We think Oaktree Capital Management’s Howard Marks is one of the market’s more insightful investors, someone worth paying attention to. When he speaks (or writes), we listen (or read). Marks is famous for his memos which outline Oaktree’s investment themes and ideas.
Last December Marks’ memo titled, Sea Change, noted that a 40-year tailwind of declining interest rates had likely run its course. Earlier this month Marks doubled down with a memo titled Further Thoughts on Sea Change. I’ve summarized the main themes from this as follows:
- Interest rates are likely to stay higher longer than most people believe.
- Low interest rates made investment success (across all asset classes) easier. Now that rates are higher, the halcyon days are behind us.
- The last two decades have marked a period of unprecedented Federal Reserve activism. Keeping interest rates artificially low has distorted the behavior of economic and market participants, causing things to be built that otherwise wouldn’t have been built, investments to be made that otherwise wouldn’t have been made, and risks to be borne that otherwise wouldn’t have been accepted.
- Investors today can get equity-like returns from investments in credit. Given that these returns are contractual returns (less market dependent) should investors be considering more investment in credit?
We’ve been contemplating changes to our investment allocations and think the themes Marks outlines merit serious consideration. While it’s impossible to time the market (and we make no efforts to do so), we are constantly assessing the balance between risk and expected return across the universe of acceptable investments. In our view, extending bond maturities slightly and increasing allocations to fixed income looks increasing appealing.