Investing In A Low-Return World

Transcription

1 morgan stanley financials oaktree conference conference june 10, distressed opportunities Investing In A Low-Return World Howard Marks, Chairman Oaktree Capital Management

2 The Investment Environment: A Mixed Bag a slow, gradual, unsteady economic recovery in the u.s. Less economic vigor and bigger problems elsewhere The U.S. economy is clearly the best house on a bad block

3 The Investment Environment: A Mixed Bag (continued) serious long-term issues Debt reduction vs. stimulating growth Globalization and competitiveness Less-than-constructive politics Job growth Geopolitics

4 The Investment Environment: A Mixed Bag (continued) low central-bank-mandated interest rates Free markets do a good job of allocating capital; there s no free market in money today Borrowers are being subsidized; lenders and savers are penalized Low-risk investments offer ultra-low returns Therefore investors are forced up the risk curve in pursuit of return

5 The Investment Environment: A Mixed Bag (continued) most assets priced on the high side of fair Equity valuations are reasonable Yield spreads on bonds are reasonable But interest rates are historically low dragging down all fixed income prospects, and other returns by contagion

6 The Cycle of Investor Behavior as markets rise, participants become increasingly euphoric and optimistic Thus they want to invest more, even at high prices They compete for investments by accepting lower prospective returns, weaker structures and greater risk The quantity of issuance rises to meet the demand The quality of issuance declines simultaneously This is the race to the bottom This is a time for caution

7 The Cycle of Investor Behavior (continued) as markets fall, participants become depressed and afraid They want to invest less, and to sell, and eventually to sell at any price There are few buyers for the things that are for sale Market participants reject deals, even good ones The quantity of issuance declines and eventually can go to zero Low-quality issues cannot be done Asset prices are very low This is the time for aggressiveness

8 The Cycle of Investor Behavior (continued) where are we today?

9 The Temperature of Today s Markets The economic news is good, or at least improving. There may be a positive wealth effect as 401-Ks and home prices rise The capital markets are accommodating, making it easy to refinance debt and feasible to do risky deals Consequently distressed situations, defaults and bankruptcies are few Because central banks have brought interest rates low, investors can t get the returns they want in Treasurys, money market instruments or high grade bonds. Thus they are forced out the risk curve

10 The Temperature of Today s Markets (continued) The demand for risk assets is high; cash flow into mutual funds is strong There are many buyers and few sellers. There s no distress among holders, and thus no forced sellers Bargains are few, especially in easy-to-access areas Investors moving out the risk curve often drop their caution Issuers and sellers are holding the cards today, not prudent investors or bargain hunters The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs. Warren Buffett Our bottom line: todays markets call for caution, not aggressiveness

11 Disclosures This presentation and the information contained herein are for educational and informational purposes only and do not constitute, and should not be construed as, an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. Responses to any inquiry that may involve the rendering of personalized investment advice or effecting or attempting to effect transactions in securities will not be made absent compliance with applicable laws or regulations (including broker dealer, investment adviser or applicable agent or representative registration requirements), or applicable exemptions or exclusions therefrom. This presentation contains information and views as of the date indicated and such information and views are subject to change without notice. Oaktree has no duty or obligation to update the information contained herein. Further, Oaktree makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Oaktree believes that such information is accurate and that the sources from which it has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Moreover, independent third-party sources cited in these materials are not making any representations or warranties regarding any information attributed to them and shall have no liability in connection with the use of such information in these materials.