Fortress – On the Ramparts

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% of AUM, alternative assets, asset managers, Blackstone, FIG, Fortress Investment Group, Gagfah, hedge funds, KKR, Logan Circle Partners, Newcastle Investment Corp, private equity funds, Springleaf Holdings

When I posted my first writeup on Fortress Investment Group (FIG:US), it was May-2012 & the share price was only $3.11. Buying the shares (& writing about them), I felt like I was in the thick of battle – trying to defend a breached portcullis in a last-ditch & perhaps doomed effort! [In hindsight, the more revulsion I hear about a post/company, the more promising the investment opportunity might actually be…] But the situation certainly looked much safer by December (with the share price at $4.38), when I posted a follow-up piece: Another Assault on Fortress. And now here we are, standing proud & tall on the ramparts, masters of all before us – the share price is $8.17, and even traded up to $9.00+ recently!

But ramparts aren’t about the view, they’re designed for spotting danger. My last fair value price target was $8.84 per share – we need to do a fresh survey. How much upside potential is now on offer? And more importantly, has our margin of safety been eroded to unacceptable levels?

OK, let’s do a quick wrap-up of 2012, and then take a closer look at progress YTD-2013. I plan to stick with roughly the same valuation methodology, so I definitely recommend you revisit my last two posts (linked above). However, it would be handy to reproduce this table here:

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Argo Group – 2013 Interim Results

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% of AUM, Andreas Rialas, AREO, ARGO, Argo Group, Argo Real Estate Opportunities Fund, Globalworth Real Estate Investments, intrinsic value, Kyriakos Rialas, Price/Cash, The Argo Fund, TPPI

You may want to first read my preview of Argo Group’s (ARGO:LN) interim results here.

My estimate for end-Jun Assets under Management (AUM) was $333.8 mio. Actual AUM was reported at $308.0 m – down (5.6)% from end-Dec, but up 1.9% y-o-y. The H1 return estimates I noted for The Argo Fund (TAF), the Argo Distressed Credit Fund (ADCF) & the Argo Local Markets Fund (ALMF) were all spot-on. [And my Argo Real Estate Opportunities Fund (AREO:LN) estimate was derived directly from their published results]. What tripped me up was the Argo Special Situations Fund (SSF) – its (20.6)% H1 NAV decline was rather unexpected… That’s a loss of nearly $23 m, which accounts for the vast majority of my AUM over-statement (net redemptions presumably explain the rest).

Even with more info to hand, I’m not sure I would have anticipated this kind of result anyway. Here’s management’s explanation: ‘The main contributors to this position were the decline in share price of AREOF; a write down in the value of an investment in the Greek telecommunications company, On Telecoms; a higher valuation ascribed to the investment in TPPI.’ Now, let’s consider each of those components:

– The PT Trans-Pacific Petrochemical Industries (TPPI) gain is no great surprise – TPPI was also the main performance contributor for TAF & ADCF this year.

– While AREO’s price decline (from EUR 0.0522 to EUR 0.02) may seem fairly irrelevant at this point, the company’s share count is high & Argo (Group & funds) own a 73.9% stake. [NB: Argo Group itself only owns a 1.8% AREO stake]. That still translates into a meaningful write-down. If I assume SSF’s the only Argo fund invested in AREO – and I’m not at all sure that’s a correct assumption – by my calculation, its loss could total up to $18.8 m.

– As regards On Telecoms, the Greek telecommunications company, it was my understanding that SSF’s predecessor funds (ACPF & AHL) had already recorded a complete write-down on their investment in the company.

Considering the points above, I’m puzzled how SSF lost almost $23 m..?

Argo Group Interims – A Preview

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% of AUM, Andreas Rialas, ARGO, Argo Group, Argo Real Estate Opportunities Fund, AUM, Cyprus bail-out, intrinsic value, Investor Relations, shareholder activism, shareholder value, The Argo Fund

I expect Argo Group (ARGO:LN) will be releasing interim results in the next week or so. I’ve no desire to be a hostage to fortune, but I think we can make some intelligent assumptions about their results – and there’s an important issue I want to highlight:

Let’s begin with Assets Under Management (AUM). First, I obviously have no idea re subscriptions/redemptions! But rightly or wrongly, my impression is that changes in Argo’s AUM have been driven primarily by performance, at least in the past couple of years. [NB: See here – at our meeting earlier this year, Andreas Rialas committed to better disclosure re changes in AUM – breaking out gross subscriptions, performance & gross redemptions is standard practice for the majority of Argo’s listed peers].

I also have no insight into the performance of the Argo Special Situations Fund (SSF) – let’s assume AUM remains unchanged. We then have the Argo Real Estate Opportunities Fund (AREO:LN) – which last reported an adjusted NAV of EUR 68.5 mio. For Argo’s other funds, I’ve come across conflicting reports of YTD returns – I prefer to be conservative, so I’m fairly confident we’ll see the following returns (as of end-June 2013), at a minimum:

UK Asset Managers & Argo Group

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% of AUM, Andreas Rialas, ARGO, Argo Group, asset managers, Charlemagne Capital, Dolphin Capital Investors, Ex-Cash Ratios, F&C Asset Management, Impax Asset Management Group, Investor Relations, Kyriakos Rialas, Miton Group, NAV discount, The Argo Fund, Third Point, UK

In April, I took a closer look at the universe of UK-listed asset managers. A key piece of research was a (relatively) simple analysis which focused on financial stability & market valuation – this study also offered a useful peer comparison with Argo Group Ltd. (ARGO:LN) (& see this recent post).

