It’s time to get some good deals, says debt investor Howard Marks
According to Howard Marks, one of the world’s most fearsome distressed debt investors, now is the time to get some “bargains” in the financial markets after the sell-off.
“Today I’m starting to behave aggressively,” the founder and co-chairman of Oaktree Capital said in an interview. “Everything we trade is significantly cheaper than it was six or 12 months ago,” he added, pointing to falling prices for high-yield bonds, leveraged loans, mortgages and secured loan obligations.
According to Ice Data Services, the main metric used to measure junk US corporate debt has seen a loss of just under 13% this year, the largest since the 2008 financial crisis.
Prices of loans offered to poorly rated corporate borrowers have fallen more than 5% and are trading on average at 93.27 cents on the dollar, levels last seen in November 2020 just before the Covid-19 vaccine breakthroughs. 19 are reported, data from S&P and the Loan Syndications and Trading Association showed.
Marks said Los Angeles-based Oaktree did not make investment decisions based on macroeconomic forecasts — such as rising inflation or whether there would be a recession — nor did it try to time the market. .
“I think the idea of waiting for the bottom is a terrible idea,” he said. Assets could become cheaper than current valuations “in which case we will buy more”.
Marks, 76, co-founded Oaktree in 1995 with a strategy of investing in “good companies with bad balance sheets” and built the company into a $164 billion investment powerhouse. The company does not publicly disclose its financial performance.
His career has been founded on making big bets when and where others don’t want to, and he lays out his investing views in a series of popular memos, whose regular readers include Warren Buffett.
“We are more aggressive if we think. . . bargains are plentiful,” he said. “And we are more defensive if we think the market is high and investor behavior is reckless.”
Over the past year, Marks has advocated a more defensive positioning. “I thought asset prices were reasonable given the interest rate situation, but I thought interest rates would go up, which meant prices would go down.”
Financial markets sold off as the Federal Reserve began to hike interest rates sharply, putting pressure on treasurers around the world. Borrowing costs have risen, with yields on well-rated corporate debt in the United States averaging 4.72% this week, double the level at the end of 2021.
For riskier groups rated as junk by major ratings agencies, returns are now above 8.5%, down from 4.32% previously.
Oaktree, which sold to Canadian infrastructure group Brookfield for a valuation of nearly $8 billion in 2019, is one of the oldest specialists in suing companies for unpaid debts. Marks said while he expected the number of corporate bankruptcies to rise — after a period in developed markets when an abundance of cheap central bank money kept them down — he did not think it would reach double digit levels as in previous crises.
Businesses have taken advantage of low interest rates to secure cheap financing during the pandemic, he said.
The bulk of Oaktree’s assets are managed in credit strategies, but it also has much smaller divisions in real assets, listed equities, and private equities. Marks questioned whether the average private equity fund can consistently outperform listed markets, and said leverage is a big contributor to sector returns.
“Maybe the best private equity funds really outperform, or maybe the others do it for short periods,” he said. “But you can’t talk about long-term private equity outperformance based on the average private equity firm and the research I’ve seen. Yes, private equity has produced very good returns over the past few bullish years. But given their influence, shouldn’t we expect that in such a period? »
Until this year, and barring a strong sell-off at the start of the pandemic, U.S. stocks were in a decade-long bull market, which Marks said had fueled complacency. “When things are going well, people don’t worry about the downsides. And they are entering new areas where they have never been before.
He pointed to areas such as private assets, where mainstream equity and bond investors have expanded, some with seemingly little concern for matching fund liquidity with underlying assets. “That’s bullish market behavior,” Marks said. “But when you get withdrawals in an illiquid market with falling values, those funds melt.”
Marks argued that the same psychological dynamic drove investors into cryptocurrencies.
“The warmer the environment, the more people look at something like crypto and they go from saying it’s possible it will work to it’s sure it will work. And that’s where you get in trouble.
He admitted he “didn’t know enough about cryptocurrencies to know if it’s going to work or not” but said he was skeptical as it was impossible to value them: “I believe that the assets that don’t have cash flow don’t have intrinsic value valuing…much of value should be conceptual and forward-looking.
Oaktree’s most high-profile recent deals have been in China, where it seized two crown jewel real estate projects from property developer Evergrande after it defaulted on $1 billion in loans from Oaktree. Marks said Oaktree has yet to sell the two locations – Project Castle in Hong Kong and “Venice” on the mainland – but “the process is going as it should. We are in control of the assets and we are very optimistic”.
Marks said Beijing’s zero Covid policy was hurting Shanghai’s ambitions as a global financial hub: “You can’t put an economy into a coma and expect vigorous activity.”
Additional reporting by Eric Platt in New York