Private credit is bridging the gap to help sustain investing for innovation and growth as global turbulence and uncertainty rises.
Presented by Montgomery Investment Management
Is it time to rethink traditional portfolio construction? For decades, a 60-40 mix of stocks and bonds has been a core investment strategy — the gold standard for balancing growth and stability. However, when interest rates were increased by central banks in 2022, amid accelerating inflation, the “protective” bonds component actually compounded investors’ problems.
“As stocks went down, bonds went with them,” says Roger Montgomery, founder and chairman of Montgomery Investment Management (MIM). “This prompted many sophisticated investors to look for alternatives and found that, without that public market exposure, private credit could provide better defensive diversification.”
An alternative to fixed income
Carefully selected private credit offers an alternative to traditional fixed income investments such as government and corporate bonds — albeit with a different risk and return profile. And as Montgomery points out, investing in private credit doesn’t mean being out of the stock market.
“What investors and their advisers should be doing is regularly rebalancing their portfolios to ensure the mix of investments matches their personal risk level and investment horizon,” says Montgomery.
“For example, right now there’s a case for reallocating profits from big artificial intelligence (AI) technology stocks. These companies have delivered strong gains over three years of sustained performance, but they’re now trading at elevated price-to-earnings ratios and there’s a risk they won’t make enough money to generate a decent return on the trillions they are spending to build out the infrastructure. It makes sense to consider smaller-cap companies with the potential for growth and better value.”
Alternatives, such as arbitrage funds that profit from heightened market volatility could also play a role in diversification and as a source of uncorrelated returns. However, carefully selected private credit stands out for its ability to deliver regular monthly income while maintaining capital stability, especially if conditions become turbulent.
Persistent inflation pressures, an AI bubble, uncertainty around interest rates and geopolitical tensions affecting global trade are all contributing to the unpredictability. Stretched equity valuations and uneven earnings growth have also made the markets more sensitive to economic data and government or central bank decisions.
“It’s hardly surprising that stability is a top priority for many investors,” says Montgomery.
A different approach to private credit
Roger Montgomery has spent three decades in funds management and related activities, equities analysis, equity and derivatives, trading and stockbroking. He is the author of the bestselling guide to value investing, Valueable.
When he established MIM in 2010, his goal was to deliver superior long-term investment outcomes for clients and their advisers.
“There’s a misconception that all private credit providers are the same,” he says.
“Our private credit partner addresses the concerns often raised about this space.”
As part of MIM’s strategy for mitigating sector-specific shocks, none of the private credit funds they offer is exposed to construction, which has seen significant losses this year. Investors also enjoy considerable liquidity.
“It’s common for a private credit fund to lend money for one, two or even three years,” says Montgomery. “There could come a time when a lot of investors wanted to retrieve their money at the same time. If that happens, the managers might ‘gate’ their fund, blocking redemptions until the term of the loans expire. Our funds have loans with average terms of less than six months, and many have less than three months. In today’s environment of heightened uncertainty, that can be very appealing to investors.”
Widespread diversity offers greater security.
“Rather than a concentrated pool of very large loans, our funds have between 10,000 and 13,000 very small loans,” says Montgomery. “They have an average value of about $140,000 and all are secured. An isolated issue is unlikely to affect overall performance.”
MIM has also been around long enough to navigate different economic cycles, including the impact of COVID.
“One of our private credit funds has been running for eight years and has generated returns similar to the S&P/ASX200 stock market index but has not experienced a negative month,” says Montgomery. “It is currently generating returns of just over nine per cent per year (net of fees and assuming reinvestment of distributions) and monthly cash income.”
All of the funds distributed by MIM are also externally credit rated, providing investors with an independent assessment of risk and quality. Some other private credit funds “mark their own homework”, says Montgomery.
Opportunities beneath the radar
Montgomery sees a wealth of high performing funds flying beneath the radar.
“Whether it’s private credit or arbitrage funds, investors could benefit by digging a little deeper to investigate some of these opportunities,” he says.
“Even advisers might be unaware of them, because they’re simply too small to attract the interest of large, established advisory firms that need to place large amounts of money with a fund. It could be that they're good enough, just not big enough. But they’re out there, and they might be the right fund for the next season in markets.”
For more information about MIM and the private credit funds they offer, visit their website or call 02 8046 5000.
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