Uncertain markets, stagflation fears support more diversified approach

Nehemiah Richardson,

Diversification is becoming more important as markets navigate significant uncertainty and persistent inflation, including potential for ‘stagflation’, according to Pengana Credit CEO, Nehemiah Richardson.

“There are conflicting signals in markets. On the one hand there is optimism that a soft landing can be achieved, while the inflation hawks suggest potential for a bumpy ride.

“If we have learned anything from the last few years, it is that things can change quickly and market swings can be extremely volatile.”

Mr Richardson said there is an argument to diversify into asset classes with a lower correlation to listed investments, such as global private credit. “Equities have run hard both locally and overseas, and listed credit market spreads have contracted accordingly.

“Yet there is no clear direction. Inflation numbers are proving stubborn and are confounding interest rate cut expectations, which keep being pushed out.

“Diversifying returns across different investments, and the emergence of asset classes such as global private credit, adds another option to the investor’s toolkit.”

He said institutional investors had diversified into non-listed assets including global private credit for years, but that retail investors had limited access to such investments until recently. “We’ve seen institutional investors increase their exposure to global private credit due to the asset class’s attractive yields, low volatility and defensive characteristics.

“Institutional investors also like the access to floating rate yields in private credit, which provide protection from rising rates, and the low correlation to traded markets. It also offers great potential for capital preservation from strong underlying structural protections.

“Global private credit has been difficult to access for all but the largest investors for too long. It is pleasing to see this starting to change, with more options becoming available to Australian investors.”

Mr Richardson said that when considering global private credit investment options, diversification is important. “We believe to make the most of the attractive characteristics of the asset class, diversification is key to minimising downside risk and maximising returns through economic cycles. This means diversifying across geographies, industry segments, managers, strategies and individual loans.

“For example, the Pengana Global Private Credit Trust will be invested in 19 managers with over 2,000 individual underlying loans as part of a highly diversified portfolio across the US and Europe

“This level of diversification is a proven strategy for consistency of income returns, and to spread risk through the portfolio.”

The Pengana Global Private Credit Trust (ASX: PCX) is currently open to investors and targets a 7% annual cash distribution target yield, paid monthly, along with capital growth in the portfolio. It is also fully hedged back to Australian dollars.