Wednesday, November 20, 2013

Jon Parepoynt

Great article. I agree with the premise and believe OZM is under followed and under owned. I think it is far better to own the shares of the hedge fund managers than their products. In addition, many hedgies use their shares as additional compensation, meaning management has a very vested interest in keeping share prices high.

One interesting note is that during the financial crisis, other funds were hedging their redemptions while OZM embraced them. This higher transparency has led to a better reputation in the sector. 

Jon Parepoynt Seeking Alpha

Charts tell the story

This chart shows Total Return, the only thing that matters in an IRA.  Charts were going OK until they dropped that $0.75 dividend on us last February.
Ozm hit another new high and an s/a article came out today.  Ozm is the fifth largest hedge fund firm and one of the fastest growing with a compound annual growth rate of approximately 19% over the last 11 years.
This is the deal with management companies, assets under management, not how much they make in the markets each year.  The Hedge Fund they manage has returned more than double the S&P 500 while taking less than a third of the risk.  Like Kmr the LLC pays out nearly all its income to shareholders.  The dividend pays 7.7%.  Quarterly distributions are considered a return of capital, not interest or dividend income, which means a K-1s and tax advantages.

I only went with these guys because of my interest in the Investment Counsel business which I understand, and my belief that the management companies prayed upon Investors and Private Bankers.  Risk of dilution is high as OZM could sell new shares of stock and use shares to pay help.

These charts tell the story

This chart shows the current jump in P/E ratios that is causing the rise.
Investors are pissed off at them because they diluted the shares to pay off debt a few years ago.  This shows in a low P/E ratio.   Och-Ziff reckons this distributable-earnings figure is a more accurate gauge of its performance than Earnings per share.
Using a dividend discount valuation methodology off of Bloomberg (above) intrinsic value looks to be approximately $17.50 per share, or about 34% higher than the current price.

Tuesday, November 19, 2013

Och-Ziff: Underappreciated Catalysts May Reward Shareholders

Editor's notes: Past corporate structure choices have left OZM undervalued despite its track record as a top-tier asset manager. Firm has multiple upcoming catalysts and offers 35% upside.

Tuesday, November 5, 2013

Daniel Saul Och presentation

Daniel Saul Och

Thanks, Tina. Good morning, everyone, and thank you for joining us. This morning, I'll briefly review our year-to-date investment performance and our assets under management. I'll also update you on our capital flows and on the environment we see for investment opportunities globally.

During the third quarter and again in October, we generated strong performance with low volatility for our fund investors, further extending the strong absolute returns we generated in the first half of this year. The flexibility we have to move capital across strategies and geographies was again evident, and we remain highly opportunistic in capitalizing what we viewed as the best investment opportunities. 

Our investment teams operate within the framework of our consistent and disciplined process to identify the opportunities globally. This approach has been central to the repeatability of our returns historically and the subsequent value we have created for our fund investors.

We remain confident that allocations to hedge funds will grow. We believe institutional investors will continue to increase the proportion of their portfolios, investing with alternative managers to enhance their equity and fixed income returns. According to HFR, net inflows to hedge fund industry during the third quarter of this year were the highest in 9 quarters, and year-to-date, they exceed those for all of 2012, suggesting an improving trend line. While these are just a couple of data points, we believe that we are well positioned to benefit as capital allocations to the industries increase.

Now let me turn to our assets under management. As you saw in the 8-K we issued this morning, our assets under management as of November 1 totaled $38.5 billion. This amount reflects growth of $5.9 billion or 18% from $32.6 billion on December 31. The year-to-date increase was driven by approximately $3.5 billion of performance-related appreciation and $2.4 billion of net inflows, which includes the 2 CLOs we closed this year.

Pension funds and private banks remain the largest sources of our net inflows year-to-date. We continue to experience strong interest from fund investors across our platforms and have made solid progress in establishing relationships with new investors. Excluding the CLOs we've raised, our net inflows through September 30 have improved significantly year-over-year, driven by an increase in our gross inflows, which are more than 50% higher than they were for all of 2012. Although we can't predict future flows, the trend in our net flows appears to be improving.

