ART - Artio Global Investors

[Guest hellsten]

I'm not an expert in the asset management industry, many on this board are, so I would like to ask you what you think about the following company:

 

- Market cap ~$200 million

- Free cash flow ~$50 million. 5-year average ~$70-80 million.

- Cash and equivalents ~$60 million

- Practically no debt

- 3.8 P/CF, 4.7 forward P/E

- Pays 2.5% dividend

- Insiders own ~21%

- US-based asset management business spun of from Julius Baer (GAM Holding AG) in 2009

- Owned by value investors:

Gabelli Small Cap Growth AAA

Markel Gayner Asset Management Corp

Oceanstone Capital Management, Inc

Legg Mason Investments Europe Ltd

Franklin Templeton Investments Corp

Royce & Associates, LLC

 

Tom Gayner added to his holdings in Artio Global Investors Inc. by 304.23%. His purchase prices were between $2.92 and $4.8, with an estimated average price of $3.55.

 

- AUM dropping like a stone 3 years in a row:

 

July 31, 2012: $19

July 31, 2011: $45.2

our International Equity strategies, which represented 64% of our assets under management as of December 31, 2011. In particular, the International Equity strategies’ one- and three- year performance records remained below our peers. Our net client cash outflows for 2011 totaled $16.7 billion, and were due primarily to redemptions from our International Equity strategies.

However:

approximately 68% of our asset mix is in equities, we are subject to greater losses in declining markets and greater gains in rising markets

 

Our AuM increased from approximately $7.5 billion as of December 31, 2003 to approximately $75.4 billion as of December 31, 2007, then declined to $45.2 billion as of December 31, 2008, and remained stable in 2009 and 2010 at $56.0 billion and $53.4 billion, respectively. However, AuM declined 43% from December 31, 2010, to $30.4 billion as of December 31, 2011, due primarily to net client cash outflows in our International Equity I and II strategies and market depreciation.

- International equity funds underperforming markets since 2009 (can happen even to the best):

 

http://quicktake.morningstar.com/FundFamily/Snapshot.asp?symbol=0C00001YWC

 

- International Equity I (and most other funds) beating markets since inception:

 

Annualized Net Returns 10.4% vs market 3.7-4.3%.

 

- Performing well in other areas:

 

U.S. Equity strategies reached their five-year anniversaries during 2011 and were all in the top quartile of Lipper ranking for performance since inception at their anniversary dates.

…

Additionally, our High Grade Fixed Income strategy added another year of strong performance to its exceptional long-term track record.

 

- Diversifying and expanding their business internationally and in the US:

 

During the year, the Company successfully executed on several strategic initiatives, including the diversification of our business by growing and achieving strong performance in our non-International Equity offerings

 

- Management compensation is aligned with performance:

 

the Company’s poor investment and financial results, particularly within the International Equity strategies, led the Compensation Committee to reduce Mr. Pell’s annual incentive award by 55% to $1,410,000 for 2011 performance from $3,150,000 for 2010 performance, while his annual base salary remained at $500,000, pursuant to his employment agreement.

 

 

I have Pat Dorsey's excellent book The Five Rules for Successful Stock Investing in front of me where he writes about the asset management industry:

 

Asset management is incredibly lucractive, and even a poorly managed asset manager is likely to post stellar financial results. Historically, asset managers have been excellent investments…

With huge margins and constant streams of fee income, asset managers are perennial profit machines.

 

…their stock prices often reflect oversized doses of the current optimism or pessimism prevailing in the economy, which means it pays off to take a contrarian approach when you're thinking about when to invest.

The most important competitive advantages we look for are diversification (both in products and customers) and stickiness of assets (money that stays with the firm even when times are tough).

these companies can pare back to the bone to remain in business.

 

many asset managers can almost be considered as leveraged bets on the market.

 

 

References:

 

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTI4NjI5fENoaWxkSUQ9LTF8VHlwZT0z&t=1

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTQ5MDkwfENoaWxkSUQ9LTF8VHlwZT0z&t=1

http://quote.morningstar.com/stock/s.aspx?t=art

http://www.morningstar.com/topics/stocks/artio-global-investors.htm

 

"Despite its strong investment track record, Artio's shareholder structure leaves much to be desired."

