The Wizard of Och-Ziff


I like OZM. It pays out a large portion of the firm’s profit in dividends. Public shareholders own ~1/3 of shares outstanding, the rest is owned by management and employees. Financial interests are fairly well aligned.


OZM is a huge hedge fund. At March 1st 2014, OZM had a little over 42 Billion under management.


Get ready for some math:


They earn a management fee (% of assets under management) and an incentive fee (% of profits). In 2013 they earned ~1.5% management fee on an average asset base of $36 billion. That’s $550 million. This year average assets are 15-20% higher so let’s say $650 million in management fee. Expenses are compensation and SG&A, in 2013 that number was about $700 million. Because I’m a simple guy, I’m going to assume that management fee just about covers all fixed expenses. That means all profit comes form the incentive fee.


The incentive fee is split 2/3 to management (they own a lot of shares) and 1/3 to public shareholders. The incentive fee is ~20% of all profits. So for every 1 billion they make, the firm takes $200 million. Since there are less than 500 million shares(including management shares), every $500 million in incentive profit is worth $1 in Earnings (paid as dividends). ALL NUMBERS ARE APPROXIMATE, because that’s how I roll.


Ok. Now that we all understand the complex financial model, what do we expect the firm to earn in a normal year? Since inception the firm has returned a little under 10% a year, so we shall discount that and say 8% annual returns. (some years will be more and some will be less-DISCLAIMER) 8% of 43 billion is $3.44 billion and 20% (the incentive fee) is $688 million. That would be earnings per share of ~$1.4 mostly paid out as dividends.


I like this stock at $12 bucks because on average it’s going to have a pretty juicy yield. It has market exposure because most asset managers do well when the market goes up. I like that I get payouts every year. DIVIDENDS are my favorite.


So what’s the risk?

Well, OZM is currently under investigation for taking money from people you shouldn’t take money from. As a lesson for all, don’t take money from dictators, unless you’re Jennifer Lopez and it’s for a couple songs. Second their fund performance this year is a rocking 0%. 0% is not a good performance. While the stock tends to trade on performance, that’s pretty short sighted for an institution that isn’t going away anytime soon.


So I’m buying on dips. I’d own some here at $12 bucks. (Leave room to buy more) Be prepared for negative headlines, I occasionally use those to buy more. Let’s talk about this stock again in a year, and see what’s what.


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