Investment opportunities in debt funds at last emerge - guidance on where to put your money
In a sea change in the world of investing, Howard Marks, the renowned US billionaire known for his work in the world of bonds and fixed income, has highlighted a trend towards debt investing in his October 2023 "Sea Change" memo.
Marks, who made a name for himself at Citicorp in the 1970s and TCW Group in the 1980s trading distressed bonds, points to a current trend in debt investing characterized by more attractive risk-adjusted returns relative to traditional equity investing. He notes that the credit market environment has shifted due to higher interest rates and tighter lending conditions, creating opportunities in debt that were not as compelling when rates were ultra-low.
Compared to equities, debt investing now offers potentially safer income streams with comparatively favorable returns. Many fixed income yields have risen with monetary tightening, whereas equities face valuation pressure from uncertainty and elevated price-to-earnings ratios.
Traditional equity investing risks have increased due to wider ranges of possible outcomes in an uncertain economic environment. Equity valuations are at historically high multiples, which compress future expected returns and elevate risk. Meanwhile, senior debt instruments and other credit assets benefit from higher yields and potentially more stable cash flows.
The current trend described by Marks is a relative shift in favor of debt investing for investors seeking better risk/return profiles amid market volatility and economic uncertainty. This signals a strategic reevaluation by investors leaning toward credit over equities for capital preservation and steady income in late 2023.
Investment trusts specializing in debt and lending, such as GCP Infrastructure Investments, Sequoia Economic Infrastructure, and BioPharma Credit, offer near double-digit yields and reduced downside risk compared with an equity portfolio. For instance, BioPharma Credit lends money to small and mid-sized companies in the life-sciences sector, with 76% of the portfolio being floating rate and repayable within two years at interest rates of between 8% and 12%.
However, investors should be mindful of two metrics when considering credit investments: duration risk and credit risk. Duration risk, a measure of a bond's price sensitivity to changes in interest rates, is higher for long-term fixed-rate products compared to short-term bonds or those with floating interest rates. Credit risk, or the risk that the bond issuer will fail to meet its financial obligations, is another crucial factor to consider.
Global debt reached a record high of over $324 trillion in the first quarter of 2025, according to the Institute of International Finance (IIF). Despite this, the opportunities in debt investing remain, as indicated by the ICE BofA US High Yield Constrained index, which now offers returns similar to the S&P 500.
Howard Marks, who founded Oaktree Capital Management in 1995, focusing on high-yield debt, distressed debt, and private equity, continues to shape the investment landscape with his insights and investment strategies. His latest memo serves as a reminder that the investment world is ever-evolving, and savvy investors must remain adaptable to seize opportunities and navigate challenges.
[1] Marks, H. (2023). Sea Change. [Unpublished memo].
- Howard Marks, in his October 2023 "Sea Change" memo, emphasizes a transition from traditional equity investing towards debt investing, citing more attractive risk-adjusted returns in the current credit market environment with higher interest rates and tighter lending conditions.
- As equities face valuation pressure from uncertainty and elevated price-to-earnings ratios, debt investing now offers potentially safer income streams with comparatively favorable returns.
- In a strategic reevaluation, investors are shifting toward credit over equities for capital preservation and steady income, such as those offered by investment trusts like GCP Infrastructure Investments, Sequoia Economic Infrastructure, and BioPharma Credit.
- Investors should carefully consider two metrics when investing in credit, including duration risk (bond's price sensitivity to changes in interest rates) and credit risk (the risk that the bond issuer will fail to meet its financial obligations).
- Despite global debt reaching a record high of over $324 trillion in Q1 2025, opportunities in debt investing persist, as evidenced by the ICE BofA US High Yield Constrained index offering returns similar to the S&P 500, indicating an ongoing evolution in the world of personal finance and investing.
