Brookfield Asset Management - Value AND Growth Investing!

Value and Growth Investing can be achieved by holdings positions in Brookfield Asset Management (BAM) and its various limited partnerships.

Summary

  • Brookfield Asset Management helped launch Brazil’s first electrical and transport utility in 1899 and listing it on the Toronto Stock Exchange in 1912.
  • BAM and its limited partnerships have $350B+ in assets under management, over 80,000 operational employees, and more than 100 offices in 30+ countries.
  • BAM and its limited partnerships have just recently reported strong Q4 and FY2018 financial results.
  • Invest along with the world’s largest institutional investors, sovereign wealth funds and individuals who entrust BAM to generate attractive investment returns.
  • Combined, BAM and its limited partnerships are currently my 19th largest holding but I will be increasing its ranking with the passage of time.

Introduction

On occasion before someone subscribes to my site, I am asked whether I am a Value or Growth investor.

I can’t say that I really fall in either camp. When I look at our (my wife and me) holdings I am of the opinion that I have succeeded in creating a portfolio which generates more than ample income to finance our lifestyle in retirement before we remotely consider collecting pension income in 10 years. At the same time, however, I have created a portfolio which consists of several companies with significant growth potential.

I recognize there are many investors who will gravitate to higher dividend yielding companies and in some cases a company with a sub 4% dividend yield is of no interest to them. Such is not the case with me.

An investment portfolio comprised of stocks with a lofty dividend yield has no appeal to me. In fact, I typically view an abnormally high dividend yield as a ‘red flag’. Far too often I read articles in which a blogger has disclosed a position in ‘such and such’ a company. When I look at the company’s financial statements, however, my heart skips a beat. In some cases it is clearly apparent that the company’s dividend or distribution is unsustainable over the long-term and a permanent impairment to an investor’s capital is a strong possibility.

In fact, I wrote an Owens & Minor (OMI) article in which I indicated why I would never invest in such a company. I fully recognize my article would have been more beneficial to readers if it had come out before the dividend cut but OMI was not/is not a company I follow closely and I can only write so many articles; I prefer to focus on better companies. The reason I wrote about OMI is because another highly followed blog had OMI on its recommended list and I received an email from that blog.

Holdings Overview

While it certainly is nice to generate dividend income I think far too many investors focus on dividend yield. While a company’s dividend and dividend yield are ‘nice to know’ I think investors should focus on the underlying performance and financial strength of a company and the company’s competitive advantages.

In this regard I have endeavored over the years to invest in companies where I have a high degree of confidence that I will not get any nasty surprises. I have not been correct 100% of the time but my losses over the past 30+ years of investing are negligible.

One of my duds was General Electric (GE). In my October 23, 2017 article to subscribers I wrote:

The vast majority of our holdings have experienced double/triple digit growth. GE, however, is an exception even when I take into consideration:

  • the automatic reinvestment of all dividends (even during the 2009 – 2011 timeframe);
  • additional share purchases I made at the height of the Financial Crisis;
  • some option premium income I generated over time by writing covered calls.

In fact, if I take into consideration the time value of money I am slightly underwater.

Thankfully I sold my shares at $23.42 because GE’s stock price has been pretty much downhill after that sale.

Despite the occasional dud, our investment holdings have performed reasonably well. Having said this, I recently listened to an interview in which Hamish Douglass, Co-Founder, Chairman and Chief Investment Officer of Magellan Financial Group, and Lead Portfolio Manager of Magellan’s Global Equity strategies in Australia discussed the art of investing in international equities and shared 6 simple guiding principles for investors wanting to gain exposure to international equities.

After listening to this interview I decided to undertake a review of all our holdings. The timing was perfect since I had undertaking a similar review almost to the day in 2018.

I shared the outcome of my analysis in my recent ‘A Great Investment Portfolio Example of Diversification’ article. In that article I listed our top 30 holdings which comprises 98.39% of our total holdings. I am reasonably confident you will recognize most, if not all, our holdings listed in that article. Within that list of companies you will find value and growth companies.