 

http://seekingalpha.com/article/320555-artio-global-outflows-are-you-trend-agnostic

http://seekingalpha.com/article/162740-julius-baer-s-artio-global-investors-to-price-ipo-this-week

http://www.gurufocus.com/news/186661/latest-picks-from-markels-tom-gayner-buys-adm-art-brka-dell-mon-has-brp

[PlanMaestro]

I think you nailed it:

 

* AUM dropping like a stone

* Main funds underperforming

* Lack of diversification levered to global equities (Europe)

 

They have been reluctant to adjust the cost structure to the new reality. It is one of those stocks that might be interesting to wait in case of a European crash, that they might survive. Now, if you think that European equities might be set for a big rebound and like the margin of safety of no debt, cash, and a cost structure that can adjust ...

 

Might be interesting to revisit what Morningstar says of those funds.

 

From 2011:Staff Reductions Expected to Result in Estimated Annualized Expense Savings of Approximately $10 Million

http://ir.artioglobal.com/phoenix.zhtml?c=219917&p=irol-newsArticle&ID=1608949&highlight=

 

Fund Manager Hits a Rough Patch

http://online.wsj.com/article/SB20001424052702304868004577378241983891180.html

 

Since then, the money manager has fallen on hard times, as clients have pulled out assets and as its two signature mutual funds, both with an international focus, delivered poor returns last year. The funds are reflective of the firm's overall international stocks strategy, which also includes managing accounts for institutional clients. [...]

 

The two mutual funds, Artio International Equity I and Artio International Equity II, have significantly underperformed their benchmark, according to investment-research firm Morningstar Inc., MORN -0.51% in part because the euro zone's sovereign-debt crisis roiled markets the past few years. But both funds have rebounded in the first quarter.

 

 

 

 

[Guest hellsten]

Alice Shroeder writes "Days of Easy Money Are Over for Fund Managers":

http://www.bloomberg.com/news/2012-01-19/days-of-easy-money-over-for-fund-managers-commentary-by-alice-schroeder.html

 

From the owners’ standpoint, all this has been fabulous. They work in a business that produces abnormally high profits and forgives incompetence, a rarity in modern capitalism.

 

funds are flowing furiously toward the largest managers because people want the tried-and-true, lest they wind up trusting another Bernard Madoff

 

Equity mutual funds lost $99 billion of assets in 2011, and $64 billion of that money went right back into exchange traded equity funds. This long-term trend is sucking assets out of mutual funds and jeopardizing their future.

 

IMHO, Alice is too negative about the future.

 

Martin Whitman on asset management business:

http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Marty%20Whitman/Profiles%20in%20Investin%20-%20Whitman.pdf

 

I discovered what a license to steal the mutual fund business was – it was like having your own toll booth on a bridge

 

The one thing I hate about the mutual fund business is that you don't control the cash flows.

 

Martin Whitman uses "tangible book value plus 2% of AUM" for calculating the buying price:

http://www.gurufocus.com/news/1169/martin-whitmans-cowardly-safeandcheap-way-to-invest

 

TBV is ~$3.2, so it seems you get a very decent margin of safety if you add 2% of AUM.

 

$20 billion*2% = $400 million.

 

Artio's 2003-2012 average AUM is $40 billion:

7.5 2003

21.6 2004

34.9 2005

53.5 2006

75.4 2007

45.2 2008

56 2009

53.4 2010

30.4 2011

19 2012

 

$40 billion*2% = $800 million.

 

Anyone have more details on why Whitman uses 2% and what it means in practice. Is it as simple as adding AUM*2% to tangible book value?

 

I also noticed Barel Karsan and Frank Voisin have been writing about Janus Capital, and Artio:

http://www.barelkarsan.com/2011/11/janus-is-cheap.html

http://www.barelkarsan.com/2012/01/investment-management-out-of-favour.html

http://seekingalpha.com/article/309249-janus-capital-group-when-the-wrong-metrics-create-a-value-opportunity

[Guest hellsten]

The World's 500 Largest Asset Managers (1999-2010):

http://www.towerswatson.com/assets/pdf/5707/PI500-Analysis-YE2010.pdf

http://www.towerswatson.com/assets/pdf/2942/PI500-Analysis.pdf

 

Since 1999:

- AUM CAGR for the top 20 was 7.2% vs 5.7% for the top 500

- market share for top 20 increased from 34.5% to 40.7%

- AUM CAGR of passive managers 12.7% vs top 500 5.7%

 

Did passive asset management become popular at the worst possible time? A time when markets have gone nowhere and when stock picking was profitable.

