giofranchi

http://seekingalpha.com/news/2178265-buys-and-sells-as-morgan-stanley-launches-p-e-coverage?uide=7935531&uprof=25#email_link Gio

http://www.valuewalk.com/2014/12/stick-mission-howard-marks-oaktree-capital-management/ Gio

The following is from an article about OAK that appeared on The Motley Fool last Janaury 26th, 2014: Gio

Well, there is a corollary to that: in Milan we have to pay for all the taxes the rest of Italy evades…!! ;) Ahahahah!!!!! Gio

Well, two things: 1) OAK is treated like a MLP: its GAAP net income is always much smaller than ANI from which distributions are calculated, therefore I guess it is inevitable that taxes on distributions are much higher than on regular dividends. 2) Good for you, that you live in the Netherlands, and don’t have to deal with Italian taxes! ;) Gio

Regarding OAK’s potential for future growth, we should not forget that ANI is composed of three parts: fees + incentives + investment income. And, although AUM today are $93 billion, fee-generating AUM are $79 billion, while incentive-generating AUM are only $35 billion. Therefore, in order to grow ANI at a CAGR of 15%, OAK needs: 1) To be able to grow fee-generating AUM at a CAGR of 15%: starting from $79 billion today, it might not be easy; 2) To be able to grow incentive-generating AUM at a CAGR of 15%: starting from $35 billion today, that might be easier. If all AUM today would be generating incentives, it translates into 7 years of 15% annual growth for incentive-generating AUM; 3) To be able to compound its capital at 15% annual: given their 20% IRR track record, I think this goal could be even exceeded. If 1) falls short of expectations, 2) meets expectations, and 3) exceeds expectations (in between 15% and 20%), overall I wouldn’t rule out an healthy future growth in ANI. Furthermore, please note that also a multiple expansion cannot be ruled out: as we have seen, OAK is selling at a multiple of 12 x ANI. And it is selling at a discount to the average multiple the market is currently assigning to its peers, which is 15. If OAK shows the kind of growth in ANI I expect, it is only logical the market should price it at a premium to peers, not a discount! I wouldn’t be surprise to see OAK selling for 16-17 x ANI. Therefore, even if ANI ultimately doesn’t compound at 15% annual, OAK’s stock price might still. Finally, don’t forget that, given its very generous distributions policy, we don’t really need OAK’s stock price to compound at 15% to get a return of 15% annual on our investment. In my case, assuming an average 6% dividend, and assuming a very burdensome 50% tax rate, I might be left with a 3% return from distributions alone. If reinvested, that would bring down the return needed from OAK’s stock price to a more manageable 12% annual. Gio

Imo there is little doubt a “tactical” change, like the one you have described, might renew the interest of investors who got worried about the actual track record and performance of those businesses VRX has acquired, and therefore got also worried about the high level of debt: 3 or 4 quarters of results without any new acquisition should make clear enough how VRX’s existing businesses are actually performing, and at the same time should also help the company bringing down its debt load. If the market punishes its stock price for such a “tactical” change… well... then I agree with you: a boy can surely dream! ;) Gio

Good weekly commentary by David Hay of Evergreen/Gavekal Gio EVA+12.12.2014+NA.pdf

If not clear, I meant the following: Just as you regard Buffett’s qualitative judgment that BAC will still be doing business 50 years from now in context with his valuation of the bank, so you should also regard my sentence that a very capable money manager like OAK will probably always be needed in context with the valuation of OAK I have attempted in the last few posts of mine for this thread! I hope it is clear now! ;) Gio

Can you read the the last few posts of mine about OAK? Gio

Well, I remember Buffett saying something like this about BAC: I could never pretend I understand BAC as well as I understand WFC… But I reasoned it is cheap and it will still be around 50 years from now. The difference is: if Buffett says something like that, he sounds intelligent… If I say something like that, it sounds like a platitude! ;) Gio

AtlCDore, Please don’t get me wrong: in a market crash OAK’s stock price might plummet like all the rest! But… either we just hold cash, or we must choose something to invest in, right? So, my idea is simply that at this point in the market cycle I prefer to hold a company cash rich and with the proven ability to raise much more cash in a downturn, than to hold a company with little cash (maybe some debt) and that in a downturn won’t have much dry powder to put to good use! This is what I mean by counter-cyclical. Anyway, OAK’s earnings are driven by: fees + incentives + investment income. Now let’s just pretend that in 2015 a market crash awaits us: I would be very surprised if OAK’s 2015 AUM wouldn’t end up being much higher than today. Fees, therefore, would follow AUM and will be higher. Of course, incentives + investment income will be much lower… But their effect would be somehow mitigated by higher fees… And I don’t see OAK’s earnings to decline drastically… In fact, OAK posted good earnings in 2008 too! And we know the stock market should be a discounting machine… During the market crash of 2015 it will see OAK’s earnings holding up much better than the rest, and it will see OAK investing large sums of capital in opportunities that will make incentives + investment income grow dramatically in future years… In a market crash there are not many places where it seems safe to park your money, right?… Under the mattress might be one such a place… OAK might be another!… So, who knows what really could happen to its stock price?! ;) Gio

