10/02/15 09:36 AM EDT

Och Ziff (OZM) | It's Darkest Before Dawn - Tax, FCPA, and Performance Fears Rampant

Jonathan Casteleyn

Josh Steiner, CFA

Takeaway: September performance was very soft and the stock reflects that now trading at trough levels on a Price/AUM basis.

September performance released this morning was very soft and underperformed both the broader market and the early calculation of leading alternative benchmarks. OZM's core Multi-Strat product experienced a -3.66% decline in September, more in line with beta as the S&P 500 lost -2.64% and with the Barclay's Hedge Index currently running at a -0.80% decline. Importantly, OZM Multi-Strat lost its running year-to-date positive return now down -2.0% for 2015 versus the Barclay's Hedge Index running down -0.6% but better than the S&P 500's performance of down -6.5%. Och's other Multi-Strat products are faring better year-to-date with its Asian strategy up +2.8% and its European product up +3.8% for '15.
Backing out investment losses for the month, we calculate that OZM also had a -$821 million redemption in the period, which annualizes to a -21% organic growth rate. The year-to-date score however is not as bad with Och's running fund raising at -$1.2 billion, or a negative growth rate of just -4%.
OZM stock has underperformed the broader market and the asset management sector since March of last year and the disclosure of a potential FCPA violation (see our note titled Watching the Same Movie Twice) which was also reduxed in a major media outlet last month. We see nothing new on this issue other than shares continue to overly discount this item in our view. With the current depreciation of the stock on its core dividend payout alone (without incentive earnings), OZM now yields 7.8% as the company dividends out over 85% of its earnings and we calculate core OZM earnings at $0.80 per share on an annual basis. Putting a traditional asset management multiple on this core earnings stream translates to a $10 per share fair value, however with 3 months to go in 2015, there is also the opportunity for the firm to earnings back its slight performance deficit and create a year-end incentive payout. OZM shares are near their all-time trough on a Price-to-AUM multiple with the firm's current market cap at just 9.6% of its asset-under-management. The stock bottomed at 9.3% on this metric in 2009 with the long term mean value at 15.8%.

September Results

This morning Och Ziff reported soft performance in September with negative returns in all of its main products. The firm gives four numbers in a shortly worded 8-K on a monthly basis, which includes the monthly performance for its OZ Master Multi-Strat Fund (~59% of total assets-under-management), its multi-strat fund in Asia (~3% of AUM), its multi-strat fund in Europe (~3% of AUM), and its total month ending assets-under-management. The OZM reported numbers this morning were:

OZ Master Fund performance in September of -3.66% (YTD: -2.0%)
OZ Asia Master Fund performance in September of -1.39% (YTD: +2.8%)
OZ Europe Master Fund performance in September of -2.11% (YTD: +3.8%)
Ending total assets-under-management of $44.1 billion (YTD: -4.1%)

The most current tabulation of running OZM performance and AUM:

Relative to other Alternative benchmarks including the Barclay's Hedge and the Barclay's Multi-Strat, OZM returns under performed:

However capitalizing the firm's core management fees of $0.80 per share at a traditional asset management multiple translates into $10 per share in value alone: