With: Greg Mason, Managing Director, Ares Management Portfolio Manager, Litman Gregory Masters High Income Alternatives Fund
Date: November 14, 2019
Greg Mason: I’m going to talk about our Ares Income Opportunities strategy. What we really focus on is public-equity incomes that have high dividend yields that are actually not largely invested by institutional investors. They’re not in passive ETFs (exchange-traded funds). And they’re in areas in which our team has expertise, as well as Ares our platform, has expertise.
To first start off quickly with an overview of Ares Asset-Management, just in case you don’t know us. We’re an about $150 billion alternative-asset-manager. Primarily in credit, private-equity and real estate.
Our biggest vertical is in credit. We’re one of the largest private credit managers in the US; over 1,000 employees across the globe.
What’s interesting is, these verticals actually match up very well with the underlying industries that we cover in our fund.
For the Ares Income Opportunities strategy, it includes myself, my partner Troy Ward, who’s here today. We’re co-portfolio managers on the fund, as well as Brian Brungardt. He’s our MLP (master limited partnership) midstream energy expert.
Troy and I come from a background – and Brian – of being sell-side analysts. We covered for 15 to 20 years, a bunch of stocks in the financial areas. Including business development companies. We cover mortgage, banks, insurance; asset managers.
We’ve covered a plethora of industries, and ultimately started at AG Edwards in St Louis and then went to Stifel. In 2006, we actually went over to Ares to start managing this alternative-public-equity strategy.
This is really the pie chart of what we focus on.
I think there are three key areas that we really spend our time on in the portfolio. That’s investing in business development companies, mortgage REITs and midstream energy. We also will do some opportunistic investments, where we know the companies well and have high dividend yields, that don’t fall into these categories. We’ll also dabble in some credit-based closed-end funds when we see periods of market dislocation.
Finally, we can layer in preferred-equity in these targeted asset classes.
To give you a sense of the yields that we have here relative to others – when people think of equity-income, you invest in equity-income funds – those funds generally have a 3%-to-4% dividend yield. A lot of people think here on the third and fourth bars of this slide, of equity-REITs and utilities. They’re yielding very low yields, right now.
The targeted asset classes that we focus on – MLPs, midstream energy, BDCs and mortgage REITs — have yields of 8.5% to 10%. We have significant yields over what most people get when they think of equity-income.
Even when we look at the high-yield bond strategies that are other parts of the Litman Gregory fund – leveraged loans and high-yield bonds – in that 6% range – we’re call it 200 to 400 bps (basis points) higher yield than what we have in those.
With those higher yields comes volatility. I think Jason will say we’re kind of the juice of the Litman Gregory Masters Portfolio. But with that volatility, we can through active management take advantage of that. Litman Gregory has levers that they can pull to increase or lower their exposure to our area, to take advantage of that potential market volatility – as well as in our portfolio, we do the same thing. Allocating among these asset classes.
Jason Steuerwalt: You talked about the Ares platform investing in various areas that you guys look at. Can you expand on that a little bit and maybe give an example of how being part of that larger platform has helped you – as in your investment process?
Greg: Sure. The nice thing is, not only does our team have experience in these three main asset classes; Ares as a platform has expertise, as well.
They have one of the largest private credit markets. They manage a commercial mortgage REIT and have significant real estate credit.
In terms of our energy exposure, we have over $11 billion of energy exposure between our private-equity and liquid-credits team. Ares as a platform has a lot of expertise, and we’re able to tap into that.
Every other week we have a call with our private credit team where we talk about what they’re seeing in the private credit markets and what do origination activities and what do deal volumes look like? Leverage multiples. Pricing.
Then in addition, once-a-month we have a corporate call, where every single investment category tells what’s going on. So we get to hear from the real estate team, the European team, the liquid credits team. The private-equity team. The asset-based lending team. To hear what’s going on.
Then we also have regular dialogue with just our counterparts on the other side.
For example, Brian our energy guy – he talks with our energy-credit team and our energy private-equity team on a regular basis. Talking about what’s going on in those markets.
So we get real intel of what they’re seeing on the ground on a regular basis. I think that helps inform us as we manage the portfolio.