OakTree: On the Mark
03/07/2016 9:00 am EST
If you've read or seen The Big Short, you know that a select few investors actually made huge profits during the last crash. One of them is a brilliant self-made billionaire named Howard Marks, explains Ian Wyatt, editor of Million Dollar Portfolio.
Most individual investors haven't heard of Howard Marks. That's likely because his funds primarily serve institutional investors and the super rich.
Oaktree Capital is an investment management firm that's focused on distressed debt. Essentially, the firm aims to buy up risky debt for pennies on the dollar.
Since founding Oaktree in 1995, Marks and his partners have consistently delivered outstanding returns.
In 2008, Oaktree had raised $11 billion for a new fund. At the time, it was the largest ever-distressed debt fund.
Soon after the Lehman Brothers bankruptcy, Oaktree began making big investments; the firm delivered profits of $6 billion on its distressed debt fund. And Oaktree's partners earned $1.5 billion in fees.
Right now, Oaktree is preparing for the next credit crisis. With commodity prices remaining low for a couple years now, companies are feeling the pain.
If commodity prices remain low, many companies will be unable to service their debt payments. That could cause a new wave of junk bond defaults.
This is horrible news for companies in the commodity sector and their bondholders. But for distressed debt investors—who have cash on the sidelines—this is the perfect set-up.
Oaktree currently has $22 billion in cash on the sidelines, twice as much as Marks accumulated ahead of the financial crisis.
There is no doubt that Howard Marks is one of the world's best bear market investors. But you would need $5 million to invest with one of his distressed debt funds.
But there's a far better opportunity that's available to every investor. My recommendation is to buy shares in Oaktree Capital Partners (OAK).
Oaktree is structured as an MLP. As such, it is required to distribute 85% of its earnings to shareholders in the form of a dividend. Over the last year, the company has paid out dividends of $2.01 per share, equaling a 4.5% yield.
In addition, by investing in Oaktree, you'll also claim a stake in another rapidly growing bond fund. You've probably heard of Jeffrey Gundlach.
When he set up his own investment shop called DoubleLine (DSL), Oaktree invested $20 million for a 20% stake. That investment now represents roughly 15% of Oaktree's $6 billion market value.
I am buying Oaktree shares now and plan to hold the stock for a couple years. I believe this investment will thrive in a choppy debt market. And that makes it a great investment to own today.
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