Long ART (Artio Global Investors) - $2.01

Background

Artio was Julius Baer’s US asset management arm until it was separated via IPO in September of 2009.

Artio priced at $26 based on strong performance and fund flows in its flagship International Equity strategy.  The first two graphs in their initial S-1 filing are worth a look to get an idea of the extent of their pre-IPO outperformance and impressive flows: http://www.sec.gov/Archives/edgar/data/1419178/000095010308000318/dp08507_s1.htm

The IPO proved well timed.  Artio has since suffered a period of underperformance and has lost assets fairly relentlessly.  The table below shows the trend over time in AUM:

 
ART has reported declining assets each month for the past 14.

The Opportunity

Given Artio’s struggles, why is now a good time to buy?  I think the reasons are two-fold:

1. Artio is priced at a discount to tangible book
2. Artio’s AUM will stabilize over the next two quarters as equity outflows cease

Starting with the first point, here’s the quick overview of Artio’s balance sheet as of last quarter:

+ 79.7m Cash
+ 60.4m net Investments Owned
+ 10.7m net Receivables
- 12.3m Accrued Comp
= 138.5m TBV
/ 60m shares outstanding

= 2.30 TBV / share

You may think a discount to TBV is warranted since Artio seems en route to losing the remainder of its AUM.  This, however, is not the case.    Although Artio is known as an International Equity shop, the majority of its assets are now in Fixed Income.  Unlike the Equity side, FI has been stable and growing.  Here’s the same AUM table, but broken down between Equity and FI strategies:

Artio’s FI assets are split primarily between High Yield (Artio Global High Income, 3-star Morningstar rated) and High Grade (Artio Total Return, 5-star Morningstar rated).

Stabilizing AUM

Within two quarters, ART will have lost all the equity assets they have left to lose.  Once assets stabilize and ART is shown to have a viable FI business, I believe ART will reprice from its current discount to a valuation of TBV + a multiple on AUM.

Artio discloses overall effective fee rate, but doesn’t break down the rate for equity vs. fixed income funds.  Modeling 68 bps for equity and 44 bps for FI vs. the overall effective fee rate seems to be a pretty close match.  Conservatively, I’d say the FI fee rate falls somewhere between 35-45 bps.  Valuing the FI assets at 1% of AUM gives you $100m, at 2x fees you get 70-90mm, at 3x it’s 105-135mm.

Cash Burn

In theory, asset managers should have strictly variable cost structures.  However, in practice, management may choose to maintain salaries and employment instead of appropriately scaling the business.  I have a good degree of confidence that Artio will keep the organization right sized.  For one, they have reduced headcount in the past to correspond to the new lower levels of AUM.  In September of 2011, they did a RIF of 25 (11% of workforce).  As assets continued to fall, they let go of another 25 in August of 2012.  Reductions to date have been of back office personnel and analysts and PMs of tertiary strategies.  No analysts or PMs for International Equity have been let go, so there is still a lot of leeway to right-size to reflect the smaller shop they have become.  Second, insider incentives are aligned with shareholders.  Insiders Richard Pell (recent CEO & current CIO) and Rudolph-Riad Younes (co-International Equity PM) are large holders, with ~5.7mm shares each.