The financial markets haven't been kind to investment managers lately, with greater volatility making it tough for companies to navigate turbulent market conditions. For Oaktree Capital (NYSE:OAK), the company's emphasis on alternative investments makes it even more important for it to look attractive to would-be investors seeking ways to diversify their overall investment exposure.
Coming into Friday's third-quarter financial report, Oaktree investors were optimistic that the company would see its sales and earnings jump dramatically. Oaktree largely delivered on its investors' hopes, and although some of the gains were attributable to changes in the way the company treats some of its investment funds, Oaktree still showed improvement in important operational metrics, as well. Let's take a closer look at what Oaktree Capital said, and what's ahead for the investment manager.
Oaktree makes a big leap
Oaktree Capital's third-quarter results were quite impressive on the surface. Segment revenue doubled, to $365 million, easily outpacing the $320 million consensus estimate among investors following the stock. Adjusted net income soared sixfold, to $162.1 million, and the portion attributable to the company's Class A units was $0.92 per unit. That was $0.25 higher than most shareholders had expected from the investment company.
One thing to keep in mind is that the company said that it had adopted new consolidation guidance in accounting for its results as of the beginning of 2016, and this resulted in the deconsolidation of nearly all of its investment funds that were previously consolidated into Oaktree's overall performance. In explaining the rise in segment revenue, Oaktree noted that management fees rose about 5%, or $8.5 million, while incentive income soared nearly sixfold, to almost $100 million. Investment income weighed in at $70.9 million, reversing a year-earlier loss.
Looking more closely at Oaktree's operating metrics, there was some more good news in the report. Assets under management climbed to $99.8 billion, down a fraction of a percentage point from year-ago levels, but up almost 2% over the past three months. Out of that figure, assets generating management fees totaled $78.7 billion, and assets creating incentives for managers amounted to $32.4 billion. Overlap between those two categories explains how the numbers added up to more than Oaktree's total assets under management.
However, not all the news was rosy. Over the past three months, net outflows from open-end funds totaled $1.2 billion, and the $2 billion in distributions that Oaktree made from its closed-end funds offset the $1.2 billion in capital inflows on the closed-end side of the business. It took sizable investment gains to produce the increase in assets under management.
CEO Jay Wintrob looked pleased about Oaktree's performance. "We delivered good results in the third quarter," Wintrob said, "primarily driven by strong investment returns and incentive income from realizations." The CEO also pointed to healthy increases in fee-related earnings that stemmed from management fees from closed-end funds and measures to control expenses.
What's ahead for Oaktree?
At the same time, Oaktree recognizes that things aren't just business as usual in the financial markets. "It's natural that a strong realization environment will not simultaneously offer plentiful bargains," said Wintrob, "and thus we're maintaining our 'move forward but with caution' investing posture." However, the CEO noted that Oaktree would take full advantage of any changing conditions in the investing environment if they occurred.
In addition, Oaktree still has plenty of financial flexibility if it wants to look at more strategic business moves. The company reported $1.1 billion in cash and short-term investment against about $800 million in debt, and it also said it had used none of its $500 million revolving credit facility.
Oaktree Capital shareholders were pleased with the results, sending the stock up 3% during the trading day following the announcement. If Oaktree can continue to navigate tough investment conditions well, then its business has every chance of sustaining growth trends well into the future.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Oaktree Capital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.