We also made significant progress in expanding the capabilities of our fund investor relations team through additional hires globally and restructuring the team to focus on important sources of a new capital. We believe that these steps position us to attract significant additional assets, not only to our well-established multi-strategy platforms but also to our growing credit, real estate and long/short equity platforms. These 4 areas remain our strategic priorities for asset growth, although we continue to look for additional opportunities to meet the needs of our fund investors.

Now let me give you a quick update on our fund's investment performance. Year-to-date through October 31, our Master Fund was up 10.9% net, our Europe Master Fund was up 10.1% net, and our Asia Master Fund was up 10.5% net. These returns were generated with 36% of the volatility of the S&P 500 Index on a weighted average basis for these funds.

Our year-to-date performance continued to be driven primarily by our long/short equity and credit-related strategies. During the quarter, we took advantage of market volatility to enter a long/short equity allocation, where our focus remains on selecting positions with defined events and catalysts while also seeking investment opportunities with strong underlying fundamentals.

We remain fully invested in the Master Fund. In the U.S., with an improving economic backdrop, we continue to be cautiously optimistic about growth prospects for the medium term, but we remain patient, thoughtful investors. We believe the current environment plays to our strengths and our global reach.

Joel Martin Frank

Joel Martin Frank

Thanks, Dan. This morning, I'll review our 2013 third quarter results and discuss how we are thinking about expenses for the fourth quarter.

For the third quarter, we've reported GAAP net income of $25 million or $0.16 per basic and $0.14 per diluted Class A share. As always, our press release includes a detailed discussion of GAAP results.

Now let me turn to the 2013 third quarter economic income, starting with revenues. Management fees totaled $138 million, increasing slightly on a sequential basis as assets under management grew approximately $1.2 billion from April 1 to July 1. From July 1 to October 1, our assets under management grew another $1.7 billion to $37.8 billion.

Our average management fee for the quarter was approximately 1.5%. As a reminder, the management fees we earn vary based on which platforms our assets under management are invested in, and we anticipate that our average management fee will fluctuate over time based on the mix of products that drive our growth.

Incentive income was approximately $72 million for the third quarter. The majority of this amount related to crystallized incentive income earned on the expiration of approximately $800 million of 3-year multi-strategy assets with the remainder related to redemptions. The majority of these assets were  reinvested for an additional 3 years in the same multi-strategy platform and the remainder across other platforms within the firm.

Now let me turn to our third quarter expenses. Comp and benefits totaled $28 million during the third quarter of this year. Of this amount, salaries and benefits were $23 million, up 6% from the second quarter, and the remainder were primarily guaranteed bonus expense. The increase was driven by our hiring activity globally during the quarter on both the investing side as well as the infrastructure side.

Salaries and benefits were 17% of management fees in the third quarter. We anticipate that this ratio will remain approximately 16% to 18% of management fees for the fourth quarter of this year.

In addition to employee bonuses, our Partner Incentive Plan will also impact our compensation expenses in the fourth quarter. As a reminder, our eligible pre-IPO partners may receive an annual discretionary performance award, which will be a mix of partner units and cash. We can award a maximum of 2.8 million units this year and 10% of the annual incentive income we earn up to a cap of $39.6 million.

Now turning to non-compensation expenses. Non-comp expenses totaled $29 million in the third quarter, a decline of 15% sequentially, primarily due to a net increase in professional fees. Non-comp expenses totaled 21% of management fees in the third quarter, and we anticipate this ratio to be 21% to 23% for the fourth quarter.

Our third quarter effective tax rate was 16%, declining sequentially due to an increase in our estimate of annual incentive income for this year, which impacts our full year effective tax rate calculation. As I've discussed in the past, our effective tax rate is impacted by several factors, including the amount of revenue we generate and how our revenue and expenses flow through our legal entity structure. As a result, our actual quarterly and annual effective tax rates can vary materially from our estimates. We estimate that our effective tax rate for the fourth quarter of this year will be in the range of 15% to 20%.

