The Intellectual Investor: Income Opportunity Weekly Updates

February 21, 2017

LMM Income Opportunity Strategy Update for Week Ended 2/17/17

Fortress Investment Group Gets Acquired While Detractors Decline on Light News

Last week, the LMM Income Opportunity Strategy gained 2.52%, outperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.20% gain and the S&P 500’s 1.60% advance (Exhibit 1). The strategy ended the week up 9.06% YTD, or 696 basis points ahead of the high yield index and 374 basis points ahead of the S&P 500.

Exhibit 1: Preliminary Performance of LMM Income Opportunity Strategy Versus High Yield, Equity Indices, Through 2/17/171

Time Period Income Opportunity ML HY II S&P 500
Last Week (2/10 – 2/17) 2.52% 0.20% 1.60%
MTD 4.78% 0.74% 3.36%
QTD 9.06% 2.10% 5.32%
YTD 9.06% 2.10% 5.32%
Inception (annualized since 4/2/2009) 16.16% 12.87% 16.37%

Source: Bloomberg, LMM

Four equities and one bond comprised this week’s top contributors (Exhibit 2). Fortress Investment Group (FIG) soared after news broke that the company will be acquired by Japan-based Softbank Group Corp. (SFTBY) for $3.3Bn in cash. The acquisition price of $8.08 per share was a 38.6% premium from where the stock closed the day before the deal. Web services firm Endurance International Group (EIGI) posted strong 4Q results and 2017 guidance, with management demonstrating a focus on core business execution and free cash flow generation. Residential mortgage credit firm Chimera Investment Corp (CIM) posted 4Q core EPS of $0.65, easily surpassing the $0.50 dividend (10.7% annualized yield). The company’s assets also appreciated in value during the quarter, leading to additional gains in non-core income. There was no price-changing news on GEO Group (GEO).

Exhibit 2: Significant Contributors to Performance, 2/10/17 – 2/17/17

Name Type Return
Fortress Investment Group Equity 34.3%
GEO Group Equity 5.2%
*Recently Added Security* Equity 10.7%
EIGI 10.875 2/24 Bond 3.8%
Chimera Investment Corp. Equity 2.6%

Source: LMM LLC.

Four equities and a preferred comprised this week’s top five detractors (Exhibit 3), though there appeared to be very little fundamental news behind the declines. Compass Diversified Holdings (CODI) continued its slide as the stock fell below its 200-day moving average. Frontier Communications (FTR) declined as the company maintained its $0.105 dividend (12.9% annualized yield). There was little to report on Apollo Global Management (APO), Colony NorthStar (CLNS) or Fortress Transportation & Infrastructure (FTAI).

Exhibit 3: Significant Detractors from Performance, 2/10/17 – 2/17/17

Name Type Return
Apollo Global Management Equity -4.6%
Colony NorthStar Inc. Equity -2.5%
Compass Diversified Holdings Equity -2.6%
Fortress Transportation & Infrastructure Equity -0.7%
Frontier Communications 11.125 Preferred -1.5%

Source: LMM LLC.

Did you know that we write this piece for Opportunity Equity as well? Check it out.

1The performance figures reflect the deduction of a model investment management fee of 1% (the highest fee for separate accounts under our fee schedule) and certain other expenses. For important additional information about Income Opportunity Strategy performance, please click on the Income Opportunity Strategy Composite Performance Disclosure. The performance returns shown in this report are preliminary and are subject to revision. Past performance is no guarantee of future results.

Significant Contributors and Significant Detractors are the Strategy holdings that had the greatest effect on Strategy performance for the week. Holdings that have been in the Strategy since the end of the most recent calendar quarter are identified by name. For information on how Contributor/Detractor data were calculated and a list showing the contribution to the Strategy’s weekly performance of each investment held at such quarter end, contact LMM.

Any views expressed are subject to change at any time, and LMM disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results, and there is no guarantee dividends will be paid or continued.

©2017 LMM LLC. LMM LLC is owned by Bill Miller and Legg Mason, Inc.

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