Investment opportunity in debt funds unveiled - Guidelines for investment outlined
In the world of finance, two major markets – bonds and equities – are currently displaying a stark contrast in their outlooks, according to Howard Marks, a US billionaire known for his expertise in the fixed income sector.
Marks, who has over 55 years of experience in the investment industry and has witnessed multiple market cycles, recently penned a memo titled "Sea Change". In it, he discussed the shifting landscape for bond and equity returns, noting that higher interest rates have diminished the traditional advantage of stocks over bonds.
The Institute of International Finance (IIF) reports record-high global debt in 2025, which adds complexity to this picture. High global debt levels increase vulnerabilities in financial markets, particularly for bonds. IIF's chief economist has warned that shocks in debt markets could lead to significant financial stress akin to an oil price shock, underscoring the risks inherent in the debt-heavy environment.
On the bond front, institutions like Vanguard are recommending a higher allocation to bonds (70%) versus stocks (30%) for the next decade due to stretched stock valuations and moderating equity returns. The bond market has recently signaled a turning point with a positive Treasury yield curve slope and falling yields, favoring intermediate-term, high-credit-quality bonds but advising caution on lower-credit and high-yield bonds amid concerns about economic slowdown.
Sequoia Economic Infrastructure, for instance, has an average investment of £23.7 million with a weighted average maturity of 3.5 years. Just under two-thirds of the debt is senior and secured against an asset, with 41% on floating interest rates. The floating-rate nature of Sequoia's portfolio, coupled with the relatively short duration of assets, means duration risk is relatively low.
On the other hand, the equity market is more optimistic but contends with overvaluation and the risk that slowing growth (if bond market predictions are right) could lead to a market correction. Syndicated loans, financing offered by a group of lenders, are a significant chunk of funding in the UK corporate debt market.
The current bond market outlook is generally more cautious and sees slowing growth and potential rate cuts, whereas the equity (stock) market is more optimistic, suggesting accelerating growth. This divergence reflects differing economic expectations and has significant implications for asset allocation.
In summary, the bond market currently appears more cautious and defensive, pricing in slowing growth and rate cuts amid high global debt risks, while the equity market remains comparatively bullish but vulnerable to a growth slowdown. This divergence aligns broadly with Howard Marks' caution about risk cycles and emphasizes the need for balanced, risk-aware portfolio positioning in 2025.
Individual investors typically do not have access to wholesale bonds, which often have minimum denominations of £100,000. However, there are 24 listed debt and lending trusts, with GCP Infrastructure Investments, Sequoia Economic Infrastructure, and BioPharma Credit being the largest. These trusts provide a more accessible way for individual investors to invest in the bond market.
As always, investors should be concerned with two metrics when assessing risk: duration risk and credit risk. Duration risk is a measure of a bond's price sensitivity to changes in interest rates, while credit risk represents the likelihood of the issuer making timely interest payments and repaying the principal amount at maturity.
[1] Source: Marks, H. (2025). Sea Change. [Memo] [2] Source: Institute of International Finance (IIF) (2025). Global Debt Monitor. [3] Source: Vanguard (2025). Investment Strategy: Asset Allocation. [4] Source: Bank of England (2025). Corporate Debt and Liabilities. [5] Source: Financial Times (2025). Bond Market Signals Turning Point.
Investors who wish to participate in the bond market may find investment trusts more accessible, as these trusts allow individual investors to invest in a diverse bond portfolio. For instance, GCP Infrastructure Investments, Sequoia Economic Infrastructure, and BioPharma Credit are among the largest listed debt and lending trusts.
Cautious investors would take note of Howard Marks' cautious bond market outlook, which reflects slowing growth and potential rate cuts in response to high global debt risks.
Investors should also pay attention to the two primary risks associated with investing in bonds, namely duration risk and credit risk. Duration risk refers to a bond's price sensitivity to changes in interest rates, while credit risk represents the likelihood of the issuer making timely interest payments and repaying the principal amount at maturity.
