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Epoch got its start in April 2004, and three months later, it became a public company through a reverse merger with J Net Enterprises. Priest's sole goal was to become a global asset manager who delivered superior, risk-adjusted returns over the long-term. Like any other asset manager, it receives asset management fees for providing its advisory services. In 2011, it generated around $68.8 million in investment advisory and management fees, up about 31% year-over-year. In some instances, it also receives performance fees from certain clients for exceeding a specific benchmark. In 2011, it received just over $1.8 million in performance fees representing just 2.5% of its $70.6 million in operating revenue. At the end of March, its assets under management (AUM) were $22.7 billion, up 18% from the end of December and roughly 393% since the end of 2007.
The key to any successful investment manager, whether public or not, is to grow AUM. It does this in two ways. First, by outperforming its benchmarks, thereby growing the assets under its advisory, and second, by bringing in new assets that exceed those departing. With the exception of 2009, it's been a steady climb in terms of AUM and profitability. In 2011, its earnings per share was 93 cents. Earnings are so consistent that it has been able to pay a quarterly dividend since December 2007 and three special dividends including one for 75 cents in early January. If you bought Epoch's stock prior to Dec. 20, 2011, and hold through to the end of this year, your effective yield is around 4.2%. Companies that use special dividends as a way to reward shareholders tend to be conservatively financed, generating strong free cash flow. That's Epoch to a tee.
SEE: A Guide To Spotting A Reverse Merger
Epoch represents the third-largest holding in General American Investors (NYSE:GAM), a closed-end fund dating all the way back to 1927. Owning about 1.67 million shares of the money manager, it has held the stock since the fourth quarter of 2006, when it acquired 10,000 Series A Convertible Preferred, paying 4.6% for $16.6 million. The preferred shares were then converted in the third quarter of 2008 into common stock. Those shares are worth roughly $42.5 million as of April 17. General American Investors has done quite nicely on its investment. With a diversified portfolio of 50 to 60 stocks in names like Diageo (NYSE:DEO) and TJX (NYSE:TJX), GAM's achieved excellent results. Over a 50-year period based on market price, its delivered an annualized return of about 11.2%, 200 basis points higher than the S&P 500. At present, its shares are trading at a 14.7% discount to net asset value, which indicates that its shares aren't expensive nor are they cheap. It's an interesting alternative.
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Rather than investing in an ETF with a minuscule amount of Epoch stock, it might make more sense to invest in one of the largest shareholders. According to its DEF 14A, Janus Capital Group (NYSE:JNS) owns 1.78 million shares of Epoch as of Dec. 31, 2011. At 7.8%, it owns slightly more than General American Investors. Janus' stock from a valuation perspective is reasonably cheap right now - traded below $6 at the end of 2011 - so it might be of interest to value investors looking to kill two birds with one stone. Epoch's current enterprise value is almost 6.9 times revenue, compared to approximately 1.7 times for Janus. The difference in valuation is not justified, in my opinion.
SEE: Value Investing Using The Enterprise Multiple
The Bottom Line
While I like what Epoch stands for, its stock is a little expensive right now. If you're in for the next three to five years, you'll do fine. In fact, I like all three over the long-term.
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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.