Howard Marks still believes in U.S. exceptionalism — but perhaps not by as much

Howard Marks and Sheikh Saoud Salem Abdulaziz Al-Sabah, speaking at the Qatar Economic Forum, affirmed the U.S.'s continued attractiveness for investors, citing its dynamic economy and rule of law, though Marks questioned if its dominance is as strong as in the past. While Al-Sabah stated underweighting America is risky, he expressed concerns about the private equity sector, highlighting issues such as poor underwriting, lack of exit optionality, and size drift as funds struggle to find buyers for increasingly large assets nearing the end of their fund life cycles.

Analysis

Prominent investors Howard Marks of Oaktree Capital Management and Sheikh Saoud Salem Abdulaziz Al-Sabah of the Kuwait Investment Authority (KIA), speaking at the Qatar Economic Forum, reiterated the U.S.'s enduring appeal as a primary investment destination, attributing this to its dynamic economy, free-market principles, rule of law, and innovation. While Marks acknowledged the U.S. as the "destination of choice," he also introduced a note of caution, questioning if its pre-eminence remains as absolute as historically perceived and citing concerns about dependability, though he conceded that large global funds face challenges in significantly reducing U.S. exposure due to a scarcity of comparable alternatives. Sheikh Al-Sabah, managing director of the $1 trillion KIA, strongly advised against underweighting U.S. assets, emphasizing the breadth and depth of the U.S. market, and confirmed KIA's commitment to its existing U.S. holdings, while remaining non-committal on new increases. The article presents contrasting market data: the iShares MSCI All-World ex-U.S. ETF has appreciated 14% year-to-date, significantly outpacing the S&P 500’s 1% rise, even as the S&P 500 reportedly rallied to near 6,000 in response to a partial tariff rollback. However, Sheikh Al-Sabah expressed significant apprehension regarding the private equity sector, terming it "in trouble" due to deteriorating underwriting standards over the recent 5-10 year period, constrained exit optionality, and "size drift"—where funds have scaled to $10-20 billion with a static number of portfolio companies, thereby requiring substantial realizations (e.g., $40 billion for a 2x return) from an uncertain buyer pool as they near their fund life cycle conclusions.

Key Decisions for Investors

• Investors should acknowledge the prevailing view that the U.S. remains a core strategic allocation, with substantial underweighting considered risky by influential asset managers due to limited large-scale alternatives, despite some emerging questions about its undiminished global pre-eminence.
• Heightened due diligence is warranted for private equity allocations; specifically, investors should critically assess underwriting standards, exit viability for large assets given current market dynamics, and the impact of 'size drift' and fund life cycle pressures, reflecting concerns voiced by the Kuwait Investment Authority.
• The reported divergence in year-to-date performance between ex-U.S. equities (iShares MSCI All-World ex-U.S. ETF +14%) and the S&P 500 (+1%), alongside a recent U.S. market rally, suggests that while U.S. exposure is key, strategic international diversification should be considered for potential alpha and risk management.