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Oaktree Capital Finishes 2017 Well, but Market Fears Loom

By Dan Caplinger - Feb 6, 2018 at 12:51PM

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Could the recent stock market drop hurt the asset manager in 2018?

For Oaktree Capital Group (OAK), strong investment performance is important. When the overall financial markets are rising, it makes it that much easier for Oaktree and its asset management peers to produce the returns that their investing clients want to see. That attracts greater amounts of new assets, which in turn helps boost management fees and creates a positive feedback loop for the company.

Coming into Tuesday's fourth-quarter financial report, Oaktree investors were prepared to see a bit of a pullback from the asset manager for the end of 2017 compared to an extremely strong year-earlier period, but they remained somewhat concerned about what the market's most recent volatility could mean for the future. Oaktree isn't invulnerable to adverse market environments. However, it also remains positioned to take advantage of whatever opportunities it can find, even if things in the financial markets get tough for a while. Let's look more closely at Oaktree Capital and what its results say about the future.

Oaktree logo next to the word Oaktree.

Image source: Oaktree.

Oaktree keeps moving forward

In the fourth quarter, Oaktree Capital's results continued to reflect difficulties that the asset manager has faced. GAAP revenue climbed 4% to $311.1 million, but adjusted revenue was down 7% to $327.4 million. When you take out the impact of tax reform, adjusted net income attributable to Oaktree Capital Group investors fell by 17% to $46.7 million, and that resulted in adjusted net income per Class A unit of $0.72. The figures were reasonably favorable in investors' eyes, with sales falling less than expected and adjusted net income coming in a bit stronger than the consensus forecast among analysts following the stock.

Oaktree's own preferred measures of performance also showed challenges. Economic net income attributable to Oaktree Capital Group was down 37% from year-earlier figures even when you take out the tax law's impact, weighing in at $0.85 per Class A unit. Assets under management of $100.2 billion showed little change from recent levels, with a 1% rise in management-fee-generating assets but a 3% drop in incentive-creating assets under management. Distributions to investors of closed-end funds wiped out the market-value gains that Oaktree enjoyed during the year and weighed particularly hard on incentive-creating-asset levels.

CEO Jay Wintrob expressed satisfaction with the end of 2017. "The fourth quarter of 2017 completed another strong year for Oaktree," Wintrob said, with "strong investment performance resulting in our best annual incentive income and investment income totals since 2013." The CEO also noted a substantial rise in distributable earnings in 2017, rewarding shareholders for their commitment.

Can Oaktree keep growing in 2018?

Oaktree was confident in its prospects in the coming year. In Wintrob's words, "We will continue to take advantage of buoyant market conditions to sell assets and return capital and profits to our clients." Oaktree also has assets on hand to consider major strategic moves as conditions warrant.

Yet those comments themselves raised concerns among investors about Oaktree's future. If "buoyant market conditions" have ended -- as at least some short-term traders now seriously fear -- investors would be less willing to commit more capital to Oaktree's investments. Thus far, even relatively small declines in percentage terms have evoked a loud outcry from some ordinary investors on the verge of panic. A more typical correction of 10% to 15% could prove to be an ill-timed cyclical downturn for Oaktree.

Still, shareholders got a nice boost from a rising payout. Class A unitholders got a distribution of $0.76 per unit for the quarter, up from $0.56 three months ago. That brought full-year distributions to $3.34 per unit, marking an attractive distribution yield of more than 7% for Oaktree.

Oaktree Capital Group unitholders took the news in stride, with shares falling less than 1% at midday following the announcement despite a turbulent market. In the months ahead, it will be important to watch how Oaktree reacts to any fundamental shift in market sentiment, and whether any reaction is sufficient to keep the asset manager's clients confident in the company's ability to thrive even under tough conditions.

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