When bull markets reign, the asset management industry does well. But all good things come to an end, and the market turbulence in the final quarter of 2018 sent shivers throughout the investing world. Oaktree Capital Group (OAK) has the experience to deal with downturns, but that doesn't mean it's immune from the impacts that those episodes have on financial performance.
Coming into Tuesday's fourth-quarter financial report, Oaktree investors were expecting to see some hits to the strong performance the asset manager has enjoyed recently. That proved to be the case, but that hasn't diminished the company's belief that it can take advantage of opportunities to make smart long-term investing decisions to bolster its bottom line for years to come.
Image source: Oaktree.
Dealing with a tough fall
Oaktree Capital's fourth-quarter results showed the extent to which the market's tumble did damage to asset managers. Adjusted revenue dropped 11% to $290.2 million, although that was far better than the 20% decline that many following the stock had expected to see. Adjusted net income attributable to Oaktree Capital Group unitholders fell by roughly a third to $84.2 million, and that worked out to adjusted net income per Class A unit of $0.43. That was better than the consensus forecast but still represented a sizable drop from year-earlier levels.
Oaktree's favored metric saw even bigger moves. Economic net income swung to a $18.9 million loss during the fourth quarter, reversing income of $147.8 million in 2017's fourth quarter. Total assets under management dropped to $119.6 billion, down by a bit more than $4 billion over the past three months. Oaktree said that about two-thirds of the decline was due to market price changes, while there was about $1 billion in net outflows among Oaktree's open-end mutual funds. Similar declines in management fee-generating assets weighed somewhat on fee income, but the company did manage to boost incentive-creating assets by $1 billion to $34.6 billion.
Oaktree did collect on some of its commitments for capital among its investors. Total uncalled capital commitments were down to $19.5 billion at the end of 2018, compared to $21.4 billion at the end of September. Yet the evaporation of investment income weighed on the company's bottom line.
CEO Jay Wintrob put the quarter into perspective. "The market declines experienced in the fourth quarter of 2018," Wintrob said, "stood in sharp contrast to the optimistic market conditions observed in the first three quarters of the year." The CEO pointed to solid returns for Oaktree's closed-end funds as an important sign of the company's success.
Check out the latest Oaktree earnings call transcript.
What's next for Oaktree?
Oaktree has every expectation of making the most of currently available smart investments. By continuing to raise funds aggressively, Oaktree has billions at its disposal to invest, and that will let the company buy whatever assets it sees as most likely to rebound in 2019.
Oaktree's own pros know that there are still risks. One that co-founder Howard Marks discussed recently is how anti-capitalist populist sentiment in the political realm is endangering the investment marketplace, and uncertainty in areas like taxation and wealth distribution could introduce new challenges for businesses in the years to come. However, Oaktree's investment professionals will keep doing what they can to account for and reduce those risks.
One thing that unitholders will appreciate is getting a slightly larger distribution as 2018 closes out. Class A unitholders will get $0.75 per unit for the quarter, up $0.05 from the previous quarter and higher by $0.20 per unit compared to the quarter before that.
Oaktree Capital Group unitholders didn't have a strong reaction to the news, and Oaktree's unit price was up just a fraction of a percent on Tuesday following the announcement. With prospects for the market seeming to improve, Oaktree looks like it's getting back on track toward putting its investment prowess to full use in 2019.
