Akre Focus Fund Quarterly Letter
Akre Capital Management
By Chuck Akre
July 28, 2011
Disclosures:
Mutual fund investing involves risk. Principal loss is possible. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. The Fund invests in small and medium capitalization companies, which involve additional risks such as limited liquidity and greater volatility than larger capitalization companies.
The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The summary and statutory prospectus contains this and other important information about the investment company and it may be obtained by calling (877) 862-9556 or visiting www.akrefund.com. Read it carefully before investing.
Per the Prospectus, the Fund’s annual operating expense (gross) for the Retail Class shares is 1.45% and 1.20% for the Institutional Class shares.
Fund holdings and sector allocations are subject to change at any time and should not be considered a recommendation to buy or sell any security.
Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling (877) 862-9556. The Akre Focus Fund is distributed by Quasar Distributors, LLC.
AKRE FOCUS FUND 2ND QUARTER 2011 COMMENTARY
The Akre Focus Fund Retail shares (AKREX) and Institutional shares (AKRIX) returned 2.49% and 2.56% net of fees and expenses, respectively, in the second quarter of 2011. Cash and equivalents were 5.3% of the portfolio at quarter end.
We believe that businesses and consumers in the United States are gradually healing, but it is clear the economy remains hobbled by the housing hangover and excessive debts public and private. Perhaps even greater troubles are brewing abroad. Serious fragilities in the European and Chinese banking and monetary systems are coming to light. Every major economy of the world including our own is facing down the uncomfortable prospect of “austerity.” Nearly everywhere, the ability of monetary authorities to maintain a stable value of paper currency is in question.
Our charge remains to find superior and reasonably valued businesses that can continue to compound capital given this backdrop. We continue to like owning businesses that excel at delivering values to customers. And always-- but increasingly so-- we are on the lookout for businesses with superior pricing power that will be well positioned to maintain and grow “real” value in coming years.
Our strongest contributors to performance during the quarter were Dollar Tree, MasterCard, and Ross Stores. If you have shopped at Dollar Tree or Ross Stores, you probably already appreciate their expertise in delivering true bargains to consumers. Bargains are nearly always in style, so these businesses have produced good results in a variety of economic environments. Lately, one could say bargains have not only been in style but also have been essential for many families. Traffic and spending at these stores has increased at above average rates. Operational execution has remained top-notch and valuations have remained reasonable, so we see plenty of “runway” for continued growth in these businesses. We can say much the same of O’Reilly Automotive and Carmax, whose shares we bought at good prices during the quarter.
MasterCard is currently the largest holding in the fund. This is a remarkable global business that interconnects consumers, retailers and banks enabling easy, secure, and reliable electronic payments. Our opportunity to invest in this superior business at an unusually cheap price came courtesy of regulatory machinations in Washington, beginning with the Durbin Amendment to the Dodd-Frank bill. After a good deal of study and expert consultations we concluded the regulatory “overhang” on MasterCard’s valuation was overdone. The view has proved correct, so far as we can know today. Looking forward, we think other investors increasingly will appreciate MasterCard’s “tollbooth” position within the payments value chain (read: “pricing power”). We believe investors will refocus on the remarkable secular growth opportunity for MasterCard, as people around the globe “vote with their wallets” and show their preference for the convenience of plastic and electronic payments over cash and checks.
The most significant detractor from performance in the quarter was Lamar Advertising.
We added to this position early in the quarter and the share price has declined since. Sentiment on Lamar has soured as local businesses are proving slow to ramp cyclical advertising spend. Lamar derives about 80% of its revenue from local businesses. Also, secular concerns have begun to swirl about whether new avenues of advertising on mobile devices or through Groupon-like schemes may take a meaningful bite out of billboard spending budgets. We are alert to these concerns but today we are not convinced this is a “game changer” for the industry. Every day our economy and population grows -- albeit slowly as of late-- the scarcity value of Lamar’s billboards increases. A majority of Lamar’s assets are actually impossible to replicate given modern zoning requirements. We think the business remains durable, and its valuation in the market remains modest.
As we will continue to say, we are utterly unable to predict how the market as a whole will respond to all the crosscurrents affecting our world today. We spend much of our time ensuring we understand the downside, or the risks, in our individual investments. Only then do we explore new opportunities. We remain true to our process-- seeking to identify and invest in reasonably priced “compounding machines.” An old adage to leave you with: we’re lucky if we learn something new every day, and we’re doubly lucky if it doesn’t cost us too much!
(c) Akre Capital Management
