In one of his famous “memos” released on Dec. 13, Howard Marks (Trades, Portfolio), co-chairman of multibillion-dollar asset management firm Oaktree Capital, discussed his views on the current economic climate.
The paper, titled “Sea Change,” began with the investor providing a definition of the idiom, which is “a complete transformation, a radical change of direction in attitude, goals…”
Throughout his career, Marks noted he has seen “a number of economic cycles, pendulum swings, manias and panics, bubbles and crashes, but I remember only two real sea changes. I think we may be in the midst of a third one today.”
The guru then went on to discuss the changes in the market he observed when he first started working in investment management in 1969. While Nifty Fifty stocks were popular due to their fast growth, they did not end up being successful investments.
At the same time, bonds, which were unpopular, had good performances. Marks wrote:
“In other words, whereas prudent bond investing had previously consisted of buying only presumably safe investment grade bonds, investment managers could now prudently buy bonds of almost any quality as long as they were adequately compensated for the attendant risk. The U.S. high yield bond universe amounted to about $2 billion when I first got involved, and today it stands at roughly $1.2 trillion.
This clearly represented a major change in direction for the business of investing. But that’s not the end of it. Prior to the inception of high yield bond issuance, companies could only be acquired by larger firms – those that were able to pay with cash on hand or borrow large amounts of money and still retain their investment grade ratings. But with the ability to issue high yield bonds, smaller firms could now acquire larger ones by using heavy leverage, since there was no longer a need to possess or maintain an investment grade rating. This change permitted, in particular, the growth of leveraged buyouts and what’s now called the private equity industry.”
Read Marks’ full memo here.
