A Silver Medal...for Stock Picking This Time -- Journal Report

Date : 10/07/2019 @ 2:41AM
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A Silver Medal...for Stock Picking This Time -- Journal Report

Akre Focus - Institutional (MM) (NASDAQ:AKRIX)
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2 Months : From Sep 2019 to Nov 2019

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By Suzanne McGee 

Being a multiple -- and repeat -- winner isn't a new experience for Joe Hudepohl.

As the youngest member of the U.S. swimming team at the 1992 Olympics in Barcelona, Mr. Hudepohl earned gold and bronze medals in the 100- and 200-meter freestyle relays. Four years later, he won another gold in Atlanta.

In similar fashion, Mr. Hudepohl just captured the "silver" and "bronze" medals in the latest round of The Wall Street Journal's quarterly Winners' Circle ranking of top mutual-fund managers. And this is the second consecutive round in which Mr. Hudepohl finished near the top of the rankings.

The gold medalists for the latest round are the co-managers of Akre Focus Fund (AKRIX), Charles "Chuck" Akre and John Neff. The I share class of their fund finished the quarter with a 12-month return of 20%. This year marks the 30th anniversary of Mr. Akre's founding of his eponymous firm, Akre Capital Management, and the 10th anniversary of Mr. Neff's arrival to join the team.

To reach the podium in the Journal's contest, managers had to be running diversified U.S.-stock funds with track records of at least three years and assets of at least $50 million for the 12-month period ended Sept. 30. (Under the rules, no global funds, sector funds, quantitative funds or leveraged funds qualify. As always, the contest results aren't intended to be a "buy" list for investors, since a 12-month performance is a combination of skill and luck.)

Mr. Hudepohl captured his second- and third-place finishes for this latest period as the manager of two funds. Eaton Vance Atlanta Capital Focused Growth Fund (EILGX) ended up in second place in this quarter's survey (up from his third-place finish in the second quarter) with a 12-month return of 19.2% for its I share class. Meanwhile, the A share class of Calvert Equity fund (CSIEX) that he and Atlanta Capital Management Corp. also oversee as a subadviser wrapped up the period with a gain of 18.7%.

Being able to demonstrate expertise in either swimming or the market "takes a long time, and a lot of practice," Mr. Hudepohl says. Both also offer the chance to demonstrate skill. "I don't need the crowd, or the pat on the back, or whatever," he adds. "I like to win."

The Akre co-manager Mr. Neff, meanwhile, is unrelated to the late fund manager of the same name, who ran Vanguard's Windsor Fund for decades and died in June at the age of 87. "Chuck jokes that he thought he was hiring the legendary John Neff when he recruited me," quips Mr. Neff.

Messrs. Neff, Akre and Hudepohl do share some of the late star manager's discipline and focus. Like the Windsor Fund legend, all three emphasize getting well acquainted with the companies in which they invest, and focusing on fundamentals. Unlike some fast-moving investors, however, this new generation of winners prefers to hang on to their holdings for years or even decades.

One of the Akre fund's best-performing holdings -- and its single largest holding -- is a stock it has held since the company's 2009 launch: American Tower Corp., a dominant player in the global telecom industry as an owner-operator of cellphone towers. While the stock traded at around $36 in 2009, today it stands at about $225 a share, up from $142 over the past 12 months.

It is easy to understand American Tower's appeal, Mr. Neff says, "once you understand that there are economic and zoning reasons not to build new towers too close to each other, making each [existing] tower a geospatial monopoly." Throw in continuing annual double-digit growth in demand for wireless connectivity and the company's growing international presence, the Akre fund's managers say, and the result is a stock with impeccable competitive advantages.

"Their sheer size means they can negotiate advantageous master-lease agreements" with cellphone companies who must gain the use of the firm's towers to provide their own customers with coverage, notes Mr. Akre.

American Tower also is a core holding for Mr. Hudepohl's two funds. It is a stock he added to both the Eaton Vance and Calvert portfolios about two years ago, when real-estate investment trusts were taking a beating as investors anticipated an uptick in interest rates.

"American Tower's business is classified as a REIT, and people didn't want to own it; it traded with other REITs," Mr. Hudepohl says. "That's where having a long-term focus on fundamentals becomes important. We knew that this issue didn't affect the business itself."

