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Oaktree Capital Fights Turbulent Markets

By Dan Caplinger – Apr 26, 2018 at 12:48PM

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Uncertainty has brought asset growth to a standstill, but the asset manager is still optimistic.

Asset management companies like Oaktree Capital Group (OAK) have to deal with market volatility in two very different ways. On one hand, they have to produce the exceptional returns that keep them ahead of their peers even when conditions make it difficult. Yet even when they are able to outperform, asset managers also have to address the fears of their clients, many of whom start to flee in down markets even when their funds are holding up quite well.

Coming into Thursday's first-quarter financial report, Oaktree investors wanted to see signs that the asset management company would be able to weather the storm that recent market turbulence has produced. Oaktree's results were mixed, but the company remains confident that it can prevail in the long run and put itself in position to benefit competitively from current conditions.

White oak tree surrounded by green oval, with word Oaktree next to it.

Image source: Oaktree Capital Group.

How Oaktree fared to start 2018

Oaktree Capital's first-quarter results reflected the efforts that the asset manager has made to shore up its business even in tough times. Adjusted revenue jumped 15% to $451.1 million, bouncing back from a corresponding decline in the fourth quarter of 2017. Adjusted net income attributable to Oaktree Capital Group unitholders climbed 17% to $62.9 million, and that produced adjusted net income per Class A unit of $0.93. The bottom-line figure was stronger than the consensus forecast among those following the stock.

Despite that favorable look, Oaktree's challenges showed up in other metrics that the asset manager prefers to follow. Economic net income attributable to Oaktree Capital Group was down by roughly a third from year-ago levels, coming in at $0.63 on a per-unit basis. Total assets under management rose just a fraction of a percent to $121.4 billion, with management fee-generating assets seeing a more favorable gain of nearly 2% to $102 billion. Similarly, assets generating incentives were incrementally higher to $33 billion.

Oaktree saw a variety of factors at play in its results. Distributions of more than $10 billion to closed-end investors and nearly $4 billion in outflows from open-end funds over the past year wiped out market-value gains, acquisitions, favorable foreign currency moves, and the pro-rata inclusion of Oaktree's 20% stake in DoubleLine Capital. Similar issues weighed on growth in management and incentive fee-producing assets.

CEO Jay Wintrob pointed to how the asset manager addressed the market's swoon. "Against a backdrop of turbulent financial markets," Wintrob said, "we continued to harvest assets across our credit, private equity, and real assets categories." The CEO pointed to good levels of distributable earnings growth during the quarter as well.

What's ahead for Oaktree?

Indeed, investors will be happy with the distributable income that Oaktree generated. Class A unitholders will get a $0.96 per unit distribution for the quarter, which is higher than the $0.76 per unit payout that unitholders received in the fourth quarter of 2017. That implies a distribution yield of nearly 10% if that rate of payout were to continue into the foreseeable future.

Looking forward, Oaktree thinks it can sustain its competitive advantages. In Wintrob's words, "Our ability to sell assets at favorable prices and deliver solid investment returns, while continuing to deploy capital on attractive terms across a wide range of Oaktree strategies, speaks to the power of our investment philosophy and discipline of our teams."

Still, a lot depends on what happens with the market. If Oaktree can both outperform benchmarks during down markets and keep investors calm about long-term prospects, then it could potentially grab assets away from competitors that prove less adept at handling the situation. That will take considerable effort, but Oaktree has a long track record of pulling through difficult markets.

Oaktree Capital Group unitholders were still a bit troubled by the news, and unit prices fell about 2% in morning trading following the announcement. For now, Oaktree is doing everything it can to weather the market's storm and keep doing right by its investment clients.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Oaktree Capital. The Motley Fool has a disclosure policy.

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