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5 days ago
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Akre Capital's Akre Focus Fund 2nd-Quarter 2025 Letter: A Review
Greetings from Middleburg. We hope your summer is off to a good start. The Akre Focus Fund's (the Fund) second quarter 2025 performance for the Institutional share class was 6.46% compared with S&P 500 Total Return of 10.94%. Performance for the trailing 12-month period ending June 30, 2025, for the Institutional share class was 20.43% compared with 15.16% for the S&P 500 Total Return. Warning! GuruFocus has detected 7 Warning Signs with TSX:CSU. We recently read a very interesting report by Morgan Stanley's Michael Mauboussin and Dan Callahan entitled Drawdowns and Recoveries: Base Rates for Bottoms and Bounces (1). We were hooked from the opening sentence: One of the hardest aspects of being a long-term investor is that even the best investments, or investment portfolios, suffer large drawdowns. A drawdown is the price decline from peak to trough. For us, the report's key findings were as follows: Large drawdowns indeed! The report cites a study of roughly 28,600 public companies from 1926 through 2024. The top six of these in terms of wealth creation (Apple, Microsoft, NVIDIA, Alphabet, Amazon, ExxonMobil) suffered an average maximum drawdown of 80.3%! Amazon's share price dropped 95% from December 1999 to October 2001, for example. Nvidia's dropped 90% from January 2002 to October 2002. The study by Messrs. Mauboussin and Callahan involved 6,500 US stocks from 19852024. The median stock price recovery from the drawdown bottom was 89.6% of the pre-drawdown peak (a.k.a. par). In other words, the median stock failed to return to its prior peak after max drawdowns: a permanent loss of capital for those who bought high. Returns from the bottom of these drawdowns were spectacular even if the stock failed to return to par. Intuitively, the bigger the drawdown, the bigger the subsequent return from the bottom. As the report points out, buying at the very bottom of a drawdown is highly unlikely. But it holds that the lower one buys during a drawdown, the higher the subsequent return. The role business quality played in terms of long-term compounding was of particular interest to us. In this report, the proxy for business quality was the extent of the drawdown: the smaller the drawdown, the higher the business quality, and vice versa. Critically, the study shows that while the largest drawdown (lowest quality) businesses produced the highest returns from the bottom, they generally did not compound from their pre-drawdown peak. Specifically, the quintile of stocks with the largest drawdowns recovered just 80% of prior peak value five years after the drawdown bottom. On the other hand, the quintile of stocks with the smallest drawdowns (a.k.a. the highest quality stocks) nearly doubled in value from their prior peak value five years after bottoming. In rough math, given the seven-year time frame of the study (two-year drawdown followed by five years of recovery), the lowest quality businesses compounded at negative 3.1% annually from peak to recovery, declining from an indexed peak of $100 to $80 seven years later. The highest quality businesses compounded at positive 9.6% annually over those seven years, increasing from an indexed peak of $100 to approximately $190 seven years later. We cannot directly map these research findings to our portfolio or investment approach, particularly the correlation of drawdown depth to business quality. However, we believe the findings corroborate our long-held notion that a compounding investment approach has subtle but important distinctions from value investing. Those distinctions center on the primacy of business quality. Per the Morgan Stanley study (2), high quality businesses generally compounded positively over time, even from their pre-drawdown peak. Low quality businesses, which declined more and bounced higher off the bottom, generally did not. These findings reminded us of what we did, and did not do, during the sharp but short-lived COVID bear market of March 2020, a month during which we bought over $1.1 billion in equities. We did not buy the COVID ground zero names such as airlines and cruise lines, both among the hardest hit, deepest value sectors at the time. Value investors might reasonably look to play the bounce in such sectors. If you bought the all-airline US Global Jets ETF (JETS) on March 30, 2020, you made an 85.62% return after just one year! The harder the fall, the higher the bounce. To our way of thinking, however, airlines are not high-quality businesses. And indeed, that lack of quality weighed on their longer-term rate of compounding. By the second anniversary of that well-timed JETS purchase, the annual rate of return dropped to 22.31%. By June 30, 2025, the annualized return off the bottom stood at 9.15% [per Bloomberg]. The equity investments we made in March 2020 bounced less but have compounded more. A year later, as of March 30, 2021, our March 2020 investments in aggregate had appreciated 74.85%, excluding dividends. A nice rebound, to be sure, but less than that achieved by the harder hit, lower quality airline stocks. However, quality and compounding