February 3, 2020
Income Strategy Update for Week Ended 1/31/20
Danske Bank Advances on Potential US Fine Loophole While Alternative Asset Managers Sink
Last week, the Income Strategy declined -3.33%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s -0.33% fall and the S&P 500’s -2.10% loss. (Exhibit 1). The strategy ended the week down -2.17% YTD, or 217 basis points behind the high yield index and 213 basis points behind the S&P 500.
Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 1/31/201
|Time Period||Income Strategy||ML HY II||S&P 500|
|Last Week (1/24 – 1/31)||-3.33%||-0.33%||-2.10%|
|Inception (annualized since 4/2/2009)||13.56%||10.97%||16.15%|
Source: Bloomberg, Miller Value Partners
Four bonds and an equity comprised last week’s top five contributors (Exhibit 2). Danske Bank (DANSKE DC) rose on reports by S&P Global Market Intelligence stating the company could escape a US fine in their money laundering case as they do not have a license to operate as a US bank. Debt of CenturyLink (CTL) rose as the company announced the successful extension and repricing of its senior secured credit facilities. Debt of Bombardier (BBD/B CN) rose slightly on continued speculation of a potential rail merger with Alstom (ALO FP). Moody’s downgraded GameStop (GME) to B2 (from Ba2) with a “Stable” outlook. There was no price changing news on the debt of Ultra Petroleum (UPLC).
Exhibit 2: Significant Contributors to Performance, 1/24/20 – 1/31/20
|Danske Bank A/S||Equity||3.6%|
|CenturyLink Inc 7.6 9/39||Bond||0.7%|
|Ultra Petroleum 7.125 04/25||Bond||4.3%|
|Bombardier 7.875 04/27||Bond||1.2%|
|GameStop 6.75% 3/21||Bond||0.2%|
Source: Miller Value Partners
Equities comprised last week’s top five detractors (Exhibit 3). Alternative asset managers Apollo Global Management (APO) and Carlyle Group (CG) fell with the broad equity market. Further, Apollo reported solid Q4 results with distributable earnings of $1.10 coming in well ahead of consensus of $0.73, driven by higher-than-expected realized performance fees. Fee-related earnings (FRE) of $241M ($0.59/share) and management fees of $388M were both in-line. Capital raising remained robust with $10.5B of gross inflows while fee-generating AUM grew +1% and permanent capital increased to $166B (50% of total AUM). Shares fell, though, as management guided to 55% FRE margins for FY20 (flat Y/Y and below consensus) mainly driven by a $0.20/share pull-forward of net realizations in Q4 and a $0.13/share impairment in one of their private equity funds. Lastly, the company declared a $0.89/share distribution (7.6% annualized yield). JP Morgan cut Alrosa (ALRS RX) to “Neutral” with a Rub 86 price target, 6% implied upside excluding the 9.7% dividend yield, noting that while the gradual diamond market recovery is underway and remains intact, recent share price outperformance makes the risk/reward more balanced. Chemours (CC) fell in sympathy with peers DuPont de Nemours (DD), who reported in-line results but issued lackluster guidance, as well as Sherwin-Williams (SHW), whose weaker-than-expected results could signal continued weakness in titanium dioxide demand. There was no price-changing news on Sberbank (SBER LI).
Exhibit 3: Significant Detractors from Performance, 1/24/20 – 1/31/20
|Apollo Global Management Inc||Equity||-7.2%|
|Carlyle Group Inc||Equity||-3.7%|
|The Chemours Co||Equity||-11.0%|
Source: Miller Value Partners
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1The performance figures reflect the results of a representative account net of management fees and certain other expenses. For important additional information about Income Strategy performance, please click on the Income 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. Content may not be reprinted, republished or used in any manner without written consent from Miller Value Partners.
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