OAK - Oaktree Cap Group LLC

[thepupil]

 

I realize that 20X may be a lot to pay for that annuity stream  and I do not own this stock, but it just seems there are lower quality companies and business models to short on valuation. I think the Russell 2000 is a more compelling and easier short than OAK.

 

nice job picasso...my IWM suggestion and OAK were neck and neck at -9% since i posted, until the past 3 days OAK sold off by a lot and handily pulled away!

 

market hates the entire credit/real estate/asset manager financial complex...since this is like 80% of what i invest in, it's been a rough few weeks.

 

I do like how all these alternative asset managers are selling off as their opportunity set is arguably improving (if they're good that is)

[Picasso]

OAK has to earn above a hurdle rate so just because the opportunity set increases doesn't make it that much more attractive in this kind of environment, in my opinion.  Credit has been trading like crap but it doesn't mean they can earn high spreads over their hurdle rate.  If anything this is the kind of sluggish market condition where OAK will work for only management fees for a few years while they try and build back their incentives.  It's not so bad that they can find amazing deals (maybe when energy goes full blown tits up) and not so good to realize a ton of gains.  Even looking at their large equity holdings show you the pain they're feeling in various trades.  It's just a bad market for what they do.  The economic cycle is somewhere in the middle of no one knows what, and that's not where OAK makes their money.

 

If anything this might go lower than I thought based on how similar investments are trading.  It's just a tough environment to give a lot of credit to the carry side of the business.  In the future if I ever decide to buy back into these types of vehicles, you have to give no credit to the carry side of the business because it just overstates the value of the business during good times and during bad times it's practically worthless in the markets eye.

 

But maybe it's just trading weak because Mr. Market is an idiot like me.

[VersaillesinNY]

Howard Marks: CNBC's "Value Spark" with Kelly Evans - Jun 28, 2016

 

https://www.youtube.com/watch?v=kZdkiSQmy6Q

[plato1976]

It is back to $40 again

basically going nowhere in 4 years (except quite some dividend)

 

OAK has to earn above a hurdle rate so just because the opportunity set increases doesn't make it that much more attractive in this kind of environment, in my opinion.  Credit has been trading like crap but it doesn't mean they can earn high spreads over their hurdle rate.  If anything this is the kind of sluggish market condition where OAK will work for only management fees for a few years while they try and build back their incentives.  It's not so bad that they can find amazing deals (maybe when energy goes full blown tits up) and not so good to realize a ton of gains.  Even looking at their large equity holdings show you the pain they're feeling in various trades.  It's just a bad market for what they do.  The economic cycle is somewhere in the middle of no one knows what, and that's not where OAK makes their money.

 

If anything this might go lower than I thought based on how similar investments are trading.  It's just a tough environment to give a lot of credit to the carry side of the business.  In the future if I ever decide to buy back into these types of vehicles, you have to give no credit to the carry side of the business because it just overstates the value of the business during good times and during bad times it's practically worthless in the markets eye.

 

But maybe it's just trading weak because Mr. Market is an idiot like me.

[james22]

Anyone like OAK at near its 10-year P/B low?

[sleepydragon]

I like to own oak, but how's everyone's experience of dealing K1s? For oak, have you ever need to file tax returns for many states? It will be better if they are setup as corporations

[bskptkl]

I decided to short a fair amount of OAK.  When I get my butt kicked by Howard Marks, you guys can all laugh.  But I don't see much upside from the $55 level, if at all.  Between their incentive fee hurdle, their investment portfolio, and the retail investors piling into OAK, I think this could be a pretty good risk/reward on the short side.

 

I think the stock should trade a lot closer to $40.  Good luck to all and may the trading gods have mercy on my soul.

I was just reviewing the board on a slow day and I saw this thread...no position or opinion and terrible shorting anything.

 

What a great call Picasso! Nailed it.

 

[james22]

I'm thinking I might try holding a small position in my Roth IRA (if Picasso recommends...), sleepydragon.

 

... not all K-1 issuing companies are the same as MLPs. The finance related publicly traded partnerships may or may not generate UBTI. The investor relations managers at our portfolio holding Oaktree Capital (NYSE: OAK) have told me that OAK units will not generate UBTI in an IRA.

 

https://www.investorsalley.com/wp-content/uploads/2015/03/TDH-Special-Report-Quick-Start-Guide-to-MLP-Investing.pdf

 

OAK is theoretically safe for IRAs but there is no assurance that it will last (I would think a position below 1000 shares would be safe in IRAs in any case, barring ownership of other UBTI generating MLPs).

 

http://boards.fool.com/oak-thoughts-31285758.aspx?sort=whole#31285758

 

A holder of Oaktree units that is tax-exempt (such as a Traditional IRA, ROTH IRA or 401(k) account) may nevertheless be subject to tax to the extent that its allocable share of income includes any Unrelated Business Taxable Income (“UBTI”). Current tax laws require IRAs and other tax-exempt entities with more than $1,000 of gross Unrelated Business Taxable Income (“UBTI”) to file a U.S. tax return (Form 990-T). This form may be filed by the custodian of your account. The account will only owe taxes if its UBTI exceeds $1,000.

