Mallnutrition at BAM?

Brookfield Asset Management (BAM) is a powerful asset manager specializing in real estate, infrastructure, private equity and all things requiring high management fees. Due to their scale, BAM has found itself with little competition - a feature that attracted my attention. However, the complexity of BAM's structure is unlike any I have ever seen and I will leave a discussion of that to another post.

In early May, BAM announced that $5 billion had been set aside to support retailers affected by the pandemic. My assumption was that this simply allowed BAM to show this $5 billion as some type of infusion to offset the loss of $5 billion in rent payments. By using this approach, BAM should be able to avoid violating some debt provisions that secure various properties. BAM will likely have different approaches that may even include minority ownership stakes in the businesses of some of their renters.

But this week's announcement demonstrated that these concepts have reached a new level. BAM and another prominent mall owner are exploring the purchase of J.C. Penney Co. Rather than risk losing a major anchor tenant and being forced to look for others, BAM is evaluating an ownership structure that would allow it to retain J.C. Penney's presence. Losing an anchor tenant means losing traffic which means losing the smaller, higher-paying tenants.

In my mind, this is a perfect example of a "confirmation" bias. Either this is a secular change bringing the future of retail forward more rapidly or this is a cyclical downturn building pent-up demand for leaving the home and shopping in malls. If the latter, BAM is brilliant. But I believe that the former is indicated and, as a non-owner of malls, am less knowledgeable than BAM but also less susceptible to a "confirmation" bias.

One of my favorite stories of confirmation bias is about a young Jewish man that quit being observant. One day he ran into a rabbi friend of his and said that his lack of observance was because he had some questions. The rabbi said he had only one thing to ask the young man - did he stop being observant before or after these questions arose? The young man thought for a moment and said these questions arose after he stopped being observant. The rabbi chuckled and said the young man didn't have questions in need of answers but answers in need of support. 

Maybe Chuck needs to "Talk to Chuck" (SCHW)

This graph is disappointing. Charles Schwab (SCHW) has benefited investors by providing lower cost structures for investing and has prided itself on honesty with "no hidden fees." However, this graph is misleading. Most companies provide a comparison to the S&P 500 in their annual reports. Sometimes these comparisons are chosen for long periods and sometimes for short ones, but always for corporate self-interest. That's the way it is.

But this graph is wholly different. It implies superior performance where it is inferior - quite inferior with the S&P 500 up over 29% with SCHW up roughly one-half of that. I studied the graph closely wondering what the management was doing. I came up with no other solution than an effort to mislead the investor into perceiving the blue line representing SCHW as superior to the black line representing S&P 500.

In the annual report, SCHW was candid about its lack of accuracy forecasting the likely interest rate movements for 2019. This lack of accuracy was a critical component for subpar results. SCHW could have argued that the strength of their business model even overcomes the weakness of their forecasting. I guess this is an instructional video to help read their "nickel and dime us" annual reports: Talk to Chuck