15 Aug 2011 Akre Capital Management - July 19, 2011 Commentary ( Portfolio )
There is a lot going on around the world these days which could reasonably cause an investor to be anxious, if not fearful. You know the names across the water: Greece, Euro, European Banks, China, Libya, Pakistan, Arab Spring, Syria, etc. Here at home we have U.S. Debt Ceiling, Floods, House Prices and Foreclosures, Unemployment, Elections, Zero percent interest rates, Inflation or Deflation and much more. What is one to do?

We have previously discussed with you that this question is virtually identical to the one being asked in the early 1970’s. Where can I put my assets so that they are safe and won’t erode in value (too badly)? Several choices discussed then and now are: Gold, Real Estate, Art, Commodities, Bank Accounts, Bonds, U.S. Common Stocks, non U.S. Common Stocks and my favorite, my brother’s Pizza Restaurant. You may have your own version of the pizza restaurant.

Our view then and now is that the best place to store assets is in operating businesses which have real pricing power. During the 1970’s, inflation was rampant, so the ability to “price” one’s product or service was critical. Particularly in light of all the world’s uncertainties, we firmly believe that businesses with real pricing power are emphatically the place to be for the next several years, if not indefinitely!

As you have come to expect from us, we have built your portfolios (those that are primarily growth oriented) emphasizing investments in businesses which have demonstrated real pricing power. In a few instances we have invested in businesses which demonstrate exceptional operating skills where real pricing power is less available, and in still another small group of companies we have identified pure low cost operators. In virtually all instances, these businesses (all public companies) continue to grow and compound the real economic value per share at rates which are generally above average.

We believe this (growth in real economic value per share) is the very best way to protect and grow your assets, while incurring a manageable amount of risk. Further, we also believe that fixed income investing today is among the most treacherous places to have assets, particularly because the odds of inflation are looming large in this country.

Virtually all our managed portfolios own American Tower (AMT). The company in its own words is “very likely” to convert their U.S. operations into a REIT shortly after the new year, while keeping the non U.S. holdings in a taxable subsidiary. This will produce a modest cash stream for shareholders, while still leaving the company with ample capital to meet growth and reinvestment plans. We still believe the business model of American Tower is one of the very best, and the dividend will not slow them down much, so we will for now continue to hold our position. It is important to remember that there is no “free lunch,” meaning that receiving the dividend will not in fact be a bonus, but rather a diversion of the free capital the company generates.

Also in most portfolios this year we added a new position in MasterCard. We purchased the shares after uncertainty was created for the debit card market including issuing banks, payment networks, and acquirers by the enactment of the Durbin amended Dodd-Frank Bill. Since the quarter’s end, the Federal Reserve has provided some clarity for the space, and the shares have responded positively. We think the card network business (MasterCard, Visa, AmEx and Discover) is a superb business, with significant pricing power. We are expecting to be owners for years to come.