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Latest Memo From Howard Marks: Further Thoughts On Sea Change
° The investment environment has undergone a sweeping alteration, calling for significant capital reallocation. ° The decline in interest rates over the past 40 years has been overlooked as a major driver of investment profits. ° Credit instruments may offer competitive returns and should be considered for a substantial portion of portfolios.
@Crash, I think Marks would say that is up to the Fed. What are the chances the Fed goes back to the interest rate policy we have experienced since 2008?
Always had the utmost respect for Howard Marks. What I got out of the article is the money to be made in bonds going forward is what has been working YTD - non investment grade specifically junk corporate and bank loans. Most bond investors don’t seem to grasp his thesis of a sea change in bonds. One only need look at Treasury bonds about to have their third straight year of losses - an unprecedented event - to realize that.
A severe recession would negate Mr Marks’ favored junk bonds and bank loans. Bank loans by the way after being severely overbought finally had a bit of a contraction recently. A new buy was signaled last week.
Thanks for your input @Junkster. Would SPHY or similar be worth watching in your opinion?
@Mark, not a fan of bond ETFs for several reasons. Here is one of many reasons. Say you are in a bond ETF and real late in the trading day some rare momentous and negative news event occurs sending stocks and bonds in a major tailspin. The bond ETF would get clobbered. The open end bond fund on the other hand would be priced at NAV and wouldn’t get hit till the next trading day.
Edit. I am not as enamored with junk corporates as Mr Marks. I would prefer a severe recession and huge widening of spreads to set up a major buy. In absence of a major recession just see them plodding along. Normally after a double digit loss like last year, junk comes roaring back the next year (2023) and more than making up for the previous year’s loss. That certainly hasn’t been the case this year which makes me wary.
Thanks for sharing HM memo. For an equity + fixed income investor, what I got out of the memo is, prefer
Credit over Equities Large Cap Equities over Small Cap equities Active over passive index Low leverage over high leverage but interestingly, to a point, lower credit over higher credit because he focused on high yield credit; so, may be draw a line in the sand at BB or B to cover for @junkster's comment on what if severe recession and reading between the lines HM's preference away from floating rate (BL) and towards fixed rate HY credit.
(Where dreams are made of (equity investing per HM!), investor returns are in the form of capital gains and qualified dividends which are taxed at a lower rate than the interest income which HM prefers. (Smile while you read this).)
Yes thanks to all here. I like Marks a lot. That said, ISTM he made his name analyzing / investing in distressed debt. So the tilt towards credit doesn’t surprise me. But Yuppers - I’d listen to him ahead of a lot of others. Nice summary @BaluBalu.
Nice article for owning more bonds than stocks. It has been challenging this year when investment grade bonds trail junk bonds by a wide margin. With the recent geopolitical turmoil, treasury may return.
My takeaways from the article were: 1. Marks is forcing a conversation among asset allocators. He’s right. 2. He prefers credit. He’s right there but how do you get asset allocators to act. Questionable. Not easy to get people to move. 3. He says credit yield are high enough to for now ditch equities. Eventually once equities go down he expects equities to then once again be the right play because nominal earnings will be there tool to beat inflation. This makes sense. 4. The big problem with this is that these investments require a sense of sequencing and thus are frowned upon as market timing. Especially among the endowment crowd that he is trying to influence. 5. If you market time out of stocks and into credit how will you know it’s ok to get out. Committees don’t know this stuff. So they do nothing. And take the volatility. 6. Marks knows all this but his hands are tied. If he is helpful he needs to tell you to sequence. He is running against how institutions make decisions for asset allocation. 7. At least he has forced us to have a conversation and understand our weaknesses.
Comments
A severe recession would negate Mr Marks’ favored junk bonds and bank loans. Bank loans by the way after being severely overbought finally had a bit of a contraction recently. A new buy was signaled last week.
Edit. I am not as enamored with junk corporates as Mr Marks. I would prefer a severe recession and huge widening of spreads to set up a major buy. In absence of a major recession just see them plodding along. Normally after a double digit loss like last year, junk comes roaring back the next year (2023) and more than making up for the previous year’s loss. That certainly hasn’t been the case this year which makes me wary.
Credit over Equities
Large Cap Equities over Small Cap equities
Active over passive index
Low leverage over high leverage
but interestingly, to a point, lower credit over higher credit because he focused on high yield credit; so, may be draw a line in the sand at BB or B to cover for @junkster's comment on what if severe recession and reading between the lines HM's preference away from floating rate (BL) and towards fixed rate HY credit.
(Where dreams are made of (equity investing per HM!), investor returns are in the form of capital gains and qualified dividends which are taxed at a lower rate than the interest income which HM prefers. (Smile while you read this).)
Thanks @Junkster for your unique perspective.
Yes thanks to all here. I like Marks a lot. That said, ISTM he made his name analyzing / investing in distressed debt. So the tilt towards credit doesn’t surprise me. But Yuppers - I’d listen to him ahead of a lot of others. Nice summary @BaluBalu.
1. Marks is forcing a conversation among asset allocators. He’s right.
2. He prefers credit. He’s right there but how do you get asset allocators to act. Questionable. Not easy to get people to move.
3. He says credit yield are high enough to for now ditch equities. Eventually once equities go down he expects equities to then once again be the right play because nominal earnings will be there tool to beat inflation. This makes sense.
4. The big problem with this is that these investments require a sense of sequencing and thus are frowned upon as market timing. Especially among the endowment crowd that he is trying to influence.
5. If you market time out of stocks and into credit how will you know it’s ok to get out. Committees don’t know this stuff. So they do nothing. And take the volatility.
6. Marks knows all this but his hands are tied. If he is helpful he needs to tell you to sequence. He is running against how institutions make decisions for asset allocation.
7. At least he has forced us to have a conversation and understand our weaknesses.