus liabilities) per share, among other factors. The first leg of the stool: a high-quality business that earns an above-average return on capital. The second leg: strong executives who have both skill and integrity. Akre calls the third criteria the "reinvestment leg": A company has to have a record of achieving "outsize" returns — gauged by measures of profitability, including return on equity — by reinvesting wisely in the business.

Over time, this approach has worked well. Since Akre Focus's August 2009 launch, the fund, a member of the Kiplinger 25 since 2009, has returned an annualized 19.1%. That beats the return of the typical midsize growth fund by an average of 2.2 percentage points per year, according to Morningstar (returns are through May 21).

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That track record may seem short, but Akre used a similar strategy at FBR Focus, now known as Hennessy Focus (HFCSX). During his nearly 13-year tenure at FBR, Akre returned 12.5% annualized, blowing away his competition, which returned 4.7% annualized over the same period.

In truth, Morningstar's categorization of Akre Focus as a midsize-company growth fund is a bit of a misnomer. The average market capitalization of its holdings &mdash $13.5 billion — falls within the range for those types of funds. But Akre can invest in companies of all sizes — and he does. The fund's top holding, credit-card giant MasterCard, has a whopping market capitalization of $71 billion. Another holding, investment-adviser firm Diamond Hill Investment Group, has a market cap of just $271 million.

Recently, the fund has picked up more shares in Apple, the largest company in the country by market capitalization (at least in mid-May). The draw: growth in mobile computing. Sales of tablets are expected to grow 20% annually over the next several years, and sales of smart phones may grow 15% to 20% as well. "Apple has to be considered when you consider ways to profit from that trend," says Tom Saberhagen, an analyst with Akre Focus.

What's more, Akre has confidence in Apple's post-Steve Jobs management team. But Apple is a small position in the fund — about 2.8% of assets — in part because its reinvesting leg is weak. Although Akre and his team are pleased about Apple's recent announcement that it would buy back $60 billion worth of shares, they still believe the firm's reinvestment of capital "remains a weakness in the story," says Saberhagen. "It all depends on share price," he adds. Only time will tell if the company executes the repurchase wisely and buys back shares when they trade at a discount to the company's intrinsic, or true, value.

The fund's success has attracted a lot of attention, and its assets have mushroomed. Akre Focus had just $10,000 on Day One. It now has $1.9 billion. That's been a factor in the number of holdings in the fund, which have grown since the fund launched from as few as 14 in early 2010 to 34 today. But the fund's top ten holdings represent 54% of assets. Some of those top stocks, including American Tower, which owns wireless-communications towers, and insurer Markel, have been in the fund since 2009, its earliest days. None of the fund's ten smallest positions account for more than 1% of assets. Says Akre: "We want to have the largest concentration of money in the best ideas."