Is it worth buying Blue Sky Alternative Investments Ltd shares?

Blue Sky Alternative Investments Ltd (ASX: BLA) is a fund manager specialising in alternative investment funds in private equity, real estate, hedge fund strategies and real assets.

Shares have gone from strength to strength; up over 700% since listing in 2012, with gains of over 75% in the last 12 months.

Results to 30 June 2016 released last week showed an increase in underlying net profit after tax of 57% to $16.3 million.

Blue Sky has generated impressive investment performance of 16.7% p.a. net of fees since inception across the four fund categories. 2016-08-24 17-26-35Source: Company reports

Strong investment performance and growing demand for exposure to alternative investments have seen assets under management skyrocket to $2.1 billion, up from $1.35 billion last year. 2016-08-24 17-25-51Source: Company reports

Income, primarily from management fees, grew 44% to $62.8 million, including $18.7 million contributed by performance fees.

Blue Sky improved its EBITDA margins from 35.5% to 39% and declared a 16 cent per share fully franked dividend, representing a yield of 1.9%.

Over 70% of Blue Sky’s assets under management are in closed-ended funds, meaning they are long-term commitments from investors and it is less exposed to investor withdrawals than a typical fund manager.

The primary cause for concern was an announcement that Blue Sky founder, Mark Sowerby, will step down from his role as managing director to be replaced by the current chief operating officer, Robert Shand.

Is Blue Sky a buy?

Blue Sky expects massive growth in demand for alternative investments in the coming decade and with its impressive track record, it is well placed to benefit.

I agree that the outlook for alternatives appears solid. Growing numbers of investors are likely to look to alternatives instead of fixed interest investments as a way to diversify their portfolios and chase higher returns in the current low interest rate environment.

In addition, despite the current trend of downward pressure on fund manager fees across the investment industry, investors are often happy to pay a premium to quality managers of alternative asset funds.

In my view, the change in managing director is not likely to dampen Blue Sky’s growth prospects. However, after an impressive run-up, shares are not cheap, and strong continued growth is needed to justify the current share price.

Investors looking for diversified exposure to a portfolio of funds managed by Blue Sky could consider its listed investment company, Blue Sky Alternatives Access Fund Limited (ASX: BAF). Shares are up over 25% in the last year and the fund has announced a fully franked dividend of 4%.

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Motley Fool contributor Matthew Bugden has shares in Blue Sky Alternatives Access Fund Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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