Howard Marks on Dividend Policy

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: want to aim for. The ratio of return to risk is similar at all points on the continuum – less of both toward the left, and more of both toward the right. Said another way, there’s no free lunch. • Also, looking at each position on the risk continuum, the symmetricalness of the vertical distribution of possible returns around the expected return is similar from one position to the next. That means the ratio of upside potential to downside risk at one position on the continuum isn’t markedly better than it is at other positions – again no free lunch. • Finally, if you want to move further out on the risk continuum, you can do so by either (a) investing in riskier assets or (b) applying leverage to the same assets (magnifying both the expected return and risk). Again, in a fully efficient market, neither tactic is preferable to the other. The above three statements capture some of the important implications of supposed market efficiency. Looked at this way, the only thing that matters is getting to the right risk position for you; under an assumption of market efficiency, there’s nothing to be gained in terms of return at a given level of risk. All ways of getting to a certain risk level will produce the same expected return.

[In the mid-17th century,] Thomas Manley added that lowering the rate of interest would involve robbing Peter (the creditor) to pay Paul (the borrower). (TPOT) Doing so is a policy decision, or more likely the consequence of a decision to stimulate the economy. But it can have many other effects. When the rate of interest on savings is 4%, a retiree fortunate enough to have saved up $500,000 will earn $20,000 per year on her bank balance. But when the interest rate on a savings account is near zero, as we saw for much of the last 14 years, she gets essentially nothing. Is it good for society to make her settle for zero? Or would it be better if she put the money into the stock market in an effort to make more? While discussing the ramifications of policy decisions, let’s consider the impact of low rates on the distribution of income and wealth. . . . because assets like stocks and real estate are disproportionately held by the rich, ZIRP [the “zero interest-rate policy” that was introduced in December 2008] helped produce the largest spike in wealth inequality in postwar American history. From 2007 to 2019, . . . the wealthiest 1 percent of Americans saw their net worth increase by 46 percent, while the bottom half saw only an 8 percent increase.

© 2023 Oaktree Capital Management, L.P. All Rights Reserved Follow us: The last element I want to touch on is what I call “alpha,” or individual investing skill. The reason the EMH disdains efforts to beat the market is its conviction that since securities are always priced correctly, the ability to identify bargains to buy and over-pricings to avoid can’t exist. Theory’s assertion that there’s no such thing as mastery of markets implies that no one has the skill to assemble portfolios that outperform. This is why I depict the bell-shaped curves above as symmetrical: In an efficient market, investors can only take what the market gives them. But I’m convinced the potential to improve on that through skill does exist in some markets and some people. Investors who possess alpha have the ability to alter the shape of the distributions in the graphs above so that they’re not symmetrical, in that the portion of the distribution representing the less desirable outcomes is smaller than the portion representing the better ones. In fact, that’s what alpha really means: Investors with alpha can go into a market and, by applying their skill, access the upside potential offered in that market without taking on all the downside risk. In my memo What Really Matters? (November 2022), I said the key characteristic of superior investing is asymmetry – having more upside than downside.

And some people perhaps have this innate ability, whereas others would perhaps be helped with different methodologies and different tools, and we can try to grasp mood better in that way, because, nowadays, people talk about market sentiment and try to capture it by looking at the VIX or put/call ratios or things like that, which I think you would disqualify as market mood. That’s not market mood. HM: Those things are indicators or symptomatic, but they don’t all move in the same direction at the same time. Sometimes A and B will go up, and C won’t. Sometimes A and C will go up, but B won’t. So, clearly, they’re not reliable indicators, and they also can’t be dealt with in a mechanical sense. But I wrote in one of my memos – I think it was Risk Revisited Again in 2015 – I said superior investors have a better sense for the shape of the probability distribution that will govern future stock price movements, and thus a better sense for whether the expected return justifies taking on the potential negative events that lurk in the left-hand tail. I think that’s it, and there’s nothing in there about measuring, Patrick, or anything mechanical. You know, I was locked up with my son for several months during the pandemic. He and his family moved in with us, so we had a lot of time for talking. He’s an optimist. (He would say © 2022 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

And, if we continued to like what we saw, in three years we would organize a fund dedicated exclusively to their power infrastructure investments, which would also be run jointly. All went well during the period in question, and so the first Oaktree/GFI Power Opportunities Fund was formed in 1999. While we tried to get the people of GFI to join Oaktree, Larry and Richard resisted our entreaties. But when they retired in 2009, Ian and his team jumped aboard, and we’ve had a great ride ever since. We’re now in the process of investing Oaktree Power Opportunities Fund V. A few specific things stand out to me about the last 25 years: • When Bruce and I first met Larry, Richard and Ian, we were immediately struck by the strength of their thesis. Everyone knew the U.S. power grid was old and hadn’t kept up with the country’s progress. The frequent blackouts, among other things, told us it needed extensive (and expensive) remediation and investment. • Interestingly, GFI didn’t invest in power generation or transmission infrastructure, but rather in successful companies that sold products, services and software to firms involved “downstream” in the distribution, monitoring and consumption of power. In the words we used at the time, © 2021 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

Finally among the positives, I believe U.S. political uncertainty has declined somewhat, truncating the extreme tails of the distribution of possible events. With a center-left president and tiny Democratic majorities in both houses of Congress, I believe radical legislation is unlikely to be enacted. Arrayed against the optimistic outlook regarding the two most important things, the economy and the fight against the pandemic, are a number of concerns. The shortest-term risk is the possibility of unimpressive first quarter GDP data. The latest severe wave of the virus, which took daily cases in the U.S. to record levels, may have slowed current economic activity (so far, the economic data are very mixed). But everyone knows this, and investors have been willing to “look across the valley” for the past eleven months and are unlikely to stop now, when strong growth is right around the corner. The biggest risk of all is the possibility of rising interest rates. Rates have declined quite steadily for the last 40 years. This has been a huge tailwind for investors, since a declining-rate environment lowers the demanded returns on assets, making for higher asset prices. The linkage between falling interest rates and rising asset valuations is a good part of the reason why p/e ratios on stocks are above average and bond yields are the lowest we’ve ever seen (which is the same as saying bond prices are the highest).

