- “Money put to work aggressively could bring bigger losses,” says Oaktree co-founder
- Firm has yet to activate $8.9 bln Fund Xb
- Oaktree AUM dips slightly to $100.2 bln year-over-year
Investing in a low-return environment was hard. The stock market’s sudden dip over the past two weeks made it harder.
“I imagine there are some people for whom the declines of the last … 11 days have increased their concern,” said Oaktree Capital Group Co-Founder Howard Marks during a Feb. 6 earnings call.
“We have tried to create an awareness so that events like these would not come as a surprise, and they shouldn’t have been a surprise. Of course, that doesn’t make them any more pleasant.”
Global markets were rocked on Monday by falling prices, raising the specter of a market correction. The Dow Jones Industrial Average fell 1,175 points, the largest point decline in its history, and the S&P 500 dropped by more than 4 percent.
Both indices stabilized on Tuesday, to a degree. The CBOE Volatility Index, a measure of market volatility known as the VIX, opened the day at more than double where it closed the week before.
“If and when a substantial malaise or correction develops, money put to work now and in the last few years could bring losses. Money put to work aggressively could bring bigger losses. Struggling with how to invest in a low-return climate that is characterized by decent fundamentals is a challenge,” Marks said.
Historically low interest rates limited the performance of traditional fixed-income portfolios following the global recession, forcing many institutional investors to find yield in other parts of the market to meet assumed rates of return.
This push contributed to a surge in fundraising for private equity and private-debt-related strategies, which boosted the performance of overall portfolios while also driving up risk, Marks said.
Even as the market moves into more volatile territory, most of those investors will have little choice but to stay the course.
“Investors in general have no choice, at the institutional level, but to hang in there. And I think they will,” Marks said.
As stock prices dip and interest rates are expected to rise, Oaktree could stand to benefit if more companies default on their loans or undergo some degree of stress.
The firm’s most recent flagship closed-ended fund, which specializes in distressed debt, raised more than $12 billion of committed capital across two vehicles.
The larger of the two vehicles, the $8.9 billion Oaktree Opportunities Fund Xb, has yet to be activated due to the lack of distressed activity in the market.
The firm doesn’t expect to activate Fund Xb, and start collecting management fees, until the fourth quarter of 2018 at the earliest, Managing Director and Chief Financial Officer Dan Levin said on the earnings call.
Oaktree’s assets under management fell slightly year-over-year to $100.2 billion, thanks in no small part to the $10.6 billion it distributed to limited partners in its closed-ended investment funds. The loss in AUM was offset by $2.8 billion of LP commitments to new funds as well as $6.6 billion of market-value gains.
The decline in AUM was also reflected in Oaktree’s management-fee revenue, which fell by 4.9 percent to $747.3 million year-over-year, according to the earnings release.
Action Item: To see Oaktree’s earnings report, visit www.oaktreecapital.com
Vistitors check out the sights around the Angel Oak tree in Charleston, South Carolina, on Sept. 24, 2013. REUTERS/Randall Hill