Brookfield Asset Management: The Best Stock for High Inflation

Brookfield Asset Management (NYSE:BAMWe believe that ) will be a top global alternative asset manager business.

• Inflation adjustments are a common feature in most contracts for renewable energy and infrastructure companies.
• TheyMost debt is fixed-interest. In many cases, this will lead to a negative real rate during high inflation periods. The company will then be paid to borrow.
• Due to their high-quality nature and being mainly real assets (e.g., energy generation and transmission) and infrastructure, most of its assets’ values should adjust quickly for inflation.
• The inflation we are currently experiencing is a result of an increase in the money supply. This means that there is more money available to invest. This provides tailwinds for asset management.
• Because real assets are more resilient to inflation, this company should have a competitive advantage over asset management companies that focus on equity and debt. Bonds will be particularly at disadvantage as many fixed-income assets will experience negative returns during high inflation periods.

Inflation caused by a flood of money

Milton Friedman, a monetary economist, said that inflation is a monetary phenomenon. We can see why inflation is high right now and likely to continue for a while by looking at the increase in M2 money supply after the COVID crisis. The economy Can absorb normallyWe can expect inflation to rise for some time, with a minimum of 6% M2 money supply growth. However, M2 growth has peaked at 24% in 2021, and is still at 11% today. It is important that investors make wise decisions about where they place their money over the next few years. While some companies will be severely affected by high inflation, others may be more resilient and even benefit. We believe BAM is in this latter category.

Financials

We can see a correlation between BAM’s revenue growth rate and the U.S. inflation rate. The correlation has fluctuated over time, but averaged around 0.30. This is not negligible. It reaffirms our belief revenue grows faster during periods of high inflation at BAM.

We can see why shares have performed well by looking at absolute revenue growth rates. Revenue has increased by almost 20% over the past decade, although Oaktree’s acquisition of Oaktree is a part of it.

Brookfield’s rapid growth, especially in its asset management business is due to investors around the globe increasing their allocations for alternative investments. Brookfield is a specialist in this area. It is estimated that institutional investors have increased their allocations to alternative investments from 5% to 30% in 2000 to 30% today and will double to 60% by 2030.

This should result in a significant rise in fee bearing capital. This should increase faster than the increases in allocation due to the increased money supply, which we discussed earlier. Brookfield is different from other asset managers because it has more capital invested than its investors.

Insurance Boost

The company’s new insurance venture should also benefit from inflation. The company is betting that it can make more from “float capital” than the insurance companies. Inflation forces interest rates to rise, so it should be easier to generate higher rates on this capital. The company has already taken $45Billion in insurance AUM, re-insuring policyholders liabilities and long-dated fixed anuities. American Equity, American National and RGA are just a few of the agreements that the company has signed. In our article entitled “Brookfield Makes a Change From Buffett’s Playbook,” we provide more information about this new strategy.

Real Asset Inflation Tailwinds

BAM, as we’ve mentioned, specializes in real asset investment. This includes buildings, communication towers and pipelines.

These real assets also have the added benefit that their cash flows can adapt quickly to inflation or that their contracts are indexed for inflation. For example, the renewable energy company has 70% of its contracts indexed for inflation.

The infrastructure business also has approximately 70% of its funds from operations (FFO), with contractual and regulated inflation adjustments.

Growth drivers

We know why Brookfield can profit from inflation. But can it grow faster that inflation? We believe that the company has several tailwinds that will allow it to grow faster than inflation. There are few additional reasons that the company can grow quickly, aside from the previously mentioned increased allocation to Alternatives. These include the need for governments to sell infrastructure assets in order to fund stimulus measures, critical infrastructure that needs to be upgraded, and transport assets that are critically impacted by climate change.

Balance Sheet

The company has a very strong financial position that it can leverage to take advantage of all the growth opportunities. With $5.5 billion in cash, undrawn credit facilities and access to substantial financing, it can leverage its balance sheet. The company’s current leverage is very low and it has very little debt compared to its assets.

Competitors

Blackstone (BX), KKR & Co., (KKR) are BAM’s closest competitors. Although we believe all three asset managers can benefit by some of the tailwinds mentioned in this article, BAM is priced much more reasonably than Blackstone (BX) and should see inflation more than KKR due to its greater focus on real assets.

Conclusion

Brookfield’s compounded, annualized return has been 20%. We believe the company can keep delivering these types returns because of the tailwinds that it is likely to enjoy. These tailwinds include inflation because Brookfield’s focus on real assets is financed mainly by fixed-rate loans. The company’s solid financial position should allow it to capitalize on opportunities and provide downside protection.