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Oaktree Capital Keeps Gaining From Strong Markets

By Dan Caplinger - Jul 27, 2017 at 6:19PM

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The asset manager reported record highs in incentive income from its funds.

The financial industry thrives on bull markets, and investment manager Oaktree Capital Group (OAK) has sought to take full advantage of favorable conditions while they last. The result has been impressive growth in recent periods, and Oaktree, in particular, has been able to use its reputation for putting investors first to its advantage against its competitors in the asset-management space.

Coming into Thursday's second-quarter financial report, Oaktree investors had high expectations that the company would be able to produce better performance than it did in the year-ago quarter. Yet even bullish Oaktree investors were pleasantly surprised by some of the numbers that the asset manager put up in its report. Let's look more closely at Oaktree Capital and what its latest results mean for the company's future.

Oaktree logo.

Image source: Oaktree Capital Group.

Oaktree heads skyward

Oaktree Capital's second-quarter results showed how hard the company is pressing ahead to profit from favorable conditions. Total GAAP revenue skyrocketed by 124%, to $634.1 million, which was far better than the roughly 80% growth that most of those following the stock had expected to see. Adjusted net income attributable to Oaktree Capital Group investors jumped 125%, to $111.1 million, and that resulted in adjusted net income per Class A unit of $1.73. That dramatically exceeded the $1.48 per-unit consensus forecast among Oaktree investors.

Taking a closer look at Oaktree's results, the company had several strong numbers. Oaktree likes to look at its economic net income measure, which uses a different method of recognizing revenue to account for incentive income, and that amount rose more than 10%, to $1.05 per Class A unit. Assets under management inched higher by 1%, to $99.3 billion compared to the year-earlier period, and small gains in incentive-creating assets and management-fee-generating assets also added to Oaktree's success. Market-value gains added $1.8 billion over the past three months, partially offsetting $3.3 billion in distributions to closed-end fund investors and $0.5 billion in net outflows from Oaktree's open-end funds.

The most noteworthy contributor to performance was incentive income. A single favorable transaction was primarily responsible for the rise, with the sale of AdvancePierre Foods resulting in nearly $428 million in incentive income for Oaktree Principal Opportunities Fund IV. Investment income was also a positive factor, rising by more than a quarter, but management-fee revenue weakened by 6%, due largely to closed-end funds in liquidation.

CEO Jay Wintrob couldn't have been happier with how things went. "The second quarter was exceptional," Wintrob said, as "strong closed-end fund investment performance of 4% gross for the quarter and 19% for the last 12 months has driven year-over-year growth in net accrued incentives and speaks to our team's ability to deliver superior investment results with risk under control."

Can Oaktree keep making progress?

Looking forward, Oaktree still has plenty of opportunities to identify and take advantage of future investment success. By raising $1.4 billion in gross capital during the quarter, uncalled capital commitments of $21.5 billion leave Oaktree with the ability to look at promising new investments without fear of not having the capital to act on them.

Investors also have to be happy about how Oaktree has rewarded them by sharing its success through distributions. The company declared a distribution of $1.31 per Class A unit, its highest quarterly distribution since 2013, and that pushed its distribution yield over the past 12 months to nearly 7%.

Oaktree Capital Group unitholders seemed to be content with the strong performance, and the share price rose 1.5% in Thursday's session following the announcement, reaching its best levels since early 2016. Oaktree should continue to enjoy fundamental strength if markets sustain their recent gains. Even if the financial environment grows cloudier, it has the capital to take full advantage of the chance to invest at cheaper valuations.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Oaktree Capital. The Motley Fool has a disclosure policy.

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