UPDATE 2-Fortress profit shrinks as fund performance lagged

Tue Feb 28, 2012 12:55pm EST

* Firm will pay Q4 dividend of $0.05 per share in March

* Dividend is first payout since Q2, 2008

* Quarterly profit falls 60 pct

* Misses Wall Street estimates

By Katya Wachtel

NEW YORK, Feb 28 (Reuters) - Fortress Investment Group's quarterly profit slumped as its hedge funds struggled to make gains in last year's volatile global markets, though in some good news for shareholders, the firm will pay its first dividend since 2008, it said Tuesday.

Fortress, one of a handful of publicly traded alternative investment managers, announced last year it would reinstate its dividend in the fourth quarter. The firm has not made a dividend payout since the second quarter of 2008, and then it was 22.5 cents per share. Next month, shareholders will earn a 5 cent dividend on each share they own.

The New York company said its pretax distributable earnings fell 60 percent to $50 million in the fourth quarter, or 9 cents per share, from $125 million, or 24 cents per share in the same quarter a year ago.

Fortress says pretax distributable income is the best way to measure its performance because it excludes large quarterly compensation costs stemming from the equity interest of principals who took the company public in 2007. For the full year, pretax distributable earnings fell to $242 million, down 35 percent from $372 million in 2010.

Wall Street analysts had expected quarterly earnings of 12 cents per share, according to Thomson Reuters I/B/E/S.

Sagging returns led to lower incentive fee income in what interim CEO Randal Nardone called a "challenging year," during an earnings conference call Tuesday.

He said 2011 was a "disappointing year for flagship macro funds." Chief Financial Officer Daniel Bass added that in the liquid strategies, "nearly all the capital ended 2011 below respective high watermarks."

Fortress' liquid hedge funds struggled to make up losses it suffered during the volatile third quarter, when the European sovereign debt crisis sent markets into a tailspin.

The Fortress Macro Fund ended 2011 down 9.3 percent, losing 2.2 percent in the fourth quarter. Its flagship commodities fund lost almost 9 percent in the final quarter alone. Hedge funds lost about 5 percent in 2011, according to Hedge Fund Research.

"But liquid markets wasn't without a bright spot," said Stuart Bohart, who oversees that business for Fortress, pointing to gains of 3.6 percent in the Fortress Asia Macro fund. The company plans to "expand the liquid markets lineup by at least two new funds this year," he added.

Despite redemptions and lower performance income, new capital helped push Fortress' assets under management to $43.7 billion as of Dec. 31, up slightly from $43.6 billion in the previous quarter.

The firm said its quarterly net loss attributable to Class A shareholders widened to $91 million, compared with $13 million this time last year.

LOSSES IN PORTFOLIOS, AND IN PERSONNEL

Apart from whipsawing markets, last year brought many challenges for Fortress.

The firm's CEO since 2009, Daniel Mudd, resigned in December after the U.S Securities and Exchange Commission filed civil charges against him and five other former executives at Fannie Mae and Freddie Mac, for allegedly misleading investors over their companies' exposure to soured subprime mortgages through 2008.

During an earnings call Tuesday, no mention was made of Mudd by name, but Nardone, one of the firm's founders and interim CEO, reassured investors at the top of the call that the leadership transition has been "seamless" and the firm "remained laser-focused on investments."

The firm did not indicate if or when a new chief executive would be named.

Campbell Anthony, an analyst at Macquarie, said Mudd's departure was less concerning than poor performance .

"If one of the principals left, that would be a much bigger problem," Anthony said. "But Mudd was not managing funds. I do not think of it as a big deal for investors in FIG stock nor for investors in their funds."

Instead Anthony highlighted Fortress' lacklustre returns in private equity and some of its hedge funds.

"Regarding liquid hedge funds, performance was weak in 2011 and the funds now face a total of $1.7 billion in redemptions in the fourth quarter, and the first quarter of 2012," Anthony said. "In the Private Equity Business, performance is a concern and should make fund raising difficult in the future."

He noted that credit portfolios run by Peter Briger were a bright spot, with "very strong performance."

GOODBYE 2011, HELLO 2012

Other publicly traded asset managers, like Och-Ziff Capital Management Group and the Blackstone Group LP, saw quarterly profit fall at the end of 2011. Like Fortress, those firms' performance income slid last year.

But markets have rallied early in 2012, and hedge funds have benefited, posting solid gains in the first month of the year. The Fortress Macro Fund rose 3.82 percent in January.

The firm's stock has rallied over 18 percent since the beginning of 2012, after losing more than 41 percent in 2011. Fortress shares were down slightly to $3.88 in midday trading.

While the Fortress executives sounded optimistic about investment and fundraising opportunities in 2012, senior managing director Bohart sounded a word of caution.

"Last year, we saw a market focused on a Chinese hard landing, Arab Spring, U.S. growth and insolvency in Europe. To varying degrees, all those concerns are still out there," Bohart said, emphasizing that even though progress has been made on the terms of Greece's 130 billion euro bailout, the situation there is still precarious.

He pointed to Spain and Portugal in Europe, as well as Iran and Syria in the Middle East, as continuing concerns, alongside growth in the United States.

"We have an environment in which we feel relatively good about our ability to pound out returns, but we know we'll need to be fleet-footed," Bohart said.

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