We’re in a ‘range of fairness’ in terms of normal balances: Howard Marks

When Oaktree Capital Management Co-Founder and Co-Chairman Howard Marks appears on TV, he is often asked whether to embrace a risk-on or risk-off strategy when trading assets.

But he believes such questions are highly deficient and no one answer is right for everyone. The answer has to be a function of where an investor’s portfolio currently stands, the firm’s co-founder said in his “Which Way Now?” lecture given during a chief investment officers’ roundtable held by The Korea Economic Daily on Oct. 31.

“The market is usually in a ‘gray area,’ the zone of reasonableness. That means there is nothing compelling to do and investors should establish their own normal positions in terms of the balance between aggressiveness and defensiveness,” the investment guru said.

He suggested two questions for investors in a normal risk position: Are you a “buy and hold” investor or will you adjust your posture in response to market conditions? If the latter, where should you be today – normal, more aggressive than normal or more defensive?

Oaktree sees that risk control and consistency are desirable in risk markets, therefore, its normal position incorporates a heavy dose of defensiveness, which helps the alternative investment firm reduce risk more than it reduces return.

That will result in good returns in good market times and significantly superior returns in bad times, Marks said.

The US alternative investment firm doesn’t consider itself a market timer, the co-founder said. “We become more defensive when we think markets are at extreme highs, and we become more aggressive when markets are at extreme lows,” he added.

Investors should increase defensiveness in the post-pandemic era with characteristics like historically high valuation parameters, the aftermath of Fed stimulus and federal deficit spending, high inflation, rising interest rates and high geopolitical turmoil, he said.

“In bubbles, asset prices are irrationally high. I don’t believe we are at such an extreme high today and we are in the range of fairness. So Oaktree is applying its normal balance of aggressiveness and defensiveness, assuming nuclear confrontation or World War III won’t break out.”

Founded in 1995, Oaktree is managing $163 billion in assets. The alternative investment firm under Brookfield Asset Management is investing in credit, private equity and real assets, as well as listed equities.

Write to Jihyun Kim at snowy@hankyung.com
Jennifer Nicholson-Breen edited this article.