Our third quarter distributable earnings were $130 million or $0.27 per adjusted Class A share. As we disclosed in our press release this morning, our dividend for the third quarter is $0.25 for Class A share. As we approach the end of the year and begin to look towards 2014, I'd like to again emphasize the elements of our model which position us to deliver superior earnings growth over time.

Our year-to-date investment performance has been very strong, demonstrating the repeatability that our investment and risk management processes have achieved historically. Our assets under management have increased by 18% during the same period.

As Dan mentioned, current and prospective fund investors have reacted positively to our performance,  and this remains the most important criteria in their decision to invest capital with us. We believe we are well positioned for additional asset growth and that we will see continued acceleration in organic net inflows as our business diversifies.

Complementing our investment performance and asset growth is a financial model that is simple and transparent with a clear linkage between our distributable earnings and our dividend. First, the management fees we earn more than exceed our fixed operating expenses, and our cost structure is scalable, meaning that we expect our operating expenses to grow at a lower rate than our assets under management over time. The results in operating leverage flows directly through to our distributable earnings.

Second, we earn 20% incentive income annually in cash on the majority of our assets as we generate investment returns. And the incentive income we earn as revenue is not subject to callbacks, and the majority of our assets under management are not subject to hurdle rates. Cash bonuses, which are discretionary, are the only operating expense paid out from the incentive income. The remainder flows directly through to our distributable learnings.

The assets we have in platforms and earned incentive income cumulatively over a multiyear period, such as our 3-year multi-strategy or dedicated credit assets, also create significant additional earnings potential. The sort of objective of the structure is reflected in our distributable earnings and dividends both this year and last year.

Third, as our assets grow, we earn management fees and incentive income on that growth. Year-to-date through November 1, our assets under management have increased by $5.9 billion. We are earning management fees and incentive income on that asset growth, which have been and will continue to be reflected in our earnings this year. 

The compounding effect of asset growth on our distributable earnings and dividends can be significant over time. Henceforth, our dividend policy is to distribute substantially all of our distributable earnings as dividends to our shareholders each quarter. We believe that the combination of these elements is a powerful driver of our current and future earnings potential.

Chinese opportunity

Daniel Saul Och

Look, it's a long-term opportunity, I don't think anyone knows. I think it's fair to say that it's potentially significant. You'd want to be one of the firms that were selected, and it's a good example of where -- what we do at our firm in terms of our reputation, our preparedness and our commitment to geographic expansion, and having a significant business is relevant. 

We've had an -- operations in Asia since 2001. We do have an office in Beijing. We've been investors in China. Our firm has a relation -- a reputation in China. And we think that, along with the global relationship of the firm, was relevant to the decision. 

So doing those types of things, it goes back to my comment about the retail distribution. We're not going to plan for distribution. We're not going to be the ones to figure out the distribution channel. 

We want to be the ones -- when people say, "We want the best. Who's the best? That's our goal," we want them to say, "Och-Ziff," in any of the areas we're focusing. If we can do that, then we're doing the right things for our clients, and we'll grow.

Investment opportunity

Daniel Saul Och

Sure. If you look at how we've grown historically, it's been a .. whether it's geographically or by investment discipline, it's finding an area where we think there is an opportunity, dedicating, committing, building a business, doing it in a way that works for the clients who invest in that area and for the rest of the clients and for the firm. 

So what we mean by that is very simple. The .. right now, our multi-strategy funds, our credit funds, our long/short equity funds and our real estate funds, which are our strategic growth areas, are all very significant and provide a lot of opportunity. 

Having said that, we're always on the lookout for areas where we think we can provide value to clients. Some of that will just lead to new things that we do within the current fund structure. It is potential that it can lead to new investment opportunities. 

Our new products tend to be driven by where we see investment opportunity, not necessarily where others are marketing funds or raising assets. That's the key.


