With the exception of traditional retailers, there may not be a more contrarian move than to bet on alternative asset managers. They have been reviled in the media, not necessarily undeservedly so, for high fees and under performance relative to indices.
Add to that, somewhat opaque business models with sector-specific jargon (valuing hamburger joints is more straightforward than a multi-pronged revenue stream with management and incentive fees, stakes in external companies, and co-investments), and it’s no surprise that many alternative managers trade at depressed multiples.
But don’t make the mistake of leaving active managers for dead.
These three picks will give you exposure to not only top notch financial minds at a discount to NAV but also growing funds with sticky asset bases from which to continually generate fee income. Sentiment is cyclical, and when that reverses you’ll want to hold shares of each.
Top Active Managers: Oaktree Capital Group (OAK)
Howard Marks may no longer run the day-to-day at Oaktree Capital Group LLC (NYSE:OAK), but his very sensible investment philosophy still permeates the organization. OAK continues to be very strong in areas that I would consider specialty finance, simply meaning that which is outside of pure stocks and basic vanilla corporate debt — namely distressed debt, though they have logically branched out into adjacent strategies.
Oaktree has demonstrated an opportunistic mindset, being patient when others are panicky. Early last year, when the market showed signs of strain, albeit brief, they had $22 billion in dry powder ready to pounce. The market bounced back, but OAK’s restraint and almost counter-cyclical discipline proved again that they are very deliberate — ideal for those wary of the current environment of ever-rising valuations.
Between the net cash balance, principal investments that OAK makes alongside LPs, fees from a very sticky capital base, and the 20% stake in Doubleline, a fixed income manager, a share of OAK gives investors exposure to both an undervalued fund relative to imputed NAV and new asset classes that Oaktree has significant expertise in.
Top Active Managers: Pzena Investment Management (PZN)
Pzena Investment Management, Inc. (NYSE:PZN) is as pure as you get in closed-end value funds. It has fewer moving parts than Oaktree, too, so it’s easier to parse through.
Assets under management have been growing steadily in the pre-2007 IPO. Returns in the 1995 to 2007 IPO duration amounted to 16.2% year-over-year, trouncing the 9.2% S&P 500 performance. So, very impressive overall.
But then the crisis hit, and PZN was overweight financials and got clobbered. AUM dipped from a 2007 figure of over $23 billion to $13.5 billion in 2011. Since then, Pzena has gotten mandates and despite a really tough environment for value funds, as of the end of this April, assets came to $32.3 billion.
Given the simplicity of PZN’s business model, you can run the figures easily yourself. Based on AUM of $32 billion, average fees of 0.4%, a 50% pretax margin, and a 13x multiple (keep in mind asset managers once traded in the 20x range), that gets to a conservative $12/share, or roughly 30% upside from here.
Top Active Managers: Pershing Square Holdings Ltd (PSH)
The very public debacle with the Valeant Pharmaceuticals Intl Inc (NYSE:VRX) investment may understandably keep you at arm’s length from Pershing Square Holdings Ltd. (Hey, not every pick is going to be a winner).
What’s clear though is that with PSH stock up 8% YTD, both the market and yours truly still have faith in Bill Ackman. He still runs a tight ship at Pershing Square and continues to generate strong long and short ideas, allocating capital accordingly.
His long positions in Mondelez International Inc (NASDAQ:MDLZ), Restaurant Brands International Inc (NYSE:QSR) and Chipotle Mexican Grill, Inc. (NYSE:CMG), to name a few, are rigorously thought through and the new position in Howard Hughes Corp (NYSE:HHC) is no different. Ackman has not slowed down.
Even accounting for gains in the first half of the year, PSH stock still trades at a significant discount to NAV. Again, this is understandable given negative returns the past couple of years. Many will argue that closed-end funds traditionally trade at a discount to NAV with some exceptions like Berkshire Hathaway Inc. (NYSE:BRK.B), so why would PSH deserve to even have that discount to NAV decrease?
Better liquidity and a track record of outperformance separate PSH from the normal closed-end fund, and once Ackman continues to deliver, the stock should re-rate at a much lower discount in the single digits.
Pershing also is taking steps to support share price with the commencement of a buyback program for up to 5% of shares outstanding, showing investors its commitment to having the stock trade at a more reasonable discount between share price and NAV, and perhaps eventually at a premium.
There’s just one caveat with this last pick: Pershing Square trades as PSH on the Amsterdam Stock Exchange, requiring your brokerage account to have access to international exchanges.
As of this writing, Luce Emerson was long PZN.