In this Talks at GS episode, Oaktree Capital co-founder Howard Marks shares his insights on the forces shaping the market cycle and discusses how his writing has informed his perspective as an investor.
Howard Marks: “Mastering The Market Cycle”
Well I’m a kid from Queens and I went to the public schools in Queens.
As odd as it may seem. My education school education included accounting and I like the accounting my dad was an accountant so I figured I’d be an accountant then I went off to Wharton to take a degree in accounting. But when I got there I was introduced to finance and I found that more interesting so I switched my major to finance. Then I wanted to get an MBA. In those days you could get an MBA right from college. And
so I applied to the good business schools and some of them Harvard Stanford for example required experience in University of Chicago didn’t so I went there and I had a summer job at Citibank in 68 and the investment research department and then when I got was getting out I still didn’t know what I wanted to do. I applied for six different jobs in six different fields. And but you know on the strength of the experiences that I had I went back to Citibank into the investment research department. And so in 1995 we started Oaktree right. Why we saw what we said at the time was that we wanted to have a firm that ran our way. We had ideas on what the right investment philosophy was for us not necessarily for everybody but for us. You know we were in the aggressive risk oriented asset classes like high yield bonds and convertibles and distressed debt and opportunistic real estate and emerging markets so forth.
And our approach was to be the controlled risk option in some risky asset classes and that was a big part of our philosophy. And everything we do at Oak Tree now runs according to the same philosophy it’s implemented differently because markets are different but the underlying philosophy is the same and it fits with what with our personality it fits with our values it fits with what the clients our clients want. And so it’s very holistic. I mean did you ever envision oak tree becoming what it is today.
The the alternative investment category which is where I place US went from being an oddball sideshow that you might put a little into to spice up your portfolio to a respectable component of investing.
Number one and so you know we started we started in 95 at the end of 95. We had five billion under management and at the end of 97 we had 10 billion under management. And I would say that at the end of 0 6 we probably had 35 but one of the things that really changed is that in order to pull the world out of the global financial crisis the central banks pulled down the risk free rate from let’s say 3 or 4 to zero or minus. And most institutional investors have the concept of a required return.
Pension funds basically need nine and a half and seven and a half or eight most endowments need eight in order to pay out five to support the institution earned to cover inflation and one to cover administration. So most U.S. institutions need 7 8 and today for example.
And by the way remember that rates have come up a great deal in relative terms. So today cash pays one five year pace to the 10 year pace. Three high grades pay for high yield pay six stocks are expected to return five or six.