The truth is that great asset managers are not necessarily great asset management stocks. From private equity managers like Blackstone (BX) to distressed debt specialists like Oaktree Capital Group (OAK), legendary fund performance hasn't necessarily translated into legendary returns for shareholders of the management company. The reason? Employees, not shareholders, usually come first.
In this segment from Industry Focus: Financials, join The Motley Fool's Gaby Lapera and Jordan Wathen as they discuss why the best way to get rich with an asset manager is to work for them, not invest in them.
A full transcript follows the video.
This video was recorded on April 24, 2017.
Gaby Lapera: Question for you, Jordan. Would you invest in an alternative asset manager? Would you buy stock?
Jordan Wathen: Yes. But that comes with a very big caveat that I wouldn't invest in most of them. One of the problems with financial companies in general -- and this extends from banking to asset management to alternative asset management -- is that so many of them are actually run to maximize compensation for employees, rather than profits for shareholders. The shareholders are at the bottom, taking what's left over after everyone has taken their $2 million bonus. As an exception to that rule, the one that I'm most interested in, and I'm glad we talked about it today, was Oaktree. I generally like it as a business model. It's one of the few financial companies that gets better as the world gets worse, which is a nice diversification thing. Earlier this year, I put together a model for it, and I updated it prior to the show, valuing it in two pieces: the assets it owns and the business as it stands. I value it at about $53 per share, and I think that's kind of conservative. And it's a stock that, if it traded a little bit lower -- I had to make a lot of assumptions to get to that valuation -- but if it traded a little bit lower, I would be interested in it.
Lapera: Yeah. I actually also really like Oaktree, especially because the investor letters that they share are always really interesting; a lot of really interesting investment knowledge in there. I encourage listeners to go ahead and read those, they're a pretty valuable resource. As for me, if I would invest in alternative asset managers -- they're currently not for me right now, mostly because I have no money, so I can't actually invest in anything right now, not until I have a little bit more money. But even if I did have money, I think I'm more interested in other types of stocks right now. But I wouldn't rule it out as a future investment.
Wathen: I think timing is important, too. A company like Blackstone, which makes a lot of money from private equity, its business gets better as the world gets better and the economy improves. This late in an economic cycle, I don't know if you want to hold a cyclical company like that, if you want to be the buyer right now this late. With Oaktree, it's the opposite. They get better as distressed debt opportunities come up. So, that would be a company that would get better as things get worse, so it's maybe more attractive this late in the cycle than something like a private-equity company, for example.
Lapera: Yeah. And I know we're going to get an email now saying, "I thought The Fool said not to time the market." That's true. You shouldn't time the market. But it's one thing to be like, "I'm going to time the market and do all this technical analysis," and it's another thing to be like, "I think this cycle is about probably about here, and reasonably I can assume that this is what the business will do if it goes this way or that." And if you're wrong, you can always just buy, if you really believe in the company. Just buy it. Dollar-cost average it.
Wathen: It's not even really so much timing the market. It's like, if I own Bank of America, I know that when the economy gets worse, when unemployment goes up and GDP drops for a few quarters or a year, their loan performance is going to be bad. It's just going to. They'll have more defaults and more loan losses. Oaktree, for example: It's a company where it's going to make more money as things get worse. That's where it really shines. So it's diversification, if anything. Instead of buying, maybe, banks, I want to own a little bit more of this alternative asset manager.