(Bloomberg) -- Howard Marks, the dean of distressed-debt investing who turned bullish within days of the sector’s 2020 low, is back to a cautious stance now that the ensuing rally has whittled attractive targets down to pre-pandemic levels.

“When the level of optimism is high, there is usually more room for disappointment,” Marks, the co-founder of Oaktree Capital Group, said in a Tuesday telephone interview. “The main way to achieve high returns in a low-return world is through taking increased risk. And I don’t think this is the climate to take more risk.”

Back in early April, after valuations had collapsed and the supply of newly distressed assets was soaring, Marks told investors it was time to play offense. Trying to time the market for the absolute low is “irrational,” he wrote at the time, because the bottom is apparent only in retrospect.

Prediction Trap

The same advice still applies today about forecasting tops as well as bottoms, according to Marks. “Trying to predict market sentiment gets you into trouble,” he said in the interview. Nevertheless, Marks has doubts about the wisdom of buying at current prices.

“Maybe we’re in the area of a top,” he said. “The rebound has been substantial.”

Investors are viewing future events including the development of a Covid-19 vaccine favorably, with equity and debt markets staging strong rallies. Yields and spreads remain low, and “the pressure to buy is strong,” he said.

Marks may not have intended to call the exact bottom in April, but the 74-year-old money manager’s comments were well-timed. Hindsight shows that the ICE BofA index of distressed debt set its low two weeks earlier on March 23, and was still hovering near that level when Marks made his bullish comments in a memo to investors. The benchmark has risen almost 50% since then.

Distressed bonds and loans, which approached $1 trillion at the height of the coronavirus outbreak, have fallen back to pre-pandemic levels, presenting fewer options for firms like Oaktree to put cash to work. The total of traded troubled debt fell to about $236 billion as of Nov. 13.

“Opportunities are moderate,” Marks said. “We have to make good investments when they present themselves, but maintain our discipline and not chase things.” Sectors including hospitality, travel and retail still present some appealing targets, to the extent that their problems are overrated, according to Marks.

Oaktree is one of the largest distressed-debt investors in the world, with nearly $30 billion committed to credit from troubled companies. The Los Angeles-based firm has thrived in times of economic stress, when prices on bonds of companies in danger of defaulting fall to deep discounts.

Marks began his career as an analyst at Citigroup Inc. and co-founded Oaktree in 1995. Oaktree sold a controlling stake to Brookfield Asset Management in 2019. He’s looking for issuers that are perceived as out of favor, but not as bad as they seem.

“There is no such thing in a troubled company that everyone loves,” Marks said.

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