Can BAM Add Some Punch To Your Portfolio?

By Stephen D. Simpson, CFA | May 13, 2012 AAA

Large asset management companies can be tricky companies to monitor and evaluate. Oftentimes, success is predicated more on identifying top managers like Henry Kravis and George Roberts at Kohlberg Kravis Roberts (NYSE:KKR) or Warren Buffett at Berkshire Hathaway (NYSE:BRK.A, BRK.B) and letting them do their thing - trusting that superior management and investment identification will produce and accumulate value over time.

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It's a similar situation for Brookfield Asset Management (NYSE:BAM) - while the fact that the company has multiple publicly-traded entities makes analysis a little simpler, the reality is that this too is largely a bet on the ability to management to continue to find attractive investment options.

Quality Results Largely Irrelevant
Although BAM does report results on a quarterly basis, this really isn't a quarter-to-quarter story for most investors (and both institutional ownership and short interest are fairly low relative to its market cap). As is the case for Berkshire Hathaway, Carlyle Group (NYSE:CG), and many similar firms, it's about the long-term value added through the companies' investment decisions.

For the quarter ended March 31, total return increased 67% to $711 million, net income for shareholders increased almost 50% to $416 million, and per-share funds from operation rose 21% to 40 cents.

But what does that really tell an investor? The improved results from the company's commercial property are good news, as are improving lease rates. On the other hand, operating assets like timberlands, power generation and toll roads don't really show their value on a quarterly basis.

Alphabet Soup
Unlike many asset management companies that operate like opaque black boxes, Brookfield has numerous publicly traded entities. Brookfield Infrastructure Partners (NYSE:BIP), Brookfield Canada Office Properties (Nasdaq:BOXC), Brookfield Renewable Energy Partners (OTCBB:BRPFF), Brookfield Residential Properties (NYSE:BRP), Brookfield Properties (NYSE:BPO) and General Growth Properties (NYSE:GGP) all give investors more focused plays on BAM's various investment areas and quite a bit of detail about their operations.

As time goes on, I would expect this trend to continue - making BAM more of an investment option for those who want a stake in everything and the private equity investments (which include residential property development, "special situations," and ag development). In other words, investors who really want exposure to "infrastructure" assets like timber or petroleum transportation can go with BIP, investors who want exposure to Canadian real estate can go with BOXC and investors wanting a generalist high-quality asset management can still buy BAM shares.

SEE: How To Invest In Private Equity

The Bottom Line
Evaluating and valuing BAM is frankly a pain for most investors. Valuing such things as the company's real estate portfolio and timber assets generally comes down to Net Asset Value (NAV) modeling and analysis, which is quite difficult for individual investors to do on their own due to the lack of readily available free information out there.

Likewise, assessing the company's long-term performance takes some unconventional analysis. The structure of BAM means that return on invested capital and free cash flow does not work especially well, leaving investors to rely on metrics like long-term book value growth and other internal metrics provided by the company.

BAM actually scores pretty well in terms of internal total return growth, book value growth, and stock market returns over the long term, though the company's performance over the past five years has been less impressive. Bought well, I believe this stock can outperform for the long term and roughly 1.2 times book value seems like a decent, albeit unspectacular, entry point for long-term investors.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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