At the heart of Marks’ argument is the notion that risk is more than a tool for achieving gains. It widens the spectrum of possible investment outcomes and increases the likelihood of more severe adverse scenarios. He explains, “As risk increases, not only does the expected return increase, but the range of possible outcomes becomes wider, and the bad outcomes become worse.” 


This insight is particularly significant for local fixed-income investors, operating in South Africa’s fixed-income space, as we have to navigate a complex landscape defined by sovereign debt concerns and broader macroeconomic pressures. With the country’s economic uncertainty and fiscal challenges, investors need to continuously account for the possibility of unfavourable outcomes. Marks’ insights remind us that successful investing goes beyond choosing the right assets – it extends to ensuring that one has an understanding of how risk shapes return expectations and portfolio outcomes.


Given this reality, a systematic approach to asset allocation is essential. Understanding the fund mandate and then establishing clear risk targets allows investors to balance potential rewards with the possibility of downsides. This approach is especially crucial in the fixed-income market, where understanding the underlying assets and macroeconomic context can mitigate risks while still pursuing yield. This discipline ensures that asset allocation decisions are framed within a broader risk management strategy for South African investors, reducing exposure to volatility and enhancing long-term stability.


Marks further distinguishes between efficient and inefficient markets, challenging traditional finance theory, which posits that markets reflect all available information. In reality, inefficiencies exist, even in developed markets, creating both challenges and opportunities. South Africa’s fixed-income market is no exception, offering opportunities for managers to exploit pricing misalignments and market dislocations. However, this also requires disciplined risk management, which means knowing which risks are worth taking and ensuring that the price paid for those risks is fair.


At Prescient Investment Management, we believe South Africa’s fixed-income market provides investors with a host of opportunities for active asset allocation. Despite the country’s economic headwinds, the market presents compelling opportunities, both in absolute terms and relative to global peers. By staying agile and disciplined in managing risks, we believe South Africa offers active investors a valuable playing field.


While equity markets often come under the spotlight with their potential for rapid growth and outsized returns, it is essential not to overlook fixed income's critical role in portfolio construction. Equities may be seen as the “exciting” part of investing. However, the characteristics of fixed-income investments should not be overlooked. Debt instruments, including sovereign bonds, corporate debt, or inflation-linked securities, offer relatively stable returns compared to equities. 


However, debt instruments do come with their own set of risks, such as credit risk (the chance of borrower default), interest rate risk (sensitivity to rate changes), and liquidity risk (ease of trading these assets). Understanding and managing these risks is critical in constructing a resilient portfolio.


The interplay between fixed income and equities is vital to long-term portfolio success. While equities offer higher growth potential, fixed income provides a counterbalance, contributing consistent income with lower volatility. In the context of asset allocation, fixed income functions as a stabiliser on the risk-return continuum. This stability is crucial in achieving long-term client outcomes, especially during market downturns.


As Howard Marks highlights, a balanced portfolio requires carefully managing the trade-off between risk and reward.


At Prescient Investment Management, we approach fixed-income investing with this balance in mind. Our strategies go beyond chasing yield; we focus on the underlying drivers of return along with the associated level of risk (and volatility). By employing this approach, we ensure that our clients benefit from the stability of a broad range of opportunities and their associated liquidity (or lack thereof) and take appropriate risks that ensure that we do not neglect the growth potential.

Strategic asset allocation is the key to building portfolios that not only grow but endure. Howard Marks’ memo is a potent reminder that successful investing is about more than identifying opportunities—it’s about skilfully managing risk. In South Africa’s fixed-income market, this means making deliberate decisions that balance potential rewards with the likelihood of adverse outcomes. Whether through sovereign bonds, corporate debt, or other fixed-income instruments, these investments are pivotal in constructing portfolios resilient enough to weather various economic scenarios. 


Our approach combines systematic risk assessment with disciplined asset allocation to deliver consistent, long-term outcomes. By thoughtfully integrating diverse opportunities into our strategies, we harness the rewards of risk while managing its potential downsides with precision. It is our view that this careful balance of risk and reward lies at the core of successful investing.

 

Disclaimer

This document is for information purposes only and does not constitute or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investments. Opinions and views expressed in this document may be changed without notice at any time after publication and are, unless otherwise stated, those of the author and all rights are reserved. The information contained herein may contain proprietary information. The content of any article released or posted by Prescient is for information purposes only and is protected by copy right laws. We therefore disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information. 


Prescient Investment Management (Pty) Ltd is an authorised Financial Services Provider (FSP 612). Please note that there are risks involved in buying or selling a financial product, and past performance of a financial product is not necessarily a guide to future performance. The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. There is no guarantee in respect of capital or returns in a portfolio. No action should be taken on the basis of this information without first seeking independent professional advice.