” Whereas the future is always uncertain, today the uncertainty is much greater than usual: the probability distribution governing future events is much wider and the tails much fatter. In fact, there are potential negatives (and perhaps positives) that few living people have faced before. Most of what we have is subjective opinion and interpretation. © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: why they’re walking in upscale neighborhoods. The workers who don’t have the luxury of ensuring safety by socially isolating, but have to go to work in proximity to others and then come home to close quarters and possibly infect their children or parents. The parents who have to send their children out into the world each day without confidence that they’ll come back. These thoughts break my heart. I feel deeply for every individual forced to live under these conditions. But I know I must do more than simply feel. I have talked in my memos of the fact that in the latter half of the 20th century, there was an economic “tide that lifted all boats.” That tide may have enriched nations but not all people in those nations; instead, the benefits went to some but not others. Today the economic tide is no longer rising as strongly and the distribution is still more uneven; the advantages enjoyed by those with education or capital are being magnified; and the inequality of outcomes is simply no longer acceptable – hopefully to society and certainly to those getting less. It’s a shame that it has taken so long for many of us to articulate that. Our nation cannot endure for long if some people are denied basic human rights and opportunities simply because they belong to groups defined by color or race.

In addition, the fact that closings reduce the spread should alleviate the flow of patients to doctors and hospitals, improving the health system’s ability to help sufferers. But, of course, the impact on individuals and the economy will be painful. Unavoidable Pain The news in the near term is unlikely to be good; instead it’ll probably include:  Business closures  Job losses  Supply-chain disruption  Shortages of life’s necessities, stemming from reduced production and distribution difficulties  Challenges to the health system Many businesses have been ordered to close (e.g., restaurants and bars). Some have seen their revenues evaporate (e.g., airlines, hotels and theaters). All of these things will cause job losses, with a particularly heavy impact on lower-income workers. On March 17, Treasury Secretary Mnuchin warned that failure of the government to take appropriate action could take the U.S. unemployment rate to nearly 20% (by way of comparison, it reached 25% in 1933, during the Great Depression, and hit 10% as a result of the Global Financial Crisis). Regardless of the action taken, it seems sure to rise substantially from the 50-year low of 3.5%. © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

Here’s how I discussed it in my book Mastering the Market Cycle: Most people think the way to deal with the future is by formulating an opinion as to what’s going to happen, perhaps via a probability distribution. I think there are actually two requirements, not one. In addition to an opinion regarding what’s going to happen, people should have a view on the likelihood that their opinion will prove correct. Some events can be predicted with substantial confidence (e.g., will a given investment grade bond pay the interest it promises?), some are uncertain (will Amazon still be the leader in online retailing in ten years?) and some are entirely unpredictable (will the stock market go up or down next month?) It’s my point here that not all predictions should be treated as equally likely to be correct, and thus they shouldn’t be relied on equally. I don’t think most people are as aware of this as they should be. In short, we have to have a realistic view of the probability that we’re right before we choose a course of action and decide how heavily to bet on it. And anyone who’s sure about what’s going to happen in the world, the economy or the markets is probably deceiving himself. It all comes down to dealing with uncertainty. To me, that starts with acknowledging uncertainty and having an appropriate degree of respect for it. As I quoted Annie Duke this past January, in my memo You Bet!

We don’t know how many people are infected, or how many people will be. We have much to learn about how to treat the people who are sick – and how to help prevent infection in those who aren’t. There’s reasonable disagreement on the best policies to pursue, whether about health care, economics, or supply distribution. Although scientists worldwide are working hard and in concert to address these questions, final answers are some ways away. Another thing that’s in short supply is the realization of how little we know. . . . Frequent expressions of supreme confidence might seem odd in light of our obvious and inevitable ignorance about a new threat. The thing about overconfidence, though, is that it afflicts most of us much of the time. That’s according to cognitive psychologists, who’ve studied the phenomenon systematically for half a century. Overconfidence has been called “the mother of all psychological biases. . . .” The point is not that true experts should withhold their beliefs or that they should never speak with conviction. Some beliefs are better supported by the evidence than others, after all, and we should not hesitate to say so. The point is that true experts express themselves with the proper degree of confidence – meaning with a degree of confidence that’s justified given the evidence. . . .

Today, many people apparently fail to understand the role of capitalism in creating the wealth that Americans share. Others may feel the capitalism that got us here may have been fine in its time but isn’t needed anymore; thus, we should shift our attention to more equal distribution instead. And a last cohort may consider equal sharing more important than the creation of more prosperity. Socialism superimposes socio-political considerations on an economic system, such that equality is elevated relative to self-interest and individual motivation. Capitalism omits that emphasis. In this © 2019 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

but also from the substantial expansion of rural non-farm employment and income. . . . Although decollectivization has provided the incentives for improved productivity growth, it has created . . . significant and partially unanticipated adverse consequences. . . . Over the longer run it is not clear how the local labor-intensive maintenance of existing irrigation systems will be sustained. . . . The current system appears almost certain to have an adverse effect on the distribution of income in rural areas and may lead, ultimately, to significant rural unrest. . . . Another seemingly © 2019 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© 2019 Oaktree Capital Management, L.P. All Rights Reserved Follow us: No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of Government except all those other forms that have been tried from time to time. In the same way, I’m convinced that capitalism is the worst economic system . . . except for all the rest. No other economy has accomplished what the U.S. has, accompanied by extensive personal freedom, and especially not the ones centrally controlled by government. In particular, no other economy has produced inventions and innovations – and distributed life-enhancing products – like the U.S. has. I’m not arguing in favor of unfettered behavior on the part of corporations. They can’t be allowed to use just any tactics to get ahead. They mustn’t be permitted to compete unfairly against each other, behave in anti-social ways, or do damage in pursuit of profit. Thus laws, regulations and active supervision on the part of diligent directors are needed to police corporate behavior. I also think the leaders of society should encourage companies to operate with a conscience and voluntarily work for the betterment of their communities. But this must be done within the framework of the elements that made America great – not by subverting them. Also, I feel it’s essential that governments create effective safety nets to assist the less-fortunate members of society who end up at the bottom of the income distribution.