Frankly, the numbers (plus the rest of this post) speak for themselves, but let’s have a taste of the main highlights:

Name	Ticker		Net Cash/Inv as % of Mkt Cap
F&C Asset Management	FCAM		(23)%
Liontrust Asset Management	LIO		3.9%
Henderson Group	HGG		6.2%
Aberdeen Asset Management	ADN		7.9%
Jupiter Fund Management	JUP		8.4%
Polar Capital Holdings	POLR		16%
Ashmore Group	ASHM		18%
Miton Group	MGR		26%
Schroders	SDR		34%
Man Group	EMG		55%
Impax Asset Management Group	IPX		59%
Charlemagne Capital	CCAP		64%
Median			17%
Argo Group	ARGO		175%

It’s encouraging to see the entire sector now enjoys robust financial health. Only F&C Asset Management (FCAM:LN) is in a net debt position – all other companies sport net cash & investments on their balance sheets. But it’s also clear this healthy financial position is not the key driver of market valuations – for Argo’s peer group, net cash/investments only represents a median 17% of market cap. On the other hand, Argo’s $23.6 mio of net cash/investments amounts to a whopping 175% of its market cap.

EIIB – Closing The Value Gap

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% of AUM, AUM, EIIB, European Islamic Investment Bank, frontier markets, GCC countries, Investor Relations, Islamic finance, MENA, NAV discount, Norges, Rasmala Holdings, share buyback, Sharia'a, Zak Hydari

In mid-April, I realized it was a full year since I’d last posted about European Islamic Investment Bank (EIIB:LN). No real neglect on my part (EIIB is now a Top 3 holding for me), but simply an undimmed confidence in their underlying story & intrinsic value. A fresh write-up made sense (esp. with 2012 final results due for release), as I suspected EIIB would be a brand new & interesting stock for a lot of (more recent) readers. [The stock actually rallied +15% in the week after my post].

The results speak for themselves, and received an enthusiastic reception from current & prospective shareholders. [EIIB shares are now up +27% since my last post]. These are the first set of results to properly illustrate EIIB’s new asset management strategy, its operational turn-around & progress to date, and the exciting potential of the MENA region. Again, see my prior post, but I definitely encourage you to read the full set of results – or even better, the entire annual report! Let’s divide the rest of this post into four sections:

Highlights:

– Assets under Management (AUM) increased +53% to $922 million, including a mandate win from Norway’s sovereign wealth fund

– EIIB & Rasmala staff/operating expense costs were basically halved – ahead of forecast, with some further efficiencies targeted for 2013

– Underlying business operating near-breakeven (GBP 0.6 mio pre-tax loss, exc. write-downs & discontinued ops.)

– A reduced GBP 13.3 mio in legacy assets targeted for an orderly exit

– Balance sheet risk continues to reduce, with 75%+ of assets invested in cash, deposits & fixed income, and liabilities limited to 25% of total assets

– Wholesale strategy confirmed, with new distribution agreements signed & existing relationships deepened. Re-iterated $3 billion AUM target by 2016

Also, this commitment from the CEO particularly grabbed my attention:

Argo Group – Awaiting Results

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% of AUM, alternative assets, Andreas Rialas, AREO, ARGO, Argo Group, Argo Real Estate Opportunities Fund, asset managers, distressed assets, distressed investing, emerging markets, European sovereign debt crisis, Expected Value, intrinsic value, Kyriakos Rialas, Price/Cash, share buyback, shareholder activism, tender offer, The Argo Fund

Argo Group’s (ARGO:LN) Final Results should be released shortly (I’ll try confirm the exact date). In my most recent Argo posts, I published two letters I’ve sent to Kyriakos & Andreas Rialas (CEO & CIO, respectively). I encourage you to review both letters before continuing:

Here’s the first letter (from Nov-2012)

Argo’s share price rallied +6.2% in the following week.

And the second letter (from Dec-2012)

This was sent on behalf of myself, Guy Thomas & some other (smaller) shareholders, representing an aggregate 5% shareholding in Argo. The letter focused on a single specific shareholder distribution proposal. ARGO subsequently rallied +6.5% (in the following week). [In fact, the share price is now up an impressive +36% since my November letter. Despite the rally, I believe Argo remains just as compelling an investment proposition – I currently have a 5.4% portfolio stake].

