The truth is that great asset managers are not necessarily great asset management stocks. From private equity managers like Blackstone (NYSE: BX) to distressed debt specialists like Oaktree Capital Group (NYSE: OAK), legendary fund performance hasn't necessarily translated into legendary returns for shareholders of the management company. The reason? Employees, not shareholders, usually come first.
In this segment from Industry Focus: Financials, join The Motley Fool's Gaby Lapera and Jordan Wathen as they discuss why the best way to get rich with an asset manager is to work for them, not invest in them.
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A full transcript follows the video.
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This video was recorded on April 24, 2017.
Gaby Lapera: Question for you, Jordan.Would youinvest in an alternative asset manager? Would you buy stock?
Jordan Wathen:Yes. Butthat comes with a very big caveat that I wouldn't invest in most of them. One of theproblems with financial companies in general -- andthis extends from banking to asset management toalternative asset management -- is that so many of them are actually run to maximizecompensation for employees, rather than profits for shareholders. Theshareholders are at the bottom, taking what's left over after everyone has taken their $2 million bonus. As anexception to that rule, the one that I'm mostinterested in, and I'm glad we talked about it today, was Oaktree.I generally like itas a business model. It's one of the few financial companies that gets better as the world gets worse,which is a nice diversification thing. Earlier this year, Iput together a model for it,and I updated it prior to the show, valuing it in two pieces: the assets it owns and the business as it stands. I value it at about $53 per share, andI think that's kind of conservative. And it's a stock that, if ittraded a little bit lower -- I had to make a lot of assumptions to get to that valuation -- butif it traded a little bit lower, I would be interested in it.
Lapera:Yeah. I actually also really like Oaktree,especially because the investor letters that they share are always really interesting; a lot of really interesting investment knowledge in there. Iencourage listeners to go ahead and read those, they're apretty valuable resource. As for me, if I wouldinvest in alternative asset managers -- they'recurrently not for me right now,mostly because I have no money, soI can't actually invest in anything right now, not until I have a little bit more money. Buteven if I did have money, I think I'm more interested in other types of stocks right now. But I wouldn't rule it out as a future investment.
Wathen:I think timing is important, too. A company like Blackstone, whichmakes a lot of money from private equity, itsbusiness gets better as the world gets better and the economy improves. This late in an economic cycle,I don't know if you want to hold a cyclical company like that, if you want to be the buyer right now this late. With Oaktree,it's the opposite. They get better as distressed debt opportunities come up. So,that would be a company that would get better as things get worse, so it'smaybe more attractive this late in the cycle thansomething like a private-equity company, for example.
Lapera:Yeah. AndI know we're going to get an email now saying, "I thought The Fool said not to time the market." That's true. Youshouldn't time the market. But it's one thing to be like, "I'm going to time the market and do all thistechnical analysis," andit's another thing to be like, "I think this cycle is about probably about here, andreasonablyI can assume that this is what the business will do if it goes this way or that." And if you're wrong, you can always just buy,if you really believe in the company. Just buy it. Dollar-cost average it.
Wathen:It'snot even really so much timing the market. It's like, if I ownBank of America,I know that when the economy gets worse, whenunemployment goes up and GDP drops for a few quarters or a year, their loan performance is going to be bad. It's just going to. They'll havemore defaults and more loan losses. Oaktree,for example: It's a company where it's going to make more money as things get worse. That's where it really shines. So it's diversification, if anything. Instead of buying, maybe, banks, I want to own alittle bit more of this alternative asset manager.