March 25, 2019

Income Strategy Update for Week Ended 3/22/19

Debt of Avon Products Advances on Natura Takeover Talk While Ascena Falls on Moody’s Downgrade

Last week, the Income Strategy declined -1.13%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.26% gain and the S&P 500’s -0.75% fall. (Exhibit 1). The strategy ended the week up 9.87% YTD, or 292 basis points ahead of the high yield index and 239 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 3/22/191

Time Period Income Strategy ML HY II S&P 500
Last Week (3/15 – 3/22) -1.13% 0.26% -0.75%
MTD -1.74% 0.56% 0.70%
QTD 9.87% 6.95% 12.26%
YTD 9.87% 6.95% 12.26%
Inception (annualized since 4/2/2009) 13.58% 11.22% 15.82%

Source: Bloomberg, Miller Value Partners

Four equities and a bond comprised last week’s top five contributors (Exhibit 2). Debt of Avon Products (AVP) rose on reports that peer Natura engaged in talks with Avon regarding a potential transaction. Barclays upgraded Avon debt to “Market Weight”, citing a potential change of control offer and belief that the headline will create a support level for the bonds with a lack of willingness to sell short. Energy MLPs were another top contributor, as UBS remains optimistic on the group, citing capital discipline, a stable macro environment, and potential dividend increases. The analyst reiterated Buy ratings on NGL Energy Partners (NGL) and Energy Transfer (ET) with 15% ($16) and 76% ($27) upside, respectively. Sberbank (SBER LI) and Washington Prime Group (WPG) rose above their 50-day moving averages.

Exhibit 2: Significant Contributors to Performance, 3/15/19 – 3/22/19

Name Type Return
Avon Products 7.0 3/23 Bond 3.6%
Sberbank Equity 2.8%
Washington Prime Group Equity 4.9%
NGL Energy Partners LP Equity 2.1%
Energy Transfer LP Equity 2.1%

Source: Miller Value Partners

Four equities and a term loan comprised last week’s top five detractors (Exhibit 3). Debt of Ascena Retail Group (ASNA) fell on a Moody’s Corporate Family Rating downgrade to B1 from Ba3, but upgraded their outlook to Stable from Negative. Apollo Global Management (APO) fell despite a bullish note from Goldman Sachs citing a robust outlook for fee-related earnings growth. Management is confident they can maintain a +20% CAGR over the coming years driven by strong demand for Credit products, Real Assets, and Private Equity. The analyst maintains a “Buy” rating and $41 price target, 46% implied upside excluding the 8.0% dividend yield. Danske Bank (DANSKE DC) fell despite UBS naming it as a top pick with a DKK 193 price target, 59% implied upside excluding the 7.0% dividend yield. The analyst cites shares are attractively valued at 7x 2019e earnings and 0.7x tangible book with an expected return on tangible equity of ~11%. Carlyle Group (CG) named Christopher Finn as the firm’s COO from his previous role as Managing Director and Global Head of Operations. Citi reiterates their “Buy” rating and $34.50 price target, 90% implied upside excluding the 9.5% dividend yield.  There was no price changing news for BGC Partners (BGCP).

Exhibit 3: Significant Detractors from Performance, 3/15/2019 – 3/22/19

Name Type Return
Ascena Retail Group TL B 1L 08/22 Term Loan -9.5%
Apollo Global Management LLC Equity -3.8%
BGC Partners Equity -7.0%
Danske Bank A/S Equity -9.4%
Carlyle Group LP Equity -2.9%

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.

©2019 Miller Value Partners, LLC

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