In preparation for this article I have ranked all our holdings on the basis of current dividend yield. At one end of the scale we have Berkshire Hathaway (BRK.b) which pays no dividend.

Next we have growth companies with a sub 0.7% dividend yield (Visa (V) and Mastercard (MA)). These companies are our first and eighth largest holdings, respectively.

At the other extreme we have value stocks with yields in excess of 6.1% (AT&T (T), Enbridge (ENB), Brookfield Property Partners LP (BPY), and Brookfield Renewable Partners LP (BEP)). I view T and ENB as value companies. While the two Brookfield companies are high dividend yielding stocks because the mandate of these Limited Partnerships is to disburse a high component of funds from operations, I would view those two stocks as more of a hybrid between value and growth.

T and ENB do not fall within our top 30 holdings. The two Brookfield entities reflected above, however, when lumped together with our Brookfield Asset Management (BAM) and Brookfield Infrastructure Partners (BIP) holdings form our nineteenth largest holding.

We currently only hold just over $100,000 invested across the following entities:

  • Brookfield Asset Management
  • Brookfield Property Partners L.P.
  • Brookfield Renewable Partners L.P.
  • Brookfield Infrastructure Partners L.P.

but I fully intend to grow our Brookfield exposure. NOTE: We have not yet invested in Brookfield Business Partners L.P. (BBU).

This brings us to the subject matter of this article: The Brookfield Group of Companies.

Brookfield Overview

The BAM conglomerate is enormous and it can be somewhat daunting to absorb all the information at once.

A 1.5 minute video which provides a very high level overview of the Brookfield group of companies can be found here.

If you do, however, have 53 minutes to spare and are interested in learning about BAM, I very highly recommend you listen to Bruce Flatt’s (BAM’s CEO) Durable Principles for Real Asset Investing presentation at Talks at Google.

If, after listening to Bruce Flatt, you wish to obtain more information you may wish to listen to and view the presentations from BAM’s September 26, 2018 Investor Day. This is far more time consuming but after personally having listened to and viewed all the presentations I have gradually acquired a few thousand extra shares/units in the various BAM entities.

Perhaps the best Letter to Shareholders comes from none other than Warren Buffett, Chairman and CEO of Berkshire Hathaway; Berkshire Hathaway is our eighteenth largest holding. His letters, while lengthy, are clear and concise and give shareholders a good idea of how the various entities within the Berkshire Hathaway family of companies are performing. If you have not read any of his Letters to Shareholders I encourage you to do so.

Bruce Flatt’s (CEO of BAM) Letters to Shareholders, in my opinion, rank up there with the best of the best. I encourage you to read his 2017 and 2018 Letter to Shareholders if you want to get a great overview of this leading global alternative asset manager with over $350B of assets under management and $138B in fee bearing capital as at FYE2018.

You want an impressive conglomerate? Just look at these 2018 Full Year Highlights.

BAM - 2018 Full Year Highlights

Source: BAM – Q4 and FY 2018 Supplemental Information

I provide a link to each Brookfield entity's Q4 and FY2018 Earnings Release:

If you are unfamiliar with BAM, they essentially raise private and public capital from the world’s largest institutional investors, sovereign wealth funds and individuals, with a focus on generating attractive investment returns that will allow investors and their stakeholders to meet their goals and protect their financial future. In essence, you have very serious players with very serious money who are entrusting BAM with their money for the long-term.

In addition to its asset management activities, BAM invests significant capital from its balance sheet in its managed entities (see list of L.P.s above) alongside its clients thus creating an important alignment of interests. This is referred to as BAM’s Invested Capital and it totals ~$40B prior to leverage.

