Most of us in Marcellus know Howard Marks for his outstanding books and his remarkably well written investment memos. What we also know now thanks to this lively interview in the FT is: “He began writing the memos in 1990, initially sending them by post to Oaktree’s 50 or so clients. For the first 10 years, “I never had one response,” he says. And then, on January 2 2000, Marks distributed a memo called “bubble.com”, in which he made the “overwhelming” case for “an overheated, speculative market in technology, internet and telecommunications stocks”, similar to past manias such as the 18th-century South Sea Bubble.
The memo “had two virtues”, says Marks. “It was right and it was right quickly.” The technology-heavy Nasdaq index slumped four-fifths from peak to trough between March 2000 and October 2002. “After 10 years, I became an overnight success.””
In the interview, Marks goes on to explain in his usual lucid style where we now stand in the capital markets cycle: “Marks expounds one of his core philosophies: that economic cycles are driven by the pendulum of human emotion. “In real life, things fluctuate between pretty good and not so hot, but in the market, things go from flawless to hopeless,” he says. “Nothing’s ever flawless and nothing is ever hopeless, but when people reach those extremes, it’s a good opportunity for the contrarian.”
We’re lunching in late September. The US Federal Reserve has quickly raised interest rates to curb inflation and there has been a correction in equity markets. For Marks, “we’re in what I call the zone of reasonableness . . . And when it’s in fair territory, there’s nothing brilliant to do.”
I follow up with him in mid-November and his stance has turned considerably more aggressive. The pendulum of human emotion has swung towards hopeless and the bargain hunter’s excitement is palpable.
“Risk aversion has replaced Fomo [‘fear of missing out’],” says Marks. “Capital is harder to come by. Debt is available at very attractive returns . . . which are likely to go higher.” He sees compelling buying opportunities in high-yield bonds, distressed debt, leveraged loans, mortgage-backed securities and collateralised loan obligations that are Oaktree’s bread and butter. Marks is expecting a pick-up in corporate bankruptcies “but not soon because any company that wasn’t asleep at the switch” refinanced their debt and pushed out their maturities.
“It’s been a tough last decade-plus for bargain hunting, but I feel we’re holding more cards now,” he goes on. “The easy days are over for now. It’s no longer an asset owner’s paradise, a seller’s market and a borrower’s market.”
The FT interview also contains a very good recent example of Marks’ ballsy deep value investing style: “Recently, Oaktree’s most high-profile borrower has been Evergrande. This year the asset manager seized two plots of land — “Project Castle” in northern Hong Kong and a “Venice” project on the Chinese mainland — from the heavily indebted Chinese property developer after it defaulted on its debt.
For Oaktree, China marked yet another example of how, if somewhere is deemed “uninvestable”, it marks a good starting point to take a look. Marks says he got comfortable with investing in China after years of high-level discussions with authorities and assurances that the rule of law would prevail. Crucially, Oaktree insisted that its loans to Evergrande were secured against collateral.
The Evergrande trade is still playing out but earlier this month, Oaktree sold the Project Castle plot, recouping all of its original investment and making a profit of about $140mn, due to a 19 per cent interest rate on its loan.”
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