Triple Threat Firms Will Deliver Your Best Stocks Returns in 2014
Companies / Investing 2014 Jan 30, 2014 - 11:47 AM GMTBy: Money_Morning
Robert Hsu writes: As readers of my Permanent Wealth Investor know, alternative money management firms are some of my favorite securities for investors to own.
After a great run in 2013, those firms will have a hard act to follow in 2014.
But, here's the thing: the same sources that drove income last year for these companies are firmly in place. And will be throughout 2014.
So, what's so great about alternative money management firms?
They're great for both growth and income-oriented investors because their revenue comes from a "triple threat" of catalysts that can drive your best returns in 2014...
How Multiple Profits Pass Straight to Your Pocket
First off, alternative money management firms and private-equity firms charge fees based on the amount of assets under management. With billions of dollars in "AUM," or "assets under management," these firms are seeing big dollars each year in annual management fees.
On top of the management fees there are also performance fees, which can come to about 20% of the performance gains in a given account.
Finally, there's the capital appreciation of the capital these funds invest for themselves, which gives them an added layer of bottom-line performance that can drive their share prices higher.
The multiple revenue sources feeding alternative investment and private-equity firms are in large part what makes them such a great asset class for income investors. Yet the structure of these funds also makes them well-suited for both growth and income investors.
You see, most of these firms are structured as a limited partnership, which means at least 90% of their earnings must be "passed through" to shareholders. That means they are set up differently than traditional public corporations. While traditional corporate structures are designed to retain earnings, pass-through entities are designed to funnel their earnings directly to shareholders.
The Extra Tax "Boost" That Enhances Your Return
One huge reason why pass-through securities are so attractive is because the money paid out to shareholders (also known as unitholders in the case of most pass-through securities) is only taxed once at the corporate level.
This single taxation, as opposed to the double taxation on traditional corporations, means dividend payouts from pass-through entities are much bigger, and hence many of their annual dividend yields are much more attractive than regular corporate dividends.
For unitholders, pass-through securities offer the limited liability protection of traditional corporations, but without the double tax bite you take from Uncle Sam. And, because these entities don't have to contend with retained earnings, they are usually much more efficient and have far fewer financial barriers between money earned and the unitholders.
Finally, one of the most attractive aspects of alternative money management, pass-through securities is their outstanding yields. Many pay out distributions (dividends) that amount to a 5% to 10% yield.
Two Great Companies to Get You Started
Although there are many great companies to choose from in the alternative investment management space, there are two that I really like, and that investors should consider owning. The first is hedge fund titan Och-Ziff Capital Management Group LLC (NYSE: OZM).
Founded in 1994 by former Goldman Sachs' proprietary trader and self-made billionaire Daniel Och, OZM is one of the largest institutional alternative asset managers in the world, with approximately $38.5 billion in assets under management as of November 2013.
Through the management of assets for large institutions and select high-net-worth clients, OZM collects substantial management fees of about 1.5% per year on total assets. Finally, the firm charges its customers a percentage of profits, around 20%, which in the business is known as an incentive allocation. The multiple revenue sources feeding OZM are in large part what make it an ideal pick to benefit from a strong bull market.
Last year, the company's AUM soared to record levels that increased some 21% from the prior year. In 2013, OZM's three equity hedge funds were each up more than 10% for the year through October, versus 5.5% during the same period for the average equity hedge fund. The firm also earned $72.3 million in incentive income in Q3, 2013, up from $8 million in the same quarter a year earlier.
Last quarter, OZM declared a dividend of 25 cents per share, a 2% quarterly yield for the stock. Annualized, that's a 6% yield. That's solid, but when you consider the share price on OZM is up more than 50% over the past 12 months, you get the real sense of why I like this stock.
Another stalwart firm in this space that I really like is The Blackstone Group L.P. (NYSE: BX). This is the largest private-equity firm in the United States, with $248.1 billion in total assets under management as of September 2013. That's an incredible amount of total assets, and the sheer size of Blackstone's fiscal might is what helps makes it such a revenue and earnings machine.
Founded by Wall Street veterans and former Lehman Brothers bankers Stephen Schwartzman and Pete Peterson in 1985, Blackstone managers have accumulated decades of experience and fiscal know-how when it comes to generating returns for investors. Like many private-equity firms, Blackstone bought assets on the cheap during the Great Recession, and in recent years it's cashed in on those discounted acquisitions. Some of the highest-profile holdings in Blackstone's investment portfolio include marine-life themed amusement park SeaWorld Entertainment, and Hilton Hotels.
BX shares currently yield 3%, which is solid if not spectacular. What is spectacular, however, is the share price and dividend gain of more than 100% in 2013.
2014 should be another great year for money management firms. That means investors seeking high income and great capital appreciation need to take note, and embrace the alternative.
The total return potential in these securities is just too good to pass up.
Source : http://moneymorning.com/2014/01/30/triple-threat-firms-will-deliver-best-returns-2014/
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