 

Oaktree did not report any UBTI in 2013. However, given the nature of our investments and the use of leverage in making certain investments, we may report UBTI in the future and therefore cannot make any representation that we will not generate UBTI.

 

http://ir.oaktreecapital.com/phoenix.zhtml?c=212597&p=irol-faq

[Nell-e]

What are people's thoughts about OAK during this part of the cycle?  Their core competency is distressed debt.

 

With Jeff Gundlach bearish on bonds and assuming he's right, is now the time to buy? 

[Haasje]

I'm long. It is valued on current earnings/AUM while the firm has the connections/reputation to raise a lot of AUM (which it is presently declining) as soon as there's something to do.

[StevieV]

I am long OAK and some of the other alt managers.  OAK has been disappointing the past several years.

 

While I appreciate their conservatism, I think they could be doing more outside of the distressed debt arena so that they aren't just sitting around waiting for the next big dis-allocation.  What about expanding other, non-distressed, credit strategies?  Expanding with insurance support strategies?  Could they expand into real-estate?  Their peers have been able to expand during the past several years, and I don't think they are putting themselves at particular risk.

 

Regardless, I don't think there is anything wrong with buying OAK at this price.  I think you should get 6% yield or better.  It should be counter-cyclical/anti-fragile, which is a nice feature.  Eventually I think they'll get some chances.

[netnet]

The dividend has been great since the IPO, but the stock itself has been flat.  At the current price and the current point of the economic cycle (end of the boom) the stock seems to be an excellent place to put a relatively large percentage of the portfolio, specifically, upto 30% of either the dry powder or income segment. (The theory is that except in a 2008 type recession the stock should hold up well and in fact this is when they shine, so you can sell if you see something better; otherwise hold on through the correction.)

[james22]

Made it a near 10% position just recently.

[tede02]

For what its worth, I've heard there has been some rockiness within Oaktree in recent years. The gist of my conversation with an industry insider is the current CEO has been somewhat controversial within the firm and a number managers have left. I have no idea to what degree this sentiment pervades, but the anecdote came from someone who knows a lot of people in the asset management business.

[StevieV]

Made it a near 10% position just recently.

 

Would you mind elaborating on your reasoning?

 

They pay a nice distribution, and should do well in a down market.  However, as I mentioned upthread, I have been disappointed that the AUM growth has stalled out.  I understand that they may need some dis-allocations to really hit the ball out of the park, but I would like to see at least some modest growth without it.  It's not clear to me that we are on the verge of a bond crisis that they can take advantage of.  So, it seems to me as though they may sputter along at these levels.

 

I figure they'll pay about 6% here (rough estimate, of course, given the structure).  With the possibility of doing well counter-cyclically, that doesn't put you in a bad spot.  But, a little uninspiring if the market continues to chug along ok and they can't find a way to grow without more upheaval.

[james22]

1. I believe fed-driven yield chasing will likely create an opportunity.

 

The even bigger opportunity might be in high-yield bonds. They’ve not yet begun to retreat. If we get into a real fear-based market that thinks recession is coming, I think we’ll see 15% yields in the junk bond segment. They’ll get even better if recession actually appears.

 

You see opportunities like this in the high-yield market only every 15 to 20 years. When they emerge, you have to put aside your fears and buy for the longer term. The technical charts show nothing but down when that pattern does happen. But a 15% yield and almost 50% capital gain can make that trade a meaningful addition to your portfolio.

 

http://www.mauldineconomics.com/frontlinethoughts/economy-on-a-roll#fb-root

 

I really like buying credit in bear markets. Go back and look at high yield funds coming out of bear markets. You’re talking about 30-40% returns, especially on the lower-quality stuff.

 

On a risk-adjusted basis, it’s a lot better than stocks.

 

http://www.mauldineconomics.com/the-10th-man/2018s-number-one-risk#fb-root

 

I am telling you that what is going to happen in the high-yield market is going to be more – much more – of the same. It’s going to seemingly fall out overnight. The bids are going to disappear, and high-yield bonds are going to be sold to what are essentially distressed-debt funds at distressed-debt prices.

 

http://www.mauldineconomics.com/outsidethebox/kill-the-quants#fb-root

 

2. Yield chasing myself.

 

I think of OAK as a quasi fixed income instruments. By owning OAK, I am getting paid approximately 7.90%, or approximately 500 bp over the US Ten Year Treasury Note or approximately 170 bp over the high yield ETF.

 

In the event of a crisis when OAK is able to deploy funds, its units will reflect the value that is created when capital that is deployed into distressed situations. In the meantime, I am getting paid to wait by a superb manager with an excellent track record.

 

https://seekingalpha.com/article/4148022-oaktree-capital-great-company-hurry-pile-stock

 

3. Seems undervalued.

 

4. Howard Marks.

[james22]

Occurs to me I didn't address your point specifically - they *are* expanding their business into infrastructure, real estate, emerging markets debt and equities, and direct lending:

 

https://seekingalpha.com/article/4143814-oaktree-capital-group-llc-oak-q4-2017-results-earnings-call-transcript?page=2

 

Just not the reason I'm into them.