show over time. Our March 2020 equity investments in total would have compounded at approximately 19.07% annualized if all were held through June 30, 2025, excluding dividends. The investments we made in March 2020 and have held through June 30, 2025, have compounded at approximately 21.67% excluding dividends. We believe compounding-driven investors are distinguished by an emphasis on quality and quality's tendency to reward longer holding periods. Warren Buffett (Trades, Portfolio)'s adage, If you aren't thinking about owning a stock for ten years, don't even think about owning it for ten minutes, captures this distinction between compounding and bounce-seeking value investing. Furthermore, we think of traditional value investing as seeking to buy the proverbial $1 of intrinsic value for ~$0.60, sell at $0.85 or $0.90, rinse and repeat. For value investors, valuation is the primary investment (buy and sell) consideration. And there's nothing wrong with this whatsoever. However, in our view, such an approach implies a somewhat commoditized view of businesses as easily exchangeable like-for-like. We believe business quality is just as important as starting valuations if the goal is to compound capital at an attractive rate over the longest time. We endeavor to own the highest quality businesses we can understand and buy them only at attractive valuations. The Morgan Stanley study supports this notion that high business quality is key to long-term compounding, even from pre-drawdown peaks. Obviously, compounding is easier said than done. Even when done exceptionally well, an active manager is prone to getting fired during the inevitable sharp drawdown or its aftermath. Indeed, the Morgan Stanley piece cites another of our favorite reads of recent years, Wes Gray's Even God Would Get Fired as an Active Investor. Dr. Gray constructs portfolios consisting only of the 50 best performing stocks over five-year periods starting January 1, 1927. Every five years, these portfolios are reset to include only the 50 best performers over the next five years. Calling these God Portfoliosbuilt with perfect foresight to contain only the best performing stocks over each five-year periodthese portfolios performed brilliantly, with annualized returns over the study period (1927 through 2016) three times that of the S&P 500. However, even these perfect portfolios were subject to significant drawdowns, the worst being 76% (August 1929 to May 1932) along with five drawdowns of 30% and higher. As Messrs. Mauboussin and Callahan say, Even the perfect portfolio tests the resolve of those who own it. Even for the best performing stocks and the best performing portfolios, faith-testing drawdowns are inevitable. The Morgan Stanley study supports our long-held view that a dual focus on business quality and starting valuation are the keys to long-term compounding. The top five contributors to performance during the quarter were Constellation Software (TSX:CSU), Brookfield Corporation (NYSE:BN), (TOITF), KKR (NYSE:KKR), and Moody's (NYSE:MCO). No callouts worth mentioning. The top four detractors from performance this quarter were O'Reilly Automotive (NASDAQ:ORLY), Roper Technologies (NASDAQ:ROP), LVMH (LVMUY), and Danaher (NYSE:DHR). As of June 30, cash and equivalents stood at 8.1% of the Fund, up from 6.3% on March 31 and 1.4% on December 31st. We have made a point of raising our cash position in case our valuation discipline and patience gets rewarded in the weeks and months ahead. Over the life of the Fund, we have routinely held cash in the 5-10% range. Finally, as announced in the supplement to the Akre Focus Fund's Prospectus dated June 4, 2025, we received approval from the Board of Trustees to convert the Fund from a mutual fund to an exchange traded fund. The ETF structure is expected to offer enhanced tax efficiency, greater trading flexibility, and increased transparency of portfolio holdings. The investment process and investment team will remain the same. We thank you for your exceptional support. John 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 Read it carefully before investing. Performance data quoted represents past performance and 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. Fund performance current to the most recent month-end may be lower or higher than the performance quoted and can be obtained by calling 1-877-862-9556. The Fund's annual operating expense (gross) for the Retail Class shares is 1.31% and 1.04% for the Institutional Class shares. The Fund imposes a 1.00% redemption fee on shares held less than 30 days. Performance data does not reflect the redemption fee, and if reflected, total returns would be reduced. 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. In addition to large- capitalization companies, the Fund invests in small- and medium- capitalization companies, which involve additional risks such as limited liquidity and greater volatility than larger capitalization companies. (1) Drawdowns and Recoveries: Base Rates for Bottoms and Bounces (2) Drawdowns and Recoveries: Base Rates for Bottoms and Bounces This article first appeared on GuruFocus.
Yahoo
01-06-2025
- Business
- Yahoo
Commentary: Identifying winning stocks is hard. Holding winning stocks is a nightmare.
