Ruminating on Asset Allocation

oaktreecapital.com · 2024-10-22 · tier T2

Source: Memo · oaktreecapital.com dated 2024-10-22. Auto-generated factual summary. Not investment advice. Verify before acting.

Howard Marks argues that all investing reduces to two fundamentally different asset classes — ownership and debt — and that the choice between them is the single most important decision in portfolio construction. Ownership assets carry no promised return and expose investors to the full range of outcomes, while debt offers a contractually fixed return with a much narrower distribution of results. Marks contends that most investors fail to grasp this distinction viscerally, treating stocks and bonds as variations on a theme rather than categorically different instruments. Marks frames the entire asset allocation process as a question of offense versus defense: how much emphasis an investor places on growing capital versus preserving it. He argues the absolute level of risk in a portfolio must be consciously targeted — not left as a byproduct of chasing risk-adjusted returns — and that all other allocation decisions (public vs. private, domestic vs. foreign, levered vs. unlevered) are merely implementation details once that posture is set. On current conditions, Marks notes that non-investment-grade credit yields roughly 7% on public instruments and 10% on private credit, levels he describes as competitive with historical equity returns and far above the near-zero real yields available from 2009 to 2021. He recommends investors establish a program to increase credit allocations in partial steps, while acknowledging that higher yields were available one to two years ago and may return if market optimism fades.

Citations · 6

“at bottom, there are only two asset classes: ownership and debt. If someone wants to participate financially in a business, the essential choice is between (a) owning part of it and (b) making a loan to it.”
p#17 · confidence 97%
“These returns, starting at roughly 7% on public credit and 10% on private credit, are competitive with the historical returns on equities and capable of helping many investors toward their overall return targets.”
p#71 · confidence 98%
“Because of their contractual nature, the returns from credit are likely to prove much more dependable than ownership returns.”
p#72 · confidence 97%
“one decision matters more than – and should set the basis for – all the other decisions in the portfolio management process. It's the selection of a targeted 'risk posture,' or the desired balance between aggressiveness and defensiveness.”
p#25 · confidence 96%
“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. 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.”
p#74 · confidence 96%
“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.”
p#36 · confidence 97%

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Howard Marks

Oaktree memos · cycles and risk-first investing