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Students of Modern Portfolio Theory are encouraged to take more risk in exchange for higher returns, but good students know there are exceptions to every rule. Low-risk stocks have substantially outperformed their high-risk peers measured by any yardstick over time.

Buying high-quality companies is an easy decision for us given today’s highly fragile economic landscape. At the same time, we can exploit the persistent opportunity offered by more certain profits, along with the average investor’s lack of interest in these boring businesses. Despite the obvious benefits of this approach, not many have the willpower to stay true to the concept.

Investors crave excitement. Stability is simply not exciting. As a result, many find it hard to resist the temptations of hugging the benchmark, following the herd, or going for a little excitement even if it’s “just for a second, just to see how it feels.” We are quite happy with boring when it comes to equity investing. We prefer to focus on exceptional companies rather than speculate on mediocre businesses with uncertain futures.

We believe Oaktree Capital Group (OAK ) is one such exceptional company with a sustainable competitive advantage. We recently outlined the thesis for our investment in OAK for the Bowden Investment Group at Appalachian State University. The full presentation is available here .

Quality At A Discount

Ideal investments are those few high-quality businesses run by superior management teams with significant ownership interest, favorable industry tailwinds, and a visible catalyst to realizing value. We believe OAK demonstrates all of these characteristics and currently trades at a significant discount to our estimate of intrinsic value.

Management has consistently exhibited great skill in raising capital when investment opportunities are abundant and has demonstrated a consistent ability in investing capital at superior risk-adjusted rates of return. Put simply, this is OAK’s moat and represents a unique and sustainable competitive advantage in the industry.

OAK is recognizably the preeminent credit manager in the alternative investment industry, which is growing at rates above the broader asset management sector as institutional investors sacrifice liquidity for higher returns in today’s low-return landscape.

We expect accelerating cash distributions in 2013 and 2014 to serve as a catalyst for increased investor attention. As OAK harvests gains produced by the seeds sown during the last crisis, we believe the shares should be rewarded with a higher multiple in line with its traditional peers. It is trading near $40 today and delivering a handsome 5.4% yield.

Furthermore, one could easily make the argument that this business deserves a significant premium to the industry that is more in line with T. Rowe Price at 20x or Eaton Vance at 18x given the track record of Howard Marks and team, the counter-cyclicality of the business, and secular growth trends in alternative assets.