My recommendations & proposal require little (further) explanation, and I expect shareholders will enthusiastically support all efforts to realize & enhance Argo’s intrinsic value. But I will revisit them in the context of an upcoming results preview – plenty of current & prospective shareholders have emailed me about Argo, so I hope you’ll find this useful. Let’s first consider Argo’s existing funds:

Another Assault on Fortress

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% of AUM, alternative assets, asset managers, dry powder, Ex-Cash Ratios, FIG, Fortress Investment Group, high dividend yield, incentive fees, Logan Circle Partners, Price/Cash, RailAmerica, share buyback

In May, I published a series on alternative asset managers, which culminated in a write-up of my latest purchase (at the time), Fortress Investment Group (FIG:US). Based on its net cash/investments per share, plus a fund management valuation of 6.3% * $46.4 bio of Assets under Management (AUM), I pegged FIG at a Fair Value of $7.80 per share. Based on FIG’s $3.11 share price at that point, this offered substantial Upside Potential of 151%. This turned out to be v fortunate timing, as I caught the 2012 bottom (in fact, pretty much the 3 yr low) for FIG:

Argo Group – A Shareholder Proposal

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% of AUM, Andreas Rialas, ARGO, Argo Group, asset managers, catalyst, distressed assets, intrinsic value, Kyriakos Rialas, Price/Cash, share buyback, shareholder activism, tender offer, The Argo Fund

Argo Group Ltd. (ARGO:LN) has been a consistent Top 7 holding for me since launching the blog last year. It currently represents 4.9% of my portfolio.

It was among the first handful of stocks I wrote up late last year (here & here). I also included it in my Baker’s Dozen for 2012. I followed up with another detailed write-up in May-12. [btw An asset manager series later that month may add useful context: Parts I, II, III, culminating in a Fortress Investment Group (FIG:US) write-up]. I then briefly revisited Argo in Oct-12 as part of my catalyst series.

I was pleased to note recently my Argo write-ups have actually proved the most popular with readers. Which certainly isn’t reflected in the performance of the share price: ARGO is actually down 20% YTD! Considering the UK market’s progress this year, and based on reader/investor feedback, it’s reasonable to suggest some/all of this price decline might have been avoided…

This compelled me to write to Argo’s management a month ago with a number of recommendations to enhance shareholder value, improve investor relations & disclosure, and to increase Assets under Management. I’m pleased to see the letter would appear to have reminded new/existing investors of Argo’s far higher intrinsic value, and its potential – the share price has subsequently rallied +15%. It also garnered some v useful shareholder feedback & support, which prompted me to send this follow-up letter to Argo last week:

Argo – Escape from an Evil State!

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% of AUM, activist investors, alternative assets, AREO, ARGO, Argo Group, Argo Real Estate Opportunities Fund, Colony Financial, distressed assets, emerging markets, European sovereign debt crisis, Fortress Investment Group, intrinsic value, Investor Relations, Kyriakos Rialas, Livermore Investments, Mello Central, Price/Cash, Rialas brothers, share buyback, special situations, sub-advisory, The Argo Fund, Universe Group

OK, sorry to disappoint… This definitely isn’t a review of Ben Affleck’s new movie ‘Argo’! [I haven’t seen it yet, but it’s on my list – the reviews are uniformly good, and Affleck displayed a sure hand with ‘The Town’.]

No, this post is about Argo Group Ltd. (ARGO:LN), whose share price is also trapped in a rather evil state… Specifically, the price has steadily declined 35% in recent months to GBP 10.125p – when the company is profitable & has net cash/investments on hand of GBP 20.9p per share! Operational execution & performance ultimately offer the best escape route for Argo. [I’m delighted to see Argo has now launched a new liquid emerging market debt fund. This offers attractive exposure, I’m sure it will clock up a good performance, but real success will come down to the level of fund-raising that’s achieved.] But there a number of additional actions & strategies that may offer considerable assistance in making this escape. Here’s a copy of a recent letter I sent to Kyriakos Rialas, CEO of Argo:

‘November 07, 2012

FAO:    Kyriakos Rialas, CEO

Cc:       Andreas Rialas, CIO

Cc:       Michael Kloter, Chairman

Argo Group Limited

33-37 Athol Street

Douglas

Isle of Man

IM1 1LB

Asset Managers – OK, Time to Storm the Castle!

Tags

% of AUM, absolute return, Ally Financial, asset managers, carried interest, catalyst, Colony Financial, de-leveraging, distressed assets, Fortress Investment Group, KKR, mortgage servicing rights, MSRs, Nationstar, Newcastle, Nomura, Oaktree Capital, Och-Ziff, Ocwen Financial, pension funds, PHH Corp, Price/Sales, private equity funds, special situations

Continued from here. As I’ve highlighted, (alternative) asset managers have an attractive business model, strong balance sheets, and are generally undervalued. On the other hand, they’re a geared market play. I see 2 ways to alleviate this risk:

i) Ration asset manager allocation in your portfolio. As I’ve discussed,  analyzing, ranking & selecting from the broadest universe of listed managers is the best way to achieve this.

ii) Look for a great story, a great stock, AND a great price. This can significantly transform your risk/reward. Make a poor decision on one attribute, and hopefully the others bail you out. Get them all right, and accelerate & increase your returns…