Howard Marks On OAK Call: Move Forward But With CautionVW Staff
Howard Marks on Oaktree Capital Group LLC (NYSE:OAK) conference call discusses 2013 and what the performance means for the next year.
Thank you, Andrea.
We’re pleased to report continued strong financial performance, including record annual revenues, distributablers, and distributions to our unit holders.
As was the case in 2012, this performance was the result of solid investment rushes and a robust cycle for realizations and distributions driving strong incentive and investment income proceeds.
It’s easy to describe 2013’s investment environment in general.
Stocks did much better than bonds, low-quality assets did Bert than hey-quality assets, US assets did Bert than non-US assets, and fund-raising got easier in alternative market.
Stocks and bonds moved in opposite directions during the year.
Fueled by an accommodative fed and an improving economic outlook equity staged a remarkable rally.
The S & P 500 skyrocketed an eye popping 32% while treasuries were pummeled.
The 10-year benchmark note lost 8%. Amid concerns about higher interest rates and the wiping down of quantitative easing.
As for high yield bonds they handley outperformed by 950 basis points proving to be much lesser less vulnerable to rising interest rates than their higher quality counterparts.
Drove significant capital flows into the leveraged debt market especially on the scene your loan side.
There was a pervasive feeling the economy was gaining strength and was the best house on a bad block.
In essence the market didn’t climb a wall of worry in 203 as they had in 2012. Rather more confident.
Thus risk aversion receded and response to low interest rates and the big gains in equities and other risky assets.
Howard Marks on Oaktree Capital’s strong investment performance for the fourth quarter
Against this backdrop of pro-risk behavior and bullish equity mark Oaktree Capital Group LLC (NYSE:OAK)’s strong investment performance for the fourth quarter in all of 203 may surprise you but it doesn’t surprise us or our clients.
Our investment approach is designed to capture much of the up side while protecting clients and capital on the downside.
The past year was an opportunity for us to demonstrate the former and I think our investment teams did that well.
Our closed-end funds averaged a 22% gross gain for 2013 with distressed debt at 24, global principal at 21, European principal at 22, power opportunities at 32, mezzanine at 20, and real estate at 16%.
As of year-end 2013 all 47 of our increptive creating closed end funds more than year old had positive gross IRRs since inception and 41 of those funds were at the 1% net IRR level which is generally the return threshold we must exceed to earn incentive allocations.
How can a firm known for specializing in credit and distressed investing achieve such strong results in a year generate — generally regarded as great for he can and poor for debt?
We did it by capitalizing on would we call the power of credit.
One benefit of credit investing is the promise of repayment.
We’re very happy to have that promise fulfilled when it is, but we’re also happy if it’s not and we have the opportunity to convert debt into equity at attractive valuations.
Last year we capitalized on raising asset price — rising asset prices and act com daft mark to generate $12 billion in distributions to closed end fund investors bringing the two-year total to almost $25 billion.
In the fourth quarter alone, note worthy IPOs sales or other realization events included our holdings in stock spirits group, food group, tech any plex and 9 entertainment.
On the closed end investment side we continue to find the best opportunities in global real estate, Europe, and shipping.
Although core real estate which is not our focus has substantially recovered we continue to find opportunity in a number of other areas including nonperforming residential and commercial lone pools and commercial properties in noncore mark.
In Europe our substantial 15-year presence enables to us benefit from the space created by diminished mainstream bank lending.
Our European principal team has been particular active in building platform investments in sectors such as residential development, retirement living, and student housing.
Finally shipping, which has been a focus of our distressed debt and principal investing teams for almost 20 years is typical of the sort of cyclical capital intensive industry that affords us some of the best opportunity.
Over the last couple of years we’ve invested in the shipping in a number of ways.
In each instance taking advantage of the opportunity to supply capital at a depressed point in the capital cycle.
From purchasing new vessels, to purchasing loans secured by ships from European banks to purchasing the distressed debt of shipping companies.
Global shipping demand trends now appear to be improving and we’re well positioned to benefit.
This is another in a long series of instances of our finding opportunities and out of favor capital intensive industries when everyone else says, no way.
For our open end fund, years in which risk bearing is rewarded, like 203 can present the challenge for Oaktree Capital Group LLC (NYSE:OAK) given our funds emphasis on risk control.
Nevertheless, we did quite well with the ma gyre tee of our marketable securities portfolios matching or outperforming benchmarks and with aggregate net inflows reaching a billion dollar for the year.
Our US hey yield bond strategy serves as a good example.
In 2013 the riskiest bonds rated ccc averaged a total return three times as high as their better quality bb counterparts.
Thus because we down play ccc we started out at dais advantage.
Nevertheless our skill overcame enabling composite’s gross return of 7.1% before fees which translates into 6.5% after, to match that of the index.
In Irene high-yield bonds we returned 10.6% before fees and 10.1% after, outdistancing the index and contributing to solid outperformance in our global high-yield bond strategy which beat its benchmark by 140 basis points for the year.
Our new emerging market equity strategy which we call E M EF continued solid performance in 2013 in a very tough market.
Our 8.8% positive return before fees and .9% after was 440 basis points ahead of the index.
We saw strong inflows in the fourth quarter which John will discuss later.
Finally, our newest ever green fund strategy, strategic credit, which falls between distressed debt and hey yield bonds on the risk return curve, add terrific start with an 18% gross return.
With $2 billion amassed in just 18 months for the strategy, strategic credit fills an attractive risk/reward spains the industry leading lineup of credit product.
Looking forward we expect to follow the same mantra we have employed over the last two plus years.
‘Move forward but with caution’
I believe that posture is highly appropriate for today’s markets and economies, and it positions us to continue delivering strong returns while protecting our clients’ capital.
The past year is a source of great pride for me and for the Oaktree Capital Group LLC (NYSE:OAK) team, especially the strong investment performance and the continued growth of our franchise even as we harvested sizable investment gains for our fund investors.
Importantly we continued to maintain our discipline and sizing funds to the opportunity set, focusing on selective product development in areas where we have expertise and maintaining our reputation with our 2,000 clients as the dependable pur vier in our alternative asset classes.