February 12, 2018

Income Strategy Update for Week Ended 2/9/18

Arlington Asset Investment Advances on Strong Earnings Report While Alternative Asset Managers Fall

Last week, the Income Strategy declined -3.97%, underperforming the Merrill Lynch U.S. High Yield Master II Index’s -1.43% fall, but outperforming the S&P 500’s -5.10% decline (Exhibit 1). The strategy ended the week down -2.84% YTD, or 161 basis points behind the high yield index and 100 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 2/9/181

Time Period Income Strategy ML HY II S&P 500
Last Week (2/2 – 2/9) -3.97% -1.43% -5.10%
MTD -5.08% -1.88% -7.15%
QTD -2.84% -1.23% -1.84%
YTD -2.84% -1.23% -1.84%
Inception (annualized since 4/2/2009) 14.64% 11.85% 16.09%

Source: Bloomberg, Miller Value Partners

Five equities comprised last week’s top five contributors (Exhibit 2). Arlington Asset Investment Corp (AI) rose after posting Q4 core EPS of $0.58, beating analyst estimates of $0.52, while tangible book value, excluding deferred tax assets, increased 4.1% sequentially. Higher than expected net interest income, stemming mainly from higher asset yields, contributed to the beat. JMP Group (JMP) moved above closely watched technical levels. There was no price-changing news on Triangle Capital (TCAP) or Abercrombie & Fitch (ANF).

Exhibit 2: Significant Contributors to Performance, 2/2/18 – 2/9/18

Name Type Return
Arlington Asset Investment Corp Equity 2.2%
JMP Group Equity 4.7%
Triangle Capital Corp Equity 1.1%
Abercrombie & Fitch Co Equity 0.5%
*Recently Added Security* Equity 1.0%

Source: Miller Value Partners

Five equities comprised last week’s top five detractors (Exhibit 3). The broad weakness in equity markets was the predominant reason the alternative asset managers fell, as Carlyle Group (CG) handily outperformed expectations, with Q4 economic net income  of $1.01 per unit, handily surpassing analyst estimates of $0.62, as well as the $0.33/share dividend (5.6% annualized yield). The beat was driven by better than expected performance in both private equity and energy portfolios, while AUM rose 12% sequentially to $195B. Apollo Global Management (APO) fell as Morgan Stanley offered a block of 2M shares, all secondary, at $35.30, a 1.11% discount vs the prior day’s close. Further, Apollo co-founder Josh Harris sold 4.5M shares at $34.00 for a total of $153M through a 10b5-1, though he retains 49M shares worth $1.6B. CBL & Associates (CBL) fell after reporting Q4 FFO of $0.56 and revenue of $235.36M, both falling short of consensus estimates of $0.57 and $242.18M, respectively, while same-store net operating income declined -6.7%. Management forecasts 2018 same-store NOI declines between -6.75% and -5.25% and guided 2018 funds from operations of $1.70-$1.80, which comes in well below street estimates of $1.97. Hi-Crush Partners (HCLP) and Century Link (CTL) both fell below closely watched technical levels.

Exhibit 3: Significant Detractors from Performance, 2/2/18 – 2/9/18

Name Type Return
Carlyle Group LP Equity -10.4%
Apollo Global Management LLC Equity -9.9%
CBL & Associates Properties Equity -20.8%
Hi-Crush Partners LP Equity -9.6%
CenturyLink Inc. Equity -9.9%

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 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.

©2018 Miller Value Partners, LLC

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