A good magician’s true skill rests in his ability to misdirect an audience’s attention. So too do management teams sometimes misdirect investors’ attention to pursue their own goals, which may conflict directly with shareholders’ best interests. A prime example of such hocus pocus rests in a large mortgage investment firm’s latest earnings call. The company’s prominence, track record and longevity mean that investors look to management for insight on the mortgage market and how the firm allocates shareholder capital. Unfortunately, management asked its audience to focus on incomplete facts regarding share repurchases, a topic we think about very carefully.

The company’s stock now trades at a 20% discount to its last-marked book value, and the CEO noted that such discounts have historically provided a compelling entry point for long-term investors. If true, then there is no better use of the company’s capital than a large share repurchase, which increases ongoing shareholders’ ownership of the company and also boosts each share’s earnings power. However, the company has not repurchased shares in any meaningful amount since the fourth quarter of 2012. Management’s comments on the call may elucidate the erroneous thinking behind that decision. As the company must pay out at least 90% of its earnings to receive favorable tax treatment, the CEO noted that the company cannot retain its earnings “to expand our investments.”

Unfortunately, “expanding investments” should not be a top priority for any closed-end specialty finance company. Management’s sole focus should be maximizing value per share for ongoing shareholders, even if that means shrinking the balance sheet. When faced with a choice between buying new assets at current market prices or using shareholder capital to buy essentially identical assets at a 20%-off sale via a share repurchase, management should choose the latter without fail.

Management further confused the issue by comparing a share repurchase to “Apple closing down the very factories that produce the cash flow that they used to buy back their stock.” This is an unfortunate and incorrect comparison — all of Apple’s value derives from its ability to generate future cash flows, not from the asset value of its “factory,” which is why Apple trades at nearly 6x its book value. This mortgage investor, in contrast, has a highly liquid asset in its portfolio of agency-guaranteed mortgages that are marked to current market values every quarter. In fact, an unwavering commitment to “closing the factory” altogether would be the best outcome in the world for this firm’s shareholders. If management were to liquidate its entire portfolio and use every last dollar to retire debt and buy back shares as long as shares traded below book value, those who held their shares would quickly wind up with a stock trading at book value, which would generate a 25% return. Unfortunately, this is not going to happen without a fight, because this company’s management agreement stipulates that those in charge take home 1.05% of equity every year. Prior to externalizing the management company in 2013, the current CEO earned over $25M in 2012, the last full year of publicly disclosed compensation.

Further comments on the call regarding share repurchases and performance were incomplete and failed to tell the whole story. The CEO pointed out that last year, the company’s stock outperformed the PowerShares Buyback Achievers ETF (PKW), an index that also underperformed the S&P in 2014, the CEO also noted. The CEO did not mention that since the buyback ETF’s inception at the end of 2006, that ETF outperformed the stock market by 2.3% per year, or 34.9% cumulatively, through May of 2015. The index has also outperformed this CEO’s stock since inception. Two other mortgage investors, CYS Investments (CYS) and American Capital Agency (AGNC), which have been among the most active mortgage REITs buying their own stock since the first quarter of 2013, have outperformed the company in question in total shareholder return since they started buying back their shares.

This firm’s reluctance to purchase shares trading at a 20% discount to book value is hypocritical in light of past share issuance at as little as a 3% premium to book value. However, the market sniffs out this behavior and rewards the balanced, thoughtful capital allocators with a premium valuation – see Triangle Capital (TCAP) and TPG Specialty Lending (TSLX) for two model citizens in the specialty finance realm, at least as of this writing. Triangle Capital is internally managed, so every dollar of new capital reduces shareholders’ expenses relative to their investment and increases the value of the company for shareholders. While TPG Specialty Lending is externally managed like the firm being discussed, TSLX has an automatic buyback program in place that becomes more aggressive the farther shares fall below book value; not surprisingly, shares have not dipped below book since the company’s IPO.

The firm’s incomplete comments on the most recent call are disappointing in light of the company’s bellwether status for mortgage investors. To be fair, there are far worse capital allocators in the world of specialty finance, most of which trade at larger discounts to book value. Still, this firm has lagged both the market and peers in recent years, which management could remedy if they were to prioritize creating value for shareholders over their own compensation.

It’s important for shareholders to recognize when management teams are inefficiently allocating capital at shareholders’ expense. Unlike a magician’s audience, which pays for the magician to deceive them, investors pay management teams not to focus on an incomplete picture but to do the right thing with their capital. Such lopsided capital allocation only undermines the long-term franchise value of the manager and the investment legitimacy of the asset class.