Building to the top: Bullish on Brookfield
Audio Brief
Show transcript
This episode deconstructs the "September Effect," discusses portfolio performance versus individual stocks, and offers a deep dive into Brookfield's dual structure and growth strategy.
There are four key takeaways from this discussion. First, ignore market seasonality and instead view pullbacks as opportunities to acquire quality assets. Second, understand Brookfield's dual structure, distinguishing between Brookfield Corporation, which compounds its own capital, and Brookfield Asset Management, which generates fees. Third, a diversified portfolio's performance is intentionally moderated by risk management and asset allocation, not designed to mirror its single best-performing component. Fourth, when evaluating complex companies like Brookfield, focus on the long-term growth of the underlying business over precise short-term valuation debates.
The "September Effect" is largely an unreliable statistical anomaly that tends to be arbitraged away. Long-term investors should welcome market pullbacks as strategic opportunities to invest in high-quality companies, rather than reacting to seasonal noise.
Brookfield operates as two distinct public entities. Brookfield Corporation, or BN, acts as the parent company, akin to Berkshire Hathaway, investing its own capital for long-term compounding and strategic reinvestment. Brookfield Asset Management, or BAM, is the asset-light manager that earns fees by managing capital for others, distributing most cash flow as dividends.
Brookfield aims to double its assets under management to two trillion dollars over five years, driven by private credit through Oaktree, global energy transition initiatives, and a new wealth solutions division targeting the insurance market. The preference for investors is often for BN due to its capital retention for growth, contrasting with BAM's dividend payout focus.
A diversified portfolio's overall return will naturally differ from its best-performing individual stocks. This reflects the inclusion of various asset classes like fixed income and cash, along with deliberate risk management strategies. These measures, such as trimming oversized positions to protect capital, are essential for ensuring long-term stability and protecting against undue concentration.
When assessing complex entities, the focus should remain on the fundamental growth of the underlying business over the long term. Debates over precise short-term net asset value or minor valuation discrepancies are less critical than the company's ability to compound capital, expand its operations, and consistently deliver results for shareholders.
These insights provide a robust framework for long-term investing and understanding complex asset managers.
Episode Overview
- The hosts deconstruct the "September Effect," arguing that seasonal market patterns are unreliable and that market pullbacks should be viewed as buying opportunities for long-term investors.
- The conversation explains why a managed portfolio's overall return differs from its top-performing individual stocks, highlighting the roles of diversification, risk management, and asset allocation.
- The majority of the episode is a deep dive into the Brookfield empire, clearly distinguishing between the parent company, Brookfield Corporation (BN), and its asset-light manager, Brookfield Asset Management (BAM).
- The podcast explores Brookfield's ambitious five-year growth strategy to double its assets under management, focusing on key areas like energy transition, private credit, and wealth solutions.
Key Concepts
- Market Seasonality vs. Long-Term Investing: The "September Effect" is a statistical anomaly that tends to be arbitraged away and is not a reliable basis for investment decisions. A better strategy is to welcome market pullbacks as opportunities to invest in high-quality companies for the long term.
- Portfolio vs. Stock Performance: A diversified portfolio's return will not match its best-performing stock due to the inclusion of fixed income, cash, underperforming assets, and risk management strategies like trimming oversized positions to protect capital.
- Brookfield's Dual Structure: Brookfield consists of two main public entities. Brookfield Corporation (BN) is the parent company that invests its own capital, similar to Berkshire Hathaway. Brookfield Asset Management (BAM) is the separate, asset-light business that manages capital for others and earns fees.
- Brookfield's Growth Strategy: The company has an ambitious five-year goal to double its assets under management to $2 trillion. Key growth drivers include private credit (via Oaktree), the global energy transition, and a new "Wealth Solutions" division targeting the insurance market.
- Investment Rationale for BN over BAM: The hosts prefer owning Brookfield Corporation (BN) because it retains more capital for long-term compounding and strategic reinvestment. In contrast, Brookfield Asset Management (BAM) is designed to pay out most of its cash flow to shareholders as dividends.
Quotes
- At 2:58 - "If anything, [we] welcome pullbacks in the market." - Barry Schwartz highlights their strategy of using market dips as buying opportunities for long-term investments.
- At 17:18 - "The key difference between Brookfield Corporation and Brookfield Asset Management is that Brookfield Corporation has capital in the business... it's kind of like Berkshire Hathaway." - Ernest Wong draws a parallel to explain how Brookfield Corporation invests its own money, distinct from its asset management arm.
- At 21:41 - "But he's put the puck in the net, right?" - Barry Schwartz defends Brookfield CEO Bruce Flatt's performance, noting that despite any criticisms, his track record of delivering results for shareholders is undeniable.
- At 22:54 - "They want assets under management and fee-bearing capital to double." - This quote summarizes Brookfield's ambitious five-year growth target, aiming to grow from ~$1 trillion to $2 trillion in AUM.
- At 28:32 - "I don't actually think it matters that much... At the end of the day... what matters is whether they're growing the underlying business." - This insight suggests that debating a company's precise net asset value is less important than focusing on its ability to grow its operations and compound capital over time.
Takeaways
- Ignore market noise and seasonal trends; instead, use volatility as an opportunity to acquire quality assets at better prices.
- To understand an investment in Brookfield, it is critical to distinguish between the parent corporation (BN), which compounds its own capital, and the asset manager (BAM), which generates fees.
- When evaluating a complex company like Brookfield, focus on the long-term growth of the underlying business rather than getting caught up in precise short-term valuation debates.
- A diversified portfolio's performance is intentionally moderated by risk management and asset allocation; it is not designed to mirror the returns of its single best-performing component.
