Oaktree Gains Since Branching Out

With the increased volatility as of late, it is easy to get caught up in the minutia of the daily market machinations. Yet be sure to set aside time for finding and studying new public companies that are carving out their own niche during difficult times.

In that vein, let’s take a quick look at Oaktree Capital Group (OAK), a global investment management firm that focuses on alternative approaches and has been around since 1995 but didn’t go public until 2012. It struggled much of last year, but is one of the few stocks to advance so far in 2015.

Oaktree now has more than 700 employees and 21 portfolio managers throughout the world.

Oaktree was founded by a group of investment professionals including the legendary Howard Marks and Bruce Karsh, who had worked together for over a decade with TCW Group managing high-yield bonds, convertible securities, and distressed debt. They decided to branch out and start their own firm, which now consists of more than 700 employees and 21 portfolio managers throughout Los Angeles, London, New York, Hong Kong, and several other global hubs.

Howard Marks has been chairman since the beginning, after leading the distressed debt and high yield bonds groups at TCW for a decade. Prior to that he was with Citicorp Investment Management for 16 years. Meanwhile Bruce Karsh serves as president and chief investment officer after serving as managing director of TCW Asset Management Company.

The firm’s growth has been phenomenal, as their client list now includes 100 of the 300 largest global pension plans, 75 of the 100 largest U.S. plans, over 300 endowments and foundations, and 40 of the 50 primary state retirement plans in the country.

Oaktree’s strategies are broken into six categories: Corporate Debt, Convertible Securities, Distressed Debt, Control Investing, Real Estate, and Listed Equities. Additionally, these strategies are offered to investors across three platforms: Open-End funds, Closed-End funds, and Evergreen funds.

The closed-end funds represent the largest platform, totaling over $50 billion in assets under management and accounting for three quarters of Oaktree’s management fee revenue. These are not funds in the traditional sense, but are more akin to private equity funds in that they have 10-year capital lock-up periods and include 20 percent incentive fees. The star of this platform is the firm’s distressed debt offerings.

Oaktree is primarily known for its expertise with distressed debt as a result of its impressive track record that dates back to TCW. The firm has used a differentiated contrarian based investment philosophy that has seen it raise $40 billion of capital for that part of the business over the past decade — double that of its next closest competitor.

According to Bruce Karsh, the firm “favors large, fundamentally sound companies that are overleveraged where we can assume a leadership role in the financial restructuring process.” As you can see, identifying opportunities is just a small part of Oaktree’s success, one that can probably be replicated by other investment firms. The experience that comes with leading these companies back to good health is where the firm differentiates itself from its peers.

The next biggest platform is the firm’s open-end funds, which total nearly $30 billion in assets under management and account for 20 percent of its management fee revenues. These are structured similarly to mutual funds, in that they have short term capital lock-ups of 30 days and average fees of 0.45 to 0.50 percent.

This group consists of high yield bonds, convertibles, and senior loans in the U.S. and Europe. The flagship however is the U.S. High Yield Bond strategy, which is the longest running one at the firm, averaging a 10 percent gross annual return since 1986.

The last platform is the group’s smallest at just over $2 billion in assets, Evergreen Funds. It consists of an emerging markets absolute return fund and a value opportunities fund, and are a bit of a mix between its closed-end and open-end fund offerings.

According to an analyst at Bank of America research, the company owes its decades of success to its numerous deal sourcing advantages, rigorous credit research, ability to attract the best talent, and its contrarian approach. An example: The firm invested aggressively during the peak of the financial crisis at a rate nearly double that of the rest of the domestic private equity firms combined.

Since going public, shares of OAK are up about 40 percent. Despite the advance, the company is still trading at just 13 times earnings, well below its peers, while sporting a 5 percent annual dividend yield. This one is worth taking a long hard look at as you would be hard-pressed to find any other firm in the world that is as efficient and successful at this lucrative niche of asset management than Oaktree.

Best wishes,

Jon Markman