Pursuing this tack has to be based on the belief that (a) there are inefficient markets and (b) you or your managers have the exceptional skill needed to exploit them. Simply put, this can’t be done without risk, as one’s choice of market or manager can easily backfire. As I mentioned above, none of these possibilities is attractive or a sure thing. But there are no others. What would I do? For me the answer lies in a combination of numbers 2, 3 and 6. Expecting normal returns from normal activities (#1) is out in my book, as are settling for zero in cash (#4) and amping up risk in the hope of draws from the favorable part of the probability distribution (#5) (our current position in the elevated part of the cycle decreases the likelihood that outcomes will be favorable). © 2017 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© 2016 Oaktree Capital Management, L.P. All Rights Reserved Follow us: There are good reasons for international specialization, and by and large Americans have benefited tremendously. Do we really want to produce T-shirts here and pay $60 for something that now costs $15? (Professor Gregory Mankiw, chairman of the Council of Economic Advisers under President George W. Bush, in The New York Times, July 15) Clearly this process makes the overall global production system more efficient – everything is made where it can be done best – to the enrichment of all nations . . . but not all people. The benefits to date have been far from evenly distributed. In the U.S. they have gone overwhelmingly to those who are better educated and technologically adept or who own the companies that profit. Real incomes for people in the lower portion of the distribution have been stagnant at best, and the percentage of Americans participating in the work force – either employed or looking for a job – has declined. As I described in 2008, Americans historically have been paid more than their counterparts around the globe. This creates incentives to both manufacture abroad and automate at home. (It also creates a condition that attracts immigrants – some illegal – who are willing to work for less.) Manufacturing employment is down a third since 1979, despite economic growth and increased manufacturing output.

 The symmetrical distribution of the results and the way they cluster around 50% tell me there isn’t much skill in predicting football winners (or, if it exists, these pickers don’t have it). The small deviations from 50% – both positive and negative – suggest that picking winning football teams for betting purposes may be little more than a matter of tossing a coin.  Even the best forecasters weren’t right much more than half the time. While I’m not a statistician, I doubt the fact that a few people were right on 56-58% of their picks rather than 50% proves it was skill rather than luck. Going back to the coin, if you flipped one 47 times (or even 237 times), you might occasionally get 58% heads.  Lastly, all eleven writers collectively – and seven of them individually – had worse results on the games they considered their “best bets” than on the rest of the games. So clearly they aren’t able to accurately assess the validity of their own forecasts. And remember, these forecasts weren’t made by members of the general populace, but rather by people who make their living following and writing about sports. My favorite quotation on the subject of forecasts comes from John Kenneth Galbraith: “We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.” Clearly these forecasters don’t know. But do they know it? And do their readers?

© Oaktree Capital Management, L.P. All Rights Reserved Dare to Be Different Here’s a line from Dare to Be Great: “This just in: you can’t take the same actions as everyone else and expect to outperform.” Simple, but still appropriate. For years I’ve posed the following riddle: Suppose I hire you as a portfolio manager and we agree you will get no compensation next year if your return is in the bottom nine deciles of the investor universe but $10 million if you’re in the top decile. What’s the first thing you have to do – the absolute prerequisite – in order to have a chance at the big money? No one has ever answered it right. The answer may not be obvious, but it’s imperative: you have to assemble a portfolio that’s different from those held by most other investors. If your portfolio looks like everyone else’s, you may do well, or you may do poorly, but you can’t do different. And being different is absolutely essential if you want a chance at being superior. In order to get into the top of the performance distribution, you have to escape from the crowd. There are many ways to try. They include being active in unusual market niches; buying things others haven’t found, don’t like or consider too risky to touch; avoiding market darlings that the crowd thinks can’t lose; engaging in contrarian cycle timing; and concentrating heavily in a small number of things you think will deliver exceptional performance. Dare to Be Great included the two-by-two matrix and paragraph below.

How can investors deal with the limitations on their ability to know the future? The answer lies in the fact that not being able to know the future doesn’t mean we can’t deal with it. It’s one thing to know what’s going to happen and something very different to have a feeling for the range of possible outcomes and the likelihood of each one happening. Saying we can’t do the former doesn’t mean we can’t do the latter. The information we’re able to estimate – the list of events that might happen and how likely each one is – can be used to construct a probability distribution. Key point number one in this memo is that the future should be viewed not as a fixed outcome that’s destined to happen and capable of being predicted, but as a range of possibilities and, hopefully on the basis of insight into their respective likelihoods, as a probability distribution. Since the future isn’t fixed and future events can’t be predicted, risk cannot be quantified with any precision. I made the point in Risk, and I want to emphasize it here, that risk estimation has to be the province of experienced experts, and their work product will by necessity be subjective, imprecise, and more qualitative than quantitative (even if it’s expressed in numbers). There’s little I believe in more than Albert Einstein’s observation: “Not everything that counts can be counted, and not everything that can be counted counts.

© Oaktree Capital Management, L.P. All Rights Reserved By the way, in my personal life I tend to incorporate another of Einstein’s comments: “I never think of the future – it comes soon enough.” We can’t take that approach as investors, however. We have to think about the future. We just shouldn’t accord too much significance to our opinions. We can’t know what will happen. We can know something about the possible outcomes (and how likely they are). People who have more insight into these things than others are likely to make superior investors. As I said in the last paragraph of The Most Important Thing: Only investors with unusual insight can regularly divine the probability distribution that governs future events and sense when the potential returns compensate for the risks that lurk in the distribution’s negative left-hand tail. In other words, in order to achieve superior results, an investor must be able – with some regularity – to find asymmetries: instances when the upside potential exceeds the downside risk. That’s what successful investing is all about. Thinking in Terms of Diverse Outcomes It’s the indeterminate nature of future events that creates investment risk. It goes without saying that if we knew everything that was going to happen, there wouldn’t be any risk. The return on a stock will be a function of the relationship between the price today and the cash flows (income and sale proceeds) it will produce in the future.

© Oaktree Capital Management, L.P. All Rights Reserved the history that took place is only one version of what it could have been. If you accept this, then the relevance of history to the future is much more limited than may appear to be the case. People who rely heavily on forecasts seem to think there’s only one possibility, meaning risk can be eliminated if they just figure out which one it is. The rest of us know many possibilities exist today, and it’s not knowable which of them will occur. Further, things are subject to change, meaning there will be new possibilities tomorrow. This uncertainty as to which of the possibilities will occur is the source of risk in investing. Even a Probability Distribution Isn’t Enough I’ve stressed the importance of viewing the future as a probability distribution rather than a single predetermined outcome. It’s still essential to bear in mind key point number three: Knowing the probabilities doesn’t mean you know what’s going to happen. For example, every good backgammon player knows the probabilities governing throws of the dice. They know there are 36 possible outcomes, and that six of them add up to the number seven (1-6, 2-5, 3-4, 4-3, 5-2 and 6-1). Thus the chance of throwing a seven on any toss is 6 in 36, or 16.7%. There’s absolutely no doubt about that. But even though we know the probability of each number, we’re far from knowing what number will come up on a given roll.