 

Anyway, the asset management business remains attractive to me. I'm just looking for the right stock(s).

 

BEN, FII and ART all look attractive.

 

BEN seems to be a stable stock. FII a bet on rising interest rates. ART a bet on international investing becoming more popular in the US, and ART turning around their funds.

 

I wonder what will happen when and if the ETF bubble bursts. Hopefully everyone will pile in to BRK, FFH, LUK, etc :D

[zippy1]

Anyone have more details on why Whitman uses 2% and what it means in practice. Is it as simple as adding AUM*2% to tangible book value?

I think this 2% comes from one of Whitman's shareholder letters where he mentioned that historically in M&A cases up to that point in time, the transactions were done at about 4-5% of AUM so 2% gives you the margin of safety. 

 

Not sure nowadays, the transactions are still being done at 4-5% of AUM or not, though.

[Guest hellsten]

Anyone have more details on why Whitman uses 2% and what it means in practice. Is it as simple as adding AUM*2% to tangible book value?

I think this 2% comes from one of Whitman's shareholder letters where he mentioned that historically in M&A cases up to that point in time, the transactions were done at about 4-5% of AUM so 2% gives you the margin of safety. 

 

Not sure nowadays, the transactions are still being done at 4-5% of AUM or not, though.

 

Thanks, that seems to be the case. I found this thread where valuation based on AUM is discussed:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/806hk-value-partners-group-limited/

 

MrB linked to a document that explains the details:

http://mercercapital.com/media/File/Understand%20the%20Value%20of%20Your%20Trust%20Company%20-%20Matthew%20R.%20Crow%20and%20Kristin%20C.%20Beckman.pdf

At one time, investment manager valuations were thought to gravitate toward about 2% of assets under management.

 

Understanding why such rules-of-thumb exist is a good way to avoid being blindly dependant on them. During periods

of consolidation, buyers often believe that the customer base of an acquisition candidate can be integrated with the acquiring firm’s existing managed assets to generate additional profits in line with industry expectations. So if the investment management industry is priced at, say, 15x earnings and profit margins are 20%, the resulting valuation multiple of revenue is 3.0x. If revenue is generated by fees priced at about 67 basis points of assets under management, then the implied valuation is about 2% of asset under management. Note, however, all the “ifs” required to make the 2% of AUM rule of thumb work.

…

In the alternative case, some companies achieve sustainably higher than normal margins which justify correspondingly higher valuations. But the higher levels of profitability must be evaluated relative to the risk that the margins are indeed not sustainable. Whatever the particulars, our experience indicates that valuation is a function of expected profitability, and is only indirectly related to level of business activity. So rules-of-thumb, if used at all, should be used with an appropriate level of discretion.

…

Of the three approaches to value, the market approach may be the most compelling due to the high availability of pricing data. The market approach can be accomplished in a number of ways, looking at the valuation multiples implied by outright sales of similar companies, or looking at the trading activity in shares of publicly held companies.

 

As expected the rule-of-thumb comes with a lot of ifs.

[north481]

Besides the valuation argument described, does anyone have an alternative explanation for Markel's Gayner taking his large position in Artio? 

 

And, with AuM falling to $19.7 billion - another $1.5 billion decline in July - what is a plausible plateau for AuM for Artio? 

[infinitee00]

Has anyone been following ART lately? The last few filings about compensatory bonuses for its CEO and CFO  in the event of a change in control and the addition of a director with background in private equity is very interesting. I am wondering if there could be a buyout offer soon.

 

Given the relentless drop in AuM during the last couple of years I can understand if there is a under-performance fatigue. Frankly, I don't see how being public is helping them at this point. I can imagine if there is a desire to go private and transform the business in the absence of public scrutiny. In fact, with management's ownership of ~20% of the company (plus another ~30%  if you count their parent company's stake ) they should not have too much trouble doing so, if they want.

 

 

 

 

[Palantir]

I wonder if this can be basis for a bullish view on BLK. Transition from active management to passive, BLK is the large scale, low cost provider.

[zippy1]

Has anyone been following ART lately? The last few filings about compensatory bonuses for its CEO and CFO  in the event of a change in control and the addition of a director with background in private equity is very interesting. I am wondering if there could be a buyout offer soon.

