The asset management business is quite impressive, with the companies having a solid profit model with management fees on assets under management. The three asset managers below trade rather cheaply by absolute forward P/E earnings standards in relation to the market, all trading less than 14 times forward earnings. They all also pay out dividend yields of at least 3.5%.
AllianceBernstein Holding (NYSE:AB) - Dividend Yield of 5.1%
AllianceBernstein is one of the largest U.S. investment advisers, with some $430 billion of assets under management at the end of 2012, up 6% from $406 billion at the end of 2011.
AllianceBernstein's biggest segment is institutional services accounts for over 50% of assets under management. This consist primarily of the active management of equity accounts, balanced accounts and fixed income accounts for institutions.
Retail services accounts for 34% of AUM and provides investment management and related services to individual investors, including cash management products such as money market funds and deposit accounts. Private clients make up 15% of AUM and include high net worth individuals, trusts and estates, charitable foundations, partnerships, private and family corporations.
Alliance has the highest P/E ratio of the four stocks, at 13.2 times forward earnings, but still well below the market. Last quarter, the company saw revenues up 13% year over year, which was on the back of improved fee performance.
At the end of 2012, equities were down to only 22% of its asset mix, compared to 72% in 2007. I see this as a positive, where the company is diversifying beyond the broader market and looking to achieve uncorrelated returns.
Oaktree Capital Group (NYSE:OAK) - Dividend Yield of 8.1%
Oaktree is an investment management firm focused on alternative markets, specializing in credit and contrarian, value-oriented investing. The firm invests across six major asset classes: distressed debt, corporate debt, control investing, convertible securities, real estate and listed equities.
Oaktree is one of the top managers in the alternative investment industry. The company's management, including famed investor Howard Marks, has great skills in raising capital.
The team over at Broyhill Asset Management also have Oaktree as one of the highest conviction picks. Here is a quick recap of what makes Oaktree superior for them:
-The company is ran by superior management, whom have a high ownership interest.
-There are industry tailwinds that will push the stock higher.
-Notable company specific catalysts for driving the company higher.
They also see the investment company boosting cash distributions in 2013 and 2014. As far as distributions go, following Oaktree's IPO in May 2012, the firm has paid four quarterly distributions:
1. $0.55 per unit in May 2012,
2. $0.79 in August 2012
3. $0.55 in November 2012
4. $1.05 in February 2013 ($4.20 annualized).
Distributions are not a consistent dollar amount because they are tied to quarterly performance.
Fortress Investment Group (NYSE:FIG) - Dividend Yield of 3.6%
Fortress pays the lowest dividend yield of the four stocks, but also has one of the lowest P/E ratios at 9 times forward earnings. Fortress' 4Q revenues of $417.6 million against $276.3 million a year ago, while income came in at $227.2 million, compared to a loss before of $222.5 a year ago.
Fortress also has a solid breakdown amongst major assets classes, with its private equity portfolio having $14.3 billion in assets at the end of 2012 with the remainder in credit funds ($13.4 billion), liquid hedge funds ($5.1 billion), and traditional fixed income ($20.7 billion).
Within the private equity business of Fortress, at the end of 2012, public companies comprised 30% of assets and were up on average 65% while private company investments comprised 70% of the portfolio but returned 11% on average during 2012.
Fortress is able to generate returns due to its expertise in a number of sectors (transportation, real estate, consumer financing), asset classes (distressed debt, complex deals and traditional fixed income), and geographies (North America, Asia, Europe). One of Fortress' big deals of late include its acquisition of HSBC's consumer loan portfolio for $3.2 billion or $0.76 on the dollar for total underlying portfolio value of $4.2 billion.
From a valuation standpoint, Fortress is also attractive. Using Wexboy's asset management valuation methodology, Fortress' fair value looks something like this:
The asset management industry has well established market/M&A multiples. On average, a high quality fixed income manager might attract a 0.67%-1.0% of AUM valuation, while a top-class alternative asset manager could command anything from 7.5%-10% of AUM, or even higher.
Using mid-points of these metrics, and noting a 37% fixed assets and 63% alternative asset split, then Fortress should theoretically trade at 5.8% of AUM.
Putting all this together:
$55.6 billion AUM * 5.8% + $1.55 billion cash & investments = $4.77 billion / 486 million shares = $9.81 intrinsic value, suggesting upside 36%.
Hedge fund trade
At the end of 2012, there were a total of 11 hedge funds long Oaktree, which was a 15% decrease from the previous quarter. Its top hedge fund owner includes Russell Hawkins' Hawkins Capital, with $136 million that makes up 15.6% of its total 13F portfolio. Sitting in the second spot is billionaire David Einhorn's Greenlight Capital.
Meanwhile, Fortress had 10 hedge funds long the stock going into 2013, which happened to be a 67% increase from the previous quarter. Bill Miller's Legg Mason Capital had the largest position in the asset manager, worth $11 million (see Legg Mason's small cap picks). Billionaires Leon Cooperman (Omega Advisors) and Jim Simons (Renaissance Technologies) were also notable Fortress shareholders going into 2013.
Having the least amount of hedge fund interest at the end of 2012 was AllianceBernstein, with 8 hedge funds long the stock. Chuck Royce and Royce & Associates had the largest position (check out Royce's top small-cap picks), while other notable owners include Mario Gabelli's GAMCO Investors and Wexford Capital.
These investment managers have a solid business model that involves collecting fees for managing money. Meanwhile, they also are very good at returning cash to shareholders. Oaktree pays the highest dividend yield at over 8%. We also believe it could be one of the best long-term investments in the space.