Saying we can’t do the former doesn’t mean we can’t do the latter. The information we’re able to estimate – the list of events that might happen and how likely each one is – can be used to construct a probability distribution. Key point number one in this memo is that the future should be viewed not as a fixed outcome that’s destined to happen and capable of being predicted, but as a range of possibilities and, hopefully on the basis of insight into their respective likelihoods, as a probability distribution. Since the future isn’t fixed and future events can’t be predicted, risk cannot be quantified with any precision. I made the point in Risk, and I want to emphasize it here, that risk estimation has to be the province of experienced experts, and their work product will by necessity be subjective, imprecise, and more qualitative than quantitative (even if it’s expressed in numbers). There’s little I believe in more than Albert Einstein’s observation: “Not everything that counts can be counted, and not everything that can be counted counts.” I’d rather have an order-of-magnitude approximation of risk from an expert than a precise figure from a highly educated statistician who knows less about the underlying investments. British philosopher and logician Carveth Read put it this way: “It is better to be vaguely right than exactly wrong.” By the way, in my personal life I tend to incorporate another of Einstein’s comments: “I never think of the future – it comes soon enough.

and if something unacceptable can happen on the path with the highest expected value, we may not be able to choose on that basis. We may have to shun that path in order to avoid the extreme negative outcome. I always say I have no interest in being a skydiver who’s successful 95% of the time. Investment performance (like life in general) is a lot like choosing a lottery winner by pulling one ticket from a bowlful. The process through which the winning ticket is chosen can be influenced by physical processes, and also by randomness. But it never amounts to anything but one ticket picked from among many. Superior investors have a better sense for the tickets in the bowl, and thus for whether it’s worth buying a ticket in a lottery. Lesser investors have less of a sense for the probability distribution and for whether the likelihood of winning the prize compensates for the risk that the cost of the ticket will be lost. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved We can’t know what will happen. We can know something about the possible outcomes (and how likely they are). People who have more insight into these things than others are likely to make superior investors. As I said in the last paragraph of The Most Important Thing: Only investors with unusual insight can regularly divine the probability distribution that governs future events and sense when the potential returns compensate for the risks that lurk in the distribution’s negative left-hand tail. In other words, in order to achieve superior results, an investor must be able – with some regularity – to find asymmetries: instances when the upside potential exceeds the downside risk. That’s what successful investing is all about. Thinking in Terms of Diverse Outcomes It’s the indeterminate nature of future events that creates investment risk. It goes without saying that if we knew everything that was going to happen, there wouldn’t be any risk. The return on a stock will be a function of the relationship between the price today and the cash flows (income and sale proceeds) it will produce in the future. The future cash flows, in turn, will be a function of the fundamental performance of the company and the way its stock is priced given that performance. We invest on the basis of expectations regarding these things.

People who rely heavily on forecasts seem to think there’s only one possibility, meaning risk can be eliminated if they just figure out which one it is. The rest of us know many possibilities exist today, and it’s not knowable which of them will occur. Further, things are subject to change, meaning there will be new possibilities tomorrow. This uncertainty as to which of the possibilities will occur is the source of risk in investing. Even a Probability Distribution Isn’t Enough I’ve stressed the importance of viewing the future as a probability distribution rather than a single predetermined outcome. It’s still essential to bear in mind key point number three: Knowing the © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved Here the underlying relationship between risk and return reflects the same positive general tendency as the first graphic, but the result of each investment is shown as a range of possibilities, not the single outcome suggested by the upward-sloping line. At each point along the horizontal risk axis, an investment’s prospective return is shown as a bell-shaped probability distribution turned on its side. The conclusions are obvious from inspection. As you move to the right, increasing the risk:  the expected return increases (as with the traditional graphic),  the range of possible outcomes becomes wider, and  the less-good outcomes become worse. This is the essence of investment risk. Riskier investments are ones where the investor is less secure regarding the eventual outcome and faces the possibility of faring worse than those who stick to safer investments, and even of losing money. These investments are undertaken because the expected return is higher. But things may happen other than that which is hoped for. Some of the possibilities are superior to the expected return, but others are decidedly unattractive. The first graph’s upward-sloping line indicates the underlying directionality of the risk/return relationship. But there’s a lot more to consider than the fact that expected returns rise along with perceived risk, and in that regard the first graph is highly misleading.

Superior investors have a better sense for what’s in the bowl, and thus for whether it’s worth buying a ticket in a lottery. But even they don’t know for sure which one will be chosen. Lesser investors have less of a sense for the probability distribution and for whether the likelihood of winning the prize compensates for the risk that the cost of the ticket will be lost. Risk and Return Both in the 2006 memo on risk and in my book, I showed two graphics that together make clear the nature of investment risk. People have told me they’re the best thing in the book, and since readers of this memo might have not seen the old one or read the book, I’m going to repeat them here. The first one below shows the relationship between risk and return as it is conventionally represented. The line slopes upward to the right, meaning the two are “positively correlated”: as risk increases, return increases. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

For that reason, I think the graphic below (with the probability distributions redrawn from those of the 2014 version of this memo) does a much better job of portraying reality: Here the underlying relationship between risk and return reflects the same positive general tendency as the first graphic, but the result of each investment is shown as a range of possibilities, not the single outcome suggested by the upward-sloping line. At each point along the horizontal risk axis, an investment’s prospective return is shown as a bell-shaped probability distribution turned on its side. The conclusions are obvious from inspection. As you move to the right, increasing the risk: Risk Return Risk Return© OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved Long-Term’s failure was also attributable to model risk. Decisions can be turned over to quants or financial engineers who either (a) conclude wrongly that an unsystematic process can be modeled or (b) employ the wrong model. During the financial crisis, models often assumed that events would occur according to a “normal distribution,” but extreme “tail events” occurred much more often than the normal distribution says they will. Not only can extreme events exceed a model’s assumptions, but excessive belief in a model’s efficacy can induce people to take risks they would never take on the basis of qualitative judgment. They’re often disappointed to find they had put too much faith in a statistical sure thing. Model risk can arise from black swan risk, for which I borrow the title of Nassim Nicholas Taleb’s popular second book. People tend to confuse “never been seen” with “impossible,” and the consequences can be dire when something occurs for the first time. That’s part of the reason why people lost so much in highly levered subprime mortgage securities. The fact that a nationwide spate of mortgage defaults hadn’t happened convinced investors that it couldn’t happen, and their certainty caused them to take actions so imprudent that it had to happen. As long as we’re on the subject of things going wrong, we should touch on the subject of career risk.

