If you're looking for a top investment that gives your portfolio diversity and exposure to so-called "alternative assets" -- that is, assets other than stocks, bonds, and cash -- you should definitely take a look at Brookfield Asset Management (BN 1.57%). The Canadian company, founded in 1899, has taken a unique approach to investing that's paid off handsomely over the past few years.
However, past performance isn't a guarantee of future results. Here's where Brookfield is likely to find itself in five years.
Brookfield Asset Management has outperformed the stock market in recent months thanks to a top management team. Image source: Getty Images.
The sum of its parts
Brookfield Asset Management not only derives income from the fees it charges for management services but also invests the firm's own money alongside its clients' money. Additionally, the company controls four master limited partnerships (MLPs). The MLP structure means that while the partnerships are separate publicly traded entities, Brookfield collects management fees from them.
Brookfield's four MLPs are:
| Name | Market Cap | Types of Assets |
|---|---|---|
| Brookfield Property Partners (BPY) | $18.6 billion | Office space, U.S. retail space, apartment buildings, hotels |
| Brookfield Infrastructure Partners (BIP 1.69%) | $14.4 billion | Gas and water pipelines, rail networks, electricity lines, telecom networks, toll roads, ports |
| Brookfield Renewable Partners (BEP 3.04%) | $7.3 billion | Hydroelectric dams, solar and wind farms, energy storage facilities |
| Brookfield Business Partners (BBU 0.41%) | $3.2 billion | Businesses in sectors including manufacturing, construction, real estate, energy, and mining |
It's a diverse group of reliable income generators. In fact, depending on your portfolio structure, you may be interested in buying units of one of the Brookfield partnerships directly.
On top of these, though, Brookfield recently completed the acquisition of a 61.2% controlling stake in fellow asset manager Oaktree Capital Group (OAK), which will operate as an independent corporation with an $8.2 billion market cap and a separate team of asset managers. The acquisition gives Brookfield exposure to various credit classes, including distressed debt and high-yield bonds.
In five years, expect Brookfield to continue to utilize this same, somewhat complex structure of controlling stakes in independent entities, coupled with strategic investments of its own and clients' capital.
Projected outperformance
In August, Brookfield released its Q2 2019 letter to shareholders. In it, the company computed its compounded annual growth rates (CAGR) for the last five years, and the results were impressive.
Assets under management -- a key metric for an asset management company -- have grown at a CAGR of 16% over the last five years, to $388.3 billion. Fee-related earnings have grown at a CAGR of 22% during the same time period, and cash available for reinvestment or distribution has grown at a 25% CAGR.
Assuming this growth rate continued, in five years, the company would be sitting on $815.6 billion in assets under management. Brookfield is also projecting free cash flow of $5.4 billion in 2023, more than double the 2019 projection of $2.6 billion. That projection doesn't include the Oaktree transaction.
Look for Brookfield to continue its impressive outperformance over the next five years.
What if there's a downturn
Many analysts anticipate a bear market sometime in the next five years. Some believe it will come within months, while others expect another year or two, at least, of market growth. We know that Brookfield has done quite well in good times, but what about when (not if) the market eventually turns south?
Judging by the company's performance during the Great Recession, we can expect it to perform about as well as the overall market. Brookfield's shares fell a bit further than those of the S&P 500 during the crash of 2008-2009 but recovered to pre-crash levels at about the same rate:
That suggests that, in the event of a recession or bear market, Brookfield could at least be expected not to underperform the broader market. In fact, thanks to Brookfield's impressive liquidity and cash generation, a recession might be a boon to the company, allowing it to pick up assets on the cheap.
Investor takeaway
The numbers don't lie. Brookfield has proven to be a well-managed company with a history of growth and value creation. Whether or not a recession is on the horizon, investors can expect more of the same from this powerhouse asset manager.