[Nell-e]

What's the bear thesis at this point?  How far could OAK fall?

[Spekulatius]

What's the bear thesis at this point?  How far could OAK fall?

 

As far as Mr. Market takes the units down. There is no way of telling because a bear market will not be rational. My concern with the “parking units” approach is that I think we could easily look at a 50% loss here , albeit temporary, since OAK will be classified as a financial or asset manager, which is technically correct.

 

I also agree that disclocations in the credit markets will come with any recession. This is what happened in 2002 and in 2008 where spreads increased significantly. We had a short spike in spreads with energy credit in late 2015, where you could buy bonds of perfectly fine BB+midstream companies with utility like business models for 11% interest rate yields.

[Cigarbutt]

"I also agree that disclocations in the credit markets will come with any recession. This is what happened in 2002 and in 2008 where spreads increased significantly. We had a short spike in spreads with energy credit in late 2015, where you could buy bonds of perfectly fine BB+midstream companies with utility like business models for 11% interest rate yields."

 

Maybe this is misguided nostalgia but I clearly remember that, for a significant window period, during the flight to safety in 2008-9, it would have been possible to form a reasonably diversified portfolio of long term investment grade securities yielding close to 10%! (with "risk-free" yields free fallin')

 

Good things eventually happen to most firms gathering capital in the investment-grade space. Fairfax recently issued 10 year securities yielding less than 3% (2,89%). Fairfax has good prospects long term but it is difficult to envision scenarios where FFH bond yields will go much lower.

 

Retrospectively looking, during the last credit crunch, value was pretty much everywhere in the widening spreads but, at the time, it wasn't so obvious, then, at least, in a behavioral sense.

 

But in terms of risk-reward and work that would have been required to follow the portfolio (collecting the coupons, spend an hour or so per year skimming annual reports), I'd say that it would have been quite a rewarding course to follow for a "reasonable" investor. One would have been still left with the reinvestment risk and that remains relevant up to this day.

 

Howard Marks has produced a lot of interesting work on yield chasing.

 

https://www.stlouisfed.org/publications/regional-economist/july-2010/flight-to-safety-and-us-treasury-securities

[james22]

Bear thesis:

 

I have to say that investing in a fixed income asset manager during the peaking of the biggest bond bubble of all time, and one that particularly specializes in credit analysis when credit spreads are at ridiculously low levels is a little frightening.

 

Of course, OAK is just about the best in the business, but even great equity managers suffer during stock market bear markets. In a real blowup, OAK would definitely benefit as their pool of potential investments would expand. But their current funds would take big marks against them, so that's sort of a conundrum with owning OAK today. It can get bad before it gets really great.

 

http://brooklyninvestor.blogspot.com/search?q=oak

[Contra123]

That's not the real bear thesis.  The real bear thesis is that common stock (in practice, publicly-listed limited partnership unit b/c this is analogous to a kind of MLP) of listed alternative asset managers is essentially an instrument to transfer wealth from you, the common stock holder, to the principals of that firm and its employees. 

 

These are all (OAK, APO, KKR, BX, CG etc) great trading stocks, but as long-term holdings, they are structurally flawed. Then you have to deal with succession (see OZM; maybe less relevant to more diversified, less single-personality driven firms) and a fundamental unwillingness of the jockey to repurchase stock (because that goes against their goal of maximizing liquidity to provide exit opportunities for themselves and their staff).  I get it. The SOTP story is seductive. I just think it's a waste of time.

[rb]

I had a PE professor in school who was formally the CEO of a PE firm. Great guy. He told me to never buy the stock of a PE shop.

[Spekulatius]

I had a PE professor in school who was formally the CEO of a PE firm. Great guy. He told me to never buy the stock of a PE shop.

 

It would be interesting to know why? I suspect because they are really run for employees, not for owners, similar to investment banks.

[StevieV]

That's not the real bear thesis.  The real bear thesis is that common stock (in practice, publicly-listed limited partnership unit b/c this is analogous to a kind of MLP) of listed alternative asset managers is essentially an instrument to transfer wealth from you, the common stock holder, to the principals of that firm and its employees. 

 

These are all (OAK, APO, KKR, BX, CG etc) great trading stocks, but as long-term holdings, they are structurally flawed. Then you have to deal with succession (see OZM; maybe less relevant to more diversified, less single-personality driven firms) and a fundamental unwillingness of the jockey to repurchase stock (because that goes against their goal of maximizing liquidity to provide exit opportunities for themselves and their staff).  I get it. The SOTP story is seductive. I just think it's a waste of time.

 

If that is the real bear thesis, I don't think it is a good one.

 

Take a look at APO, for example.  They make a lot of money, they are rapidly increasing the amount of money they make, and they pay out most of the earnings (distributable earnings) to unit holders.  Also, the founders get paid in largely the same way as unit holders - through the distributions.

 

The attached article discusses Leon Black's compensation.  About $250K in 2017.  Of course, he is a founder, and still owns a good bit of the company.  He receives distributions on that ownership stake.  But, that is similar to how the public unitholders are compensated (in mechanism; not scale).