Talk about growth as of Jan. 31, he reached the milestone of having $10 billion under management, after less than three years on his own.
We are talking about Howard Marks, chairman of money manager Oaktree Capital Management LLC in downtown Los Angeles, which specializes in high-yield debt, distressed securities, and esoteric convertible bonds. He employs 90.
By way of comparison, there are very good money managers in town who never have reached $1 billion under management.
Marks formed Oaktree Capital in 1995. Before that, he was institutional money manager at Trust Co. of the West for 10 years.
Last week, Marks said he faces a tougher investment environment than in some time; the “spreads” on yields between safe government securities and junk bonds have shrunk to historical lows.
But junk bonds, as a group, still beat government securities.
“The spread on yields between governments and high-yield bonds is about 300 basis points (or 3 percent),” he said. “But your losses from credit problems on junk bonds is about 50 basis points.”
So investors in a well-diversified group of junk bonds should earn about 250 basis points, or 2.5 percent, a year in greater yield than those in government securities, said Marks.
That hardly compares to the good old days, which for junk bond investors at least those with cast-iron stomachs was 1990. Then, in the wake of collapses by insurer Executive Life and other large institutional holders of junk bonds, the spread between junk and Treasuries reached 11 percent. The economy was weaker then too.
Buyers of junk then scored terrific yields sometimes approaching 20 percent and whopping appreciations in bond values when the scare dissipated and the economy improved through the 1990s.
But Marks said that now with the stock market waffling back and forth, the close to 9 percent yields on a junk portfolio look enticing. “Some investors have forgotten about yield, but your dividend return on stocks on the S & P; 500 is less than 2 percent,” he said. “When you buy a bond, you have a rate of return that is contractual. On the stock market, the return is conjectural.”
Mid-market star
Carrying a hot hand is James Freedman, managing director of Barrington Associates Inc., the Brentwood-based boutique investment banking house that specializes in middle market deals.
In early February, Freedman put the finishing touches on the purchase of L.A.-based Michel & Co. a designer and marketer of giftware, stationery greeting cards and other paper products, by Saunders Karp & Megrue L.P., a New York-based buyout firm. Terms were not disclosed.
“In the last six months we’ve done 11 transactions totaling $500 million in transactions value,” said Freedman, who said the amount was easily an all-time record for Barrington.
And there are mountains of work ahead. “Our backlog is bigger than it’s ever been,” he added.
With 16 investment bankers already on board, Freedman made arrangements last month to hire five more, and they’ll be joining him through the first half of this year. “We were looking for MBA grads from top schools who had a few years of experience,” he said.
As hot as 1997 was, 1998 may even be hotter, predicted Freedman.
Reviews of industry literature indicate that the buyout funds in the second half of 1997 raised $37 billion, the largest raising of cash ever, said Freedman. “You have all this new capital that doesn’t have a home, that is looking to invest in the middle market,” he said.
Small cap silver
Fred Astman has been in the investment and money management game longer than many of his peers have been alive; he’s now portfolio manager for Pasadena-based First Wilshire Securities Inc., and has about $100 million under management.
We asked Astman about the decision by Warren Buffett the investing titan of Omaha-based Berkshire Hathaway Inc. fame to go into silver.
Keep in mind that Buffett last year went heavy into U.S Treasuries zero coupons and also bought the International Dairy Queen Co. restaurant chain, lock, stock and barrel.
“When the market is trading at 25 times earnings (trailing on the S & P; 500), what Buffett is saying is that the market is too expensive,” said Astman. “So he is making investments outside the traditional stock market.”
Astman also likes silver, and began moving into it last fall but instead of the actual metal, Astman has been buying Boise-based Sunshine Mining & Refining Inc., a silver mine operator. Astman reasons that an increase in silver prices should cause an even bigger increase in Sunshine’s earnings per share. “If silver doubles in price, their earnings should quadruple,” said Astman.
By the way, Astman recently got a nod of recognition from New York-based Thompson Investment Services Inc., which rated his fund No. 1, in the 10-year period ended 1997, among equity funds in the United States.
In general, Astman said he is not worried by Buffett’s new enthusiasm for investment beyond the world of large-cap securities, which has been Buffett’s bread-and-butter for 20 years.
Astman’s world is that of “microcaps,” which by today’s standards on Wall Street are companies with a market capitalization (shares outstanding times share price) of between $5 million and $100 million.
“The stocks I invest in have little or no coverage (by Wall Street analysts), trade for one-half the multiple of the S & P; 500, and have four times the growth rate,” he said.
There is one Southern California stock Astman likes, which is San Marcos-based Natural Alternatives Inc., which manufacturers vitamins and other pills, in tablet or capsule form, for health companies and drug companies world wide.
Like many other industries, the drug companies and health plans have turned to outsourcing. In this case, health, drug and diet companies focus on marketing and product development, while the actual manufacturing is outsourced to manufacturers such as Natural Alternatives.
Contributing reporter Benjamin Mark Cole writes about the investment community for the Los Angeles Business Journal.
