Top investor fancies oil plays, but is wary of today's markets

Oaktree Capital Management co-chairman Howard Marks believes the financial markets are in their “last trimester” and it is time to tread warily.
Oaktree Capital Management co-chairman Howard Marks believes the financial markets are in their “last trimester” and it is time to tread warily. ST PHOTO: LAURA NG

Billionaire's advice to investors: Worry more about losing money than missing opportunities

Oil has long been out of favour for many, but it is top on the agenda for renowned investor Howard Marks.

The billionaire, who co-chairs Oaktree Capital Management, is partly sold on the commodity because he believes the financial markets are in their "last trimester" and it is time to tread warily.

In such a risky environment, crude has started to look like a safer bet. "There is nothing that can be said about the future price of oil. But when it's low, and everybody thinks it's going lower, then it's reasonable to think there's not much optimism embodied in oil deals. And that's when we tend to make them," he said during a recent visit to Singapore.

Oaktree, a distressed-debt and high-yield bond specialist with US$100 billion (S$135 billion) of assets under management, has invested in "companies with oil and gas reserves" this year, he noted.

It has also bought pools of non-performing loans, notably those offloaded by European banks.

Nevertheless, the typically cautious Mr Marks seems even more cautious today, suggesting that investors should worry more about losing money and less about missing opportunities.

"Securities are valued highly, prospective returns are low, people are engaging in risky behaviour. These things tell me that we're in a relatively precarious position," he added. "I don't know when the economy or the markets are going to turn down, but I just know this is not the best time for risk-bearing."

Mr Marks said it is still all right to be in the market, as long as your activities are conservative. Oaktree's mantra continues to be to move forward, but with caution.

Caution to him means to go into more secure situations that have less downside risk, but less upside potential. "It is hard to be specific. In each industry, there are riskier and safer things," he said.

"Everything else being equal, I would rather have a bond with better protective covenants. I would rather have a company that is less leveraged. I would rather have a company that has less debt above you and more debt below you."

Oaktree also likes to invest in real estate in non-prime cities, he added. "You don't get the fundamental excellence of an 'A' building on Park Avenue, but you get the comfort that comes with cheapness."

Mr Marks is known for his astute observations in memos to clients, which are available for free online. He is also working on a book on market cycles.

He noted in a widely shared July 26 note that the world feels like it is in the "eighth inning" of a baseball game. He cited examples of froth: pricey American stocks, low volatility, a group of tech firms anointed as "super stocks", with valuations exacerbated by passive investing. There is also record fund-raising, digital currencies and an eagerness for low-quality debt.

Mr Marks also warned that the coming withdrawal of a historic amount of quantitative easing means central banks are now entering new territory: "When you have something that's never been done before, there's no reason to be confident that it will be done correctly."

He admitted that he has been early in turning cautious, noting the excesses he sees are in the financial market, not so much the economy.

But what will actually spark a collapse remains guesswork. In the dot.com bubble, prices collapsed simply because they were too high. In 2006, not much was written about sub-prime mortgages.

"The spark for the conflagration often cannot be seen in abeyance. In fact, sometimes it can't be seen even after the fact," he said.

In the past year, Oaktree has been expanding in Asia, adding six investment professionals to a distressed-debt team evenly spread across Hong Kong and Singapore. It has also expanded its targets from traditional developed Asian markets to new ones in China and India, as they are deemed to have the largest potential supply of distressed debt.

While Oaktree remains in the thick of the action, Mr Marks has been easing himself out of the fast lane: "I don't have any responsibilities any more. All I have to do now is to read, and think, and speak, and write, which I enjoy."

A version of this article appeared in the print edition of The Sunday Times on November 26, 2017, with the headline 'Top investor fancies oil plays, but is wary of today's markets'. Print Edition | Subscribe