That unexpected divergence is basis risk, and it’s what happened to Long-Term Capital Management in 1998, one of the most famous meltdowns of all time. As Long-Term’s chairman John Meriwether said at the time, “the Fund added to its positions in anticipation of convergence, yet . . . the trades diverged dramatically.” This benign-sounding explanation was behind a collapse some thought capable of bringing down the global financial system. Long-Term’s failure was also attributable to model risk. Decisions can be turned over to quants or financial engineers who either (a) conclude wrongly that an unsystematic process can be modeled or (b) employ the wrong model. During the financial crisis, models often assumed that events would occur according to a “normal distribution,” but extreme “tail events” occurred much more often than the normal distribution says they will. Not only can extreme events exceed a model’s assumptions, but excessive belief in a model’s efficacy can induce people to take risks they would never take on the basis of qualitative judgment. They’re often disappointed to find they had put too much faith in a statistical sure thing. Model risk can arise from black swan risk, for which I borrow the title of Nassim Nicholas Taleb’s popular second book. People tend to confuse “never been seen” with “impossible,” and the consequences can be dire when something occurs for the first time. That’s part of the reason why people lost so much © OAKTREE CAPITAL MANAGEMENT, L.

Well, the answer to the first question lies in which definition you‟re following. Of course the data tells us what the relative performance was (and 2012 was a great year, for example, with the S&P 500 up roughly 16% while the risk-less rate was close to zero). An equity risk premium defined this way is certainly in the best part of the historic distribution. But it tells us little about investors‟ past or present demanded returns. And what does it say about the prospects for continued outperformance? To me, the answer is simple: the better returns have been, the less likely they are – all other things being equal – to be good in the future. Generally speaking, I view an asset as having a certain quantum of return potential over its lifetime. The foundation for its return comes from its ability to produce cash flow. To that base number we should add further return potential if the asset is undervalued and thus can be expected to appreciate to fair value, and we should reduce our view of its return potential if it is overvalued and thus can be expected to decline to fair value.

They believed that the markets had been rendered safe by the combination of (a) an omniscient, omnipotent Fed providing a “Greenspan put,” (b) the wonders of securitization, tranching and selling onward and (c) the “wall of liquidity” coming toward our markets, composed of excess reserves being recycled by China and the oil-producing nations. They accepted the alchemy under which financial engineering could turn sub- prime mortgages into triple-A debt. And they viewed leverage as sure to have a salutary effect on returns. There’s nothing more risky than a widespread belief that there’s no risk . . . but that’s what characterized the investment world. It was possible to conclude in 2005- 07 that investors were applying insufficient risk aversion and thus engaging in risky behavior, elevating asset prices, reducing prospective returns, and raising risk levels. What were the signs?  The issuance of non-investment grade debt was at record levels.  An unusually high percentage of the issuance was rated triple-C, something that’s not possible when attitudes toward risk are sober.  “Dividend recaps” went unquestioned, with buyout companies borrowing money with which to pay dividends, vastly increasing their leverage and reducing their ability to get through tough times.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. Rather than end there, as I originally thought I would, I want to add a little about the longer-term future. I could prepare the way by repeating my standard confession that I’m given more to worrying than to enthusing, but you already know that. What I want to say is this: the worries concerning the U.S. economic outlook enumerated on page seven are not limited to the current short-term cycle. I touched on most of them in “What Worries Me” (August 2008), “The Long View” (January 2009) and “Tell Me I’m Wrong” (January 2010), and my view of their importance hasn’t changed. I think they’re likely to influence the environment for years. I feel today’s distribution of possible futures is shifted to the left – that is, generally less attractive – relative to the distribution that governed the late twentieth century. The picture in the U.S. is less positive today in terms of consumer-led growth and the supercharging impact of increased credit use, competitiveness and job creation, and the government’s fiscal situation (and thus its ability to stimulate the economy). I think we benefited greatly in that earlier period from the luck of the draw. Things went about as well as they could have for the economy (despite sluggish income growth). Inflation was very much under control, and we benefited from steadily declining interest rates.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. “The equalizing effect of federal taxes was smaller” in 2007 than in 1979, as “the composition of federal revenues shifted away from progressive income taxes to less-progressive payroll taxes,” the budget office said. Also, it said, federal benefit payments are doing less to even out the distribution of income, as a growing share of benefits, like Social Security, goes to older Americans, regardless of their income. . . . Also cited as factors contributing to the rapid growth of income at the top [in addition to federal tax and spending policies] were the structure of executive compensation; high salaries for some “superstars” in sports and the arts; the increasing size of the financial services industry; and the growing role of capital gains, which go disproportionately to higher- income households. The implications for tax discussions are obvious. Upper earners have moved further ahead relative to lower earners, and tax policies have contributed to this trend. For those who think progressivity should be bolstered, income should be redistributed, and those most able to pay should contribute more heavily to solving the deficit problem, upper-bracket earners make a most attractive target. Topics in the News – The Sputtering Economy In early 2011, there was a growing consensus that the U.S. economy was on an upward trajectory – that recovery had taken hold. Reported growth in GDP was accelerating.

1 billion euros of loans in the first half to pay dividends to shareholders, data compiled by Fitch Ratings show. Private-equity firms “essentially decreased the risk of their portfolio equity investments, boosting their near-term equity returns at the expense of the credit quality of the companies themselves,” according to S&P. (“Junk Bond Issuers Increase Dividend Deals, S&P Says,” Bloomberg, April 20) On collateralized loan obligations – Citigroup is set to launch its second leveraged loan structured products transaction this year, this time for a large private equity client, as debt managers and bankers look to revitalise the markets which drove the buyout boom. . . . © Oaktree Capital Management, L.P.Reserved

scenario, whereas it really consists of a wide range of possibilities. (Remember Elroy Dimson’s trenchant observation that “risk means more things can happen than will happen.”) And to the extent they do consider a variety of possibilities, few people include ones that haven’t been part of recent experience. The uncertainties discussed above tell me today’s distribution of possibilities has a substantial left-hand (i.e., negative) tail, probably greater than at most times in the past. The proper response should be to discount asset prices, allowing a substantial margin for error. Forecasts should be conservative, yield spreads should incorporate ample risk premiums, valuation parameters should be below the long- term norms, and investor behavior should be prudent. Conspicuously missing from my list of worries was Greece (and all it entails); thus it falls firmly in the category of “something else.” Last week it dominated the headlines and depressed markets worldwide. Thus in this short time I have proved two things: first, I know little more than others about what the future will bring and, second, when most investors turn optimistic, it becomes important to worry. The issue of Greece and its debt has been on investors’ radar screens for months, but few people seem to have understood its ramifications and the risks it presented to the markets.

