Charlie Bobrinskoy recently appeared on CNBC and shared his insights regarding several of the value investing firm’s long positions.
Even though these quick and easy soundbites offer limited time for these investors to explain their reasoning, sometimes we can learn what their primary reasons are for owning certain stocks. There was definitely a theme to Bobrinskoy's ideas as he mentioned three asset managers, which is an interesting industry.
It is always nice to see super investors own the same stocks you do but even more so if they own them for the same reason. It’s all about the process, right?
Actually, I don’t own shares in these specific investment ideas Bobrinskoy’s offered, but I do own a few similar stocks like Franklin Resources (BEN, Financial) and the virtually unknown (in the U.S.) Van Lanschot (XAMS:LANS, Financial), which are both asset managers as well.
Morgan Stanley
Morgan Stanley (MS, Financial), with its $50 billion market cap and well-known consumer brand, needs little introduction. Not everyone realizes the transition the company has made from a more investment banking-centric organization to a wealth management-centric organization:
Wealth management firms aren’t the hottest industry in town right now, but they have an admirable business model. Bobrinskoy really likes the industry, and I concur, but he likes Morgan Stanley in particular because it trades at 0.7x book value.
It also trades below an 8x forward P/E. The stock is owned by about a million gurus but more recently T Rowe Price Equity Income Fund, Daniel Loeb (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Jim Simons (Trades, Portfolio) have been buying.
KKR
KKR (KKR, Financial) is one of the biggest brands in private equity, perhaps the biggest, with more than $110 billion in AUM. Besides asset managers being grossly out of favor, the firm also suffered a few big losses with large energy bets having gone awry. The firm has a philosophy to invest along with its limited partners, which means there is more market risk, something investors seem to be shunning.
Bobrinksoy likes the firm because the market is giving the company no credit for its carried interest which should ultimately result in outsized and unexpected payouts. The firm trades at a forward P/E (for 2017) of just 6x and at 1.15x book value.
T. Rowe Price
I’ve alluded to it before but according to Bobrinskoy investors are afraid of high beta stocks right now. They do not want stocks that tend to follow the market in the same direction but at a greater magnitude. This kind of implies an expectation of a down market or at least a choppy market.
Asset managers (unless they specialize in short positions) tend to profit exceedingly when the market is booming. Performance fees are earned, management fees are earned, and firm assets are rising along with those of clients. In a bull market these are explosions of goodness. In a down market, there are only management fees, and AUM is dwindling because of the market direction, but often there are outflows as well.
T. Rowe Price (TROW, Financial) commands ~$750 billion of AUM. That makes it one of the largest U.S.-based asset managers, and it has a lot of market share in retirement accounts and with annuity portfolios. The firm’s assets are extremely heavily weighted toward equity strategies (especially given its retirement market share), and that can be a mixed blessing.
Generally speaking equity AUM is worth more to us as investors because the firm can charge higher fees on such AUM as compared to fixed income. However, in a down market AUM gets clipped real fast. With outflows the outlook can quickly deteriorate under these circumstances. However, the firm has a solid brand and things will ultimately turn around again. On an Enterprise Value/EBITDA basis the company trades at a high single digit multiple. That’s not expensive, but KKR and Morgan Stanley are more attractive plays in the same space.
