Chuck Akre beat 99% of his peers over more than a decade picking stocks based on price and ignoring much of what happened in the economy and government. He changed his approach after his fund declined 34% in 2008.
"It's not clear how our economic and political situation will unfold, so you have to bear more things in mind today," said Akre, 67, who last year left FBR Funds and started Akre Focus Fund. "We need to do a better job of integrating our world view than we have in the past."
Akre joins a handful of "bottom-up" stock pickers who say they can no longer afford to tune out the larger economic picture after underestimating the financial crisis.
Akre, who returned 12% a year as manager of the FBR Focus Fund from 1997 through July 2009, compared with an 8.7% annual gain in the Standard & Poor's Midcap 400 index, said his concern about the economy prompted him to increase cash holdings in his own fund. He also put money into discount retailers such as Dollar Tree Inc., which can thrive even if U.S. consumers pinch pennies.
Stock pickers are struggling to add value because correlation among assets jumped during the crisis and has stayed above historical averages as investors, worried about another economic slowdown, move in and out of markets without discriminating between individual securities.
"We're at the highest level of correlation since the 1930s. There's no dispersion among stock prices," Lee Ainslie, managing partner at Maverick Capital Management LLC, said last week at the Value Investing Congress in New York. "As you can guess, that makes it very difficult for fundamental stock pickers."
Fundamental stock pickers select securities by looking at valuations, following the 1934 book "Security Analysis" by Benjamin Graham and David Dodd, the fathers of value investing. Berkshire Hathaway Inc. Chief Executive Warren Buffett studied under Graham at Columbia University. Peter Lynch, who returned 29% a year as manager of Fidelity's Magellan Fund from 1977 to 1990, said it was futile to predict interest rates or the economy.
But Akre said while his fund declined less than the Standard & Poor's 500 index in 2008, his failure to recognize the seriousness of the housing collapse and its impact on the economy convinced him he needed to pay more attention to economic developments. "We want to be better prepared for the world we are in today," he said in an interview from Middleburg, Va. The fund had 21% of its assets in cash as of July 31, Akre wrote in an October filing with the Securities and Exchange Commission.
Akre ranked in the top 1% of fund managers in his peer group until he left FBR last year, according to Morningstar.
Akre, who has a bachelor's degree from American University in Washington, says he's not an economist and won't try to predict the direction of the market or the economy. His goal? "I am trying to figure out how not to give back so much in adverse times."