They tend to think of the future in terms of a single scenario, whereas it really consists of a wide range of possibilities. (Remember Elroy Dimson’s trenchant observation that “risk means more things can happen than will happen.”) And to the extent they do consider a variety of possibilities, few people include ones that haven’t been part of recent experience. The uncertainties discussed above tell me today’s distribution of possibilities has a substantial left-hand (i.e., negative) tail, probably greater than at most times in the past. The proper response should be to discount asset prices, allowing a substantial margin for error. Forecasts should be conservative, yield spreads should incorporate ample risk premiums, valuation parameters should be below the long-term norms, and investor behavior should be prudent. And yet, the powerful rally of 2009 has more than offset the decline of 2008 in many asset classes. To the extent that the resultant valuations incorporate optimism, I would argue for caution today. A lot of “easy money” was made last year; in retrospect, all you had to do was have access to capital and the guts required to invest it at the absurd low prices of late 2008/early 2009 and hold on during the wild recovery. Of course, those things were far from easy at the time. The profits ahead won’t be easy money.

© Oaktree Capital Management, L.P. All Rights Reserved underlies the free market system – will return us to an upward trajectory. It just won’t be easy, quick or painless. And that’s why I think the investment decisions we make today must emphasize value, survivability and staying power. I readily acknowledge that assuring survival in bad times is inconsistent with return maximization in good times. Insistence on these three things won’t produce the greatest rewards if the economy and markets surprise on the upside, but that’s not my main concern. Given the uncertainty present today, it’s hard enough to find investments that can be relied on to deliver solid returns in good times but also assure survival in bad. In that interest, we’ve always been willing to cede to others much of that part of the return distribution lying between “solid” and “maximum.” This time is no different. March 5, 2009

They know all about how things will work if times are normal, but their analysis is of no help when events occur that reside in the far-off, improbable tails of the probability distribution – like when it turns out that 2% isn’t the right default rate for subprime mortgages, and the actual figure is several times that.

© Oaktree Capital Management, L.P. All Rights Reserved Fund A Annual Return Dollar Gain Distribution Portfolio Value Initial Investment $1,000 Year 1 10% $100 $600 500 Year 2 40 200 650 50 Year 3 100 50 100 -- Comp. Ann. Return 45% IRR 21% The 10% gain in year one, achieved on starting capital of $1,000, produced a $100 gain in the fund’s value. The 100% return in year three, on the other hand, was applied to just $50 of capital, producing a gain of $50. Although the percentage return was much higher in year three, it produced just half the dollar gain as the smaller return in year one. Thus, in calculating the fund’s overall performance, the 100% return should be accorded much less weight than the 10% return. IRR produces that result (whereas compound annual return does not). Because a given year’s annual result is weighted in the IRR calculation by the number of dollars in the fund that year, and thus counts for more when the fund is larger and less when it’s smaller, internal rate of return is referred to as a “dollar-weighted” return. To make the distinction clear, the old compound annual return is now referred to as a “time-weighted” return. This nonsensical term means that every year’s individual return is given the same weight in the calculation. It’s the same as saying “equal-weighted,” or even “unweighted” . . . but “time-weighted” sounds much more scientific. (It’s not for nothing that George Bernard Shaw defined professions as “conspiracies against the laity.

”) For Fund A, shown above, the three-year IRR is 21%. This is far more reflective of the amount of wealth created than is the 45% time-weighted return. The difference arises because the IRR calculation gives relatively little weight to the 100% return achieved in the third year, whereas the time-weighted return gives it as much weight as the first-year gain of 10%. To fully understand the importance of this distinction, consider Fund B, which achieves the same annual returns as Fund A – and thus the same compound annual return – but holds on to all of its capital through the end of the third year. Fund B Annual Return Dollar Gain Distribution Portfolio Value Initial Investment $1,000 Year 1 10% $ 100 0 1,100 Year 2 40 440 0 1,540 Year 3 100 1,540 $3,080 -- Comp. Ann.45

© Oaktree Capital Management, L.P. All Rights Reserved Riskier investments are those where the outcome is less certain. That is, the probability distribution of returns is wider. When priced fairly, riskier investments should entail:  higher expected returns,  the possibility of lower returns, and  in some cases the possibility of losses. The traditional graph shown first above is deceptive, because it communicates the positive connection between risk and return but fails to suggest the uncertainty involved. It has brought a lot of people a lot of misery through its unwavering intimation that taking more risk leads to making more money. I hope my version of the graph is more helpful. It’s meant to suggest both the positive relationship between risk and expected return and the fact that uncertainty about the return and the possibility of loss increase as risk increases. 1BUWhat Is Risk? According to the academicians who developed Capital Market Theory, risk equals volatility, because volatility indicates the unreliability of an investment. I take great issue with this definition of risk. It’s my view that – knowingly or unknowingly – academicians settled on volatility as the proxy for risk as a matter of convenience. They needed a number for their calculations that was objective and could be ascertained historically and extrapolated into the future. Volatility fits the bill, and most of the other types of risk do not.

Of course, the efficient market crowd would say someone will get rich doing everything – even playing the lottery or flipping coins – simply because the tails of a probability distribution usually aren’t entirely unpopulated. But who it is that gets rich that way may be purely random. If that’s the case, the mere existence of a few winners doesn’t in itself prove that something is an “alpha” activity in which hard work and skill will produce consistent performance, or that large numbers of people can pull it off. I believe firmly that the markets for commodities and currencies are generally efficient. That means a lot of highly motivated people participate; many are intelligent and computer-literate; they all have access to similar information; and they’re willing to take either side of most propositions. These people cause all of the available information to instantly be incorporated in the market price of each asset, such that the market price always reflects the consensus view of the significance of the available information. As a further consequence, few people if any can dependably identify and profit from instances when the market price is wrong. That, in turn, makes it difficult to consistently achieve high absolute returns or perform better than others. That difficulty constitutes the ultimate proof that a market’s efficient. Take currencies for example.