A version of this article first appeared on We've discussed exhaustively how difficult it is to pick stocks that outperform the market. But let's assume you were able to identify these winning stocks. Is it smooth sailing from there as you smoke the competition? No. Far from it. It turns out that the stocks offering the best returns for investors historically experienced incredibly painful max drawdowns (i.e. percentage declines from a price peak to a trough). Morgan Stanley's Michael Mauboussin and Dan Callahan recently studied the price behavior of 6,500 stocks. Among other things, they took a closer look at the 20 stocks with the best total shareholder returns over the 40-year period from 1985 to 2024. They also reviewed the performance of the 20 worst performers during the period. (Note: They only considered stocks listed on the NYSE, NASDAQ and NYSE American exchanges that traded during the entire measurement period. They excluded companies worth less than $1 billion at the beginning and $250 million at the end of their maximum drawdowns.) "The median maximum drawdown was 72% for the best group, and the median maximum drawdown duration, the time from peak to trough, was 2.9 years," they found. "The median time to return to the prior peak was 4.3 years. The median annualized abnormal returns following the bottom was 8% for the next 5 years and 12% for the next 10 years. This is based on the unrealistic assumption the stock was purchased at the low." Just thinking about one of my positions losing 72% of its value makes me queasy, even knowing full well this is the average behavior of the best stocks. Now imagine being a fund manager with the conviction to hang on to these types of stocks. Mauboussin and Callahan note that Alpha Architect's Wes Gray considered this thought experiment in a paper titled: "Even God Would Get Fired as an Active Investor." "[Gray's] point is that if you had the (godlike) foresight to build a portfolio of the stocks that would produce the highest TSRs over the next five years, you would have 'great returns, but gut-wrenching drawdowns,'" they wrote. "In other words, the drawdowns are so large that a client who hired you to be their active manager might fire you." The analysts considered the performance of the S&P 500 over this measurement period to show the benefits of diversification. "The maximum drawdown for the index was 58%, the maximum drawdown duration was 1.4 years, and the time to recover back to par was 4.2 years," they observed. "Following the trough, the annual TSR for the S&P 500 was 25% over 5 years and 17% over 10 years." So maybe your return isn't as high as investing in the top performing stocks. But the max drawdown for the S&P is shallower, and the duration of that drawdown is much shorter. Obviously, you'd still opt for the more painful drawdowns if you knew you would outperform the market over time. Unfortunately, almost no one has a consistent track record of identifying those long-term winners. And there are a lot of stocks with underperforming returns, including a whole lot of stocks that never recover from their max drawdowns. "The median stock's recovery from its maximum drawdown is 90% of the prior peak price (par), which means it fails to return to its past high," they found. "In fact, about 54% of stocks never return to par after hitting bottom." (Note: For this review, they considered stocks listed on the NYSE, NASDAQ and NYSE American exchanges that traded during the entire measurement period. They only considered stocks that worth worth at least $1 million at the end of any month.) One of the more notable findings in this study is that the average recovery from a drawdown is a whopping 338.5%, to which the analysts said: "This tells you that some stocks produced very high returns off of the bottom." Indeed, a few stocks — some generating >1,000% returns — can be responsible for the bulk of a portfolio's returns. To put it another way, the median 89.5% recovery figure tells us it's very hard to pick winning stocks. Meanwhile, the average 338.5% recovery figure tells us that a broadly diversified portfolio with exposure to all stocks can generate returns that multiply the value of your initial investment. Legendary stock picker Peter Lynch once said: "In the stock market, the most important organ is the stomach. It's not the brain." This is true for investors in broadly diversified index funds. This is even more true for investors who aim to pick stocks with the aim of producing market-beating returns. There were several notable data points and macroeconomic developments since our last review: 🏭 Business investment activity declines. