Answers in Portfolio Management

Scott provided a great summary of these Alternative Asset Managers business model and sources of revenue, but did not give a specific valuation metric. Coming up with a So I am going to give my 2 cents.

Any business is valued based on its present and future cash flows discounted at a certain rate of interest. So the question is, are these Alternative Asset Managers going to grow at a rate faster than the Traditional Asset Managers and do they deserve a higher multiple or lower discount rate, etc.

The first Alternative Asset Manager that went public a couple of years ago was Fortress Investment Group (FIG). Per Yahoo Finance it is currently valued as follows (caveat: these have not been independently verified):

Forward PE=10.5 PEG Ratio=0.77 Price/Sales=2.0 Price/Book=2.59 EV/EBITDA=9.80 ROE=26% Forward Dividend Yield=3.2%

One can compare FIG to Traditional Asset Managers like Legg Mason (LM) and/or Blackrock (BLK). What I found in a quick and dirty back of the envelope comparison was that there was not a clear cut valuation parameter that stood out for one group (Traditional) vs. the other (Alternative). For example, on a PEG basis FIG at 0.77 was lower than 1.33 for BLK. The market obviously feels that BLK deserves a premium based on its size, longevity, etc.

Ultimately, the valuation will depend on the following parameters:

1) Your forecast of the future growth of the business cash flows 2) Confidence in your forecast 3) Management's ability to execute and deliver on those forecasts 4) Whether the management is shareholder friendly 5) Demand for the shares etc. etc.

I have copied links of various articles and reports that will shed more light on various valuation related issued when looking at Private Equity Managers.:

http://finance.fortune.cnn.com/2012/05/03/private-equity-firms-valuations/

http://dealbook.nytimes.com/2007/03/16/valuing-a-public-blackstone/

http://www.bloomberg.com/news/2011-08-17/carlyle-pitches-wall-street-on-ipo-valuation-to-rival-blackstone.html

http://www.washburn.edu/sobu/apm/Reports/BX.pdf

Hope this helps.

Without getting too specific on any of the individual names that are public today (e.g. Oaktree, Blackstone), here are some of my general thoughts on the business model:

1) The main thing to remember is that these are asset management companies at their core. The primary difference between a private equity company and a more plain vanilla asset manager (think Blackrock or PIMCO) is the fee structure, which is much more favorable to the private equity model.

2) The difference in the fee structure is that when a private equity company raises a fund, they raise committed capital, which means that they are literally raising the right to receive capital at a future date from a client (for example a pension fund). The PE company begins taking fees on this pool of committed capital before it is even deployed. The PE company then typically has a certain amount of time to invest the committed capital, and if it doesn't deploy all the capital it loses the right to invest those commitments. On top of the fees on committed capital, there are then a series of other fees that the PE company takes. The main ones are the management fee, which the company charges to oversee owned assets once the capital is deployed and then of course the incentive fee, which is the ~20% fee that the company can earn on a profitable investment.

3) So to answer the question more directly, the value of a PE company is tied to its AUM like any other asset manager, and for a PE company you would have to include committed capital in that calculation. I haven't run a specific comp table comparing the value of the PE companies to other public asset managers (Blacrock, Legg Mason, etc.) but I would assume that the PE companies trade at premiums to the vanilla asset managers, although I'm not sure that's justified (I'm not sure it isn't justified either though). As to whether or not they should trade at a premium, I can see the argument going either way based on my level of understanding. On the one hand, PE companies have the potential to earn much, much higher fees than traditional managers. On the other hand I would argue that there are disadvantages to the PE model in that you are only as valuable as your last fund because the funds have defined lifespans. By contrast PIMCO can and probably will be managing its mutual funds for the foreseeable future.

4) Two other items to note:

a) Remember that if the market has enough confidence in a company, it will not be valued based on its present operating fundamentals but on its prospects for future growth. Asset managers are operating in extremely deep capital markets, and so the potential for growth can be astronomical even if the growth wont necessarily materialize.

b) Growing an asset management business isn't about who is the best manager, it's about who has the best sales and marketing. A good sales force will beat a good investor every day of the week in building a successful business.

