Howard Marks has earned a reputation among peers and clients as am extremely savvy investor and for good reason: His firm, Oaktree Capital Management LP, has been in business for almost two decades now and has developed a record of strong investment performance.
It all started in 1995 when Mr. Marks and five partners left investment firm TCW Group Inc. in a dispute to found Oaktree, a firm that forged a reputation as specialists in the distressed-debt and high-yield bond markets. Los-Angeles-based Oaktree today has more than 650 employees and is the one of the largest distressed-debt investors. It raised almost $11 billion back in 2008 for the largest distressed-debt fund in the world, according to data provider Preqin. Oaktree's 17 funds in that category have averaged annual gains of 17.5% for the 23-year period ended June 30, net of fees.
Mr. Marks is also known for his investment memos, many of which were compiled in a May 2011 book: “The Most Important Thing: Uncommon Sense for the Thoughtful Investor.”
Oaktree went public on April 12 of this year and is now listed on the New York Stock Exchange.
What is your secret sauce? No. 1, it's possible, especially in inefficient markets, to gain a knowledge advantage. By definition, an inefficient market is one where hard work and skill can pay off. We can also control our psyche and emotions so that we don't make the human mistakes that are so common. Of course the other thing is we have a philosophy of controlling risk. So that doesn't necessarily make us the winner rather than the loser in the transaction, but it increases the probability that we engage in transactions of the sort that we and our clients want.
Does that mean you're not always swinging for the fences? We're rarely, if ever, swinging for the fences. We think a high batting average rather than home runs is more important, and the clients who come to us want that.
Oaktree Capital's largest strategy has been distressed debt. How do you succeed in that asset class? Our mantra is “good company, bad balance sheet,” which is different from a bad company; those can be challenging to turn around. But if you have a good company with the wrong balance sheet, that's easier to fix. How do good companies become financially distressed? The answer is they take on more debt than it turns out they can service in tougher times.
After 17 years in business as a private company, Oaktree Capital went public. Why? It was a desire to create a route to generational transition of the ownership. The company was founded in '95 by five people. We have steadily expanded the ownership, and it's now about 160-some odd people, and we did that basically by giving away the equity. The five of us, we gave away a lot, but we don't want to give it all away. We would like to realize a fairer value for our equity, which will permit us to keep transitioning it to the second and third and subsequent generations. Achieving some value for some of what we're giving up is an important element in that.
You're 66. Is retirement in the near future, or do you plan to continue at Oaktree? There's nothing else I'd rather do in its place. It's intellectually rewarding and it's fun. I like the people here, and investing is a puzzle. I think that solving (that puzzle) is a great stimulating challenge, and working with my long-term partners to do so is very exciting.
What challenges do you face now that you've become a public company that weren't a consideration before? It's a funny thing to get a report card every day through the stock price. But if you stop to realize that the person who's grading you on the report card has a very limited attention span and doesn't know that much about what you're doing from day to day, then I think you tend to take it not so seriously. And you say, as we have, that if we do a good job in the long run, it'll all work out. The market tends to think of you as a stock; we think of ourselves as a company. We think our job is to run the company well and that if we do the same kind of job in the future as we did in the past, then it'll be good for the company and the shareholders.
Is there a danger that by going public there is more pressure to focus more on earnings and less on client needs? Well, that's always the clients' fear, but I did everything I could to assure them we're not going to do that. To do that is to practice short-term maximization over the long-term, and we are long-term oriented, not short. I'm at a point in life at which it's more important to me to preserve our reputation and build this company into a great company than it is to make a little more money in the short run. The fear is that we're going to make short-term decisions that are adverse to our clients' interest, and I consider that impossible. I can't imagine what would possibly induce me to do that.
Were you disappointed by the price of the IPO? We came in a tough market. If we had come a week before, the market was good. The week we came, the market turned bad. I think the Dow was down 100 on the ninth of April and 200 on the 10th of April, and we priced on the 11th of April. You certainly have the feeling that you're swimming upstream, and the price you can get on the 11th is lower than the price you could've gotten on the sixth. And that is somewhat humbling, but you quickly figure out it doesn't matter in the long run. I'm not selling stock today or tomorrow, and one of these days I'll sell some more stock. But hopefully the price of the stock at that time will depend not on how the market was in the week of April 9 of 2012, but on whether we did a good job for our clients over the intervening years.
Looking at world affairs, do you see the European economic crisis resolving anytime soon? The thing that I think is most important for me to say on the subject is that I don't know. ... nobody knows what needs to be done; what can be done, which is a subset; what will be done, which is a subset of that; and what the ramifications will be. So I think we really can't talk about what's going to happen. Nobody knows. And in the investment world or the bigger world, when you don't know, the most important thing is to say I don't know. You know what Mark Twain said? It's not what you don't know that'll get you into trouble; it's what you know for certain that just ain't true.
You left TCW to form Oaktree in a well-publicized dispute. Fourteen years later, TCW fired Jeffrey Gundlach. You helped fund his new firm and have more than 20% equity interest. I don't want to kick that over anymore, but the important thing is that (Mr. Gundlach and his team) had not prepared for their departure. Jeffrey didn't quit, he was fired. They didn't have any underpinnings infrastructure-wise and they wanted to get started and build a business. We knew how to do that since we had done that, so we gave them access to our capabilities. ... We thought we could help to put together their infrastructure and vouch for their investment ability.