Last month I read a great article on Howard Marks where he warned investors about the current investing climate saying, “For the past five years my mantra with Oaktree has been move forward, but with caution”. He believes that the world is still suffering from the post traumatic stress of the global financial crisis.
Howard Marks is of course the founder of the $98 billion Oaktree Capital Hedge Fund.
The article was printed in The Australian newpaper titled, Oaktree’s Howard Marks: invest, but with caution.
Let’s take a look…
The following is an excerpt from the The Australian newspaper (August 2016) titled Oaktree’s Howard Marks: invest, but with caution.
Here it is:
US investor Howard Marks was at an economics conference in the US recently and, as he tells it, making fun of economic forecasting.
“And this guy came up to me and said, ‘Look, I am an economist and if I don’t make precise forecasts no one will pay me’,” says Marks, the founder of the $US98 billion ($130bn) Oaktree Capital hedge fund.
“And I said, ‘Yes, and the only problem with that is that if you do make precise forecasts, you are going to be wrong.’
“So that is a hell of a dilemma.”
A renowned contrarian, Marks has made his estimated $US1.8bn fortune and turned Oaktree into one of the world’s biggest alternative asset managers by exploiting inefficiencies in lesser understood markets.
In 1978 it was high-yield bonds, in 1988 it was distressed debt, the Asian debt crisis brought opportunities in emerging markets in 1998, and in 2008 it was the global financial crisis.
Marks does not like second-guessing the market or trying to predict where the economy will go. But he agrees professional investors face a similar dilemma to that of the economic forecaster in the present environment of low growth, low yield and high risks.
They are not attractive conditions for investment, and it is hard to know where economies and markets will go, but it is their job to invest. “The upshot is that we have to do it with particular caution,’’ says Marks, perhaps best known in Australia for buying Channel Nine’s debt in a loan-to-own deal before a 2013 float.
“For the past five years my mantra with Oaktree has been move forward, but with caution.
“In other words, we are investing, we are not afraid to invest, we are fully invested. But everything we buy and hold has considerably more caution than usual. I think that is the best way to deal with the current circumstances.’’
And for all the uncertainty, investing has paid off, with risk markets enjoying seven straight years of gains. In debt markets, Marks notes that those scared into cash at the start of the year by an expected rise in corporate defaults have missed out on gains of 12 per cent in the first seven months of 2016.
The most recent of his regular and well read memos, “What the market knows’’, highlights that it was Oaktree’s base in Los Angeles in 2008 that helped the firm look through the greatest panic he had ever seen, and profit.
“In short, people make each other crazy. And when times are bad — like now — they depress each other,’’ Marks writes.
“That was a factor in the edge enjoyed by our distressed debt team in 2008. They were able to buy at the market’s lows because they weren’t in New York, where everyone was trading scary stories and getting each other down.’’
Marks, who will be sharing his best money-making ideas at the Hearts and Minds conference in Sydney in November (for which The Australian is a media partner), says the world is still suffering from the post traumatic stress of the global financial crisis
“Everybody is living quite well without a portfolio of investment clothing or investment watches,’’ he says. “The people who were expecting an easy recovery underestimated the extent to which people were traumatised in the crash and the extent to which a lot of people said, ‘What the hell, I have to review my behaviour.’ ’’
A week after the RBA cut rates to a record low 1.5 per cent in a bid to keep a lid on the Australian dollar and stimulate inflation, Marks notes the growing realisation of the limits of central banks’ powers.
“They can’t create growth, they can’t create prosperity, they can’t create efficiency. All they can do is make little changes in the shape of the curve and they can cause people to accelerate their buying.
“Economic reality is that they can make people buy today what they would have bought tomorrow, but they’re unlikely to be able to make people buy stuff they have no use for. And at this time people are acting as if they have enough of what they need.’’
That was a theme acknowledged by RBA governor Glenn Stevens in a valedictory speech in Sydney yesterday. He said rate cuts “never’’ affected business investment other than indirectly by stimulating households.
Oaktree — whose clients in Australia range from the Future Fund to Telstra Super and industry fund Cbus — has a policy of not discussing specific investments. It was reported to have moved into oil investments at the start of the year as the crude price plunged to $US30 a barrel, and saw opportunities in high yield debt about the same time.
Asset prices are full but not in bubble territory, Marks says, and he does not think we are headed for a crash. “I don’t think it’s as crazy as last time. Most people’s psychology is quite sane and moderate today. The only problem is that they have to stretch their behaviour because if you behave conservatively today you will get quite a low return.’’
In another memo, “It is what it is’’, Marks riffed on his faith in cycles and his belief that conditions will return. “Most people strive to adjust their portfolios based on what they think lies ahead. At the same time, most people would admit forward visibility just isn’t that great,’’ he wrote.
“That’s why I make the case for responding to the current realities and their implications, as opposed to expecting the future to be made clear.’’
That was written in 2006, before the global crisis, and Marks says that view remains relevant. “There are two main things that can happen to improve the situation. Number one, the economies of the world can start growing faster, but I am not smart enough to know whether they will or not and I am not going to bet on it happening. And number two, prospective returns can go up. But there’s only one way for prospective returns to increase in the absence of increased growth, and that’s for prices to go down. That is not a very cheering prospect.
“Those two things together are the reasons you have to move cautiously. I think there is no room for aggressive behaviour today.’’
Related Articles: What Howard Marks taught me about macro-economics.
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