5) Remember who you're partnering with. As a shareholder in any company it is imperative that you evaluate the trustworthiness of management. This means not just going with the smartest team, because if the smartest team happens to be a greedy one, they will spend their day thinking about how they can enrich themselves at the expense of the shareholder. For PE companies you should take extra care for the following reasons:

a) Asset management businesses are people businesses. They are not capital intensive and so arguably there is very little reason why they should be public companies. The primary operating reason that most asset managers come public is for succession and retention purposes, meaning that it gives them a tool to give equity to their employees. PE companies are generally not coming public to enrich their public shareholders and in fact it is likely that behind closed doors they view retail investors as "dumb money."

b) Wall Street is teeming with smart, selfish and short term thinkers. That's one of the most dangerous combinations I can think of. In my mind the excessive fee structure that PE companies charge should be an instant red flag highlighting management's propensity for greed. PE firms are hired by their clients to advise on investment opportunities. Part of being a good advisor is protecting your client from excessive fees even if that comes at your own expense. IMPORTANT: That is not to say that everyone who works in PE or manages a PE firm is greedy and lacks integrity, but it is a warning to potential shareholders to tread with extra caution.

Marvin, depending on the size of your employer, you will need to contact either Human Resources or the plan administrator. You can have them update your address so you can get current statements, and they can give you instructions on how to log on to your account through the online portal

Every plan has a third party administrator. If your company is large enough, they may have the capabilities to help you. Regardless, call HR and if they are not equipped to help you, just ask for the number of the plan administrator, who, as the name implies actually administers the plan.

There are two ways to look at your account balance:

1) The old fashioned way, which is from a paper statement from your custodian, which is usually sent on a monthly or quarterly basis. 2) The newer way, which is online, real-time, all the time.

It will depend what you signed up for and what the capabilities of your Custodian and Third Party Administrator are.

If you do not have access to any of the above, then a call to your company's HR supervisor would be the best course of action.

Hope this helps.

Value starts to matter when the market is going down. You will never be able to figure out what the Fed is doing. I believe in technicals as much as I believe in psychics. Short-term trading is essentially a waste of time. So that leaves long-term investing. I recently wrote a blog post that addresses this very issue. You might want to read it at http://www.baldwinpartners.com/blog/running-da-bulls.

In today's global economy, the answer is yes. There is a lot more to it than just the Fed and technicals. Although both are key elements, think about the overall market's reaction to bad economic news from other countries... to natural disasters... to new military conflicts in the world. None of us has a crystal ball... if we did, none of our clients would have lost a dime during the meltdown of 2008 - 2009. Thus, the best option, in my opinion, is having a good financial roadmap, know your tolerance for risk and time horizon, and invest appropriately, ie, diversification, different approaches, tactical, dynamic, etc, and keep your eye on the ball. Plus, it doesn't hurt to have a good financial advisor at your side...

Best Regards, and Good Luck... Rod

Investor sentiment also plays a big part in the stock market's movement (especially institutional sentiment). You often have an equal number of smart professionals thinking stocks are undervalued as those who believe they are overvalued. Each group is equally smart and armed with extensive research and sound justification for their opinions. However, only one of those groups will be right over any given period of time. Investing intelligently is not as easy as ads for discount brokers and online investment services want people to believe. However, I think many investors (including professionals) are too often guilty of overthinking, doing too much research and having a hard time making a decision. The more I research individual stocks, the more conflicting data and opinions I find. That's one of the reasons why I have a bias for technical analysis because it paints a picture of what's actually happening in the markets as well as who's buying and selling. With the market technical looking good, longer-term, and the Fed and other central banks greasing the wheels, I agree with Scott that the market could head much higher.

(To clarify, this question was asked of me by a reader named Viral)

Valuation based on trailing multiples can explain about 50% of an investment's forward returns when judged on a long term horizon. In the meantime the market will rise and fall and you will be able to purchase and sell securities at widely different valuations than a reasonable level of intrinsic value. I believe that it's perfectly legitimate to anticipate these swings in perception of value and analyze markets under the assumption that sometimes people will talk as if the world is ending and other times they will believe that we have attained economic Nirvana. Luckily there are cycles to the pattern of pessimism/optimism, which help us chart the probable path of the evolution of market psychology. However, no one can see the future and so we manage risk by making disciplined purchases only at or below fair intrinsic value. Simply put, value always matters.

I have been consistently bullish on stocks as the Fed has been printing money all year, and if you look at my January investor letter I wrote that:

"this year 1650 seems possible to me, and privately I would be willing to admit that I would not be surprised to see a number much higher than that. In 2013 caution, valuation and stimulus could create a potent cocktail for equities."

The reason I chose 1650 is because I have an outlook for S&P earnings somewhere around $100 this year. I believe a 16x multiple is a high multiple to be paying and that we are unlikely to see a 20x multiple like we did in the 90s. This level, 1650 also coincides with what I consider to be full valuation of a number of individual securities that I follow. In general these companies have about 10% more room before I would characterize their valuation as the maximum realistic value for all economic circumstances. I have always expected them to reach this value before the cycle turns under the assumption that people will price in the most optimistic scenario at the top.

