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Strong Investment Performance Lifts Oaktree Capital

Oaktree Capital Group (NYSE: OAK) benefits when financial markets perform well, and the long bull market has helped to lift the investment manager's returns for years now. That has helped the company bring in more assets recently. Investors have also benefited from the perception of Oaktree as a more customer-friendly option for clients than some of its industry peers.

Coming into Thursday's third-quarter financial report, Oaktree investors wanted to see the company continue to take advantage of favorable conditions in the industry. Although most of Oaktree's key financial metrics declined from year-ago levels, the asset manager remains optimistic about its current condition, and believes that its business operations are going extremely well. Let's take a closer look at how Oaktree Capital did, and whether it's likely to keep up the pace going forward.

Image source: Oaktree Capital Group.

Oaktree sees revenue fall

Oaktree Capital's third-quarter results reflected the reduction in incentive income and management fees that the company has seen lately. Total revenue was down 19% to $235 million, but that was slightly better than the 23% decline that most of those following the stock were expecting to see. Adjusted net income attributable to Oaktree Capital Group investors was down by about a quarter to $43.3 million, and that resulted in adjusted net income per Class A unit of $0.67. Although that figure was down from year-ago levels as well, it nevertheless was far better than the consensus forecast for $0.56 per unit.

Oaktree's metrics provide some color on how the quarter went for the asset manager. The company's favored economic net income measure, which uses a different method of recognizing revenue to account for incentive income, fell by about two-fifths to $0.89 per Class A unit. Assets under management fell very slightly from year-ago levels to $99.5 billion, and although management fee-generating assets climbed by about 2%, a decline of more than 4% in incentive-creating assets under management weighed on Oaktree's performance. Market-value gains provided $7.4 billion in upward pressure on assets, but distributions of $10.5 billion to closed-end fund investors weighed on Oaktree's asset base, as did $1.4 billion in outflows from open-end funds. Most of the gains in management fee-generating income came from capital-raising efforts for the European Principal Fund IV, while the downward move in incentive-creating assets came largely from closed-end fund distributions.

Yet CEO Jay Wintrob was still quite pleased with the way that the asset manager did. "Oaktree's continued strong investment performance was the highlight of the third quarter," Wintrob said, as "driving 14% growth in net incentives created year-to-date." The CEO also downplayed the third-quarter figures, focusing instead on the nine-month results that include substantial gains over 2016 levels.

What's ahead for Oaktree?

Oaktree has confidence in its ability to find lucrative investments, but it is aware of where in the business cycle things appear to be. In Wintrob's words, "At this point in the cycle, we continue to deploy capital across our strategies in a cautious and disciplined manner, and we continue to capitalize on the current market environment by actively harvesting investments."

Still, the sagging third-quarter financials resulted in a smaller distribution for Oaktree's Class A unitholders. The company said it would pay out $0.56 per unit, down by more than half from the second quarter. Investors are used to the variable payments that Oaktree makes, but it is never ideal to see those payouts fall from quarter to quarter.

Oaktree Capital Group unitholders appeared to be comfortable with the results, and the price of those units was little changed at midday following the announcement. As long as Oaktree can continue to produce market-beating performance for its clients, unitholders should keep seeing the asset manager's business fundamentals improve.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Oaktree Capital. The Motley Fool has a disclosure policy.