© Oaktree Capital Management, L.P. All Rights Reserved Unfortunately, times-capital-returned isn’t perfect either. Simply by holding on to its capital long enough, a low-return fund can produce a higher TCR than a high-return fund. But it may not have done the better job. Let’s consider two more funds: L and M, each with committed capital of $1,000. Fund L calls all of its capital and earns 20% per year for four years (turning the $1,000 into $2,074). Fund M also calls all of its capital, and earns a return of 5% per year, but it goes fifteen years without selling an asset or making a distribution. In this way, Fund M turns its $1,000 into $2,079. According to TCR, they performed the same. But in order to turn $1,000 into $2,070, would you rather give up the use of your money for four years or fifteen? I’d rather be in Fund L. UHow Should Performance Be Judged: IRR or TCR? In comparing two funds, if one has a higher internal rate of return and a higher times-capital- returned, certainly it did the better job. Fund G Fund H Year Capital Call Jan. 1 Invested Capital Jan. 1 Annual Return (%) Dollar Gain 12/31 Value Capital Call Jan. 1 Invested Capital Jan. 1 Annual Return (%) Dollar Gain 12/31 Value 1 $300 $ 300 10% $ 30 $ 330 $300 $ 300 10% $ 30 $ 330 2 700 1,030 20 206 1,236 700 1,030 20 206 1,236 3 0 1,236 30 371 1,607 -400 836 30 251 1,087 4 0 1,607 40 643 2,250 -400 687 40 275 962 $1,250 $762 IRR 28% 25% TCR 2.25 1.

It was my sense that if you added up the members’ individual distributions of expected performance, you’d get a summary distribution that was pretty close to what would have been generated randomly, and one largely devoid of valuable information. Certainly any unique insight that a member of the committee might have would be lost in such an aggregation process. Committees rarely take high-risk positions for which the members can be criticized. They rarely embrace idiosyncratic opinions. They rarely capture the most insightful member’s uniqueness, as expressed in a lone non-conformist viewpoint. And thus they rarely produce highly superior investment results. It’s not impossible, just against the odds. Barton Biggs says the chances of its happening can be improved if one or two members seize more-than-equal power. It’ll also help if it’s the right ones who do so. I think the key to successful committee efforts lies in “sparks.” There should be intellectual friction capable of generating heat and light: spirited discussion leading to unique insight. Professor Janis urges the leader to create an atmosphere that fosters “intellectual suspicion amidst personal trust.” Barton Biggs suggests praising those who disagree with the trend; designating devil’s advocates; and holding second-chance meetings where members can take another, skeptical look at decisions the group has made.

© Oaktree Capital Management, L.P. All Rights Reserved THillary Till describes Amaranth’s loss as a 9-standard-deviation event (Long-Term Capital’s is estimated at “8-sigma”). By way of reference, 5 standard deviations include the central 99.99994% of a Tnormal probability distribution. A 5-sigma event below that range should happen about three times in every ten million trials (thus a given daily occurrence should happen once every 10,000 years). But it’s amazing how often this kind of event seems to occur when derivatives are combined with leverage. TEveryone speaks about preparing for “worst-case” outcomes, but invariably things can get even worse. Statistical reassurance should be relied on only to a reasonable extent. Common sense has to come into play as well. TU Risk Management and Risk Managers TYou know from my memo of February entitled “Risk” that I’m not a big fan of quantitative risk management. It’s often said of a man that “he knows the price of everything but the value of nothing” – and it’s not meant as a compliment. Likewise, I feel effective assessment of portfolio risk is less likely to come from Ph.D. statisticians who lack intimate knowledge of the assets in the portfolio than through wise judgments made subjectively by investors possessing “alpha.” TIn the memo on risk, I enumerated several criteria that should be present if modeling is to prove effective. I also observed that most of them are lacking in the investment world.

It has brought in gross revenues of $180 million worldwide since May against its production budget of $160 million, meaning that after the deduction of at least half the revenues for distribution charges, advertising costs and exhibitors’ fees, it’s still a big loser.  If there’s one thing I’ve never claimed to understand, it’s how you put a price on a highly improbable disaster. Thus I have a lot of respect for anyone who can do a consistently superior job of underwriting catastrophe insurance against earthquakes, hurricanes and terrorist events. Is the right premium for insuring a Caribbean hotel against hurricanes $1 million or $5 million, given that the loss may be zero or $100 million? The difficulty of setting these premiums isn’t keeping hedge funds from filling the gap in the “cat insurance” market.  Along similar lines as catastrophe insurance, hedge funds are among the leading writers of Credit Default Swaps, the equivalent of issuing insurance against bond defaults. Hedge funds find it attractive to write this coverage for multi-year periods, perhaps in part because the premiums are taken into earnings each year, adding to returns and giving rise to incentive fees, while the defaults are likely to come later. As in any form of risk transfer, the ultimate profitability of this proposition will depend on how well the insurers know the risks and on what they’re able to charge in terms of premiums.

© Oaktree Capital Management, L.P. All Rights Reserved “Everyone knows” it’s better to make tax-deductible mortgage payments than to pay rent. But the beauty of financial puzzles is that there’s no answer that’s always correct regardless of the circumstances. I’d rather pay a low rent I’ll be able to afford even if things get a little worse than a high and possibly rising mortgage payment, on the continuation of which my home ownership is riding. The old goal was to have the house paid off by retirement, so you could live in it when your paycheck stopped. Now, thanks to the magic of minimal down payments, minimal amortization and adjustable interest rates (starting from historically low levels), payments may well be higher in retirement than during the owners’ working years. How will people – possibly with little or no savings – hold onto their properties when their paychecks stop? We never hear anymore about people “saving for a rainy day” or “saving for their old age.” If you do those things, it may be harder to get the house of your dreams . . . but you’ll never go broke. I wonder how many of today’s home buyers will learn this lesson through painful experience. USelling Money If a seller wants to move more of his product, what does he do? Well, that depends on whether the product is capable of being differentiated from its competitors. If it is, he can try making it better, advertising it more or improving distribution.

” If the consensus of investors feels the same, that’s what the spread will be. What if we depart from investment grade bonds? “I’m not going to touch a high yield bond unless I get 600 over a Treasury note of comparable maturity.” So high yield bonds are required to yield 12%, for a spread of 6 percent over the Treasury note, if they’re going to attract buyers. Now let’s leave fixed income altogether. Things get tougher, because you can’t look anywhere to find the prospective return on investments like stocks (that’s because, simply put, their returns are conjectural, not “fixed”). But investors have a sense for these things. “Historically S&P stocks have returned 10%, and I’ll only buy them if I think they’re going to keep doing so.” So in theory, the common stock investor determines earnings per share, earnings growth rate and dividend payout ratio and inputs them into a valuation model to arrive at the price from which S&P stocks will return 10% (although I’m not sure the process is nearly that methodical in actuality). “And riskier stocks should return more; I won’t buy on the NASDAQ unless I think I’m going to get 13%.” From there it’s onward and upward. “If I can get 10% from stocks, I need 15% to accept the illiquidity and uncertainty associated with real estate. And 25% if I’m going to invest in buyouts . . . and 30% to induce me to go for venture capital, with its low success ratio.

