Oaktree Capital: Value Investing In A Contrarian Fund ManagerVW Staff
Time and again, it has been proved that value investing trumps the illusive trading performance over a long term. One of the tenets of value investing is to invest in sound businesses. One such business is asset management, especially those practicing value investing (which is extremely hard to find). The striking benefit is that the business you are investing in, is run by people who have similar beliefs as you do. But such companies are rarely open for the public to invest in. One such company is Howard Marks’ Oaktree Capital Group LLC (NYSE:OAK).
Oaktree Capital Group LLC (NYSE:OAK) mostly invests in distressed debt, using contrarian strategies. The fee structure is setup in a shareholder friendly way. As an investor in this company, you take home your share of management fees, as well as incentive fee which is based on the performance of the company. The management fee is fixed and is a percentage of assets under management. It is quite certain as opposed to the incentive fee. The company currently manages around $ 81 billion. Most of the investors in the company understand the company’s value oriented philosophy and hence are invested for the long term basis. This provides Oaktree a fairly assured source of capital. Like other firms, Oaktree raises the capital from time to time. But the smartness of the management is evident from the timing of the capital raising. Oaktree has the habit of raising capital in tougher times like in 2008. Capital raising is more a function of availability of investing opportunity, than drawing management fees with more capital under management.
The uncertain part of the fees is incentive fees. But a closer look at the performance of the company reveals that the uncertainty is reduced significantly. One of the barometers of success in debt investing is to look at defaults on debt. This figure stands at 1.2% for Oaktree Capital Group LLC (NYSE:OAK) compared to 4.2% for the industry as a whole. Oaktree has been successful in fetching the incentive fees for the past 15 years. The firm has managed to deliver performance over an extended period of time and there is no sound reason why it can’t do the same in the future.
Apart from debt, Oaktree Capital Group LLC (NYSE:OAK) has also invested in other investment firms. The income from these investments is off balance sheet and doesn’t come under the income reported. Take an example of one such investment- Doubleline Capital. Oaktree paid $ 20 million for 22% stake. Doubleline Capital currently manages $ 40 billion. Recent acquisitions are valued somewhere between 1-2% of assets under management. With 2% the price of Doubleline comes at around $ 800 million and Oaktree’s investment comes at whopping $ 176 million. Pricing at 1%, Oaktree can be valued at $400 million which puts Oaktree’s investment at $ 88 million. With current floating shares of Oaktree, this translates to a value of $ 0.60 per share. As assets under management increases for Doubleline, Oaktree’s investment grows in value.
Oaktree Capital Group LLC (NYSE:OAK) has built a moat around it through strong brand, sound management and superior track record over a long term. One fact that stands out is that its competitor is itself. No one can take Oaktree’s capital away unless it performs poorly. That’s a good business to invest. But the investment in Oaktree Capital Group doesn’t come without risk. The major risk lies in the fact that the investment in Oaktree is essentially in its management. So when the management goes, its performance will not be the same. Of course if the current management carries out a proper succession plan, this risk can be minimized. With share price hovering around $ 40, the downsize seems fairly protected.