Brookfield Asset Management - Value AND Growth Investing!

Brookfield Asset Management Inc. (BAM.a) (BAM) held its Investor Day on September 26th at which time management stressed now is the time to be even more cautious than usual. With the recent acquisition of 61.2% of Oaktree Capital Management, BAM is now positioned to capitalize in a distressed environment.

Management also indicated that conditions are such that significant growth in alternative assets is projected over the next several years as sophisticated investors are increasingly attracted to the potential returns which can be generated. BAM is ideally positioned to benefit from this projected growth.

Summary

  • Brookfield Asset Management held its 2019 Investor Day on September 26th
  • The acquisition of 61.2% of Oaktree Capital Management, which has an enviable track record of generating superior investment returns in distressed assets, was completed late September.
  • We are in the early stages of the bulk of the infrastructure backbone of the global economy being transferred into private hands from the public sector. This should translate into an opportunity of many tens of trillions of dollars over the next 50 years for the private sector.
  • Sophisticated investors are increasing their allocation to alternative assets and BAM is positioned to benefit from this growth.
  • Free Cash Flow is expected to grow significantly and steadily and in the absence of something more beneficial, cash will be increasingly returned to shareholders through increased share buybacks (management’s preferred choice) or increased dividends.

Introduction

In several articles I have expressly stated that I am attempting to increase long-term wealth without assuming an unreasonable level of risk. In order to achieve my investment goals and objectives I have identified several high quality companies in which I am prepared to be ‘overweight’. I view the Brookfield Asset Management (BAM.a) (BAM) group of companies to fall within this ‘overweight’ group; in my February 18, 2019 article I indicated that I fully intended to increase my exposure to the BAM entities over time.

The underlying BAM Limited Partnerships provide investors with superior dividend yield/quarterly dividend income than BAM; BAM is better suited for investors seeking long-term investment returns primarily in the form of capital gains. In this article, I focus on BAM which is at the ‘top of the house’.

You may also wish to read this article if you are wondering in which BAM entity to invest.

2019 Investor Day

While many readers may be familiar with BAM to some extent, I provide the following snapshot which provides an indication as to the size and scope of the organization.

On September 26th, the BAM group of companies held its 2019 Investor Day. The presentation made by senior management of each BAM entity can be found here.

The BAM presentation was the first of the five presentations. Prior to the BAM presentation, however, investors had the opportunity to listen to an interview with Howard Marks, Director and Co-Chairman of Oaktree Capital Management, L.P.. Mr. Marks is one of the world’s best distressed investors and just recently, BAM completed the acquisition of ~61.2% of Oaktree’s business.

I have touched upon Mr. Marks’ extraordinary success as an investor and in this early August 2019 article I encouraged readers to read the following books he authored: ‘The Most Important Thing Illuminated’ and ‘Mastering The Market Cycle’.

During the interview, Mr. Marks stated that the 2 main risks are:

  • The risk of losing money
  • The risk of missing opportunity

While some may view volatility as a risk, Mr. Marks defines risk as a permanent loss of capital rather than volatility.

Mr. Marks stressed the importance of properly positioning capital for the future. This entails the emphasis on, and adherence to, strong risk control and consistency. In fact, in February 2007, Mr. Marks penned a memo to Oaktree Clients entitled Race to the Bottom. I highly recommend you read this memo in which you will gain some understanding of how Mr. Marks and his Oaktree team members approach investing.

Following the ‘fireside’ chat with Mr. Marks, Bruce Flatt, CEO of BAM, reiterated that the acquisition of a majority stake in Oaktree rounds out BAM in that the skill set of the Oaktree team will enhance BAM’s ability to wrest profitability from bad times.

Interestingly, both Mr. Flatt and Mr. Marks stressed that now is the time to be careful and to be even more cautious than usual. While BAM could have created its own team of experts to acquire and manage distressed assets, it would have very likely taken several years to develop scale. By acquiring Oaktree BAM has positioned itself to take advantage of opportunities immediately; there is an expectation that an increasing number of attractive distressed asset opportunities will arise in the not too distant future.

Four global risks were highlighted as the reason for heightened caution and why it is expected that there will be an increasing number of attractive distressed asset opportunities in the not too distant future:

  • European rates are upside down;
  • A few technology companies represent a large proportion of markets;
  • Currency wars could be disruptive;
  • Political extremes are everywhere.

Given the risks noted above, BAM (this includes Oaktree) is of the opinion there are two key consequences in the current environment. The first is that asset values are rising and the second is that the allocation to alternative investments is rising.

The allocation to alternative assets is highly likely to accelerate because investors have no alternative. In fact, BAM’s estimate of target allocation to real assets/alternatives by 2030 is ~$25 TRILLION! It is for this reason that BAM’s investment in Real Assets/Alternative Assets will likely increase from 40% to 60% by 2030.

The anticipated growth in real assets/alternatives is where the acquisition of Oaktree fits into BAM’s long-term strategy. Oaktree brings to the BAM franchise the following:

  • World class management team;
  • Scaled credit expertise;
  • Counter-cyclical fundraising strategy;
  • The ability to deliver scaled credit products.

At the beginning of Mr. Flatt’s portion of the BAM investor presentation he explained why BAM is poised to thrive in the coming years and provided investors with 4 key takeaways which can be found on pages 6 -9.

If what I have presented above, and in previous BAM articles found on this site, piques your interest then I very highly encourage you to review the entire BAM 2019 Investor Day presentation in which a considerable amount of additional information is provided; this includes a Financial Review by Brian Lawson, Managing Partner & CFO.

Final Thoughts

Given that exposure to the BAM entities within disclosed and undisclosed accounts is gradually increasing to the extent where it will soon become a Top 10 holding, it is clear that I view BAM very highly.

I abhor mutual funds and do not employ the use of ETFs nor do I invest in fixed income instruments

as part of my investment strategy; I invest solely in common shares of high quality companies. By investing in the BAM entities I get exposure to multiple businesses which adhere to BAM principles. So, for argument sake, my BAM exposure can be viewed as an ‘ETF’. In fact, my investment in Berkshire Hathaway (BRK.b) is also pretty much an ‘ETF’!

In my opinion BAM has developed an enviable track record of success which enables it to attract billions of dollars from savvy sovereign and institutional investors. It is for this reason that I think BAM’s pool of capital for deployment will only continue to increase in the coming years….especially given the trends identified in BAM’s presentation.

While some may wish to debate the USD$141/share value projection found on page 79 of the BAM presentation, I am taking management’s projections at face value.

Even if BAM’s share price falls just short of the projected value, I don’t really care. My investment in BAM is not for the next 5 years but rather for a timeframe that far exceeds my lifetime.

I did not, therefore, dissect BAM’s projections before deciding to acquire another 300 BAM.a shares on October 3, 2019 at an average cost of CDN $67.13 for one of the ‘side accounts’ within the FFJ Portfolio.

I hope you enjoyed this brief post and I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long BAM.a, BPY, BEP, BIP, and BRK.b. The TSX listed shares/units are held in multiple accounts including several for which I do not disclose details.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.