Howard Marks has met plenty of corporate junk bonds he didn't like. But as for the junk bond market as a whole, he insists there has rarely--if ever--been a bad time to buy a diversified portfolio.
"Cheap as usual" has long been his standard reply when asked by institutions or individuals how he views the junk market's relative appeal.
Simplistic as it sounds, Marks' philosophy about high-yield junk bonds--the now $300-billion market of debt issued by often mid-sized companies judged to be less than investment grade--has helped make him one of country's most respected players in that arena.
But he has been forced to repeat that basic message for scores of his longtime clients nationwide in recent months. After 10 years with giant money management firm Trust Co. of the West in Los Angeles, Marks and four other TCW officers abruptly left to form a rival firm in March, in what became a high-profile and openly bitter Wall Street divorce.
At the age of 48, Marks says, he simply decided it was time to run his own show, a venture his TCW peers Bruce Karsh, Larry Keele, Richard Masson and Sheldon Stone were eager to join.
Not surprisingly, however, TCW Chairman Robert A. Day was unwilling to merely allow Marks and his associates to walk away with the nearly $7 billion in client assets they had built up in their tenure at TCW--a hefty chunk of TCW's total $48 billion under management.
What followed was a high-stakes battle for the hearts and dollars of the TCW institutional clients whose funds had been managed directly by Marks' team. The clients would have to choose between Marks and the in-house and outside managers TCW hurriedly named to fill the void.
Now, three months after Marks' new Oaktree Capital Management opened its doors in Downtown Los Angeles, both Oaktree and TCW claim to be satisfied so far with the outcome.
More than 30 big-name clients have switched $1.5 billion in junk-bond and convertible-bond assets from TCW to Oaktree, Marks says. By agreement with TCW, Oaktree also continues to manage about $2.5 billion in TCW's "special-credits" funds, which hold distressed securities of troubled or bankrupt companies.
Although that still leaves TCW with a large portion of the original $7 billion that Marks oversaw, many clients may still be mulling whether to switch. Nonetheless, "We've been pleasantly surprised," says Marc I. Stern, president of TCW Group. "We're ahead of what our projections were" in terms of retaining clients, he says.
Although both sides privately admit that the fight for business has been bruising--a tone TCW's Day set when he called Marks' defection "disloyal at the very least" in a March letter to TCW employees--some of the institutional clients caught in the middle give both TCW and Oaktree credit for their handling of the split.
"From our perspective it's been a happy resolution," said Joseph Braccia, director of public markets for the Pennsylvania State Employees Retirement System, which has $100 million invested in the TCW special-credits funds.
By allowing Oaktree to continue managing the special-credits funds, Braccia says TCW wisely avoided the trouble that might have ensued by bringing in new managers to oversee portfolios that Karsh and Masson had hand-picked--and whose future payoff depends in part on their negotiating skills (e.g., with bankruptcy committees).
At the same time, TCW and Oaktree have managed not to sue each other over personnel issues, even though Marks has lured from TCW most of the professional staff he had hired there, bringing Oaktree's total head count to 50 now.
Marks' ability to keep his old team intact is one indication of the high regard he enjoyed within TCW and within the investment business generally. In fact, some of his competitors wondered why he waited as long as he did to leave TCW and go it alone.
But some industry veterans say Marks' timing probably couldn't be better and that Oaktree's formation is part of a wave of change in the relatively small fraternity of money managers in the junk-bond and distressed-debt arena.
"We're seeing a lot of movement of managers--probably as much as we've ever seen in the high-yield business," says Kingman Penniman, director of junk-bond research for credit-rating agency Duff & Phelps Inc.
In large part, Penniman says, the jockeying for position reflects a sense that "high-yield is finally coming to be recognized as a credible asset class by itself," like high-quality bonds and stocks.
Although the junk bond business is roughly 20 years old, for most of that period it has been viewed suspiciously by many pension funds and other institutional managers who have questioned the long-term viability of the market and the potential reward for the level of risk involved.
It didn't help, of course, that the godfather of junk--Michael Milken--ended up in prison, helping to precipitate the market's collapse in 1989 and '90.