VALUE ADDED: Should You Invest in Akre Focus?

Truth be told, there are only a handful of great fund managers. Chuck Akre, in my view, is one of them. The question is whether his best years are behind him.

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His past returns aren't just good, they're stunning. From the start of 1997 through August 2009, FBR Focus (symbol FBRVX), which Akre ran over that period, returned an annualized 12.3%, putting it in the top 1% among funds that invest mainly in fast-growing midsize companies. By comparison, Standard & Poor's 500-stock index returned an annualized 4.4%, and the average midsize growth fund gained an annualized 4.9%. (Focus invests in companies of any market capitalization, but because Morningstar doesn't have an all-cap benchmark, we compare Focus to an average of mid-cap funds.)

After falling out with FBR, Akre left the firm in late August 2009. On September 1 of that year, he launched Akre Focus (AKREX). Its returns have been mixed. From its launch through February 6, the fund, a member of the Kiplinger 25, returned 15.4% annualized, precisely the same as the S&P 500. That's hardly top of the charts.

But Akre took time putting cash to work, and cash flooded in. If you exclude the fund's record during its first four months -- a period during which the S&P surged and beat Akre Focus by a whopping 10.9 percentage points -- the record looks good. From the start of 2010 through February 6, the fund returned an annualized 17.1%, compared with 11.6% for the S&P.

Akre uses a combination of growth and value tools to evaluate stocks. He insists on 20% or higher return on equity (a measure of profitability). Companies that profitable tend to have sustainable competitive advantages. He also looks for firms with skilled executives "who treat shareholders as partners" and know how to reinvest corporate profits intelligently. Finally, he only buys when a stock is relatively cheap -- no more than 15 times free cash flow (earnings plus depreciation and other non-cash charges).

Those tough standards lead him to invest in only about two dozen stocks, and more than 60% of the fund's assets are in his top ten holdings.

Akre is a patient investor. On average, he holds a stock for more than five years. "We rarely sell something because the valuation is too great," he says. "The really good companies are too hard to find." He sells because something goes wrong with the business model or the managers.

Akre is a bottom-up stock picker, but he's paying more attention to the big picture following the 2007-09 bear market, during which FBR Focus tumbled 51.0% (the S&P 500 lost 55.3% during the rout).

Believing that U.S. consumers will be constrained by large amounts of debt for years to come, he has loaded his fund with discount retailers. He has 10% of assets in Ross Stores (ROST) and 9% in Dollar Tree (DLTR).

Where is the competitive advantage in this pair? "They have extraordinary marketing and operational skills," Akre says. "Just look at their year-over-year growth in book value [assets minus liabilities]."

Akre's other 10% holding is MasterCard (MA). Along with Visa, Discover and American Express, Master Card "owns and controls the electronic rails that run between retailers and banks." Continuing migration to electronic payments is boosting growth, and net profit margins are north of 40%. Despite my praise, the fund has a couple of big question marks -- above and beyond its 2009 returns. For starters, a lot of people Akre's age, 69, are already retired. But so far he shows no signs of slowing down. "The children are gone, and I love what I'm doing," he says.

The other unknown: When Akre left FBR, the firm made his three former analysts the co-managers of his old fund. Akre then hired three new analysts. It's impossible for an outsider to know how much of the previous fund's success may have been due to his analysts' work, nor how much his current analysts contribute.

Akre Focus's annual expense ratio is 1.45%. If you can, buy the institutional share class (AKRIX), which costs 1.20%. Many online brokerages let you invest in this share class for substantially less than the advertised $250,000 minimum. You just have to pay a small transaction fee.

The fund's assets are still small, at about $700 million. But they're growing rapidly.

My hunch: I think Akre still has his magic. I might buy the fund. But I won't pretend it's an easy call.

Steve Goldberg is an investment adviser in the Washington, D.C., area.