March 20, 2017

Income Opportunity Strategy Update for Week Ended 3/17/17

Alternative Asset Managers Rise While Walter Investment Management Posts Disappointing Results

Last week, the Income Opportunity Strategy fell -0.24%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.22% gain as well as the S&P 500’s 0.28% advance (Exhibit 1). The strategy ended the week up 7.14% YTD, or 517 basis points ahead of the high yield index and 42 basis points ahead of the S&P 500.

Exhibit 1: Preliminary Performance of Income Opportunity Strategy Versus High Yield, Equity Indices, Through 3/17/171

Time Period Income Opportunity ML HY II S&P 500
Last Week (3/10 – 3/17) -0.24% 0.22% 0.28%
MTD -3.11% -0.93% 0.73%
QTD 7.14% 1.97% 6.72%
YTD 7.14% 1.97% 6.72%
Inception (annualized since 4/2/2009) 15.73% 12.71% 16.39%

Source: Bloomberg, Miller Value Partners

Four equities and a preferred comprised last week’s top contributors (Exhibit 2). GEO Group (GEO) popped in conjunction with joining the S&P MidCap 400 Index. Arlington Asset Investment (AI) maintained its qualified $0.625/share dividend (17.4% annualized) and moved above its 200-day moving average. William Lyon Homes (WLH) continued to move higher as better-than-expected February housing starts of 3.0% came in above the Street’s estimates of 1.4%. The NAHB Builder Survey also rose 6 points to 71 following two straight months of declines and is now at the strongest level since June 2005. There was no price-changing news on Chimera Investment Corp (CIM) or Carlyle Group (CG).

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

Name Type Return
GEO Group Equity 2.8%
Chimera Investment Corp. Equity 3.2%
Arlington Asset Investment Corp. Equity 4.4%
Carlyle Group Equity 2.2%
William Lyon Homes 6.5% Preferred 2.7%

Source: Miller Value Partners

Four bonds and an equity comprised last week’s top five detractors (Exhibit 3). Mortgage servicing firm Walter Investment Management (WAC) posted disappointing 4Q results with larger-than-anticipated losses along with the disclosure of a material weakness in internal controls and a subpoena tied to its mortgage origination practices. Valeant Pharmaceuticals (VRX) bonds fell in conjunction with its stock after news broke that Bill Ackman sold his entire stake in the company. Frontier Communications Corp. (FTR) declined as the stock transferred from the S&P 500 to the S&P MidCap 400 index due to new guidelines regarding market capitalization thresholds. Declining oil prices weighed on securities of Era Group (ERA), which operates a fleet of helicopters for oil producers.

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

Name Type Return
Walter Investment Management 4.5 11/19 Bond -41.7%
Valeant Pharmaceuticals 6.75 8/21 Bond -4.2%
*Recently Added Security* Bond -16.0%
Era Group 7.75 12/22 Bond -2.4%
Frontier Communications Equity -3.7%

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 (includes LMM LLC and Miller Value Partners, LLC)

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