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Chuck Akre sells most of his BRK


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I don't find it troubling. Berkshire doesn't really fit all that well with Akre's current investment strategy given its lack of very high returning re-investment opportunities.

 

This was 75 (90 bps, forgot to look for A shares) bps of their 13-F in Q1 2018 (as far back as free version of Whalewisdom goes) and is now 10 20 bps. It hasn't been a top position for a very long time and may not even be in the fund (could have been held in an Akre managed SMA) but I didn't confirm that.

 

Judge Berkshire and Akre separately, but I don't think this data point is worth anything. Is something going from 90 bps to 20 bps when the manager has like 70-80% top 10 name concentration important?

 

this isn't news.

 

https://www.akrecapital.com/investment-approach/

 

3 legged stool criteria, I would argue that Berkshire scores poorly on a relative basis in what I've bolded / enlarged. It scores well on others and is far cheaper than a lot of what Akre owns, but Akre does not prioritize cheapness.

 

BUSINESS

 

Enduring, predictable high ROEs* and FCF**

Identifiable, sustainable competitive advantages

Pricing power in excess of costs, inflation protection

Easy to understand

Normally avoid return-regulated industries

Strong balance sheets

icon box image

MANAGEMENT

 

Management with exceptional skill, integrity, and passion

Treat shareholders like partners

Indifferent to Wall Street’s short-term focus

Lean corporate culture fosters independence, accountability

Compensation rationally determined

icon box image

REINVESTMENT

 

Pattern of disciplined reinvestment

Extensive opportunities to reinvest FCF organically or through acquisitions

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I don't find it troubling. Berkshire doesn't really fit all that well with Akre's current investment strategy given its lack of very high returning re-investment opportunities.

 

This was 75 (90 bps, forgot to look for A shares) bps of their 13-F in Q1 2018 (as far back as free version of Whalewisdom goes) and is now 10 20 bps. It hasn't been a top position for a very long time and may not even be in the fund (could have been held in an Akre managed SMA) but I didn't confirm that.

 

Judge Berkshire and Akre separately, but I don't think this data point is worth anything. Is something going from 90 bps to 20 bps when the manager has like 70-80% top 10 name concentration important?

 

this isn't news.

 

https://www.akrecapital.com/investment-approach/

 

3 legged stool criteria, I would argue that Berkshire scores poorly on a relative basis in what I've bolded / enlarged. It scores well on others and is far cheaper than a lot of what Akre owns, but Akre does not prioritize cheapness.

 

BUSINESS

 

Enduring, predictable high ROEs* and FCF**

Identifiable, sustainable competitive advantages

Pricing power in excess of costs, inflation protection

Easy to understand

Normally avoid return-regulated industries

Strong balance sheets

icon box image

MANAGEMENT

 

Management with exceptional skill, integrity, and passion

Treat shareholders like partners

Indifferent to Wall Street’s short-term focus

Lean corporate culture fosters independence, accountability

Compensation rationally determined

icon box image

REINVESTMENT

 

Pattern of disciplined reinvestment

Extensive opportunities to reinvest FCF organically or through acquisitions

 

That's a good analysis. Do you consider Berkshire return regulated due to energy and insurance ? Insurance has always been a big part of their portfolio.  BHE is a good example of reinvestment of excess capital. I am more worried about a lot of their smaller businesses and how they will survive a prolonged downturn.

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Interesting news, but I don't find it concerning. You can understand why Akre would sell it based on the kind of businesses they talk about wanting to own. Especially when you had the opportunity to buy some pretty interesting companies in March.

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I consider Berkshire highly regulated because it has ~$100 billion of accounting equity (more by market value) in utilities and railroads. While railroads are less regulated than in the past, the history of the industry is one of very high regulation and Buffett's letters include the railroad in discussions of the partnership with regulators/government/constituents IIRC.

 

Berkshire is the 4th or 5th largest bank by look-through owned deposit share.

 

Berkshire is a large insurance company.

 

Berkshire has not demonstrated ability to re-invest the bulk of its free cash flow in high returning acquisitions or organically over the past few years. Instead it has piled up excess capital (as discussed throughout the board).

 

Berkshire is my family's largest position, but I just don't think it meets Chuck and team's criteria and I once spoke to Tom Saberhagen when he was there and asked him why they owned Berkshire and he described it as a legacy position that didn't really meet their criteria because of its size/stodginess/relatively low rate of intrinsic value compounding.

 

 

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I guess what's interesting is that Akre still holds 4+% of MKL. I don't see why MKL is more attractive than BRK. I also don't quite understand holding something like MKL in a fund. You're basically buying a company that holds a bunch of stocks and not even at a discount. Also somewhat true for BRK, but BRK at least has pretty big wholly owned businesses part.