I recognize it may seem daunting to look at a company’s Annual Report and, for many, reading an Annual report might be like reading Chaucer’s Canterbury Tales. If you fall in this camp, don’t go straight to the financial statements. Read about the business, the regions in which they operate, the types of investments they make, etc.. NOTE: My apologies if I have offended anyone by comparing BAM’s Annual Report to Chaucer’s book. It is just that I had to read this book in grade 10 and I literally had no idea what the heck I was reading. Needless to say, I performed very poorly when tested on what we had learned from reading the book. (There are some meaningless things in life I just never forget).

I Am Increasing My Exposure To Brookfield

If you are inclined to pass on reading BAM’s Annual Report you might be inclined to pass on BAM as an investment. Before you do so, please read my November 8, 2018 Brookfield article.

If you access the Archives section of this blog and perform a ‘Brookfield’ search you will find various BAM articles; there are additional BAM articles in which access is restricted and will only appear if you are a subscriber to this blog. In addition, I referenced BAM in my January 18, 2017 Low or No Dividend Yield Companies Belong in Your Portfolio.

I have approached our investment in the BAM companies from the perspective that this is how I can invest in alternative assets. In addition, I do not have the expertise to take a struggling company and doing what needs to be done to turn a lump of coal into a diamond.

I also figure that if the world’s largest institutional investors, sovereign wealth funds and individuals are prepared to entrust BAM to invest their money wisely to generate attractive returns then it behooves me not to invest in BAM for a similar reason.

I do not invest in a company for the short-term and my holding period in the vast majority of cases is forever. This holding period is ideal if you are interested in investing in BAM. The reason is that while BAM has a track record of turning around underperforming assets for subsequent resale in the future, this is a process which takes time and money. You must, therefore, be a patient long-term investor.

BAM, however, has been revitalizing assets for many years and has reached the stage where every year there are businesses it can sell for several times the value of its investment.

While BAM has indicated there are competitors larger than itself, not all these competitors have the same level of expertise to rejuvenate a struggling company.

Interestingly, in Bruce Flatt’s February 14, 2019 Letter to Shareholders he states:

‘Despite competitive conditions for most of 2018, we acquired a number of businesses that should do very well over the longer term. More importantly at this point in the cycle, each has inherent defensive protections. This is important as it is likely we will own all of these businesses through the next downturn

Each one of these acquisitions is different but they all have one or more of the following in common: they are large in size and therefore the competition was limited; they are diverse in nature so many cannot participate due to their limited global reach; or they require significant operational enhancements to generate value – this is where our 100,000 operating team members come in. While none of the above guarantees success, we have found that by relentlessly focusing on these competitive advantages, the odds favor a greater chance of success.’

In Which Brookfield Entity Should You Invest?

I am in agreement with Bruce Flatt’s comment in his 2018 Letter to Shareholders that investors should invest in all BAM entities. Please read that letter starting on page 4 of 8 for his explanation.

Dividends and Dividend Yield

Since the dividend aspect of an investment is extremely important to many investors I would be remiss in not including a brief section on this topic.

  • Brookfield Asset Management Inc. - its quarterly dividend history can be found here. Details of BAM’s 3 for 2 stock split in 2015 can be found here.
  • Brookfield Property Partners L.P. - its quarterly distribution history can be found here.
  • Brookfield Infrastructure Partners L.P. - its quarterly distribution history can be found here.
  • Brookfield Renewable Partners L.P. - its quarterly distribution history can be found here.
  • Brookfield Business Partners L.P.  - This is a relatively new LP and its first $0.0625 quarterly distribution was in September 2016. Subsequent to this distribution, the quarterly distributions have remained at the same level.

Final Thoughts

Looking at my historical records I see that I became a BAM shareholder on February 18, 2009 which is EXACTLY 10 years ago from the date of this article. My first BAM purchase was 130 shares @ CDN $16.86/share!

I have watched BAM evolve over the years and I fully agree with Bruce Flatt’s comments in his 2018 Letter to Shareholders under the ‘The 50-Year Infrastructure Runway’ and ‘Alternatives Cannot be Replaced by ETFs’ sections of his letter. This is why I am gradually increasing my exposure to the BAM entities.

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, BRK.b, T, ENB, V, and MA. 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.