Artio Global Investors (ART) is a publicly owned asset management company. It went public in 2009 at $25 a share and is now down to just over $2. The reason for the more than 90% drop in market value is mostly due to poor performance in an area that was formerly its principal area of activity, International Equity Funds. The current Lipper ranking for its International Equity funds is in the bottom 10% for the periods of one, three, and five years (that's the bottom 10% out of the hundreds of mutual funds covered by Lipper). Following the poor investment performance, its AUM (assets under management) went down from $56 billion on the year of the IPO to less than $17 billion presently.
The market is obviously concerned that with the huge drop of AUM there will be operational de-leveraging, and the company could not carry its weight. Let's jump in and evaluate ART's situation and valuation.
One of the first facts that needs to be clarified to properly value ART is that not all parts of the AUM suffered the same (all figures in billion $):
Total excluding International Equity
I'm purposely ignoring the years prior to 2009 because those years were tough for the entire money management industry, and ART's International Equity funds were in the top quartile. As can be seen from the table, ART has a stable AUM of $11 billion in fixed income and Other, and an International Equity AUM shrinking at a very rapid pace ($40 billion of outflows and losses over the last four years).
On thing worth noting at this point is that the commission for the Equity funds is more than double the commission of the fixed-income funds, so the change of mix hurts revenue to a larger extent than the pro-rata decline in AUM might imply.
ART has three parts that can be valued:
- Pristine balance sheet, mostly distributable.
- Fixed income and Other operations with AUM of $11 billion.
- International Equity operations with AUM of $6.8 billion.
ART has a clean balance sheet with no debt and $156 million of book value, where 85% of the assets are cash, cash equivalent, or investments in own funds. $156 million translates to $2.6$ ps (FD), or 10% over current share price.
Through operational efficiencies ART is downsizing headcount and outsourcing back office operations to cut costs and be profitable even with current AUM. Based on Q3 2012 numbers, the operations are running at $5 million of annual pretax income (ignoring the income from investments). Applying an eight times multiple gets us to $40 million, or $0.66 ps, which brings us to a grand total value of $3.26 ps, or 40% higher than current figures.
However, I believe that the suggested valuation understates the real value of the operations, so let's dive into the other two parts of the valuation.
Fixed income and Other
A bargain price at which AUM may be purchased would be a 1.5 multiple over the fee income. The income from $11 billion of fixed income with an average of 50 bps commissions comes in at $55 million, and the 1.5 multiple would bring us to $82.5 million, or $1.38 ps.
One could argue that the multiple is too low because the funds have a decent track record and they require less analysis work than equity, hence leaving more of the revenue to turn into profit for an acquirer. But let's leave it at that.
Since the equity is flowing out at such a high pace, let's use an AUM of $5 billion for it and take the 115 bps of income to get to fees of $57.5 million. However, a buyer may not be willing to pay the 1.5 multiple here because of the low quality of the AUM, so let's just apply a multiple of 1 to get us to $0.96 ps.
I believe that the AUM valuation is awfully conservative valuation as can be seen from a recent acquisition by Schwab, which bought $2.3 billion of equity income for $85 million in cash plus additional payments contingent on growth. Similar valuation to the equity part alone would yield over $250 million, or $4.1 ps. Again, let's stick to our conservative valuation.
Summing up the three parts would give us a grand total of 2.6 + 1.38 + 0.96 = $4.94 ps, 110% over the current market price.
- Continued deterioration of the International Equity funds may erode further value. Although, as can be seen, even if funds would outflow to 0, there's still $4 ps in value, providing enough margin of safety from current levels.
- Management keeps the Equity's head-count of analysts even as the AUM drops to a non-sustainable level. The nice thing about the money management business is that there is no factory to maintain or inventory to hold, and at any point they have visibility to the AUM and the derived fee income so management can really control costs to guarantee profitability. However, if they decide to wait forever for a turnaround on the equity side, they may start burning cash.
To summarize, at current valuation ART provides an interesting opportunity with much of the downside protected by assets, while the upside is enormous.
Additional disclosure: The author purchased shares of Artio Global Investors for himself and for his partners at Capra Capital.