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — declined 1.3% to $74.8 billion in April. Core capex orders are a leading indicator, meaning they foretell economic activity down the road. The recent decline could portend slowing growth in the months to come. For more on core capex, read: ⚠️ 👎 CEO confidence tanks. From The Conference Board's Stephanie Guichard: "CEO Confidence collapsed in Q2 2025 after surging in Q1. CEOs' views about current economic conditions led the plunge, registering the largest quarter-on-quarter decline in almost 50 years. Expectations for the future also plummeted, with more than half of CEOs now expecting conditions to worsen over the next six months, both for the economy overall and in their own industries. CEOs' assessments of current conditions in their own industries—a measure not included in calculating the topline Confidence measure—also fell sharply in Q2. The vast majority of CEOs (83%) said they expect a recession in the next 12-18 months, nearly matching the percentage who feared recession in late 2022 and early 2023. The US–China trade deal announced on May 12 seems to have eased, but not removed, concerns about the future." From the firm's Roger Ferguson: "CEOs named geopolitical instability, followed by trade and tariffs, as the two top business risks impacting their industry in Q2. Regulatory uncertainty followed close behind, while cyber risks—which dominated CEOs' concerns over the past two years—dropped down to 4th place. As in previous quarters, a majority of CEOs indicated no revisions to their capital spending plans over the next 12 months. Still, consistent with more pessimism about the outlook in their own industries, the share of CEOs expecting to revise down investment plans doubled in Q2 to 26%, while the share expecting to upgrade investment plans dropped 14 ppts to 19%." For more on deteriorating sentiment, read: 📊 and 😵💫 🚢 Imports sink. Here's Bloomberg on April Census data: "[G]oods imports plummeted by a record as companies adjusted to higher tariffs. …data showed an almost 20% slump in imports, leading to a massive narrowing in the US merchandise-trade deficit in April. … Besides the punitive tariffs in place last month on Chinese products, the slump in goods imports probably reflected a reversal in the inflow of pharmaceuticals following a surge in March and a decline of gold imports…" For more on volatile imports, read: 🤷🏻♂️, 🤔, and 🤔 🎈 Inflation cools. The personal consumption expenditures (PCE) price index in April was up 2.1% from a year ago. The core PCE price index — the Federal Reserve's preferred measure of inflation — was up 2.5% during the month, down from March's 2.7% rate. While it's above the Fed's 2% target, it remains near its lowest level since March 2021. On a month over month basis, the core PCE price index was up 0.1%. If you annualized the rolling three-month and six-month figures, the core PCE price index was up 2.7% and 2.6%, respectively. For more on inflation and the outlook for monetary policy, read: ✂️ and 🧐 🛍️ Consumer spending ticks up. According to BEA data, personal consumption expenditures increased 0.2% month over month in April to a record annual rate of $20.67 trillion. 💳 Card spending data is holding up. From JPMorgan: "As of 23 May 2025, our Chase Consumer Card spending data (unadjusted) was 1.5% above the same day last year. Based on the Chase Consumer Card data through 23 May 2025, our estimate of the US Census May control measure of retail sales m/m is 0.48%." From BofA: "Total card spending per HH was up 0.2% y/y in the week ending May 24, according to BAC aggregated credit & debit card data. The shift in Memorial Day (5/26/25 vs. 5/27/24) likely weighed on y/y total card spending growth in the week ending May 24. Initial read suggests that we could be getting a softer Memorial Day spending weekend this year likely due to colder weather." May spending is likely being boosted by consumers pulling forward purchases in an attempt to front-run tariffs. For more on consumer spending, read: 😵💫 and 🛍️ 💼 Unemployment claims tick higher. Initial claims for unemployment benefits rose to 240,000 during the week ending May 24, up from 226,000 the week prior. This metric continues to be at levels historically associated with economic growth. For more context, read: 🏛️ and 💼 👍 Consumer vibes improve. The Conference Board's Consumer Confidence Index ticked higher in May. From the firm's Stephanie Guichard: "Consumer confidence improved in May after five consecutive months of decline. The rebound was already visible before the May 12 US-China trade deal but gained momentum afterwards. The monthly improvement was largely driven by consumer expectations as all three components of the Expectations Index—business conditions, employment prospects, and future income—rose from their April lows. Consumers were less pessimistic about business conditions and job availability over the next six months and regained optimism about future income prospects. Consumers' assessments of the present situation also improved." Relatively weak consumer sentiment readings appear to contradict resilient consumer spending data. For more on this contradiction, read: 🙊 and 🛫 👎 Consumers feel worse about the labor market. The Conference Board's Guichard noted: "However, while consumers were more positive about current business conditions than last month, their appraisal of current job availability weakened for the fifth consecutive month." From the firm's May Consumer Confidence survey: "Consumers' views of the labor market weakened in May. 31.8% of consumers said jobs were 'plentiful,' up slightly from 31.2% in April. 