Greater volatility, greater opportunities?

Strap in - the increasingly uncertain world before us will lead to greater market volatility, says Howard Marks, co-founder and co-chair of one of SJP’s specialist external fund managers, Oaktree Capital. He says the strong influence of the US, led by a president who seems determined to be unpredictable, has resulted in unusually high uncertainty.

And markets are responding to this.

Market swings around the US tariff announcements have been a dominant story of the past five months. Right after the so-called Liberation Day announcements, Howard wrote to his own investors highlighting the impact of the tariffs, saying: “All norms have been overthrown. The way world trade has operated for the last 80 years may be of little relevance to the future. The impact on economies and the world at large is entirely unpredictable. We’re faced with large-scale decisions, yet again there are no facts or prior experiences on which to base those decisions.”

Yet through this uncertainty, Howard remains optimistic about the value bonds have for investors. And in the long-term, the noise of today will fade. When it comes to value, he believes areas like sub-investment grade corporate bonds still look attractive today – even if defaults rise considerably.

In talking with SJP’s CIO Justin Onuekwusi in May about the risks in today’s bond markets, Howard agrees the chances of companies not paying back their debt (defaulting) is higher than in recent years. This is due to rising interest rates, which in tough economic times make it difficult to pay interest on loans. But, he argues, the yield available on bonds today is sufficiently attractive even with that threat. “If you can get annual returns of around 6-8% a year in today’s market, with the kind of uncertainty we face, that’s great.”

Investors need to remember bonds are called fixed income for a reason – the outcome is fixed. You know exactly the return you’ll get (yield) if they keep their promise to pay back your money at a specified date. Companies with debt rated as sub-investment grade (aka high yield, meaning they are rated as riskier than others of default) pay even more as an incentive. And even though the promise of a high yield company is less ironclad, the returns they offer in exchange for that uncertainty is appealing.

Watch Justin and Howard's view on high yield bonds.

Describing risk tolerance as “how much volatility can you stomach”, Howard says investors should tune out the noise that causes the volatility. Describing his own investment philosophy, Howard says he tries to think about what the right thing is today for a future he can’t see. “Yesterday’s solution may not be the same as tomorrow. My job is to position capital to benefit from future events and yet we can’t predict the future.”

Some of the strongest emotions by investors are envy and FOMO (fear of missing out), Howard points out in an interview with SJP director of portfolio management Robin Ellis. “How can you be a good investor if you let those feelings control your decision making? The most important thing is not to get it right but to be steady and stay with it – it’s not about timing the market but time in the market that makes the difference.” People used to invest for years now they look at returns over shorter and shorter time frames, but it is still the long-term that matters most, Howard adds.

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