Howard Marks - Sea Change

[simoan]

There are few market commentators I give the time of day to, but Howard Marks is one of them. Even though they can be slightly repetitive, I enjoy reading his memos. Indeed, his latest memo is a rehash of the one he published last December.

He is a well known high yield debt investor, so there’s an element of him talking his own book in this memo, but I have recently been thinking along the same lines with regard to interest rates staying much higher than has been the case since the GFC and that high yield bonds are now yielding close to the kind of return I would be happy with for years to come. As such, I am likely to increase my exposure to bonds and prefs further in the coming months.

https://www.oaktreecapital.com/insights ... sea-change

All the best, Si

[88V8]

....interest rates staying much higher than has been the case since the GFC and that high yield bonds are now yielding close to the kind of return I would be happy with for years to come. ....

That's an interesting article, the big picture.

We have around 25% of our assets in Prefs, and if I add debt ITs it's around a third overall in FI and I don't see a need to stop adding.
I had thought that we would see FI prices moving up from here, and I'm sure we will but with a longer than expected intervening steady-state at current levels, so a longer opportunity to buy at 7-8% yields.

As he says, one has to pick and choose... once refi rates get into double-figures I get nervous, and as commented in other threads there isn't a lot of availability for retail in the bonds arena.

On the whole though, good times for FI buyers.

V8

[simoan]

....interest rates staying much higher than has been the case since the GFC and that high yield bonds are now yielding close to the kind of return I would be happy with for years to come. ....

That's an interesting article, the big picture.

We have around 25% of our assets in Prefs, and if I add debt ITs it's around a third overall in FI and I don't see a need to stop adding.
I had thought that we would see FI prices moving up from here, and I'm sure we will but with a longer than expected intervening steady-state at current levels, so a longer opportunity to buy at 7-8% yields.

As he says, one has to pick and choose... once refi rates get into double-figures I get nervous, and as commented in other threads there isn't a lot of availability for retail in the bonds arena.

On the whole though, good times for FI buyers.

V8

I confess, I am not really a fixed income investor, although like other PI's I made out like a bandit on the USD sub-debt of RBS and bought hefty clumps of NWBD and LLPC at significant discounts to par back in the day. I had a small number of the Vanquis 5.125% bonds that redeemed this week and also hold some Prefs that currently represent only around 2.5% of my portfolio (mainly ELLA and GACA with a few NWBD and BP.B). However, I do feel there is a sea change happening as Howard Marks suggests, and hence, what worked in the past will likely not work so well in the future. I can certainly see equity returns being far less than we have enjoyed in the 2009-21 ultra low interest rate period he highlights.

Of course, you're right that the relative lack of UK listed bonds available in denominations suitable for retail investors does not help, so I'm most likely to increase exposure using collective instruments; more than likely HY bond ETFs for which I will need to do some research. BTW here's a chart of the ICE BofA US High Yield Index referred to in the Howard Marks memo: https://fred.stlouisfed.org/series/BAMLH0A0HYM2EY

All the best, Si

[Lootman]

I have recently been thinking along the same lines with regard to interest rates staying much higher than has been the case since the GFC and that high yield bonds are now yielding close to the kind of return I would be happy with for years to come. As such, I am likely to increase my exposure to bonds and prefs further in the coming months.

I have hardly ever invested in fixed income in 40 years of investing. Never really saw the point when long-term equities give you 10% annually, on average.

But in August I slapped 50K into a gilt issue trading well below par. And I am averaging into TLT every time it ticks down a buck. which it has been doing a lot recently.

Prefs and junk is still too rich for my blood however.

[simoan]

I have recently been thinking along the same lines with regard to interest rates staying much higher than has been the case since the GFC and that high yield bonds are now yielding close to the kind of return I would be happy with for years to come. As such, I am likely to increase my exposure to bonds and prefs further in the coming months.

I have hardly ever invested in fixed income in 40 years of investing. Never really saw the point when long-term equities give you 10% annually, on average.

But in August I slapped 50K into a gilt issue trading well below par. And I am averaging into TLT every time it ticks down a buck. which it has been doing a lot recently.

Prefs and junk is still too rich for my blood however.

Horses for courses, of course. I have no interest in holding long dated US Government debt whilst I can get 4.2% on cash in my SIPP. Especially when USG are issuing new bonds like confetti into a market with less and less appetite now the big marginal buyer (US Fed) is sitting on its hands. Where it all ends up is way beyond my pay grade, and frankly, I'd rather sit on my hands too until valuations make more sense to me.

