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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