According to billionaire investor Howard Marks, investors seeking more stable, longer-term returns should focus on credit rather than relying on the S&P 500 to bring them there.
“For the next ten years, the S&P will not provide the historically high return of 10% annually. In an interview with India’s Economic Times published Friday, Marks, co-founder and co-chairman of Oaktree Capital Management, stated, “You will receive something less, and if that is true, then the returns described from credit are quite competitive and dependable.”
“Historically, credit investments have yielded low returns. The roles have now been reversed. “Private credit is at 9% to 11%, while high-yield bonds are at 7%,” Marks stated. “These are very good absolute returns and competitive with equities earned contractually and independently.”
Marks elaborated on that opinion in a blog post that was published on Thursday, stating that credit returns from the latter are less prone to fluctuation and unpredictability. According to historical statistics, the S&P 500’s current price-to-earnings ratio of about 21 has provided returns of between -2% and 2% annually over the past ten years, he said.
According to him, this is because the yield on the 10-year Treasury BX:TMUBMUSD10Y is higher than the earnings yield of the S&P 500, which is the inverse of the P/E ratio and represents earnings to price. “And if Treasurys are poised to out-yield the S&P 500, high-yield bonds will do so to an even greater extent.”
“The bottom line is that credit presently offers a better deal than equities … even at today’s spreads,” he stated. Although credit isn’t a given these days, it is reasonably priced in relation to its relative returns and gives strong absolute returns. Even though yield spreads are tight, this is still the case.
“We might have an opportunity to buy at wider spreads and greater returns, but we might not. However, that choice by itself does not justify not raising credit allocations today,” he stated.
According to him, this perspective extends beyond high-yield bonds to include private lending, senior loans, mezzanine debt, asset-backed loans, and collateralized loan obligations.
Marks is especially interested in private credit, which includes debt that is not publicly traded and nonbank lending. According to him, the asset class mostly developed in 2011 as a result of banks facing more stringent lending requirements following the 2008–2009 global financial crisis. Since then, the economy has not experienced a recession, therefore private credit has not been put to the test in a more challenging setting.
But he doesn’t think private credit “represents a systemic risk,” because private-loan owners and portfolios are much less leveraged than banks were in the years prior to the crisis, and because loan holders haven’t sold each other default protection or other hedging, unlike banks did in those years.
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Marks also discussed global and market dangers in his interview with the Economic Times. Concerns over President Donald Trump’s tariffs and other measures have caused stocks to plummet this week.
According to Marks, the nation’s leader does have “very good objectives” in attempting to eradicate waste, fraud, and abuse, and he believes that Republicans and President Trump are more pro-business than Democrats or the previous government.
“On the surface, there is nothing wrong with Trump’s desire to put an end to it. However, the issue will ultimately boil down to a) implementation and b) consequences,” Marks stated.
However, he expressed his preference for “fine distinctions made… done carefully without too much collateral damage.”
“Today’s future is remarkably uncertain. According to Marks, there is likely a higher chance of tail occurrences than normal in both directions: negatively if the implementation fails and positively if it succeeds.