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Why did they sell Berkshire now?

 

Berkshire has owned highly regulated businesses for years. Same with its bank portfolio. It hasn't met those aspects of Akre's criteria for a long time - so why sell now?

 

Perhaps Akre doesn't believe Berkshire fits the remainder of his criteria, perhaps:

 

Enduring, predictable high ROEs* and FCF**

Identifiable, sustainable competitive advantages

Pricing power in excess of costs, inflation protection

 

 

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I guess what's interesting is that Akre still holds 4+% of MKL. I don't see why MKL is more attractive than BRK. I also don't quite understand holding something like MKL in a fund. You're basically buying a company that holds a bunch of stocks and not even at a discount. Also somewhat true for BRK, but BRK at least has pretty big wholly owned businesses part.

 

I agree with you that BRK > MKL.

 

I would also point out that again using the Q1 2018 13-F's and the Q1 2020 13-F's, Akre has gone from owning 3.7% to 3.6% of MKL and it has declined from 8%+ to a ~4% position.

 

Akre has been "selling" MKL in a tax efficient manner via dilution with inflows and letting other positions get bigger.

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I guess what's interesting is that Akre still holds 4+% of MKL. I don't see why MKL is more attractive than BRK. I also don't quite understand holding something like MKL in a fund. You're basically buying a company that holds a bunch of stocks and not even at a discount. Also somewhat true for BRK, but BRK at least has pretty big wholly owned businesses part.

 

I agree with you that BRK > MKL.

 

I would also point out that again using the Q1 2018 13-F's and the Q1 2020 13-F's, Akre has gone from owning 3.7% to 3.6% of MKL and it has declined from 8%+ to a ~4% position.

 

Akre has been "selling" MKL in a tax efficient manner via dilution with inflows and letting other positions get bigger.

 

Good insight.

 

Maybe he sold BRK for tax reasons too: a good year to match whatever BRK gains they have against losses elsewhere? Not sure. Just thinking aloud.  ::)

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Why did they sell Berkshire now?

 

Berkshire has owned highly regulated businesses for years. Same with its bank portfolio. It hasn't met those aspects of Akre's criteria for a long time - so why sell now?

 

Perhaps Akre doesn't believe Berkshire fits the remainder of his criteria, perhaps:

 

Enduring, predictable high ROEs* and FCF**

Identifiable, sustainable competitive advantages

Pricing power in excess of costs, inflation protection

 

As of July 31st 2019, the Akre Focus Fund owned 200,000 B shares, a 0.4% position

https://www.akrefund.com/wp-content/uploads/2019/09/Akre-Focus-Fund-7.31.19-Annual-Report.pdf

 

As of January 2020, the Akre Focus Fund owned 200,000 B shares, a 0.3% position.

https://www.akrefund.com/wp-content/uploads/2020/04/Akre-Focus-Fund-Semiannual-Final-1.31.20.pdf

 

they could have just realized a loss and are using the opportunity to sell some highly appreciated shares.

 

For example, they sold 1/2 their Primo Water shares. No idea when they bought but maybe they are realizing a loss (based on the stock price) and used that loss to offset the gain on sale of the berkshire (which I assume has been held forever)

 

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Akre is a super rich, super successful dude who follows a consistent investment process. I imagine he is tax sensitive and find the series of events discussed here to be consistent with all of that.

 

the dude has like 3-10% turnover and doesn't trade much and has been growing in value and receiving net inflows, and has a lot of highly appreciated stock, and manages a RIC that passes on realized gains to his clients (who get annoyed by that). put yourself in his position and think how he operates as a PM.

 

when your AUM/fund size is going up and if you aren't buying more stock (as in Markel), you are selling the position and vice versa. you are making the company a smaller determinant of your absolute and relative performance by which you are judged and by which you receive inflows which determine your wealth (in addition to your own balance sheet investment in the fund compounding).

 

I think there are many reasons to own or not own Berkshire that are completely independent of Chuck's tax management/portfolio clean-up / whatever is going on here. I doubt anyone owned Berkshire because of Chuck's ringing endorsement via his 40 bp position, that is now sized down.

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  • 4 weeks later...

What's more interesting is Chuck Akre never thought Berkshire was worth making a bigger part of his portfolio.  That should tell you what he thinks of the company despite prices down into the 160-170. That also coincides with Buffett claiming it wasn't much of a bargain either.  He instead added positions like Adobe and Livenation at decent size on top of his other top holdings. 

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