Observations from the Company’s Investor Day

Brookfield Asset Management held its Investor Day recently.

Management made a few things very clear.

First, if interest rates remain low, investors will have no alternative except alternative investments.

With a world that offers interest rates between -2% and a positive 2%, finding returns will be very difficult using traditional investment options. Alternatives like infrastructure, energy, real estate, and other real assets will be the asset class of choice of both individuals and institutions trying to earn returns above the risk-free rate.

Income focused investors will increasingly turn towards credit markets.

BAM Teams with Oaktree Capital

The recent addition of Oaktree Capital gives Brookfield an option for those investors as well. Oaktree is headed by well-known credit and distressed securities investor Howard Marks.

BAM closed on the purchase last month. This addition brings the firm’s total assets under management to $509 billion. Brookfield now has 100,000 employees, serves over 1,800 institutional investors, and does business in over 30 countries around the world.

Since 2009, approximately $6 trillion flowed into private assets. This has resulted in an increase in the share of total investments for real assets and alternatives. The allocation has increased from 5% in 2000 to 25% in 2018.

Brookfield believes a low rate world could fuel allocation to alternatives to 60% levels by 2030. There is nowhere else for investment managers. More important, pension funds must place their money to earn returns that meet their target rates in this environment.

Brookfield Asset Management CEO Bruce Flatt Talks Macro

CEO Bruce Flatt discussed the current environment on a recent conference call.

“Fundraising and deployment during the second quarter continued to build on the momentum that we saw at the start of 2019,” he said. “And with interest rates globally heading lower over the last six months, we expect that this will continue to accelerate. This situation comes into our results in two ways. First, with the 10-year in the US now at 1.7% and negative out to 30 years in Europe and Japan — I am going to say that one more time — negative out to 30 years in Europe and Japan, the value of assets should be re-rated to higher values in that environment. Second, and in addition, our clients likely need our services even more. And if we have seen the high point in rates during this cycle, this should be very positive for our overall business.”

Brookfield is America’s Toll Collector

Earlier this year, Forbes described Flatt and Brookfield as the toll collector of the 21st century.

“We’re in the business of owning the backbone of the global economy,” Flatt said in an interview with the Financial Times. “But what we do is behind the scenes. Nobody knows we’re there, and we provide critical infrastructure to people that somebody pays a small amount for the road you drive on, most people think it’s owned by the government. Even if it is a toll road, they wouldn’t actually know who owned it.”

Finally, historical and mathematical models of market potential returns, such as those developed at GMO Asset Management and Vanguard, suggest that returns from traditional stock and bond portfolio over the next decade could optimistically around 3% annually to negative long-term returns. If the models are correct, then the only place investors will be able to look for higher returns will be alternative investments.

As a result, Brookfield would be a significant beneficiary of such this trend.