Like most other stocks, Brookfield Asset Management (BN -0.49%) has suffered the ups and downs that have come with the coronavirus pandemic over the past two months. But its carefully organized business and investing structure give it solid income capabilities that can succeed in good economic times as well as rougher ones. Read on and see why income investors might want to pay close attention while the stock is down.
What the company does
Brookfield Asset Management is an alternative asset manager, which means it makes investments outside of classic investment categories such as stocks and bonds. The company invests in many businesses through its publicly traded partnerships, which include Brookfield Property Partners (BPY), Brookfield Infrastructure Partners (BIP 0.79%), Brookfield Renewable Partners (BEP -0.11%), and Brookfield Business Partners (BBU -0.62%). It makes money through these investments as well as fees that it charges to its institutional and retail clients. As part of its investments in different businesses, it has strong interests in their operations and often works alongside management. The company recently invested $30 billion in various initiatives associated with its partnerships. Buying into Brookfield Asset Management is like buying into many businesses, all at once, that are hedged for times just like the current financial environment.
During the company's fourth quarter, which ended Dec. 31, assets under management increased to $545 billion and in fee-bearing capital grew to $290 billion. Fee-related earnings increased 41% year over year.
How it's been managing during COVID-19
Brookfield Asset Management came into the first quarter of 2020 with $64 billion of capital for investments, a strong position from which to benefit in the changing economic markets. In an update for shareholders on March 23, the company said that it had anticipated a recession -- even though it could not have imagined it coming from COVID-19 -- and that it was well-positioned to handle the crisis and take advantage of new opportunities. The letter reassured investors about the company's strong cash position and confidence about the future. Of the deployable assets, $13 billion is in liquid capital, and $5 billion is semi-liquid assets.
The company has $7 billion of corporate debt, all of which is long-term, and all of which is mortgages and other financing that is backed by individual assets. CEO Bruce Flatt said in the note to shareholders: "Most of our businesses are very resilient, and we therefore don't foresee major issues. ... Our focus has always been on structuring our affairs to ensure we can survive all environments, and we are confident we are in this position today."
How it's taking advantage of opportunities
Aside from the confidence in its ability to stay eminently solvent throughout the crisis, management updated shareholders with its plans and mobility in seizing opportunities as the market remains in flux. The company has $50 billion of newly raised funds, of which 60% are available for investment.
Right before the coronavirus hit, Brookfield Asset Management bought a majority stake in Oaktree Capital Management, adding a strong focus on the debt market and putting the company in an excellent position to hedge its assets in the current environment.
While the company mainly invests in alternative assets classes, during the current market downturn it's taking advantage of stock market lows to grow its holdings. It's also purchasing its own devalued shares at these low prices.
Lessons for investors
An interesting point Flatt made in the letter to shareholders is a lesson for all of us to keep in mind as the economy continues to surprise us.
We have no "hung purchases." In fact, it's the opposite -- one way or another, every contested deal we tried to do over the past five months, we lost. We remained disciplined, which meant that we did not buy a number of businesses as their price rose. In hindsight, this was good.
With management's disciplined approach -- regardless of what it might have felt like at the time -- plus the available capital as well as solid opportunities for investments, Brookfield Asset Management is likely to benefit from the changing markets. Likewise, shareholders are likely to benefit from buying the stock, especially as it trades almost 30% under its February highs.