© Oaktree Capital Management, L.P. All Rights Reserved regarding mutual funds. “Year after year, at literally thousands of funds, . . . the directors had mindlessly approved fees that in many cases far exceeded those that could have been negotiated.” In response, he proposes independent fund directors affirm each year that “we have negotiated a fee with our managers comparable to what other clients with equivalent funds would negotiate.” We’ll see if they do. Are fund directors and executives putting their clients’ interests first? Are they acting as the stewards of their clients’ assets? Is there room for improvement? I feel there’ll be a lot of scrutiny on this subject in the months ahead. Hopefully all mutual funds and their directors will end up acting a lot more like stewards. UThe New Math: 4 + (12b-1) = 3 Back in 1980, some genius figured out a way for the mutual fund companies to extract more from their funds: use investors’ assets to pay the costs of fund distribution. Rule 12b-1 was adopted, permitting charges against fund assets for this purpose. According to a Morningstar report of January 6, “The rule was introduced following a period of substantial outflows for the fund industry and was intended to help funds grow their assets.” It was felt that asset growth would benefit funds and their investors, and thus it would be proper for investors to bear some of the cost. According to the rule: A [mutual fund] company may implement or continue a [12b-1] plan . . .

only if the directors who vote to approve such implementation or continuation conclude, in the exercise of reasonable business judgment and in light of their fiduciary duties . . . that there is a reasonable likelihood that the plan will benefit the company [i.e., the fund] and its shareholders. As Morningstar puts it, “the latter phrase would seem to require that the fee will result in more assets, and ultimately lower costs – otherwise, there is no benefit to the fund” (or its investors). Of course, fund companies would have a clear conflict: more expense reimbursement for them would translate directly into lower asset values for their investors. The SEC recognized this conflict and stated in the release accompanying the rule that it remained “generally concerned about (1) the conflicts which may exist between the interests of a fund and those of its investment adviser in deciding whether a fund should pay its distribution costs, (2) the likelihood that the fund will benefit from paying such costs, and (3) fairness to existing shareholders.” Thus the SEC required that 12b-1 fees be approved by majorities of the full board, the disinterested (i.e., independent) directors, and the fund’s shares. It went on to state that, “Since rule 12b-1 does not restrict the kinds or amounts of payments which could be made, the role of the disinterested directors in approving such expenditures is crucial.added)

© Oaktree Capital Management, L.P. All Rights Reserved Based on data contained in Morningstar’s excellent report, the results in this regard are not encouraging:  Of the 15,774 funds tracked by Morningstar, 9,981, or 63%, charge 12b-1 fees.  Of 4,556 12b-1 funds for which there is at least five years of data on expense ratios, 66.2% showed an increase in the expense ratio over the last five years.  The percentage of funds showing expense ratio increases was roughly the same in 12b-1 funds as in non-12b-1 funds, but the average increase for the 12b-1 funds was slightly greater than for the non-12b-1 funds.  When looked at for nine years, the comparison is more negative. 12b-1 funds showed expense ratio increases more often than non-12b-1 funds, and the differential between the increases in the two groups was more unfavorable. As Morningstar puts it, “The above data strongly suggest that 12b-1 fees do not help funds materially reduce their expense ratios over time any more than would otherwise be the case, and may, in fact, do the opposite.” The fund companies have successfully transferred some of the costs of distribution to the funds’ investors, using 12b-1 fees primarily to pay brokers in order to increase assets and benefit the fund companies. But there is no evidence – certainly not in the form of decreasing expense ratios – that they benefit investors, as they’re supposed to.

Despite this, Morningstar says, “Even as funds grow, their 12b-1 fees don’t usually decrease or go away.” Why are 12b-1 fees so widespread and so persistent? And what’s the reasoning of the independent directors who approve them? How do the directors feel about the buy-and-hold investor who invests in fund shares and pays distribution fees for the next twenty years? At best, I’m afraid, the director’s answer regarding 12b-1 fees can only be the same as it is on management fees: “Our practices are no worse than those of our competitors.” One gem on which to close: currently, 12b-1 fees are being collected by 227 mutual funds (or classes of multiple-share-class funds) that are closed. How can the directors of funds that aren’t trying to attract new investors justify the continuing imposition of fund distribution charges? How can they possibly interpret this as fulfilling their responsibilities to the funds’ investors? Who do these directors represent? U What Else? I want to make it clear that just as I do not universally indict mutual fund executives and directors, I don’t think stewardship problems exist only in the mutual fund industry.the

0 million shares of outstanding Enron common stock in March 2003 (subject to certain conditions) and (ii) transferred to the Entities assets valued at approximately $309 million, including a $50 million note payable and an investment in an entity that indirectly holds warrants convertible into common stock of an Enron equity method investee. In return, Enron received economic interests in the Entities, $309 million in notes receivable, of which $259 million is recorded at Enron's carryover basis of zero, and a special distribution from the Entities in the form of $1.2 billion in notes receivable, subject to changes in the principal for amounts payable by Enron in connection with the execution of additional derivative instruments. Cash in these Entities of $172.6 million is invested in Enron demand notes. In addition, Enron paid $123 million to purchase share-settled options from the Entities on 21.7 million shares of Enron common stock. The Entities paid Enron $10.7 million to terminate the share-settled options on 14.6 million shares of Enron common stock outstanding. In late 2000, Enron entered into share-settled collar arrangements with the Entities on 15.4 million shares of Enron common stock. Such arrangements will be accounted for as equity transactions when settled. Could anyone tell what these 260 words meant? There's a lot of ink there, not much information.

On August 25, 2000, a false press release was picked up on the Internet, taking Emulex stock from $103 to $45 within twenty minutes. After a few-hour trading halt, corrected information took it back above $100. Glassman's term for the markets: “dazzling in their efficiency.” He finds comfort in the fact that both the falsified data and the correction were disseminated so quickly. I feel the rapid and universal distribution of information - often at speeds and in amounts that make it impossible to verify, distill and understand - does nothing to make the markets safer per se. For proof, look at the trend in volatility. It seems inescapable that media hype and other short-term oriented developments have made the markets more treacherous. Looking at today' s mass market and the associated flood of information, my partner Sheldon Stone sees investors as passengers on a boat, running back and forth en masse -to one side in response to new information, and then back to the other. That makes for a rocky crossing. Where does Glassman go wrong? To me, his error is obvious in the following sentence: Markets know so much more about companies, and know it so quickly, that their assessments of worth have an up-to-the-minute efficiency and accuracy.