Oaktree’s Howard Marks makes case for increased credit allocations
Oaktree Capital Management co-chairman Howard Marks has made the case for investors increasing their allocation to credit, as returns are now competing with equities.
In his latest memo, ‘Ruminating on asset allocation’, Marks outlines the fundamental choices faced by investors, principal of which is whether to invest in a business via ownership, or debt.
“Ever since coming up with my sea change thesis regarding interest rates two years ago, I’ve been talking about the increased utility of credit investments,” Marks writes, reflecting on a recent trip to Australia, where he mulled these topics with clients.
“And the more I’ve done so, the more I’ve thought about the difference between credit investments and equities. Thus, the first thing I want to mention about my ‘Australian epiphany’ is the unconventional idea that, at bottom, there are only two asset classes: ownership and debt.”
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To decide which to opt for, Marks says, an investor must decide whether their goal is primarily to preserve, or to maximise, their wealth.
“In the low-interest-rate environment that prevailed from 2009 through 2021, the expected return from debt was extremely low in the absolute and far below the historical return on equities, rendering debt relatively unattractive,” he explains.
“But today, it’s considerably higher than it was and closer to that of equities. That’s why I’ve been urging increased investment in credit.”
Despite this, Marks emphasises that a mix of ownership and debt, that varies over time and according to market conditions, is the best way for an investor to achieve their individual goals.
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Commenting on one of Oaktree’s key sectors, non-investment grade credit (defined as performing non-government debt), Marks says returns start at roughly seven per cent on public credit and 10 per cent on private credit, making them competitive with the historical returns on equities and due to their contractual nature, more dependable.
“My recommendation at this time is that investors do the research required to increase their allocation to credit, establish a ‘program’ for doing so, and take a partial step to implement it,” he concludes.
“While today’s potential returns are attractive in the absolute, higher returns were available on credit a year or two ago, and we could see them again if markets come to be less ruled by optimism. I believe there will be such a time.”
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