 

Given the relentless drop in AuM during the last couple of years I can understand if there is a under-performance fatigue. Frankly, I don't see how being public is helping them at this point. I can imagine if there is a desire to go private and transform the business in the absence of public scrutiny. In fact, with management's ownership of ~20% of the company (plus another ~30%  if you count their parent company's stake ) they should not have too much trouble doing so, if they want.

 

Wow! You are exactly right!  They are being bought out!

Artio Global Investors Inc. Enters into Agreement to be Acquired by Aberdeen Asset Management PLC

NEW YORK--(BUSINESS WIRE)--Feb. 14, 2013-- Artio Global Investors Inc. (NYSE: ART) (“Artio Global” or the “Company”), today announced that it has entered into an agreement and plan of merger (the “Merger Agreement”) with Aberdeen Asset Management PLC (“Aberdeen”), a global asset management firm listed on the London Stock Exchange, pursuant to which Aberdeen will acquire Artio Global for $2.75 in cash per share (the “Transaction”). The price represents a premium of approximately 34% over the closing price of Artio Global’s common stock as of February 13, 2013, and a premium of approximately 37% over the average closing price of Artio Global’s common stock during the 30 trading days ending February 13, 2013.

 

http://ir.artioglobal.com/phoenix.zhtml?c=219917&p=irol-newsArticle&ID=1785000&highlight=

[Guest hellsten]

Has anyone been following ART lately? The last few filings about compensatory bonuses for its CEO and CFO  in the event of a change in control and the addition of a director with background in private equity is very interesting. I am wondering if there could be a buyout offer soon.

 

Given the relentless drop in AuM during the last couple of years I can understand if there is a under-performance fatigue. Frankly, I don't see how being public is helping them at this point. I can imagine if there is a desire to go private and transform the business in the absence of public scrutiny. In fact, with management's ownership of ~20% of the company (plus another ~30%  if you count their parent company's stake ) they should not have too much trouble doing so, if they want.

 

Wow! You are exactly right!  They are being bought out!

Artio Global Investors Inc. Enters into Agreement to be Acquired by Aberdeen Asset Management PLC

NEW YORK--(BUSINESS WIRE)--Feb. 14, 2013-- Artio Global Investors Inc. (NYSE: ART) (“Artio Global” or the “Company”), today announced that it has entered into an agreement and plan of merger (the “Merger Agreement”) with Aberdeen Asset Management PLC (“Aberdeen”), a global asset management firm listed on the London Stock Exchange, pursuant to which Aberdeen will acquire Artio Global for $2.75 in cash per share (the “Transaction”). The price represents a premium of approximately 34% over the closing price of Artio Global’s common stock as of February 13, 2013, and a premium of approximately 37% over the average closing price of Artio Global’s common stock during the 30 trading days ending February 13, 2013.

 

http://ir.artioglobal.com/phoenix.zhtml?c=219917&p=irol-newsArticle&ID=1785000&highlight=

 

Interesting. The price is ~$165 million. AUM was $14.3 billion at end of 2012, which means they didn't even get 2% of that. I guess the owners and management were happy to have sold their shares to the public at $26.

 

One of the dangers of turnaround investing is that someone buys the company before the turnaround is complete (i.e. your investment thesis doesn't have time to play out), e.g. Dell. If you're unlucky the price is below what you paid, e.g. Southeastern Asset Management & Dell. I guess it could happen to SHLD, CHK, SD, etc.

[zippy1]

Has anyone been following ART lately? The last few filings about compensatory bonuses for its CEO and CFO  in the event of a change in control and the addition of a director with background in private equity is very interesting. I am wondering if there could be a buyout offer soon.

 

Given the relentless drop in AuM during the last couple of years I can understand if there is a under-performance fatigue. Frankly, I don't see how being public is helping them at this point. I can imagine if there is a desire to go private and transform the business in the absence of public scrutiny. In fact, with management's ownership of ~20% of the company (plus another ~30%  if you count their parent company's stake ) they should not have too much trouble doing so, if they want.

 

Wow! You are exactly right!  They are being bought out!

