2015 Sohn Conference

I attended the Sohn Conference in Toronto, Ont., on Sept. 29-30. The Sohn investment conferences are, in essence, charity fundraisers. Various investors—primarily hedge fund managers—donate their time as presenters. Attendees, meanwhile, buy tickets (largely tax-deductible) and proceeds go to a charity. In this case the beneficiary was an organization called Capitalize for Kids, which focuses on juvenile mental health issues.

The main bait for many here is that most of the managers offer up stock picks, backed by exhaustive (and occasionally exhausting) analysis, that are presumably actionable investment ideas. These are, of course, to be taken with at least a grain, if not a handful, of salt, in that the managers have every interest in “talking their book,” and certainly aren’t going to inform the outside world when their thesis changes or they decide to sell.

I do not intend to summarize the individual stock picks here. Even so, for an observer such as Hamilton & Company, which is wholly unconcerned with and uninvolved in the selection of individual securities, this portion of the conference can be interesting, in that it provides insight into how various individual managers and/or funds generate ideas and perform fundamental research and analysis. Several fund managers who presented appeared worthy of further investigation—which we are pursuing—as we are always on the lookout for promising investors to assist our clients.

The conference’s marquee speaker was venerable distressed investor Howard Marks of Oaktree, who was interviewed by a Bloomberg TV anchor named Matt Miller. Highlights from Marks:

  • China is on its way to what will be characterized as a “hard landing,” and will eventually have to determine whether the transition from an export-dominated economy to one driven by internal consumption is compatible with the sort of central control to which they’re accustomed. Though China will eventually have to operate by “the normal rules of economics,” Marks believes that over time it will endure, in relative terms, as a “fast grower.”
  • Opportunities in distressed investing, postulated by some to be newly favorable in light of problems in energy and other commodity-oriented sectors, issues in China, etc. are, in fact, “only marginally better” than they have been. “This is not a great time to be a distressed investor,” Marks said, pointing to central bank intervention, which has created a “very benign environment” for capital-hungry companies, and kept default rates at historic lows.
  • The dislocation in the price of oil has created some opportunity, Marks allowed, though he dismissed many possible investments as oil-price dependent, and proceeded to mock the notion that anybody could correctly forecast the price of oil (or much else—“predicting is not a profitable business”). In fact he offered, in all seriousness, to bet anybody in the room “a substantial amount of money” that they could not predict the price of oil within +/- $5 a barrel one year hence. He likened oil to gold: “It’s impossible to analyze it. You can’t put a price on any asset that doesn’t produce a cash flow.”
  • As for potential opportunities in China, Marks expressed skepticism over the rule of law. As a distressed investor, he said, you need “a country where if you’re a creditor and they don’t pay you, you get the company. I don’t know what’s going to happen in China and I don’t want to be the first guy to find out.”
  • Truly distressed opportunities will arise, as they did in 2008, from overleveraged companies with fundamentally sound business models that have been able to “kick the can down the road,” but will be challenged when capital markets “slam shut.”

  The Fed, in his view, needs to raise rates—the sooner the better. He offered four reasons:

o “We don’t have a free market of money—it’s cheaper than it should be.”

o “Central banks need room to lower. There’s no room if rates are zero.”

o The market needs to get past the “enormous apprehension” over a rate hike.

o “When they don’t do it, everybody takes it as a sign that the market is too weak.

“Believe it or not, we would all be alive and making money if the Fed did not exist.”

  • The U.S. is not the new Japan. Japan is a homogenous society, built around consensus and fitting in. “It’s not a nation of renegades. Idiosyncratic behavior is not encouraged.” The U.S. is culturally very different—a place where “people will diverge from convention because they want to make money.”
  • The U.S. economy, he believes, is “fairly prosperous and sound. Sound, but unimpressive in its growth. The big threat is China. Not that it impacts the U.S. directly—the threat is what China will do to the countries the U.S. is dependent on.”
  • He is optimistic about the future of American business. “If you look at where the innovations in business are coming from, they’re still coming from the U.S.”