Howard Marks' "2010 In Review"
Oaktree's Howard Marks has just released his "year in review" letter, which like any letter by Marks is a must read, as the Oaktree manager has proven his presence in the pantheon of asset managers is well-deserved. Not surprising, and as we had repeatedly highlighted, when we pointed out the near record implied correlation between all asset classes, 2010 was a year of "correlations" which we believe may be just as appropriate a word to describe last year's market as "austerity" (which has so far completely missed the US). Quote Marks: "The word for 2010 was “correlation,” meaning macro trends dominated performance within asset classes. Thus most securities performed in line with their market benchmarks and the returns to security selection were limited. It wasn’t easy to outperform benchmarks."All this and much more on the firm's performance below.
Marks' delineation of the key macro events that shaped 2010:
- The first four months of the year saw uninterrupted continuation of the optimism – and thus the security price gains – of 2009.
- In May and June, starting with Greece, people awoke to the realization that countries can’t perpetually grow their deficits and national debts faster than their GDP without consequences. That led to worry about Portugal, Ireland and Spain and about the impact on the European Union of the cost of supporting them. These concerns brought the bull market to a halt, producing substantial declines in equities and turning their year-to-date results negative.
- Then in the third quarter, as they do from time to time, stock markets switched to an attitude of “well, never mind,” producing dramatic rebounds and taking YTD returns back to positive territory.
- Given that bonds produced superior performance in the first decade of the current century – and that bond holdings had become so small in the last quarter of the twentieth century – investors rushed there for protection from the uncertainty they felt. Thus bonds saw strong demand despite their ultralow yields. As usual, this trend was carried too far, such that by the end of September, Treasurys and high grade bonds represented an inferior risk/return proposition, especially relative to equities.
- Correction of the imbalance described above contributed to weakness in high grade bonds and strength in equities over the remainder of the year.
- Demand for stocks, real estate and other assets in the emerging markets was reinforced by doubt about the economic prognosis for the developed nations, especially when compared against the apparently bright future for China, Asia in general, and countries such as Brazil and Australia that sell commodities to Asia.
- Worry reappeared concerning Ireland and Portugal in November, again raising questions about the future of the EU.
- November and December were marked by unhappiness over the lower interest rates, inflation, weaker dollar and offshore asset bubbles that the second round of quantitative easing was expected to produce. Investors concluded that the U.S. was a poor place to store wealth, and that its debt should provide higher returns. As a result, the yield on the U.S. 10-year note jumped by 100 basis points in a very short time, and a preference for gold over dollars drove the metal to a new high.
Some other performance observations on Oaktree:
- "We had inflows of $2.9 billion and outflows of $4.2 billion, for a net outflow of $1.3 billion."
- "In 2010 raised a total of $8.5 billion of commitments for Principal Fund V, Opps VIII/VIIIb, Mezzanine Fund III, Power Fund III, European Principal Fund III, Real Estate Fund V, and our Public/Private Investment Partnership with the U.S. Treasury."
- "With our collective investment gain (appreciation plus income) of $8.6 billion, total AUM increased $9.5 billion in 2010, from $72.9 billion to $82.4 billion."
- "This overall increase in AUM was the third greatest in Oaktree’s 16-year history, behind only 2009’s $23.6 billion, swollen by the recovery from the crisis lows, and 2007’s $16.6 billion, which reflected the timely formation of Opps VIIb at $10.9 billion."
- US high yield bond performance: "Our composite returned a very respectable absolute return of 12.3% before fees (11.8% after)"
- European high yield bond performance: "our composite gained 16.7% before fees (16.1% after)"
- "The aggregate gain on our Opportunities Funds in 2010 was 19.4% before fees (15.0% after)"
- "Our composite of U.S. senior loan accounts returned 8.9% before fees (8.3% after)"
- "Our European fund for these loans rose 10.1% before fees in euro (9.3% after)"
- "Our composite of U.S. convertibles accounts (we called them domestic convertibles until going global taught us that the word “domestic” has different meanings depending on where one sits) returned 19.4% before fees (18.8% after)"
- "Global Principal Funds rose 12.1% before fees in aggregate (9.1% after); the two European Principal Opportunities Funds gained between 19.2% and 22.5% before fees, albeit one was in dollars and the other in euros (both were up 15.5% after fees); and the Asia Principal Opportunities Fund gained 29.6% before fees (24.0% after)."
- "Our high income convertibles (or “busted” convertibles) were again our top performing marketable securities strategy, a few basis points ahead of the other U.S. convert portfolios. The high income composite returned 19.4% before fees (18.9% after)"
- "The aggregate gain of our Real Estate Opportunities Funds was 19.0% before fees (15.0% after)."
- "Our Power Opportunities Funds continue to achieve excellent results. Their aggregate return in 2010 was 105.8% before fees (104.7% after; this looks odd, but it’s correct, and too complicated to explain here)."
- "The aggregate return on our Mezzanine Funds was 15.3% before fees (11.6% after)."