Credit's time: portfolio diversification reimagined in volatility

In an environment defined by persistent inflation, elevated interest rates and renewed geopolitical volatility, advisers are rethinking the traditional diversification playbook.

As equity markets flirt with all-time highs and bonds continue to offer only tepid relief, credit, particularly global, sub-investment grade credit, is emerging as a powerful and risk-conscious portfolio diversifier.

A fund built for the opportunity

According to Harrison Lane, investment director at Apostle Funds Management, advisers are increasingly turning to credit to deliver smoother returns, enhanced income and robust capital preservation. 

Apostle’s Diversified Global Credit Fund is emblematic of this shift. Built for advisers seeking access to deeper, more diversified credit markets, the fund targets global, sub-investment grade debt across public and private markets.

“We’ve designed this vehicle as an entry point to a much broader opportunity set than what is typically available in Australian credit,” Lane explains. “The aim is to generate higher yields than traditional fixed income securities, with lower volatility, with downside protection built in from day one”. 

Three allocations, one framework

At the heart of the fund are three complementary allocations: private credit, syndicated loans and dynamically allocated high yield and investment grade bonds.

Each plays a different role in the risk-return equation. Private credit provides yield and customisation. Syndicated loans bring liquidity and floating-rate protection. Dynamic asset allocation introduces a tactical overlay that enables risk to be dialled up or down depending on macroeconomic conditions. 

The case for going global and private credit

The case for global diversification in credit is particularly compelling. Lane is candid about the limitations of the Australian credit market, which is “narrow and highly concentrated in banks, miners and mortgages.”

Moreover, those mortgages are predominantly tied to two geographies: Sydney and Melbourne.

“By going global, we access a more sophisticated credit ecosystem and avoid overexposure to domestic economic cycles,” he says. 

Private credit has captured particular attention from asset allocators in recent years. While illiquidity and complexity can deter some investors, Lane sees them as opportunities for skill-based return.

Apostle allocates to specialist managers with deep sector expertise, especially in defensive real estate sectors such as medical offices, seniors housing and student accommodation.

“These are areas that are more insulated from the broader economic cycle,” Lane notes. “That resilience can help support stable income generation [OR ‘income streams’] with defensive characteristics.” 

However, manager selection is paramount.

“In private credit, you’re not just underwriting the underlying assets, you’re underwriting the manager.”

Apostle’s approach leans heavily on due diligence and a preference for managers with demonstrated ability to protect capital in dislocated markets. Their focus is on specialists with granular knowledge of specific subsectors, rather than generalists chasing yield across the board. 

Tactical flexibility without chasing risk

The flexibility built into the portfolio through its DAA sleeve allows the investment team to tactically tilt between high yield and investment grade exposures.

But this isn’t a freewheeling pursuit of yield. “We’re not interested in moving down the credit quality spectrum unless we’re being properly compensated,” Lane states.

“Right now, we’re favouring investment grade, because high yield isn’t offering the extra spread to justify the credit risk”. 

Where it fits in the portfolio

For advisers wrestling with asset allocation decisions, this strategy occupies a hybrid role. “It can be a diversifier today, but over time we expect it will sit in the core credit allocation,” Lane says. “It provides exposure to areas of the market that traditional fixed income doesn’t touch, while maintaining a relatively conservative risk profile.”

The fund has also been used as a defensive alternatives allocation, particularly for clients seeking capital preservation alongside return. 

Importantly, the fund complements not only traditional equity and bond exposures, but also other credit allocations. For clients already invested in Australian credit, ADGCF offers a way to enhance breadth and improve the overall risk-return characteristics of the portfolio.

For those with limited credit exposure, it’s a low-friction on-ramp to a global, floating-rate, secured debt strategy, wrapped in daily liquidity. 

Geographic breadth as risk control

Geographic diversification is another risk control lever. While the US syndicated loan and private credit markets remain dominant, Apostle is actively pursuing opportunities in Europe and other developed markets with sufficient liquidity and transparency.

“We’re already seeing regional dispersion in returns,” Lane notes. “Being able to allocate across jurisdictions is an essential part of managing that risk”. 

All of this sits within a robust risk management framework. Apostle’s investment process is built around three pillars: diversification across managers and sub-sectors, manager due diligence, and dynamic asset allocation.

“Our clients want downside protection, not just upside potential,” Lane says. “We’ve built the fund to deliver that in a repeatable, transparent way”. 

Credit’s central role

As advisers confront an investment landscape that is far more fractured than in years past, the traditional tools of portfolio construction may no longer be enough. Credit, once an afterthought or a niche allocation, is fast becoming a central piece of the portfolio puzzle.

For those willing to engage with the nuances of manager quality, sector selection and geographic breadth, credit offers not only protection, but genuine opportunity.

Lane puts it plainly: “In an uncertain world, credit allows you to stay invested while managing your risks. That’s the kind of resilience our clients are looking for.”