‘Warped’ Markets Prompt Pensions to Add Risk, Howard Marks Says

Ultra-low interest rates have “warped” financial markets, prompting institutional investors to increase their risk-taking, according to Oaktree Capital Management director Howard Marks. 

While Marks isn’t seeing “crazy euphoria” in markets, he said that investors are flocking to alternative assets for yield they can’t hope to find in high-grade bonds. Pension funds, struggling to meet targeted returns of around seven percent, have been pouring capital in riskier areas such as private equity, venture capital and private debt, Marks explained Thursday on stage at Bloomberg’s “The Year Ahead” conference in New York.

“They’re doing something because they think they have to,” he said. 

That’s the type of herd behavior that can help form bubbles, according to Marks, who has worked in finance for a half century. Trouble brews when investors believe certain assets are so good that they keep paying up for them as there’s always some “greater fool” willing to pay a higher price, he said. 

[II Deep Dive: ‘Private Equity Is the New Stock’]

Marks doesn’t consider himself a markets forecaster, saying it’s impossible to predict the next downturn or what could trigger a steep sell-off. Still, at the late stages of a record-long bull market and economic expansion, Marks said he prefers taking on less risk than his normal positioning as an investor. 

He also expressed concern over pressure the U.S. Federal Reserve may feel from President Trump to keep lowering rates in order to prop up the markets. Interest rates in the U.S. are already low, Marks said, and the Fed should want some room to lower them in the next recession.

Also, it makes sense that the U.S. has higher rates than in Europe, where they’ve tumbled into negative territory, because the U.S. economy is stronger, according to Marks. However irrational negative rates may seem, he said they are essentially storage fees some investors are willing to pay because it’s their least bad option.