April 15, 2019

Income Strategy Update for Week Ended 4/12/19

Alternative Asset Managers Rise While Arlington Falls on JMP Lowering Earnings Estimates

Last week, the Income Strategy advanced 0.75%, outperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.57% gain and the S&P 500’s 0.56% rise. (Exhibit 1). The strategy ended the week up 13.87% YTD, or 529 basis points ahead of the high yield index and 280 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 4/12/191

Time Period Income Strategy ML HY II S&P 500
Last Week (4/5 – 4/12) 0.75% 0.57% 0.56%
MTD 2.95% 1.09% 2.66%
QTD 2.95% 1.09% 2.66%
YTD 13.87% 8.58% 16.67%
Inception (annualized since 4/2/2009) 13.91% 11.32% 16.17%

Source: Bloomberg, Miller Value Partners

Equities comprised last week’s top five contributors (Exhibit 2). Alternative Asset Managers Carlyle Group (CG) and Apollo Global Management (APO) rose with the broad equity market, while Apollo also moved above its 50-day moving average. Further, Morgan Stanley is forecasting a strong earnings season for the group, projecting private equity marks of +6.1%, real estate appreciation of +5.0%, and credit performance of +2.5%, in addition to robust monetization activity. Sberbank (SBER LI) reported March net income of $74B, bringing total Q1 net income to RUB 218B, up 11% year-over-year with a 22% return on equity. Loan growth remained strong at 13.8%, driven by retail loan growth of 24% year-over-year. The company is expected to pay out 43% of 2018 net income in dividends, implying payment of RUB 358B (6.6% annualized yield), consistent with the company’s commitment to gradually move from a 36% payout ratio in 2017 to 50% in 2019. Just Energy Group (JE CN) rose above its 50-day moving average. Seaspan (SSW) maintained their $0.125/share dividend (5.0% annualized yield).

Exhibit 2: Significant Contributors to Performance, 4/5/19 – 4/12/19

Name Type Return
Sberbank Equity 7.5%
Carlyle Group LP Equity 2.9%
Seaspan Corp Equity 5.9%
Just Energy Group Equity 3.0%
Apollo Global Management LLC Equity 1.9%

Source: Miller Value Partners

Four equities and a bond comprised last week’s top five detractors (Exhibit 3). JMP Group reiterated their Market Perform rating on Arlington Asset Investment Corp (AI) but lowered their 2019 earnings per share estimates to $1.37 (from $1.65), reflecting lower leverage and faster prepayment speeds. Washington Prime Group (WPG) fell below its 50 and 100-day moving averages. JP Morgan downgraded General Electric (GE) to “Underweight,” citing overly optimistic expectations for free cash flow in the coming years and minimal margin for error on leverage. There was no price-changing news on Ashford Hospitality Trust (AHT) or CenturyLink (CTL).

Exhibit 3: Significant Detractors from Performance, 4/5/2019 – 4/12/19

Name Type Return
Arlington Asset Investment Corp Equity -4.4%
Washington Prime Group Equity -4.0%
Ashford Hospitality Trust Equity -4.1%
General Electric 5.0% PERP Bond -1.8%
CenturyLink Inc Equity -3.4%

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 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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