After several hours looking at bond ETF's of various flavours this weekend I am struggling to find anything that really floats my boat as a died in the wool equity investor. Some of the HY Corporate Bond ETFs hold debt from issuers with extremely stretched balance sheets (to say the least), which I guess is what you'd expect when YTM is 9%. In comparison to that, Prefs yielding 7% from solid companies seem reasonable value. As such, I think my main takeaway from the Sea Change memo is to avoid companies that rely on debt to fund their assets because it is a double whammy i.e. increasing cost of debt on rollover, reducing profits and ability to pay dividend, on top of decreasing NAV (where using DCF). That means a bargepole for most Infrastructure funds and to be very wary of REITs for now.

[JohnW]

He says:
‘Bottom line: If this really is a sea change – meaning the investment environment has been fundamentally altered – you shouldn’t assume the investment strategies that have served you best since 2009 will do so in the years ahead…..
‘In the new environment, earning exceptional returns will likely once again require skill in making bargain purchases’. From which I take: IF we’re in a new environment, active investment will be needed if you want exceptional returns.
I’d expect an active fund manager to think that, but active managers’ records are not encouraging to my mind. I don’t think I’m changing course on a product selling ‘if’.

[GoSeigen]

Stock picking has been the right approach for years, particularly in the UK/FTSE100. Just take a look at where the indices have gone, while some stocks have had amazing performance -- several multi-baggers for this investor and at least one ten-bagger. Passive investors are setting themselves up to be fleeced.

GS

[simoan]

He says:
‘Bottom line: If this really is a sea change – meaning the investment environment has been fundamentally altered – you shouldn’t assume the investment strategies that have served you best since 2009 will do so in the years ahead…..
‘In the new environment, earning exceptional returns will likely once again require skill in making bargain purchases’. From which I take: IF we’re in a new environment, active investment will be needed if you want exceptional returns.
I’d expect an active fund manager to think that, but active managers’ records are not encouraging to my mind. I don’t think I’m changing course on a product selling ‘if’.

As I mentioned, he is talking his own book to a certain extent given that his own company (Oaktree Capital) specialise in active funds for distressed debt. I am an active investor and so find it difficult to invest in ETFs. Maybe ETFs are appropriate for exposure to corporate bonds but I couldn’t see any that were screaming buys when I looked at the main issuers held. I know bonds are different from equities but I still couldn’t bring myself to hold the bonds of a company with > 4x Netdebt/EBITDA.

My own preference would be to hold a portfolio of UK listed corporate bonds but those in denominations suitable for retail investors greatly limits choice.

All the best, Si

[JohnW]

‘Stock picking has been the right approach for years, particularly in the UK/FTSE100. ’

Really? 80% of GBP active funds have under-performed their benchmark index for large/mid UK stocks over the last 3, 5 and 10 years. https://www.spglobal.com/spdji/en/docum ... r-2023.pdf. And small cap not a lot better. Most people would have got better returns with an index fund, surely?

[Lootman]

Stock picking has been the right approach for years, particularly in the UK/FTSE100. Just take a look at where the indices have gone, while some stocks have had amazing performance -- several multi-baggers for this investor and at least one ten-bagger. Passive investors are setting themselves up to be fleeced.

The UK has not been the place for equity growth investors for as long as I can recall. Sure you can get lucky with a UK small-cap share - I had one that was a 25-bagger when I sold it. But most UK portfolios and active funds have been pedestrian.

The US has been the place to look for equity growth these past 30 years. You actually have a choice of large-cap growers there, whereas almost all the large-cap UK shares are high-yielding dogs. And even a passive investor in the S&P 500 has seen annualised gains of 15% for the last 15 years, plus dividends and FX gain. Very few UK-focused investors, active or passive, can match that.

[genou]

The UK has not been the place for equity growth investors for as long as I can recall. Sure you can get lucky with a UK small-cap share - I had one that was a 25-bagger when I sold it. But most UK portfolios and active funds have been pedestrian.

The US has been the place to look for equity growth these past 30 years.

Fully agree. The bit nobody mentions about multi-baggers is what percentage of their wealth they had in it. I would gamble most multi-baggers turn out to be trivial percentages of the portfolio. I am happy tracking global indices as the vast bulk of my holdings and having to do sod all thinking and worrying. Balls of steel required to put the bulk of your wealth in a potential multi-bagger.

[GoSeigen]

The UK has not been the place for equity growth investors for as long as I can recall. Sure you can get lucky with a UK small-cap share - I had one that was a 25-bagger when I sold it. But most UK portfolios and active funds have been pedestrian.

The US has been the place to look for equity growth these past 30 years.

Fully agree. The bit nobody mentions about multi-baggers is what percentage of their wealth they had in it. I would gamble most multi-baggers turn out to be trivial percentages of the portfolio. I am happy tracking global indices as the vast bulk of my holdings and having to do sod all thinking and worrying. Balls of steel required to put the bulk of your wealth in a potential multi-bagger.

