Boring Portfolio

Looking at UAM
Funds Cash Cow

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (June 28, 1999) -- United Asset Management (NYSE: UAM) is a company that has been on the radar since the day Alex and I took over this portfolio last year. I've done zero work on it, but we're going to change that starting this week.

UAM is a holding company that was formed in 1980 to acquire investment advisory firms. Owing to a heavy load of acquisitions over the years, assets under management have grown to $195.8 billion, as of the end of Q1.

Assets under management at year end ($ in billions)

  • 1998 $201.4
  • 1997 $197.5
  • 1996 $171.0
  • 1995 $151.6
  • 1994 $111.5
  • 1993 $106.1
  • 1992 $90.2

The company operates as a capital allocator and strategic center, but allows its affiliated firms to operate pretty autonomously. Many of its affiliates are institutional managers, but investors will likely recognize Pilgrim Baxter, with $13.1 billion in assets under management as of the end of 1998. Unfortunately, this is where some of the problems lie, as hot money that flowed into PBHG funds following excellent performance earlier in the decade has flowed out. According to, fund outflows this year have reached $1.3 billion and totaled $2.2 billion in 1998. A lot of people have made a big deal of this, but that's just part of the business. You get hot and you attract the hot money. You don't die if you cool off, only if you handle it wrong. From what I've heard, the company hasn't exactly handled everything right, but I think to portray it as a snake-bitten firm is rash assessment.

For the year, net change in assets under management (AUM) came from the following:

     ($ in billions)

 $197.5   beginning AUM
+ $21.2   billion investment performance
 + $2.5   acquisitions
- $19.8   net client outflows
 $201.4   ending AUM
Despite the negative stories on the company and the direction of cash flows over the last couple of years, it's a very strong cash generator. Part of the challenge in looking at a company such as this is figuring out what sort of return on investment the company is getting out of its disbursements of capital over the course of the years. You can look at it a couple different ways, but the statement of earnings really isn't that helpful in getting to the most meaningful return on investment and cash flow conclusions on this company.

Last year, for instance, net income was $78.51 million while net cash flow from operations was $212 million. Somewhere between the net income and net cash data, you'll get some major clues on the continuing cash flow generation ability of a company, and that's particularly true here. The major expense representing the consumption of assets on the books is "amortization of costs to contracts acquired," which are basically the intangible assets that come along with the purchase of affiliated firms.

In any case where there are intangibles and attendant amortization, one has to ask if the amortization of the intangibles represents true consumption of assets that must be replaced with new spending. Within the context of a runoff in client assets over the last year, that's been somewhat tough to identify straight from the cash flows, but the thesis that I would proceed with from here is that there's no reason for a company such as this to have to replace these intangibles with new spending. In other words, there is no concurrent reduction in the earning power of affiliate firms and the holding company that goes along with the amortization of contracts acquired.

Therefore, on trailing net income of $70.08 million and EPS of $1.16, I add back $112.6 million in amortization of contracts. That's cash income of $182.63 million on 60.4 million shares for the last 12 months, or $3.02 per share. At $21 1/2, we're starting with a very interesting multiple to cash-based EPS.

Of course, that's not always the entire story, so we'll proceed from there on Wednesday. I welcome your comments on the Boring Portfolio board.

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06/28/99 Close
Stock Change   Bid
APCC  +  11/16 21.56
BRKb  -9       2220.00
CSL   +  5/16  48.63
GTW   -  3/8   60.75

                  Day     Month   Year  History
        BORING   +0.33%   0.39%   4.93%  40.90%
        S&P:     +1.22%   2.27%   8.89% 122.04%
        NASDAQ:  +1.95%   5.34%  18.68% 150.00%

    Rec'd   #  Security     In At       Now    Change
  8/13/96  200 Carlisle C    26.32     48.63    84.71%
  4/20/99  460 American P    14.48     21.56    48.95%
 12/31/98   12 Berkshire   2276.17   2220.00    -2.47%
   2/9/99  100 Gateway 20    72.38     60.75   -16.06%

    Rec'd   #  Security     In At     Value    Change
  8/13/96  200 Carlisle C  5264.99   9725.00  $4460.01
  4/20/99  460 American P  6659.25   9918.75  $3259.50
 12/31/98   12 Berkshire  27314.00  26640.00  -$674.00
   2/9/99  100 Gateway 20  7237.50   6075.00 -$1162.50

                             CASH  $18091.65
                            TOTAL  $70450.40