Mr. Akre, for his part, didn't flinch at that hiccup in American Tower's trajectory. "We seek to buy exceptional businesses and own them until they are no longer exceptional," he says. He has added to the American Tower position over the years, but doesn't try to profit from fluctuations in its share price.

"We don't run our portfolio on a quantitative basis," he says. That means not only that there is no opportunistic trading, but also that the co-managers spend far more time trying to understand and assess elements that make a business succeed than they do querying short-term earnings projections.

Sometimes, the decision to add a company to the portfolio boils down to judgment: The business may display great rates of return, but Mr. Akre finds himself betting on the management team's thought process.

That has been the case in conglomerate-style companies in which the fund has invested, such as Warren Buffett's Berkshire Hathaway, Roper Technologies Inc. (an industrial firm that has acquired myriad niche manufacturers and service providers) and Canada's Constellation Software Inc., which operates more than 300 discrete software-focused businesses.

"We make judgments about them from personal interactions, and based on what they say and write," Mr. Akre says. "We quiz them about their thinking about reinvestment and what their returns on asset purchases have been."

The duo are humble about their ability to make good calls. As Mr. Akre says, "good judgment comes from experience, which comes from [learning from] bad judgment."

Right now, that judgment is telling them to hold on to the cash that has flowed into their fund over the past year or so. Cash levels stood at a large 16.4% of the fund's assets midyear, and have crept "incrementally" higher since. The two men insist they aren't bearish; it's just that while "we are letting the cash build up, we are hard pressed in today's markets to find valuations that are compelling enough to put that cash to work," Mr. Neff says.

They have a record of taking what might seem to be big risks and deploying cash when opportunities arise. In the wake of the financial crisis, the fund invested in Moody's Corp., parent company of the bond-rating service whose business model was attacked following the subprime market meltdown.

"Our strong view was that Moody's brand name would ensure it survived and that it would continue to be a ratings franchise, and that we'd also benefit from the recovery in debt capital markets," says Mr. Neff. That is indeed what happened, as the surge in Moody's share price from about $30 in early 2011 to $203.56 today has helped the fund reward shareholders.

Both fund-management teams emphasize building portfolios containing a relatively small number of holdings. Mr. Hudepohl may own perhaps 40 stocks in the Calvert portfolio, but typically holds less than two dozen of his top ideas in the Eaton Vance fund. Sometimes it means he misses out on a gem like Estée Lauder Cos., the cosmetics firm that he describes as a "great play on the global emerging middle class." Mr. Hudepohl added it to the Calvert fund but not to the more-concentrated portfolio he runs on behalf of Eaton Vance. On the other hand, both funds contain exposure to core holdings like Dollar General, which he expects to benefit from the continuing wars between Amazon.com and bricks-and-mortar retailers.

"We could own more" holdings, Mr. Hudepohl says, agreeing with Mr. Akre and Mr. Neff that running a concentrated fund means making trade-offs. "But at the end of the day, we're paid to have high-conviction ideas." And being able to concentrate on only a handful of positions, he believes, will make it easier for him to produce higher-quality portfolios, with higher returns not only in absolute terms but on a risk-adjusted basis.

Depending on the share class, these funds might look costly to some investors. Morningstar deems as "high" the fees levied on the I share class of Akre Focus, which has an expense ratio of 1.05%. (I shares are available to institutional investors, including financial advisers operating on behalf of their individual investor clients.) The ratings firm deems as "above average" the expense ratio of 0.8% on the I shares of the Atlanta Capital Focused Growth fund. Anyone opting for the A shares should be prepared to pay still more: a sales charge or "load" of 5.75%, and an expense ratio of 1.05%.

To invest in the A share class of the Calvert Equity Fund, investors pay a sales charge of 4.75% and annual fees of 0.99%, while opting for the I share (CEYIX) class via a financial adviser comes with 0.74% in fees (a level that Morningstar deems "average") and no load. (A spokeswoman for the fund management team notes that the vast majority of funds into the Calvert Equity Fund flow into those I shares.)

Since fees affect the returns that investors are able to capture -- and the cost of investing -- investors should always evaluate the trade-off between a fund's short-term performance and other factors such as fees, volatility and risk-adjusted returns.

Ms. McGee is a writer in New England. She can be reached at reports@wsj.com.

 

(END) Dow Jones Newswires

October 06, 2019 22:26 ET (02:26 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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