April 22, 2019

Income Strategy Update for Week Ended 4/18/19

Alternative Asset Managers Rise with Blackstone While Macquarie Infrastructure Falls on Barclays Downgrade

Last week, the Income Strategy advanced 0.62%, outperforming both the Merrill Lynch U.S. High Yield Master II Index’s -0.02% decline and the S&P 500’s -0.07% fall. (Exhibit 1). The strategy ended the week up 14.58% YTD, or 603 basis points ahead of the high yield index and 201 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 4/18/191

Time Period Income Strategy ML HY II S&P 500
Last Week (4/12 – 4/18) 0.62% -0.02% -0.07%
MTD 3.59% 1.07% 2.59%
QTD 3.59% 1.07% 2.59%
YTD 14.58% 8.55% 16.59%
Inception (annualized since 4/2/2009) 13.96% 11.30% 16.13%

Source: Bloomberg, Miller Value Partners

Equities comprised last week’s top five contributors (Exhibit 2). Alternative Asset Managers rose in conjunction with Blackstone Group (BX), who reported strong Q1 results and announced conversion to a C-Corp, effective July 1, 2019. Blackstone reported Q1 distributable earnings of $0.44, missing consensus estimates of $0.51 due to lower cash performance fees. Management fees beat, however, and came in +3.7% above consensus and grew 7.1% year-over-year, while management fee related earnings of $375M grew +11% year-over-year. Fundraising remained robust at $43B, topping consensus of $37B as total AUM rose to $512B. The company declared a $0.37/share dividend (3.7% annualized yield). The C-Corp conversion is expected to be 2-5% dilutive to distributable earnings over the next five years and 12-13% longer-term. The sell-side sees the conversion as a positive read-through for peers Apollo (APO) and Carlyle (CG), as both moved above their 200-day moving averages. Greenhill (GHL) moved above its 50-day moving average on news the company closed a new $375M Term Loan B, upsized from $360M and will be used to repay debt. The company also announced the amount permitted for share repurchases increased by $55M to $340M. Alrosa (ALRS RX) reported Q1 operating results where gem-quality prices fell 19% quarter-over-quarter due to a disproportionate mix of small size diamonds, while total gem sales came in at 7.9M carats. Goldman Sachs is forecasting strong financial results due out next month, calling for a 25% sequential increase in EBITDA with free cash flow expected to be 2.7x higher quarter-over-quarter.

Exhibit 2: Significant Contributors to Performance, 4/12/19 – 4/18/19

Name Type Return
Apollo Global Management LLC Equity 8.6%
Carlyle Group LP Equity 7.5%
Blackstone Group LP Equity 8.7%
Greenhill & Co Equity 8.2%
Alrosa Equity 1.9%

Source: Miller Value Partners

Four equities and a bond comprised last week’s top five detractors (Exhibit 3). Barclays downgraded Macquarie Infrastructure (MIC) from “Equal Weight” to “Underweight” with a $40 price target, slightly below current levels, citing in-line valuation with its peer group. Washington Prime Group (WPG) fell on a note from Goldman Sachs, who expects the company’s adjusted funds from operations payout ratio to continuously trend upwards and reach 135% by 2021 on lower earnings. Sberbank’s (SBER LI) Supervisory Board recommended a Rub 16/share dividend for 2019, implying a 43.5% payout ratio and 6.8% annualized yield. The dividend announcement supports Sberbank’s commitment to gradually move from a 36% payout ratio in 2017 to a 50% payout ratio in 2019. Debt of Endo Pharmaceuticals (ENDP) fell as fears of a “Medicare for All” plan sent healthcare related securities lower. There was no price-changing news on National CineMedia (NCMI).

Exhibit 3: Significant Detractors from Performance, 4/12/2019 – 4/18/19

Name Type Return
Macquarie Infrastructure Co Equity -3.3%
Washington Prime Group Equity -9.0%
Sberbank Equity -2.6%
Endo International PLC 6.0% 7/23 Bond -3.4%
National CineMedia Equity -1.8%

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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