Daniel Saul Och

We're seeing demand and client allocations in a number of different areas. If you look at credit, we presently have about $6 billion of assets under management in the credit area. You'll recall, some topic on these calls, we would talk about what it's going to take to get the first billion. We've also got demand for our multi-strategy product, a lot of interest in the real estate side, a lot of interest on long/short equity side. So what we're really seeing is, across-the-board interest in our products, across-the-board interest in the way Och-Ziff does things, a desire to establish new relationships with Och-Ziff and to increase relationships that have occurred. If you've heard Joel note on the call, the 3-year tranche that generated most of the incentive this quarter rolled into a new similar structure. So that's always very, very important to us.

We don't disclose those numbers, but it's been across the board. It's new investors. It's current investors increasing. It's current investors interested in expanding the relationship with us. This concept, for them, they look at the quality of our investment products.

They look at the quality of the organization, of its controls, of its operations, of its transparency, and we think all that's playing out well. We also feel good about the fact that the expansion is -- we feel is benefiting all of our investors.

For example, on the credit side, we now got $6 billion of assets under management on the credit side. We've dramatically increased our resources and capabilities over the past several years on the credit side. If you're an investor in a multi-strategy fund, you're benefiting from that. You're benefiting from the flows. You're betting from -- benefiting from the capabilities.

You're benefiting from the increased product capability. We -- same thing with the real estate side. There's no doubt that investors in the credit funds and the multi-strategy funds have benefited from the capabilities we have on the real estate side, and we believe investors on the real estate side also benefit from the flows and product coming from other areas of the firm.

And that's always -- it's been a very important part about how we think about growing. Where do we think we have capability? Where can we deliver value to clients and excess return to clients? And where can we do it in a way that benefits all of the investors?

No, it's mostly -- you talk about the management fee rate. Most of it relates to flows into our credit assets, which typically, as you know, have lower management fees than our other funds. But this is a very important part of our organic growth in this -- in our assets under management. So -- but that's basically the reason.

Sure. Look, our goal -- right now, we haven't done anything specific that we're discussing in terms of those new channels and platforms. Our goals, which is similar to what we do with the private banks, is not to create a channel. It's not necessarily to be the first. We want to be the best alternative available for any channel that decides to come into our space. We think we executed that well with the private banks, and that's worked well for everybody. We believe that we are -- that positions that way for any new channels. So as I said, right now, we don't have anything specific to announce. But we do believe that any new group of investors looking to come into the alternative space in the areas that we touch, we believe that Och-Ziff is one of their best alternatives. And if we maintain that, along with our infrastructure and transparency, we'll be well positioned to take advantage when it's appropriate.

Well, our concern in the credit markets has more to do with the fact that in many areas, spreads have contracted, and in many areas, prices have increased. Our goal in the credit area, our goal in expanding credit products has been to find those areas where we feel we can deliver excess return, where we feel that we can provide value that's significant to clients and do it in a way that enhances all other areas of the firm that invest on the credit side. We're very proud of the fact, as we said, that we have $6 billion in AUM. First is where we were when we first got this started. Having said that, when we look at some of the managers who are very strong in the credit area, their AUM in that asset class is substantially higher than ours. And so we think we have a lot of room to do some very good things for clients going forward.

Joel Martin Frank

Well, to your second question, we don’t think that it's really having any impact. In terms of what we're seeing in the fund raising environment, because it's -- I can't really comment on the overall industry. I don’t know what other firms are doing. But we're seeing interest in a number of different areas.

Pension funds and private banks, which have been the most robust for the past couple of years, continue to be robust. We're seeing more interest in Europe than we've seen over the past couple of years. I think that has a lot to do with the fact that Europe looks a little bit more stable.

We're seeing more interest in large clients looking to establish more significant relationships. And as long as we continue to perform and continue to drive value, we think we can continue to grow. And we like the fact that the growth is in more than one area. That's always very important in this firm. We are thoughtful about capacity.

We are thoughtful about driving returns. We're an investment-driven organization. That is what we intend to be in the future. And so when we can expand in an area such as credit or expand in an area such as real estate which has a lot of capacity, the investors in those areas do very well, and investors in other funds at Och-Ziff benefit from it. That's our formula. That's what we're going to keep doing going forward.