Chairman Howard Marks (Trades, Portfolio) is the best known leader at the excellent investment shop Oaktree Capital (OAK, Financial). CEO Jay Wintrob recently spoke at the Annual Fink Investing Conference at UCLA Anderson. You can watch the entire hour-long talk here. Wintrob talked extensively on the business cycle and I wanted to write about the three most important takeaways.Â
Where we are currently
The business cycle is getting old. Wintrob estimates we are in the eighth-inning of this cycle although admitting he's been saying that for a while. There are both headwinds and tailwinds. And a larger than usual number of wildcards. Synchronized global growth and strong corporate earnings are nothing new to most people who follow the financial media. Headwinds like high asset prices and increasing interest rates are probably not new either.
What's unusual?
"We are living in a low return high risk world," he said.
Wintrob is concerned with all the risk taking going on. There are lots of reasons to be cautious. There are very high inventories of low quality debt with very few covenants. Oaktree also observes high debt levels, debt service costs rising, lots of covenant lite lending and complacency among investors rising. Oaktree noticed this among its client base. Some examples of unusual investments that are being gobbled up by the market (emerging market debt):
- Kazachstan issued 10 year debt yielding 4%.
- Argentina issued 100 year bonds.Argentina defaulted 3 times in the last 23 years.
Wintrob likens it to a fire. All these risk factors act like kindling. You don't know when it will catch fire but if it does there could be quite an inferno.
What to do under these circumstances?
Wintrob thinks it is time to be cautious and talks about the steps Oaktree is taking in this unique environment:
- Better to cut exposure early and lag the market for a while instead of being too late. If Oaktree is too late it will have to cut exposure under potentially difficult circumstances. As Oaktree isn't very active in liquid public markets it could be hard to exit at that point. For individual investors this may not be as big of a problem.
- Oaktree is holding quite a bit of dry powder but it is doing other things as well.
- Oaktree is increasing pro-cyclical strategies but in different segments like real estate.
- Oaktree is building out its emerging market platform. Not necessarily plowing in a lot of money there already but getting ready to do so if debt sells of there.
- Building out an infrastructure platform. Infrastructure, especially domestic, could be an interesing growth category going forward. State and Federal government will need to do a little more to spur this growth for real.
- Build a direct lending platform (higher rates but lesser liquidity). This is a trend. Goldman Sachs (GS, Financial) is making similar moves. Oaktree also acquired a few BDCs; Oaktree Specialty Lending Corporation, Oaktree Strategic Income Corporation.
- Oaktree is a net seller of assets (It isn't making new investments at the same speed as it is exiting).
Disclosure: Author is long OAK.
