Brookfield Asset Management: Strong Value Creation In The Long Term

Brookfield Asset Management (BAM) has created a massive amount of value for shareholders over the long term. The asset management company has more than tripled the S&P 500 over the years on the back of consistent cash flow growth and sustained profitability.

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Data by YCharts

Past performance does not guarantee future returns, and the stock is trading at all-time highs, so a pullback in the short term is to be expected.

However, in terms of both fundamental quality and valuation, Brookfield Asset Management still offers abundant upside potential for investors in the years ahead.

A High-Quality Business

With the acquisition of a 61.2% interest in Oaktree Capital Management, Brookfield has cemented its position as a leading player in the industry. Considering Oaktree and Brookfield together, assets under management stand at $500 billion for the new company and fee bearing capital is $270 billion. The combined company has 1,800 institutional investors globally.

Size and diversification are key sources of competitive strength for the business. According to a recent survey, nearly 25% of new capital raised is going to the top 10 players in the sector, so a successful market leader such as Brookfield Asset Management tends to get stronger over time.

In essence, Brookfield is the business of investment management and capital allocation, and management quality is crucially important in these areas. When you buy a share in the stock, you are basically investing in CEO Bruce Flatt and the rest of his management team since capital allocation decisions make all the difference in the world.

Flatt joined Brookfield in 1990 and became CEO in 2002. Different media outlets have referred to Mr. Flatt as "Canada's Warren Buffett" because of his value approach to investing, his focus on the long term, and his impressive track record over the years.

In a talk at Google in 2018, Flatt explained his approach to risk management:

We make lots of mistakes. It's not possible in investing not to make mistakes, so everyone should remember that you just have to keep making them. We don't try to limit the amount of mistakes, we try to limit what the effects of those mistakes are.

This is a crucial consideration for investors in Brookfield Asset Management. You want to invest alongside a CEO who takes calculated risks and who understands that risk needs to be managed because mistakes are going to happen sooner or later. Importantly, management owns 20% of the company, so their incentives are well aligned with those of shareholders.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BAM over the next 72 hours.

Disclaimer: I wrote this article myself, and it expresses my own ...

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