Howard Marks
Xavier GuerraHOWARD MARKS
Co-Chairman, Oaktree Capital Management
Los Angeles
For many years Howard Marks, co-chairman of Oaktree Capital Management, has written regular memos to Oaktree clients; they are read widely on Wall Street and beyond. Marks, 74, is also the author of several books on investing. Oaktree, which he co-founded in 1995, is one of the largest credit investors in the world, and focuses on strategies that include distressed assets and high-yield debt.
Barron’s: What’s the biggest question we’ll face when the Covid-19 pandemic winds down?
Howard Marks: The rate at which we’ll return—and the extent to which we’ll return—to our prior behavior. My guess is we’ll go a good bit of the way back to what used to be business, or life, as usual. For the most part, life won’t be fundamentally changed. The things that you or I now would consider out of the question, like going to the movies, a sporting event, or a party, will become commonplace again once the disease is under control.
What are the most important policy issues coming out of the pandemic?
I hope we will be discussing preparedness, because it seems we were unprepared for this pandemic in terms of personal protective equipment and other things. Public health has been starved for resources in the past decade or two, and I hope we’ll double down on that, because we could easily have another pandemic or virus that threatens to be a pandemic.
Also, the pandemic has been much harder on some socioeconomic groups than others, and I hope that will continue to get attention. On the other hand, I hope the dissatisfactions of all groups that expressed their sentiments, especially through the last election, will get attention. There is a big group in the middle of the country that thinks it hasn’t received enough attention from presidents of both parties. That’s a big issue, because we don’t want to go forward forever as if the U.S. is two different countries.
What other important policy issues need attention?
Having enough economic growth to support job growth. We’re in a lower-growth mode than we’re used to. This country and the world grew at a great rate in the latter half of the 20th century, and the outlook is for less growth than that. Then we’ll have the increasing effects of automation and digitization. As a combined result, we’ll have fewer jobs. I worry about where the American whose main asset is a strong back is going to find work, because we don’t need that many laptop operators.
You have to worry about our debt load, as well. What are the long-term ramifications of what the Federal Reserve and Treasury have been doing by piling up additional deficits and debts? I don’t have an answer, but you can’t inject trillions of liquidity into the economy, as we’ve been doing this year, and not have an effect.
Turning to investing, what is your big-picture view?
In the years leading up to 2020, there were some major uncertainties—macroeconomic, political, and geopolitical. Most assets offered low prospective returns relative to their history. Most assets were fully or highly priced, and many people were engaging in what I call pro-risk behavior to try to get a good return in a low-return environment. That’s not a great combination of factors, and it left the markets vulnerable to a shock.
When the pandemic hit in March, the markets went down, the risk-taking stopped, the prospective returns became high again, and very few assets were fully priced. So we turned aggressive at Oaktree. But the Fed and Treasury quickly ended that condition with monetary and fiscal stimulus. By the end of March, the markets were recovering, and now we are back to where we were a year ago—uncertainty, prospective returns that are even lower than they were a year ago, and higher asset prices than a year ago. People are back to having to take on more risk to get return. At Oaktree, we are back to a cautious approach. This is not the kind of environment in which you would be buying with both hands.
In your book Mastering the Market Cycle, you discussed cycles and attitudes toward risk. Where do we stand on those issues now?
Fear of missing out has taken over from the fear of losing money. If people become ultra-risk-averse, that’s how you get great bargains. Because they’re risk averse, they won’t buy. They sell at low prices. But if people are risk-tolerant and afraid of being out of the market, they buy aggressively, in which case you can’t find any bargains. That’s where we are now. That’s what the Fed engineered by putting rates at zero.
You’re not a stock picker, but do parts of the stock market look appealing?
During the pandemic, my son and his family have been living with us. He loves growth stocks, and has convinced me that the ones that perform as expected are probably cheap or certainly reasonable. But we won’t know that for 10 or 15 years.
Take one of the great tech companies; let’s not be specific. People think it will grow its revenues at maybe 15% a year for 15 years. That company also has the ability to increase its profit margins if it wants to. If it does both, earnings will multiply many times. The companies that can do what is expected of them will probably make people a lot of money, even from these prices, as long as you get the right ones.
On the other hand, when you look at the nontech companies, there are a lot of areas where business models are severely challenged by the pandemic and other trends. If you can find among those companies some where the reality isn’t going to be as bad as the expectation, then you can make money in those holdings. It is all a matter of looking for situations where the merits are underestimated by investors.
How do other asset classes compare on a relative-value basis?
The capital-market line includes Treasuries, high-grade bonds, high-grade stocks, high-yield bonds, aggressive stocks, and private equity. There is a progression. As you increase the perceived risk, you increase the expected return. But then the Fed lowered the risk-free rate, and everything else followed. There aren’t asset classes that are standouts in the sense that this is fairly priced, but that is a bargain. These asset classes are in a fair relationship to one another. The prospective returns are low on everything.
On a personal note, what place would you most like to visit when the pandemic ends?
Majorca. We really love it, but weren’t able to go this year.
Thanks, Howard.
Share your thoughts on the post-pandemic world: What do you think will be the greatest investment opportunity post-Covid? What will be the most important public policy issue that the U.S. will face? Where would you most like to visit once the virus is no longer a threat to travel? Click here to share your thoughts with us.
Write to Lawrence C. Strauss at lawrence.strauss@barrons.com
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‘Prospective Returns Are Low on Everything.’ Howard Marks Outlines Investment Opportunities, Risks - Barron's
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