February 24, 2017

Income Opportunity Strategy Update for Week Ended 2/10/17

GEO Group Advances on Dividend Hike, While Carlyle Group Posts Messy Quarter

Last week, the Income Opportunity Strategy gained 0.72%, outperforming the Merrill Lynch U.S. High Yield Master II Index’s 0.10% gain, but underperforming the S&P 500’s 0.87% advance (Exhibit 1). The strategy ended the week up 6.38% YTD, or 448 basis points ahead of the high yield index and 272 basis points ahead of the S&P 500.

Exhibit 1: Preliminary Performance of Income Opportunity Strategy Versus High Yield, Equity Indices, Through 2/10/171

Time Period Income Opportunity ML HY II S&P 500
Last Week (2/3 – 2/10) 0.72% 0.10% 0.87%
MTD 2.21% 0.55% 1.73%
QTD 6.38% 1.90% 3.66%
YTD 6.38% 1.90% 3.66%
Inception (annualized since 4/2/2009) 15.83% 12.87% 16.18%

Source: Bloomberg, Miller Value Partners

All five of last week’s top five contributors were equities (Exhibit 2). Bank of America upgraded Apollo Global Management (APO) to a buy rating and increased their PT 17.4% to $27, from $23. That is an implied upside of 14% from where the stock currently trades on top of an implied distribution yield of 7.7%, for a total return possibility north of 20%. The analyst cited higher expectations for improving fee related earnings, better fund returns and an increased distribution. GEO Group (GEO) hiked their dividend 7.7% to $0.70/share (6.3% annualized yield). The company also popped in conjunction with a strong earnings report from peer CoreCivic Inc (CXW), which beat analyst estimates by $0.10 and raised 2017 guidance. Medley Capital (MCC) reported 1Q NII of $0.19/share which was in-line with analyst expectations and announced a $0.22/share dividend (11.1% annualized). There was no price-changing news on Triangle Capital Corp (TCAP) or Chimera Investment Corp (CIM).

Exhibit 2: Significant Contributors to Performance, 2/3/17 – 2/10/17

Name Type Return
Apollo Global Management Equity 6.7%
GEO Group Equity 5.0%
Medley Capital Corp. Equity 4.9%
Triangle Capital Corp. Equity 2.6%
Chimera Investment Corp. Equity 1.9%

Source: Miller Value Partners

Equities comprised all of this week’s top five detractors (Exhibit 3). Carlyle Group (CG) posted disappointing results as 4Q distributions of $0.16/share (3.9% indicated yield) came in well under analyst estimates of $0.49/share. However, 4Q results included $175M in net charge offs related to Vermillion Asset Management and “the misappropriation” of certain oil assets, while another $25M was tied to the separation from Claren Road Asset Management. Absent the one-time charges and offsetting one-time benefits, the company would have reported $0.55 in distributable earnings. Arlington Investment Management (AI) posted a core 4Q EPS of $0.64, barely missing analyst estimates of $0.65. The company said the rapid rise in rates and subsequent widening of MBS credit spreads led to underperformance in their agency MBS portfolio, which caused a book-value decline of -14.0%. Compass Diversified Holdings (CODI) declined as the stock fell below its 100-day moving average. There was no price-changing news on JMP Group (JMP).

Exhibit 3: Significant Detractors from Performance, 2/3/17 – 2/10/17

Name Type Return
Carlyle Group Equity -4.4%
Arlington Investment Management Equity -1.8%
Compass Diversified Holdings Equity -3.7%
*Recently Added Security* Equity -2.7%
JMP Group Equity  -2.9%

Source: Miller Value Partners

Did you know that we write this piece for Opportunity Equity as well? Check it out.

1The performance figures reflect the deduction of a model investment management fee of 1% (the highest fee for separate accounts under our fee schedule) and certain other expenses. For important additional information about Income Opportunity Strategy performance, please click on the Income Opportunity Strategy Composite Performance Disclosure. The performance returns shown in this report are preliminary and are subject to revision. Past performance is no guarantee of future results.

Significant Contributors and Significant Detractors are the Strategy holdings that had the greatest effect on Strategy performance for the week. Holdings that have been in the Strategy since the end of the most recent calendar quarter are identified by name. For information on how Contributor/Detractor data were calculated and a list showing the contribution to the Strategy’s weekly performance of each investment held at such quarter end, contact us.

Any views expressed are subject to change at any time, and Miller Value Partners disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results, and there is no guarantee dividends will be paid or continued.

©2017 Miller Value Partners

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