Howard Marks: Maximizing Investment Returns: A Balance of Equities and Credit

During his recent interview with Bloomberg, Howard Marks discussed the recent increase in high yield bond yields and how they can be competitive with equities when their yields are higher. He emphasizes the trade-off between the reliability of credit investments and the potential for equity investments to surprise on the upside, suggesting a balanced portfolio of credit and equities. Here’s an excerpt from the interview:

As Warren Buffett always says, you don’t want to desert the U.S or the U.S economy, or I think the corporate sector. The S&P has given a 10.2% return every year on average for the last century. You don’t want to give up that.

Right now, it looks like you can get equity type returns from credit. A little below ten for what we call liquid credit, stuff that’s tradable every day, and well above ten perhaps for private credit, which is not tradable.

And the point is that, you know 21 months ago… today high yield bonds yield in the nines. Twenty one months ago they were in the fours.

When they’re in the nines you can invest in them with high expectations, competitive with equities, and more than sufficient to meet most organizations needs.

Private credit returning in the low double digits or more. Well that’s obviously very very competitive. But you know equities, or what equities have that credit doesn’t have is the ability to surprise on the upside.

And you find some great, great, great growing companies in your portfolio. You’ll be sorry if you weeded them out.

So the question is, how do you and your organization feel about that trade off? If I say to you I think I can get you 9 to 10% through a balanced portfolio of credit, over the long term quite dependably. If you say that’s great, I love that, maybe you do 75% of your portfolio.

If you say I want to still make sure that I have exposure to the upside of equities, then you say maybe 50 or 40.

You can watch the entire discussion here: