Q&A: Oaktree's Howard Marks

Q: You have concerns about the current excess liquidity and low levels of risk aversion, but at the same time you say the investment environment is not as dangerous as before the financial crisis. Will it worsen?

A: It all starts with the fact that interest rates are so low that people can't make a decent return in money market instruments or intermediate term treasuries. They have been forced up the risk curve to make the kinds of returns they want or need. To some extent they have had to surrender their characteristic risk aversion, and when this happens, markets become more dangerous. Warren Buffett says: "The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs." Since the darkest days post-Lehman there has been a strong recovery in prices and investor psychology. Conditions aren't as bad as they were pre-crisis, but they are at a level at which caution is important.

Q: In terms of the macro environment, in 2012 you said you felt more uncertainty than ever before. What about now?

A: The US economy is doing pretty well; Europe and China are bumping along. The world has done a little better than I thought it would. On the other hand, the world is still a very uncertain place. Will US economic growth recover to prior levels? What is the outlook for European competitiveness and cohesion? It's still an open question whether China will have a hard landing or a soft landing. Can Prime Minister Abe's policies re-introduce dynamism to the Japanese economy? In the 1990s the world seemed like a safe place, but this is an interesting example of how markets work. The environment seemed so predictable that securities prices did exceptionally well, which eventually made the market a dangerous place. Excess clarity is not a good thing, because it gets incorporated into excess asset prices. I think today the world is a complex and uncertain place, and yet risk premiums aren't high.

Q: So, in an investment context, people seem overconfident...

A: Yes, and that's a dangerous combination for future prices. We've had what one of my friends describes as an excess of complacency incorporated into securities prices. If things then go bad and they hadn't been anticipated to go bad then by definition you can have a substantial correction.

Q: How does Oaktree behave in this kind of environment?

A: Since the economy is benign there isn't a lot of fear in the streets. It is a hard time to find bargains; they come when people panic and don't want to own securities and shrink from risk. There are very few compelling markets and when that's the case you have to recognize it. The biggest mistake is when there are no bargains you behave like there are bargains and buy things hand over fist, paying full prices. In general, Oaktree's mandate for the last three years has been "move forward, but with caution."

Q: Does your Asia strategy differ from your global strategy?

A: It doesn't differ. The interesting question is whether our characteristic approach is applicable to Asia. When I think about Oaktree, what are we? Credit: we invest mostly in debt. Value: we emphasize things that are demonstrably cheap in the here and now. Opportunistic: we don't take a strategic approach to industries and companies and countries, rather we buy the things that pop up as cheap. In Asia it might be the case that you have to take ownership of companies to get the big play on the upside. We have tried a couple of forays into Asian private investing and have done modestly well. We have an emerging markets team managing public equities where we can take an opportunistic approach, but we have not been able to demonstrate its successful application to private markets yet.

Q: Oaktree has a joint venture with non-performing loan specialist China Cinda Asset Management. How significant an opportunity is this?

A: It's a seat at the table. In every market there are distressed debts. In every market there are transactions that turn out to be too optimistic and have to be restructured. I believe they will exist in China as well. Historically we have been involved in buying and restructuring things. It's a good activity for us. Cinda we believe will be one of the leading participants in that field of endeavor, so we are very glad to associate with them. Now exactly how that area develops in China is yet to be seen. What happens in bankruptcy in the US, very simply, is the old owners are wiped out and the creditors become the new owners. Will that happen in China? Will the rule of law be dependable? I don't think these questions have been answered yet, but we are optimistic they will be answered.

Q: Elsewhere in emerging Asia people are offering structured debt to entrepreneurs who are reluctant to give up equity. Would you consider this?

A: We will look at it. For some of these funds, the approach is much more long-term and strategic than what we would normally do. To over-exaggerate the difference: we date, they get married. We have to decide whether that activity is right for us. If it is, then we have to tool up with skilled people on the ground.

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• Topics
• Credit/Special Situations
• Restructuring
• North America
• Greater China
• Oaktree Capital
• Howard S. Marks
• Distress
• Special Situations
• Structured finance
• China