Wrong, I'm very happy to disclose that.

Generally 2-3% of portfolio before the rise sometimes more, sometimes less. So one of my multibaggers was until recently 25% of the portfolio, still at over 20%.

GS
EDIT: No small caps involved. All fixed interest or large cap.

[GoSeigen]

‘Stock picking has been the right approach for years, particularly in the UK/FTSE100. ’

Really? 80% of GBP active funds have under-performed their benchmark index for large/mid UK stocks over the last 3, 5 and 10 years. https://www.spglobal.com/spdji/en/docum ... r-2023.pdf. And small cap not a lot better. Most people would have got better returns with an index fund, surely?

I see the spirit of The Motley Fool is completely dead. We are urged to run to the Wise to buy their passive funds or failing that jump from the frying pan into the fire with actively managed funds.

Sad.

GS

[Lootman]

Fully agree. The bit nobody mentions about multi-baggers is what percentage of their wealth they had in it. I would gamble most multi-baggers turn out to be trivial percentages of the portfolio. I am happy tracking global indices as the vast bulk of my holdings and having to do sod all thinking and worrying. Balls of steel required to put the bulk of your wealth in a potential multi-bagger.

Wrong, I'm very happy to disclose that.

Generally 2-3% of portfolio before the rise sometimes more, sometimes less. So one of my multibaggers was until recently 25% of the portfolio, still at over 20%.

EDIT: No small caps involved. All fixed interest or large cap.

But your prior claim was that active investment in UK shares easily beat a tracker.

That may be the case with a UK tracker. But as noted a US tracker has knocked the pants off any UK tracker and, I suspect, almost all active UK active funds and portfolios.

Fixed income is another matter and some FI investors no doubt got lucky riding bonds down to zero yields. But even they had to get their timing exactly right, as bonds have been a disaster recently.

[genou]

Wrong, I'm very happy to disclose that.

Generally 2-3% of portfolio before the rise sometimes more, sometimes less. So one of my multibaggers was until recently 25% of the portfolio, still at over 20%.

GS
EDIT: No small caps involved. All fixed interest or large cap.

So it seems to me that it's as I suggested. A tiny punt - I accept that is my characterisation, but there is not a lot of conviction in a 2% investment - came good. That's not a game I am in. Do you have 50 investments. i.e. is 2% a normal size for you? That's more holdings than I could pay attention to. If you do, what percentage of them succeed?

I get running winners, but the idea of having 25% of my portfolio in a single company boggles my mind. Too strong for me.

[CliffEdge]

It's always interesting to look back at threads such as this one from ten years ago.

[GoSeigen]

Wrong, I'm very happy to disclose that.

Generally 2-3% of portfolio before the rise sometimes more, sometimes less. So one of my multibaggers was until recently 25% of the portfolio, still at over 20%.

GS
EDIT: No small caps involved. All fixed interest or large cap.

So it seems to me that it's as I suggested. A tiny punt - I accept that is my characterisation, but there is not a lot of conviction in a 2% investment - came good. That's not a game I am in. Do you have 50 investments. i.e. is 2% a normal size for you? That's more holdings than I could pay attention to. If you do, what percentage of them succeed?

I get running winners, but the idea of having 25% of my portfolio in a single company boggles my mind. Too strong for me.

It's terrifying to buy investments that have the potential to be a ten-bagger. Have you tried? Besides, there is often only a small window (e.g. Anglo American) so if you leg in like I do, it's hard to build up a big holding. 2% is the lower end of my full holding size as should be clear from my earlier post. 3-4% is typical but I also have large conviction positions, as I explained clearly one of my current multi-baggers took up some 10% of portfolio (and then trebled in size to >25%), it still takes up 20% of portfolio. Is that trivial to you? I do have around 25-30 stocks, some worth much rather more than 3% of the portfolio.

Even 3% is not trivial IMO. I leg in to many positions starting at a fraction of 1%. Then the value of those initial positions can fall. I have a rule that if the price has fallen I only add in exceptional circumstances, like the fall is very large or enough time has passed, usually six months or so. e.g. been building a position in Marstons which I think can multibag. It's just reaching 1% invested but the value has declined so somewhat less than 1% now. So you should take account of the fact that a position may be 3% before it multi-bags, but the value invested could be more like 6-10%.

Can you put 10% into a position and see it decline to 3% then throw in another 7% without flinching? How many multibaggers have you had, incidentally, while you are busy delivering these lectures?

GS
EDIT: Recent multibagger was 12% of portfolio when I stopped buying in 2021. It had already doubled and trebled again, plus another +/-100% of purchase cost in dividends so far.