- Howard Marks, one of the world’s finest money managers Describes OAK pretty well, doesn’t it? ;) Well it also fits commodity companies (think oil), russian & southern Europe companies, ... Does that mean these companies are all likely bargains? Of course not. Marks could just as well say "You're likely to find the best prices when demand is low and supply is high" or just refer to Buffett's famous greed and fear quote. While obviously true, they all carry little weight when making an investment case. Another one I dislike is: "It's always darkest before the dawn". No shit. I prefer: “It’s always darkest just before it goes pitch black”. A good reminder when investing in anything. That's why you should read my whole post! ;) Gio

- Howard Marks, one of the world’s finest money managers Describes OAK pretty well, doesn’t it? ;) And I would add: things that, despite the recent poor performance, we know will still be needed 20 years from now! And how could one of the world’s finest money managers cease to be needed?! Gio

Imo this question is relevant, also because OAK might be looked at as both a long term investment and as a cyclical investment: even if you don’t believe OAK enjoys the opportunities to still grow handsomely in the future, you’d better ask yourself if at this point in the cycle it might make sense to hold a company which, given its proven ability of raising huge amounts of funds in a downturn, is one of the best counter-cyclical investment available on the market today. Gio

Well, of course that depends on when new investment opportunities might present themselves in abundance. Who really thought we could see Oil below $60?! Probably very few people! Who might expect a market crash next year?… Right… Very few people… What I would ask isn’t where the pendulum is going, but where the pendulum IS right now: 1) Huge amounts of debt in Japan, Europe, China, and even North America… It is very difficult to imagine all that capital has been wisely allocated… When capital gets misallocated, investment opportunities usually follow. 2) Volatility in the stock market has been practically non-existent for 5 years now. So, the question is: given where we are right now in the cycle, does it make sense to hold a portion of our portfolios in something as counter-cyclical as OAK? How long this cycle might still go on, or when vice versa it might start going the other way, is something we cannot know. Gio

80% of Accrued Incentives are from funds that are already liquidating. Of course, I understand your doubt about the remaining 20%. But why should incentives accrued from funds that are liquidating not be realized? Gio

Well, as I have already pointed out, almost 40% of their AUM right now are in strategies that have nothing to do with the High Yield market. Marks has always said he likes High Yield, because that’s where he finds the largest number of opportunities! But I think it would be really diminishing to come to the conclusion that OAK might achieve excellence in investing only in the High Yield market… If opportunities present themselves somewhere else, they will act accordingly… Like any good value oriented and opportunistic investor would do! Furthermore, who knows how much and how fast the High Yield market might grow in the future? With a lot of distressed debt probably showing up? With the only exception of KKR, which manages the same amount of assets, OAK is still the smallest of its peers! Don’t get me wrong: you can never be confident about growth, especially if sustained for many years in the future. All I am saying is: might growth be a sure thing for OAK? Certainly NOT… Might growth be possible and even probable for OAK? YES, of course. Gio

Vinod, I don’t agree. When we put a multiple on today’s earnings, we are implicitly discounting to the present all future earnings. Past earnings, instead, have already flown onto the balance sheet. In OAK’s case they have already been either distributed, or become partners’ capital. Accrued Incentives are incentives for a job already done: let’s suppose for instance that Fund A, B, and C have been very successful, and now are liquidating. The capital of those funds will be either reinvested in other funds or given back to clients. But incentives, even if not yet recognized as earnings, are for the partners to keep. The multiple I am assigning to today’s normalized fees + incentives takes into consideration the fact that, despite capital has always been periodically given back to clients, AUM have increased at an healthy CAGR for more than 20 years, and are likely to continue doing so in the future. Therefore, Accrued Incentives imo have nothing to do with the expected growth in earnings in coming years. Instead, that growth will only be a consequence of the underlying growth in AUM. If you want, you can also look at it this way: Accrued Incentives is a revolving Balance Sheet item. For any $ that might flow into future ANI from Accrued Incentives, there will be probably more than one $ that won’t be recognized as income yet and will go to increase Accrued Incentives. I don’t know IBM well enough to understand the comparison, but as far as OAK is concerned I don’t see the double counting. Gio

They mostly come from liquidating funds, don’t they?… Therefore, I don’t see how they could decline very rapidly... On the contrary, I have realized that, if you find a company you believe has a very real possibility of compounding capital at 15% annual for many years into the future… well, the downside will take care of itself!... If things go bad, usually it ends up compounding at 10%! ;) Anyway, it was you who pointed out how many times Marks repeats the work “risk” in his memos, right? That’s the best downside protection I could ask for! Gio