Artio Global Investors Inc. Enters into Agreement to be Acquired by Aberdeen Asset Management PLC

NEW YORK--(BUSINESS WIRE)--Feb. 14, 2013-- Artio Global Investors Inc. (NYSE: ART) (“Artio Global” or the “Company”), today announced that it has entered into an agreement and plan of merger (the “Merger Agreement”) with Aberdeen Asset Management PLC (“Aberdeen”), a global asset management firm listed on the London Stock Exchange, pursuant to which Aberdeen will acquire Artio Global for $2.75 in cash per share (the “Transaction”). The price represents a premium of approximately 34% over the closing price of Artio Global’s common stock as of February 13, 2013, and a premium of approximately 37% over the average closing price of Artio Global’s common stock during the 30 trading days ending February 13, 2013.

 

http://ir.artioglobal.com/phoenix.zhtml?c=219917&p=irol-newsArticle&ID=1785000&highlight=

 

Interesting. The price is ~$165 million. AUM was $14.3 billion at end of 2012, which means they didn't even get 2% of that. I guess the owners and management were happy to have sold their shares to the public at $26.

 

One of the dangers of turnaround investing is that someone buys the company before the turnaround is complete (i.e. your investment thesis doesn't have time to play out), e.g. Dell. If you're unlucky the price is below what you paid, e.g. Southeastern Asset Management & Dell. I guess it could happen to SHLD, CHK, SD, etc.

I think the two principals realized that it would take quite a few years to turn around their international equity strategy I and International strategy II.

 

On the other hand, their bond strategies are do well and they are probably trying to sell before a down turn of bond market.

[PlanMaestro]

Interesting. The price is ~$165 million. AUM was $14.3 billion at end of 2012, which means they didn't even get 2% of that. I guess the owners and management were happy to have sold their shares to the public at $26.

 

One of the dangers of turnaround investing is that someone buys the company before the turnaround is complete (i.e. your investment thesis doesn't have time to play out), e.g. Dell. If you're unlucky the price is below what you paid, e.g. Southeastern Asset Management & Dell. I guess it could happen to SHLD, CHK, SD, etc.

 

Yep, and that's a problem when there are owner managers. I prefer turnarounds where previous management has been ousted. However I would disagree that ART was turning in any sense of the word. It was more of a Graham stock.

[infinitee00]

Ah! Someone posted this before me  :D Thanks Zippy.

 

It feels great when a hunch turns out to be right and I can profit from it. Frankly I was expecting $2.5, so $2.75 is better. Btw, their latest outflow report seems to have slowed so they may indeed be on the cusp of a turnaround and their JETAX fund seems to be doing better lately.

 

 

 

 

[infinitee00]

 

Interesting. The price is ~$165 million. AUM was $14.3 billion at end of 2012, which means they didn't even get 2% of that. I guess the owners and management were happy to have sold their shares to the public at $26.

 

One of the dangers of turnaround investing is that someone buys the company before the turnaround is complete (i.e. your investment thesis doesn't have time to play out), e.g. Dell. If you're unlucky the price is below what you paid, e.g. Southeastern Asset Management & Dell. I guess it could happen to SHLD, CHK, SD, etc.

 

As you pointed out in an earlier post that the 2% "comes with a lot of ifs". Frankly I don't think ART should command 2% since majority of the funds assets now are in bonds - management fees of which are lower as % of AuM than for stocks. They are getting 1.25% of AuM. I would have personally liked it to be higher but I think it is a decent offer.

[Guest hellsten]

 

Interesting. The price is ~$165 million. AUM was $14.3 billion at end of 2012, which means they didn't even get 2% of that. I guess the owners and management were happy to have sold their shares to the public at $26.

 

One of the dangers of turnaround investing is that someone buys the company before the turnaround is complete (i.e. your investment thesis doesn't have time to play out), e.g. Dell. If you're unlucky the price is below what you paid, e.g. Southeastern Asset Management & Dell. I guess it could happen to SHLD, CHK, SD, etc.

 

As you pointed out in an earlier post that the 2% "comes with a lot of ifs". Frankly I don't think ART should command 2% since majority of the funds assets now are in bonds - management fees of which are lower as % of AuM than for stocks. They are getting 1.25% of AuM. I would have personally liked it to be higher but I think it is a decent offer.

 

Yes, 1.25% seems like a decent price as there was no turnaround in sight. Glad you made a profit on this. Two board members were proven right on the same day (on Heinz and Artio).

[kcipper1]

Cash and seed capital increased by $8.2 million to $135.6 million in the fourth quarter of 2012, equivalent to $2.26 per share outstanding