You can't see the future, but you can buy and sell securities at favorable prices. It's difficult to know exactly what the final buyer will pay for a company at a peak price, but you can know what the maximum reasonable value is for someone to purchase who is making extremely bullish assumptions.

For example, I can know how much TSLA would be worth if it sold as many cars as Toyota. That's a number that is greater than today (probably somewhere between $60 and $100 B). Given all the operational risk and decades that it will take the company to actually grow to Toyota's size, would I ever pay that much money ($100 B) for the company today? Absolutely not! Might someone else? Certainly! But every dollar that the stock trades above the intrinsic value of the company represents true long term risk of capital destruction. I personally become unwilling to assume that risk at certain prices which I come to based on personal analysis of what I understand/know about a company. What I am willing to pay for a company and what someone else with different information/understanding may be willing to pay could be very different.

Some of my favorite books on investing are Jack Schwager's "Market Wizards" series. Each book is a compilation of interviews with investors that have generated consistently strong returns managing money. The books are so valuable because they showcase the opinions and mindset of top practitioners as opposed to academics or others with little experience actually managing money. I love that the books demonstrate that there are a lot of different approaches to investing, but there are common threads among these top managers. The Market Wizards series is a great way to familiarize yourself with the investment philosophy of great investors and compare the things that they say to what your advisor preaches.

In my opinion, a Family should have one advisor and multiple money managers. The Advisor serves as the family's quarter back when it comes to making sure that the money is properly allocated, diversified, invested, monitored, rebalanced, and changed, as and when needed.

Generally, when there are more than one advisors, there is a lack of communication and coordination amongst them, causing significant inefficiencies. For example, one advisor could have part of the portfolio invested in large cap US equities and the other advisor may have the same, creating overlap and sub-optimal diversification.

You can learn more about how a family can bring it all under one roof, by hiring one Family Office type advisor, who then allocates the portfolio amongst several money managers, by visiting our website at www.Endowmentwm.com.

Yes! Emphatically, Yes! The most important type of diversification that you should pursue is diversification by manager. Different investors are going to have different investment philosophies and will attain different performance based on their decisions and investment process.

Make no mistake, an advisor who allocates your savings is an investor first and foremost. Even "passive" managers are making active decisions about how to invest your money by following their particular investment philosophy.

Importantly, you should be aware that most advisors have an investment philosophy that is specifically designed to help facilitate their own asset gathering. The vast majority of personal financial advisors follow a "set it and forget it" investment approach which will never have superior performance on the upside and most importantly has the advantage that any negative performance can be easily explained away as something that "no one could have seen coming" (e.g. the financial crisis).

If you focus on finding five good money managers with a broad "go anywhere/asset allocation" mandate and divide your money between the five, you are as diversified as you'll ever need to be. If all five agree that it's not the best time to own a certain asset class, then trust their opinion. Look for people who actually spend the majority of their time looking at your investments. The majority of advisors don't!

By the way, one of those managers that you hire can be the greatest one of all time, Warren Buffett. You just have to buy Berkshire Hathaway's stock.

The answers above have all made great points. It is ok to own your company stock either in a 401(k), your own personal account or some type of employee stock plan. You need to be focused on how much in percentage terms it represents in your portfolio. The guidance of between 5% and 8% is sound. I always tend to focus on the conservative side of 5% or less. Barry made an excellent about you are reliant on your company to pay your salary and to own your companies stock does concentrate some of your financial future in one company. If you are optimistic about your companies future I would suggest owning a small percentage in your company. Some companies offer discount stocks plans which might be work checking into.

There is no magic number, but don't over-diversify just for the sake of diversification. Invest in things that you understand and pay attention to price. The market is dynamic and there are times when it will be favorable to invest abroad and times when it wont be (even if you're a long term investor). If you're not a professional investor spending all your time looking for opportunities in shifting capital markets, then you might be better off considering staying more heavily invested in core areas of expertise (for instance your industry or your community). Unfortunately proper investing isn't about taking a set it and forget it approach. Understanding the investment environment takes a lot of time and energy. There aren't shortcuts.

Amelie,

A simple way of looking at this is to remember that your current income (your job) is essentially invested in your company and if you invest in your company stock for your retirement, your future income is also invested in that same company. May be a few too many eggs in the same basket regardless of your employer's growth potential.