Howard Marks: How to Allocate capital intelligently

In his latest article titled “Ruminating on Asset Allocation”, Howard Marks discuss the key concepts and strategies related to asset allocation in investment portfolios. Overall, Howard provides insights into how investors can approach asset allocation by focusing on the fundamental differences between ownership and debt, understanding their own risk preferences, and considering current market conditions.

Here are the main takeaways:

• Asset Classes Simplified: The memo posits that fundamentally, there are only two asset classes: ownership (equities) and debt (fixed income). Ownership involves taking on more risk for potentially higher returns, while debt offers more predictable, albeit lower, returns.

• Risk Posture: A crucial decision in portfolio management is determining the balance between aggressiveness and defensiveness, or offense and defense. This involves choosing how much emphasis to place on capital preservation versus growth, which are often mutually exclusive goals.

• Market Efficiency and Alpha: The article challenges the academic view of market efficiency, suggesting that markets are not always “right” and that skilled managers can achieve superior risk-adjusted returns (alpha). This raises questions about whether to adjust risk levels to capitalize on perceived opportunities.

• Current Investment Environment: The memo highlights the attractiveness of non-investment grade credit in the current market environment, noting that returns are higher than in previous years and competitive with historical equity returns. It suggests that investors consider increasing their allocation to credit if they seek dependable returns with limited volatility.

• Asset Allocation Strategy: The article emphasizes that asset allocation should be tailored to individual circumstances and risk tolerance. It is not about maximizing wealth but optimizing it in a way that aligns with an investor’s goals and needs.