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This article is part of our Rising Star Portfolios series.
Despite his humble, soft-spoken ways, Howard Marks' rigorous focus has made him perhaps the most iconic investor in distressed opportunities.
For Marks' firm, Oaktree, that discipline has paid off. With $80 billion under management, it's become one of the largest investment management firms. Marks owns one-sixth of the business, and announced plans a few weeks back to list Oaktree publicly on the New York Stock Exchange. In perusing the firm's prospectus, I found a few great acorns of wisdom that illuminate Oaktree's guiding philosophies -- and perhaps help to explain its great success.
Mighty oaks from little acorns grow
- "At our core, we are contrarian, value-oriented investors focused on buying securities and companies at prices below their intrinsic value and selling or exiting those investments when they become fairly or fully valued."
Basically, Oaktree seeks great prices, and prizes contrarian thinking. For me, that comes with a caveat.
Investors tend to restrict contrarian investments to narrow categories like "value" or "distressed." But in truth, real contrarian opportunities defy such simple classifications. A "contrarian investment" simply involves finding something that most of the rest of the market dislikes or doesn't understand. Likewise, most companies aren't inherent outperformers -- just good investments only at the right price. Investors make money by recognizing what the majority of the market's getting wrong, and figuring out what that insight's really worth.
- "We neither make nor rely on macro predictions about the economy, interest rates or financial markets. However, we believe it is critical to take into account our view of where we are in the economic cycle and to size our investment capital accordingly. When we believe opportunities are scarce, we limit the amount of capital we raise to avoid jeopardizing returns."
We'll never know exactly where the economy's going; we often won't know when it'll shift, either. Nonetheless, value investors need to remember that the big picture still matters.
The credit crisis provided painful proof of this lesson for investors in financials like Bank of America (NYSE: BAC ) or Citigroup (NYSE: C ) , or homebuilders such as Pulte Homes (NYSE: PHM ) and Toll Brothers (NYSE: TOL ) . Did they look cheap against their trailing earnings? Sure. But were they cheap on a normalized basis? Not so much.
Remember the famous last words of former Citigroup CEO Chuck Prince: "Dance while the music is playing." Fund managers and individual investors alike face huge pressure to invest with the tide, particularly when a manic bull market takes hold. But in the long run, successful investments are born of patient opportunism.
Staying aware of current market cycles and the economy at large can keep investors on the right side of market manias and value traps alike.
- "Oaktree is run for the benefit of its clients and their constituencies as well as for its owners and employees. Profit without performance, bigness for its own sake and prosperity through cost cutting all explicitly rejected."
That's not Whole Foods (Nasdaq: WFMI ) -co-founder John Mackey talking. These words come from a dyed-in-the-wool value investor. While some might criticize this approach as watered-down yuppie capitalism, it's actually remarkably smart.
Organizations and their customers aren't controlled, predictable science experiments -- they're messy, unpredictable groups of humans. Holistic, stakeholder-conscious management creates a virtuous cycle: Happy employees work harder, generate better returns, and keep investors coming back to Oaktree funds.
Genius parsed with a word of caution
Oaktree's returns make it astoundingly clear that Marks has built a focused culture of excellence there. The firm's 17 distressed debt funds have averaged 19% annual returns over a 22-year period. If you're really interested, check pages 144-145 of the prospectus, which details all of Oaktree's fund returns. This business nurtures value investors, hires well, and from outward indications, looks built to last.
Still, should you invest when the shares go public? The opportunity to buy into Oaktree, the progeny of one of the greatest value investors of our time, sounds very, very compelling. However, Oaktree's displayed a remarkable knack for timing markets across its long and storied history. Do we want to buy when the company is effectively selling?
Marks' large ownership stake clearly aligns his interests with shareholders' -- but I wouldn't want to land on the stupid side of the company's collective wisdom.
I'll spend more time thinking through this conundrum. Stay tuned, folks.