After five years together as the analytical team supporting Chuck Akre’s market-trouncing FBR Focus Fund, Brian Macauley, David Rainey and Ira Rothberg were given a straightfoward mandate in taking over the fund’s management upon Akre’s departure in mid-2009. “Basically, don’t screw it up,” says Rainey.
They certainly haven’t. Their firm, Broad Run Investment Management, sub-advises the renamed $1.4 billion Hennessy Focus Fund and has earned a net annualized 19.3% since the changeover, vs. 16.6% for the Russell 3000.
Targeting compounding machines over proverbial cigar butts, the trio today sees opportunity in aftermarket car parts, insurance brokerage, cellphone towers and investment management.
Investor Insight: Broad Run
Brian Macauley, David Rainey and Ira Rothberg of Broad Run Investment Management describe the quality standards that narrow their opportunity set, why they hold their average position for nearly seven years, how they try to limit “unforced errors,” and why they believe Aon, O’Reilly Automotive, American Tower and Diamond Hill are mispriced.
You’re at the high-quality “compounder” end of the value investor’s target spectrum. Explain what high quality means to you.
Brian Macauley: In many ways it’s the standard definition: We’re looking for businesses that have sustainable competitive advantages that enable them to earn outsized economic profits for a long time.
The advantage can come from many sources, including scale, proprietary know-how, unique patents or licenses, high customer switching costs, high barriers to entry and low costs. We focus on companies with leading positions in their industries and on industries with secular growth drivers and a rational competitive dynamic.
Ira Rothberg: Where we believe we put more emphasis than most is on risk avoidance. If you read Charles Ellis’s classic investment book, Winning the Loser’s Game, he likens investing to amateur tennis, where the victor prevails because he makes fewer unforced errors than his rival. The key to winning isn’t going for the corners, but to consistently hit the ball back over the net.
Our strategy is to own high-quality, modestly valued businesses over many years, to take advantage of the power of compounding as earnings grow. To do that successfully only works if we avoid mistakes – unforced errors – that interrupt the power of compounding. That means being acutely sensitive to rising competitive threats, technological obsolescence, faddish levels of demand, excess financial leverage and unsustainable valuation levels.
The power of compounding is so great that our first job as investors is to avoid anything that might short-circuit it.
See full article on New Edition of Value Investor Insight