Truth be told, Malone instead has made these rights offerings many times during his long career with spectacular results for all the shareholders who followed him. And he is still doing them right now with Liberty Broadband… And I am following him! ;) Buffett has made spectacularly rational choices given the circumstances he found himself in. This is key in business: circumstances always change, therefore the most rational choices are always different. Buffett has never gone activist… That doesn’t mean Icahn is not a rational investor. I would put rationality even above ethics… Because at the end of the day the most rational choice is also the one that makes the greatest good. Gio

Vinod, 1) You are right: DoubleLine might earn $50 million for OAK, not $60 million. 2) What matters is the size of AUM compared to the size of the markets OAK might invest in... And those markets are huge: many trillions of $. If OAK keeps generating stronger results than competitors', we still have much room for growth. I have little doubt about this. Just look at this year: despite their already large AUM at the end of 2013, AUM generating fees are up 18%! 3) I am not the one who compares Oaktree with BlackRock... Oaktree compares itself to BlackRock!... Just look at OAK Q3 2014 presentation. Anyway, I agree: AUM generating fees should be compared!... Tomorrow I'll check. 4) That's why Mr. Munger and me only look for that kind of businesses!! Ahahahah!!!! Gio

Well, what’s the matter with that? The fact is BlackRock, notwithstanding its huge size, has been able to increase EPS by 25% YTD and at a CAGR of 15% in the 2010-2013 period! And is still targeting a 5% CAGR in AUM. Gio

Also think about this: If Oaktree succeeds in increasing AUM at a CAGR of 15% for the next 20 years, by then it will be managing just 33% of the assets BlackRock is managing today. Lots of room for growth! :) Gio

Vinod, this is my attempt to make a sum of the parts analysis for OAK. In the 10-K for 2013 we read: Therefore, I will consider OAK as the sum of two businesses: business 1): BV + Accrued Incentives is the partners’ capital that gets managed for our own benefit. business 2): AUM generating fees and incentives is the capital that gets managed for our clients’ benefit. I will use an asset value approach to put a number on business 1), while using an earnings value approach to put a number on business 2). For the Nine Months Ended September 30, 2014 Management fees have been $572 million, while Incentive income has been $438 million. Fee-related earnings per Class A unit have been $1.03. For Incentive income per Class A unit a simple proportion would yield: (438 / 572) x 1.03 = $0.79. Therefore, Fee-related earnings per Class A unit + Incentive income per Class A unit = 1.03 + 0.79 = $1.82, which annualized would become: (1.82 / 3) x 4 = $2.43. Let’s normalize this number 15% higher: 1.15 x 2.43 = $2.80. Business 1): Book Value: $11.30 per share Accrued Incentives: $7.06 per share, which are pre-taxes, so let’s just consider $4.00 per share DoubleLine Stake: it earns circa $60 million after taxes in 2014, applying a multiple of 14, you get to $4.63 per share Total for business 1): 11.30 + 4.00 + 4.63 = $19.93. To this I am applying a multiple of 1. Business 2): Fee-related earnings per Class A unit + Incentive income per Class A unit = $2.80. To this I am applying a multiple of 12: 2.80 x 12 = $33.60. Sum of the parts: 19.93 + 33.60 = $53.53. Now, let me be clear: this sum of the parts IS NOT FAIR VALUE. All I have asked myself is: which multiple might the market assign to business 1) and to business 2) 20 years from now? 1 and 12? Ok. Is OAK selling at those multiples today or lower? It seems so. Of course, if BV + Accrued Incentives grow at a CAGR of 15%, and Fee-related earnings + Incentive income grow at a CAGR of 15%, OAK’s fair value is much higher than my sum of the parts. Gio PS If you want to simply use ANI and an earnings value approach to put a number on OAK as a whole entity, you might consider an ANI per Class A Unit of $2.63 for the first 9 months of 2014, which annualized is ($2.63 / 3) x 4 = $3.50. Let’s normalize this number 15% higher: 1.15 x 3.50 = $4.03. Therefore, OAK is selling at a multiple of $49.3 / $4.03 = 12.2 x ANI per Class A Unit. Will the market price OAK at 12 x ANI per Class A Unit 20 years from now? Probably yes! Therefore, if Management fees + Incentive income + Investment income grow at a CAGR of 15%, the return on my investment will be 15% compounded annual. It is just like saying: Fairfax is selling for 1.3 x BVPS. Will the market possibly price Fairfax at 1.3 x BVPS 20 years from now? If yes, and if Fairfax achieves a CAGR of 15% for its BVPS, the return on my investment will be 15% compounded annual.