Howard Marks Burnishes the Legend of Jeffrey Gundlach

(Bloomberg Opinion) -- Howard Marks is undoubtedly an investing legend in his own right. The co-founder and co-chairman of Oaktree Capital Group LLC has built the Los Angeles-based firm into one of the world’s largest distressed-debt investors. His memos have been required reading on Wall Street for years, with Warren Buffett saying they’re the first thing he reads when they come out.

Yet even he has no pretenses when it comes to his time overlapping with Jeffrey Gundlach at TCW Group during the 1980s and 1990s, when Gundlach reported to Marks. During a live taping on Monday of the “Masters in Business” podcast with my Bloomberg Opinion colleague Barry Ritholtz, Marks said that he “never kidded myself into thinking that I was actually supervising him.” 

“He kinda respected me intellectually, and so we got along,” Marks recalled of Gundlach. “He was very innovative in his approach,” and “he would figure out strategies and then share them with me in the hope that I would understand.”

It doesn’t seem in Marks’s character to be sheepish, so I interpreted it as a sign of respect. Of course, Marks also puts his money where his mouth is — he spent about $20 million in 2009 to acquire a 20 percent stake in Gundlach’s DoubleLine Capital LP. As of three years ago, DoubleLine had already paid that back several times over, and the position was closing in on $1 billion in value. Predictably, Marks is “extremely happy” with the decision to invest. He’s said before that his only regret was not buying more. 

The idea of investment superstars, of course, has come into question after Bill Gross announced this month that he was retiring from Janus Henderson Group Plc following years of underperformance. Gundlach has effectively been crowned the new bond king after correctly predicting much of what came to pass in 2018 and guiding his DoubleLine Total Return Bond Fund to better gains last year than its fixed-income rivals.

Much of the conversation with Marks centered on the idea of how to stand out from the pack as an investor. He invoked David Swensen, Yale University’s chief investment officer, in saying that “it’s really easy to be average and it’s really hard to be above average.” The only way to outperform, Marks argued, was taking “uncomfortably idiosyncratic” positions. Investors have to hold a strategy, rather than jumping from one to the other. A natural contrarian streak is one way he sifts out who has the potential to stand out from the pack. Marks singled out Buffett as the greatest investor of all time. 

Yet there are some scenarios that you just can’t plan for, Marks said. One of those is if the $22 trillion U.S. national debt reaches a tipping point, or if the dollar loses its status as the reserve currency of the world —  a concern shared by other market luminaries such as Ray Dalio of Bridgewater Associates and Larry Fink of BlackRock Inc.

“It’s troublesome — I think there is probably such a thing as too much” debt, Marks said. But there’s no clear challenger to the dollar’s hegemony, he said, and so the feeling is that the government will find a way to muddle through as it always does. “What does the investor do about the improbable disaster?” The answer: Not a lot.

The Federal Reserve, meanwhile, will probably raise interest rates a bit more, Marks said. Oaktree’s $22.3 billion of distressed-debt funds stumbled in the final months of 2018 as risk assets tumbled, in part because of unease about the central bank’s tightening path. Those funds lost 1.5 percent for the quarter ended Dec. 31, bringing the full-year gain to 10 percent. Marks has said the firm had trouble finding attractive opportunities in the U.S., given the late-cycle environment, leaving it looking to private deals in Europe and Asia, as well as the communications, health-care and retail industries. 

Like Gundlach, who expressed concern about the buy-the-dip mentality around the end of the year during his annual “Just Markets” webcast, Marks said FOMO — the fear of missing out — is a challenging part of human nature to contend with. 

“There is nothing as injurious for your well-being as watching your friend get rich,” he said, paraphrasing Charles Kindleberger. But investors can’t let that get the better of them. “Exceptional performance has to come from diverging from the crowd.”

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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