18.6% of consumers said jobs were 'hard to get,' up from 17.5%." For more on the labor market, read: 💼 ⛽️ Gas prices tick lower. From AAA: "With crude oil prices lingering in the low $60s per barrel, drivers are reaping the benefits at the pump. The national average is down about 3 cents from last week, returning to what it was a month ago: $3.16. While fuel prices are expected to remain on the lower side compared to last summer, weather is the wild card. The Atlantic hurricane season begins Sunday, and NOAA predicts a 60% chance of an above-normal season. Storms along the Gulf Coast can affect oil refineries and disrupt fuel deliveries, leading to a temporary increase in gas prices." For more on energy prices, read: 🛢️ 🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.80%, up from 6.86% last week. From Freddie Mac: "This week, the 30-year fixed-rate mortgage rose slightly higher. Aspiring buyers should remember to shop around for the best mortgage rate, as they can potentially save thousands of dollars by getting multiple quotes." There are 147.8 million housing units in the U.S., of which 86.1 million are owner-occupied and about 34.1 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates. For more on mortgages and home prices, read: 😖 🏚 Home sales fall. Sales of previously owned homes fell by 0.5% in April to an annualized rate of 4.0 million units. From NAR chief economist Lawrence Yun: "Home sales have been at 75% of normal or pre-pandemic activity for the past three years, even with seven million jobs added to the economy. Pent-up housing demand continues to grow, though not realized. Any meaningful decline in mortgage rates will help release this demand." Prices for previously owned homes increased from last month's levels and year ago levels. From the NAR: "The median existing-home sales price for all housing types in April was $414,000, up 1.8% from one year ago ($406,600). The Northeast and Midwest posted price increases, and the South and West registered price decreases." 🏘️ New home sales rise. Sales of newly built homes rose 10.9% in April to an annualized rate of 743,000 units. 🏠 Home prices cool. According to the S&P CoreLogic Case-Shiller index, home prices were up 3.4% year-over-year in March but declined 0.3% month-over-month. From S&P Dow Jones Indices' Nicholas Godec: "Home price growth continued to decelerate on an annual basis in March, even as the market experienced its strongest monthly gains so far in 2025. This divergence between slowing year-over-year appreciation and renewed spring momentum highlighted how the housing market shifted from mere resilience to a broader seasonal recovery. Limited supply and steady demand drove prices higher across most metropolitan areas, despite affordability challenges remaining firmly in place." 🏢 Offices remain relatively empty. From Kastle Systems: "Peak day office occupancy was 62.2% on Tuesday last week, down 1.1 points from the previous week. Only Chicago and San Francisco experienced decreases of more than two full points, falling 3.4 points to 68.6% and 2.8 points to 49.4%, respectively. The average low was on Friday at 34.8%, up three tenths of a point from the previous week." For more on office occupancy, read: 🏢 👍 Activity survey improves. From S&P Global's May U.S. PMI: "Business confidence has improved in May from the worrying slump seen in April, with gloom about prospects for the year ahead lifting somewhat thanks largely to the pause on higher rate tariffs. Current output growth has also picked up from April's recent low, which had seen the weakest rise for over one-and-a-half years, in response to an upturn in demand. However, both sentiment and output growth remain relatively subdued, and at least some of the upturn in May can be linked to companies and their customers seeking to front-run further possible tariff-related issues, most notably the potential for future tariff hikes after the 90-day pause lapses in July." Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data. For more on this, read: 🙊 🇺🇸 Most U.S. states are still growing. From the Philly Fed's April State Coincident Indexes report: "Over the past three months, the indexes increased in 42 states, decreased in five states, and remained stable in three, for a three-month diffusion index of 74. Additionally, in the past month, the indexes increased in 35 states, decreased in nine states, and remained stable in six, for a one-month diffusion index of 52." 📈 Near-term GDP growth estimates are tracking positive. The Atlanta Fed's GDPNow model sees real GDP growth rising at a 3.8% rate in Q2. For more on GDP and the economy, read: 📉 and 🤨 🚨 The tariffs announced by President Trump as they stand threaten to upend global trade — with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get some more clarity, here's where things stand: Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices. Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, while cooling, also remains positive, and the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market. But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less "coiled" these days as major tailwinds like excess job openings and core capex orders have faded. It has become harder to argue that growth is destiny. Actions speak louder than words: We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor's perspective, what matters is that the hard economic data continues to hold up. Stocks are not the economy: Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth. Mind the ever-present risks: Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets. Investing is never a smooth ride: There's also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened. Think long term: For now, there's no reason to believe there'll be a challenge that the economy and the markets won't be able to overcome over time. The long game remains undefeated, and it's a streak long-term investors can expect to continue. A version of this article first appeared on Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
