A pleasant surprise emerged during preparation for tomorrow’s webinar updating the BizNews portfolios. Despite gloom dominating news about the markets over recent weeks, our model portfolios actually gained a little ground this past month.
Which would suggest that if you’ve always simply been an interested observer, this may be the time to start becoming an active participant. Supporting that thesis is investment guru Howard Marks in an interview by our partners at the Financial Times of London (read below).
For 99.9% of us, trying to call market bottoms is as much of a fool’s errand as attempting to ring a bell at the top. Marks, however, is no mere mortal on investing. And while he warns asset prices could fall further, the fact he has turned into an aggressive buyer speaks volumes.
___STEADY_PAYWALL___So if you’ve always abdicated responsibility for your wealth creation to others, it’s never too late to reassess. Because nobody will ever care as much about your money as you do.
More for you to read today:
- How World sees SA: South African Police Investigate Deaths of 22 Youngsters in Township Tavern. Officials say cause of death of the victims, some as young as 14, is unclear.
- Value Investors Bet Recent Market Leadership Is Just the Start. Value stocks are on track to beat growth stocks by widest margin since 2001.
- In Ukraine’s South, Counterattacks Offer Kyiv Hope for Turning Back Russia. Ukraine is looking to recapture Kherson, a city crucial to economy, and stop Russians advancing to doorstep of Europe.
- The Best Player in Women’s Tennis Isn’t at Wimbledon. She’s Playing Golf Instead. Three months on from her sudden exit as world No. 1, 26-year-old Ashleigh Barty is just another retiree working on her short game.
* PS Join me tomorrow for the monthly update of the BizNews portfolios where we’ll be making some important changes. Here’s the link to register: https://attendee.gotowebinar.com/register/7995493949841928719
Time is ripe to snap up bargains, says debt investor Howard Marks
In an interview with our partners at the FT, the co-founder of $164bn Oaktree Capital explains why he’s is in a buying mood after the sharp market sell-off
By Harriet Agnew of The Financial Times
The time is right to snap up “bargains” in financial markets following a widespread sell-off, according to Howard Marks, one of the world’s most formidable distressed debt investors.
“Today I am starting to behave aggressively,” the founder and co-chair of Oaktree Capital Management, said in an interview. “Everything we deal in is significantly cheaper than it was six or 12 months ago,” he added, highlighting drops in the prices of high-yield bonds, leveraged loans, mortgage-backed securities and collateralised loan obligations.
The main gauge used to measure junk US corporate debt has registered a loss of just under 13 per cent this year, its largest since the financial crisis in 2008, according to ICE Data Services.
Prices of loans offered to low-rated corporate borrowers have fallen more than 5 per cent and are trading at an average of 93.27 cents on the dollar, levels last seen in November 2020 just before Covid-19 vaccine breakthroughs were 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 macro forecasts — such as how high inflation would rise or whether there would be a recession — nor try to time the market.
“I think the idea of waiting for the bottom is a terrible idea,” he said. Assets could get cheaper than current valuations, “in which case we’ll buy more”.
Marks, 76, co-founded Oaktree in 1995 with a strategy of investing in “good companies with bad balance sheets” and has built the company into a $164bn powerhouse of debt investing. The company does not publicly disclose its financial performance.
His career has been founded on making big bets when others were unwilling to do so, and he set out his investment views in a popular series of memos whose regular readers include Warren Buffett.
“We’re more aggressive if we think . . . bargains are rife,” he said. “And we are more defensive if we think the market is elevated and investor behaviour is imprudent.”
Over the past year, Marks has advocated positioning on the more defensive side. “I thought asset prices were reasonable given where interest rates were, but I thought interest rates would go up, which meant prices would go down.”
Financial markets have sold off as the Federal Reserve has begun to sharply raise interest rates, piling pressure on treasurers across the globe. Borrowing costs have shot higher, with yields on highly rated corporate debt in the US averaging 4.72 per cent this week, double the level at the end of 2021.
For riskier groups rated junk by major credit rating agencies, yields are now above 8.5 per cent, up from 4.32 per cent.
Oaktree, which sold itself to Canadian infrastructure group Brookfield at a near $8bn valuation in 2019, is one of the oldest specialists in chasing companies for unpaid debts. Marks said that while he expected the number of corporate bankruptcies to increase — following a period in developed markets in which abundant cheap money from central banks kept that risk low — he did not think it would reach double-digit levels as in previous crises.
Companies took advantage of low interest rates to lock in 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 equity and private equity. Marks questioned whether the average private equity fund could consistently outperform listed markets and said leverage contributed a large part of the sector’s returns.
“Maybe the best private equity funds really do outperform, or maybe the rest do so in brief periods,” he said. “But you can’t talk about private equity outperformance over the long term based on the average private equity firm and the research that I’ve seen. Yes, private equity has produced very good returns in the last few bullish years. But given their leverage, shouldn’t that be expected in such a period?”
Until this year, and barring a sharp sell-off at the start of the pandemic, US equities were in a decade-long bull market, which Marks said had bred complacency. “When things are going well, people don’t worry about the downside. And they push into new areas that they have never been in before.”
He pointed to areas such as private assets, where mainstream investors in stocks and bonds have expanded, some with seemingly little concerns for matching fund liquidity with the underlying assets. “That’s bull market behaviour,” said Marks. “But when you get withdrawals in an illiquid market with declining values, those funds melt down.”
Marks argued the same psychological dynamics had driven investors into cryptocurrencies.
“The hotter 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 when you get in trouble.”
He admitted he “did not know enough about cryptocurrencies to know if it’s going to work or not” but said he was sceptical because it was impossible to value them: “I believe that assets that don’t have cash flow don’t have intrinsic value . . . a good part of the value has to be conceptual and future-oriented.”
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 $1bn of loans from Oaktree. Marks said Oaktree had not yet sold the two sites — Project Castle in Hong Kong and Venice on the mainland — but that “the process is going as it should. We’re in control of the assets, and we’re very optimistic.”
Marks also said that Beijing’s zero-Covid policy was hurting Shanghai’s ambitions as a global financial centre: “You can’t put an economy into a coma and expect vigorous activity.”
Additional reporting by Eric Platt in New York
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