SINGAPORE - Renowned debt investor and billionaire Howard Marks thinks financial markets are in their "last trimester", and caution is in order.
But there is still one thing Oaktree Capital Management, the firm he co-chairs, has been buying: Oil.
"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 told The Business Times.
This year, Oaktree, a distressed-debt and high-yield bond specialist with US$100 billion of assets under management, has invested in "companies with oil and gas reserves", he said without elaborating.
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.
Investors should worry more about losing money and less about missing opportunities, he said.
"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 said.
"I don't know when the economy or the markets are going to turn down, but I just know that this is not the best time for risk bearing."
He stressed that it is still all right to be in the market, as long as one's 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.
"Everything else being equal, I would rather have a bond with better protective covenants. I would rather have a company that is less levered. 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 said.
"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 in the investment community for his astute observations in memos to clients, available for free online. He is currently working on a book on market cycles.
In a widely-shared July 26 note, he observed that the world feels like it is in the "eighth inning" of a baseball game. Baseball games have nine innings.
He cited examples of froth: Pricey US 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.
On the coming withdrawal of a historic amount of quantitative easing, he said caution is warranted because central banks are in 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 said.
He admitted that he has been early in turning cautious. The excesses he sees are in the financial market, not so much the economy.
He added that it is better to be cautious too soon than too late. And just because people cannot anticipate a problem now does not mean there won't be one.
Asked what will spark a collapse, he shrugged. In the dotcom 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.
On succession, he said Oaktree has had a gradual transition, without a formal one. New people are gradually elevated to share responsibilities, and older ones do not necessarily have to go in a wrenching way.
"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."