When Howard Marks was overseeing convertible bond and high-yield debt at Citibank in the '70s and '80s, his stepmother was able to purchase a one-year certificate of deposit with a 16% interest rate.
"That was easy money. There's no easy money today," Marks, the co-founder and co-chairman ofOaktree Capital Management, said during an event at the Fixed Income Analysts Society on Wednesday.
Indeed, the average rate for a one-year CD today is 0.14%, according to Bankrate's most recent national survey of banks and thrifts.
Over the past four decades, the Federal Reserve enacted easy monetary policies, added trillions to its balance sheet, and brought down short-term interest rates to near-zero.
"Not only have rates come down, bringing with them the prospect of returns on all securities and all investments, not just bonds," he said, "but at the same time markets have become more efficient."
Marks said the reason he was able to "make so much money so easily" in high yield bonds starting in 1978 was that most people didn't know about them and most institutions had rules against buying them.
"If 98% of people in a community won't buy a certain asset, then there's a better chance that it's going to be cheap," he said. "The first high-yield bonds that I bought yielded about 12% and that was really easy money."
As advanced technology and once hard-to-obtain information become widely available, it is much harder to beat the markets today, but Marks said that investors must expect that markets will become more efficient over time.
Finding opportunities in a world where 'nothing's cheap'
In an ever more efficient market, the Fed's easy monetary policy and the government's massive fiscal stimulus have made it so that "nothing's cheap in this world."
But "investing is the discipline of relative selection," as Marks learned from Sidney Cottle, an editor of Security Analysis and former consultant at Citibank.
"In other words, whatever is out there on the menu, whatever is available to us, the superior investor finds the better and avoids the worst. I think that's still true," he said. "The better is not as good as it used to be, but it's still the job of the active manager to find the better."
Marks certainly thinks that his team can find the better investments in a world where nothing is cheap. His $158 billion distressed asset manager Oaktree recently raised $16 billion for its largest-ever opportunistic credit fund, according to Bloomberg.
The fund will make both public and private investments, including private loans to companies that need money. Although the Fed's liquidity injection into the market has significantly reduced the number of distressed companies, Marks said there are still companies that have some urgency.
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"Maybe they have a wall of maturities ahead, maybe they don't have full access to the market, they can't go into the market and borrow a billion dollars," he said. "So we will lend it to them."
How to 'make the big money'
Marks said some of these companies are in Europe and others are in Asian countries including India and China.
Over the past year, the Chinese government cracked down on various industries, including some of its most successful tech giants. The move has erased more than $1 trillion of market value from Chinese stocks. The Evergrande debt crisis, which threatened to spill over to the US, has also scared off international investors. Some went as far as calling the country "uninvestable."
China's headline and regulatory risks have not deterred Marks, who is a long-time contrarian and famously deviated from the crowd by scooping up distressed assets in the throes of the 2008 global financial crisis.
"How do you make the big money? You make the big money by doing the things that other people don't want to do," he said. "If China is considered uninvestable, then chances are whatever risk you are thinking about bearing in China, you will be better paid to take it."
Marks said Oaktree Capital has been investing in Chinese equities and nonperforming loans over the past six years. The firm's non-US head of opportunistic credit also moved from London to Hong Kong three years ago to ramp up their activities in China.
"We've done very well. It's gone smoothly," he said.
As for Evergrande's debt woes, Marks finds the situation "troubling" but remains "optimistic."
"We will see whether the rule of law is followed, whether the collateral is adequate, and whether it ends up in the right hands," he added.
Not fixating on the Fed
With the CPI inflation coming in at an annual 6.2% in October, it is not only the Federal Reserve but also President Biden that is under pressure to rein in higher prices.
While the Fed is officially reducing the pace of its monthly bond purchases, Marks thinks it should take have raised rates sooner and undone stimulus faster. Rather than worrying about how a rising-rate environment would impact investors, they should make sure the economy provides a good environment for companies.
"If I were running the Fed, I would say the investors can worry about themselves," he said. "We are not going to worry about the investors, we are going to worry about the economy and the companies, that's how you get a prosperous society."
He adds that Oaktree is not taking a strong position on the assumption that there will be a lot of inflation. The firm's strategies are not guided by macro forecasts and its returns are contractual, which is typical of distressed debt investing.
"We are doing our normal thing," he said. "Where we have the flexibility, we may have more floating-rate debt than fixed, which is the ultimate response. And we may have more invested in companies and properties that can offset inflation through pricing, but we certainly have not inverted our portfolios to prepare for inflation."
