Akre Focus Fund Commentary 2nd Quarter 2017

While the narrative on Wall Street is always shifting, we remain as always “far from the madding crowd.

Author's Avatar
Jul 18, 2017
Article's Main Image

Our second quarter performance for the Institutional share class was +4.79% compared with S&P 500 Total Return at +3.09%. Performance year-to-date through June 30, 2017, for the Institutional share class was +11.14% compared with the S&P 500 Total Return at +9.34%. For the 1-year period ended June 30, 2017, the performance for the Institutional share class was +16.91% compared with the S&P 500 Total Return at +17.90%.

Strong performance continued in the second quarter for many of our core holdings: American Tower and SBA Communications returned substantially more than the market, as did Moody’s, MasterCard, and Roper Technologies. Notable for moderately detracting from the very strong overall result were two core retail holdings: Dollar Tree and O’Reilly Automotive.

Both are best in class retailers characterized by high margins, high returns on capital, regular gains in market share, and outstanding compounding track records. Both are capable of boosting sales and growing earnings whether the economy rises or falls. Both are led by proven, long-tenured, honest, and highly talented management teams. Both invest intelligently to open new stores and to repurchase shares and thereby increase earnings per share. In short– both are fine examples of what we call ”three-legged stool” investments.

Recently, Dollar Tree (DLTR, Financial) has been facing broad concerns of a grocery price war, in theory precipitated by Amazon’s rising importance in retail. Our view is that Dollar Tree (including the acquired Family Dollar banner) is well insulated from direct competition with Amazon. Further, it is not a grocer and is not squarely in the crosshairs of the recent grocery price deflation. The recent notion that Amazon acquiring Whole Foods changes the role of Dollar Tree and Family Dollar in the vast retail ecosystem strikes us as total nonsense. We expect Dollar Tree’s management team to continue doing what they do best and their customers to continue enjoying exceptional values on everyday items they want and need.

As we write, O’Reilly Automotive (ORLY, Financial) has weathered two unusual and consecutive quarterly earnings misses versus company guidance. These rare misses, largely due to a very warm winter and other timing factors, occurred concurrently with widespread Wall Street talk about Amazon’s encroachment into auto parts. This talk was on top of more Wall Street talk about long-term disruption in the automotive industry due to electric cars, self-driving cars, and ride sharing services. All together it is a lot of negative noise focused on the auto part retailers, but our view is unchanged: O’Reilly is the best at what they do; they will continue to gain share in their vast markets. Americans will continue to drive more than 3 trillion miles a year, which creates regular maintenance needs. Industry changes will play out over many decades. Meanwhile, O’Reilly will continue to provide valued service to many, many customers: mechanics who need hand-delivered parts to keep their businesses running, and retail customers who often cannot afford a professional mechanic but still need fast, local access to parts, advice, and tools to keep their cars running.

Our top-5 contributors to performance this quarter were American Tower, Moody’s, MasterCard, SBA Communications, and Roper Technologies. Our worst performers this quarter were, from worst to least, Dollar Tree, O’Reilly, Monro Muffler, Danaher, and Dollar General.

While the narrative on Wall Street is always shifting, we remain as always “far from the madding crowd.” Our focus is solely on identifying the best all-weather compounding businesses we can find and paying reasonable-to-attractive valuations for their shares. What we do may not make compelling cocktail party conversation, but we think it makes sense and believe it will continue to make for compelling long-term performance. We thank you for being on this journey with us and we look forward to updating you next quarter.

Chuck, Tom, & John