[Lootman]

So it seems to me that it's as I suggested. A tiny punt - I accept that is my characterisation, but there is not a lot of conviction in a 2% investment - came good. That's not a game I am in. Do you have 50 investments. i.e. is 2% a normal size for you? That's more holdings than I could pay attention to. If you do, what percentage of them succeed?

I get running winners, but the idea of having 25% of my portfolio in a single company boggles my mind. Too strong for me.

It's terrifying to buy investments that have the potential to be a ten-bagger. Have you tried? Besides, there is often only a small window (e.g. Anglo American) so if you leg in like I do, it's hard to build up a big holding. 2% is the lower end of my full holding size as should be clear from my earlier post. 3-4% is typical but I also have large conviction positions, as I explained clearly one of my current multi-baggers took up some 10% of portfolio (and then trebled in size to >25%), it still takes up 20% of portfolio. Is that trivial to you? I do have around 25-30 stocks, some worth much rather more than 3% of the portfolio.

Even 3% is not trivial IMO. I leg in to many positions starting at a fraction of 1%. Then the value of those initial positions can fall. I have a rule that if the price has fallen I only add in exceptional circumstances, like the fall is very large or enough time has passed, usually six months or so. e.g. been building a position in Marstons which I think can multibag. It's just reaching 1% invested but the value has declined so somewhat less than 1% now. So you should take account of the fact that a position may be 3% before it multi-bags, but the value invested could be more like 6-10%.

Can you put 10% into a position and see it decline to 3% then throw in another 7% without flinching? How many multibaggers have you had, incidentally, while you are busy delivering these lectures?

GS
EDIT: Recent multibagger was 12% of portfolio when I stopped buying in 2021. It had already doubled and trebled again, plus another +/-100% of purchase cost in dividends so far.

The problem is that you are trying to advocate an investment strategy that you claim will beat the index. But you cannot actually describe it in a way that anyone can understand or follow. It seems to boil down to the idea that you are a clever chap. And maybe you are, but that doesn't help anyone to invest better.

Moreover your claim to do this via such pedestrian asset classes as UK large-caps and bonds stretches credibility. Perhaps you can prove how that has worked but I cannot help but feel that you are perhaps either mis-computing your returns or mis-representing them.

Numerous studies have demonstrated that it is your high-level asset allocation that determines your success, and not the selection of individual securities within an asset class. So a clueless investor who picked a S&P 500 index tracker for the last 10, 20 or 30 years will have beaten your returns, for all your self-professed cleverness.

[CliffEdge]

So it seems to me that it's as I suggested. A tiny punt - I accept that is my characterisation, but there is not a lot of conviction in a 2% investment - came good. That's not a game I am in. Do you have 50 investments. i.e. is 2% a normal size for you? That's more holdings than I could pay attention to. If you do, what percentage of them succeed?

I get running winners, but the idea of having 25% of my portfolio in a single company boggles my mind. Too strong for me.

It's terrifying to buy investments that have the potential to be a ten-bagger. Have you tried? Besides, there is often only a small window (e.g. Anglo American) so if you leg in like I do, it's hard to build up a big holding. 2% is the lower end of my full holding size as should be clear from my earlier post. 3-4% is typical but I also have large conviction positions, as I explained clearly one of my current multi-baggers took up some 10% of portfolio (and then trebled in size to >25%), it still takes up 20% of portfolio. Is that trivial to you? I do have around 25-30 stocks, some worth much rather more than 3% of the portfolio.

Even 3% is not trivial IMO. I leg in to many positions starting at a fraction of 1%. Then the value of those initial positions can fall. I have a rule that if the price has fallen I only add in exceptional circumstances, like the fall is very large or enough time has passed, usually six months or so. e.g. been building a position in Marstons which I think can multibag. It's just reaching 1% invested but the value has declined so somewhat less than 1% now. So you should take account of the fact that a position may be 3% before it multi-bags, but the value invested could be more like 6-10%.

Can you put 10% into a position and see it decline to 3% then throw in another 7% without flinching? How many multibaggers have you had, incidentally, while you are busy delivering these lectures?

GS
EDIT: Recent multibagger was 12% of portfolio when I stopped buying in 2021. It had already doubled and trebled again, plus another +/-100% of purchase cost in dividends so far.

I cleared out the hall cupboard recently.

[88V8]

It's terrifying to buy investments that have the potential to be a ten-bagger.

The problem is that you are trying to advocate an investment strategy that you claim will beat the index. But you cannot actually describe it in a way that anyone can understand or follow.

GS spent considerable time singing the praises of the Manchester PIBS, which I would guess are his 20%, and thanks to him they are a multi-bagger for me.
So one can follow if one is paying attention.

I cleared out the hall cupboard recently.

Any interesting skeletons?

V8