When defensive assets stop behaving defensively

For decades, building the defensive portion of a portfolio was relatively straightforward. Growth assets generated capital appreciation. Defensive assets generated income and helped protect capital when markets became volatile.

While no asset class was immune to risk, investors could generally expect bonds and other defensive allocations to provide stability when they needed it most. That assumption has been increasingly challenged.

The 2022 bond market sell-off was a reminder that defensive assets do not always behave defensively. The Bloomberg AusBond Composite Index fell roughly 11% from its October 2021 peak. That drawdown was only matched by the 1994 bond-market rout, which fell approximately 8% over 10 months.

For calendar year 2022, the index finished down 9.7%. The median Australian fixed interest manager finished broadly in line. Active management did not insulate investors from a duration-driven sell-off.

Balanced investment portfolios offered no protection during this period. Australian and global shares fell simultaneously, stripping away the diversification benefit advisers and clients had historically relied on.

Conditions have evolved. The RBA cash rate cycled from an emergency low of 0.10% in November 2020 to a peak of 4.35% in November 2023, eased to 3.60%, and climbed again to 4.35% in May 2026. But the underlying question for advisers remains the same: if defensive assets exist to provide stability, how should advisers assess them when the macro backdrop keeps shifting?

At the time of writing, a cursory look at the returns of an ETF index tracking the Bond Composite shows a 10-year return of only around 1.80%.

The label matters less than the behaviour

One of the lessons from recent years is that the label attached to an investment may be less important than how that investment behaves under stress.

An asset can be classified as defensive, yet still be highly sensitive to macro events, interest-rate movements, inflation expectations, liquidity conditions or market sentiment. Equally, an investment that sits outside traditional defensive allocations may exhibit characteristics that contribute to portfolio stability.

For experienced wealth advisers, momentum is continuing to shift from defining asset categories to portfolio outcomes. Rather than asking whether an investment is defensive or growth, the more useful question is how it is likely to perform across different market environments within the particular portfolio.

The challenge for income-focused investors

According to APRA, there are roughly 23 million Australian superannuation accounts. Together with more than 1.2 million SMSF members and retirees who rely on their portfolios to fund regular drawdowns, this makes the question of defensive asset performance particularly relevant.

For those in or entering retirement, outperforming markets matters less than maintaining a reliable income stream while managing capital risk.

In that context, income consistency becomes a more important benchmark for investors. Defensive characteristics need to be true-to-label rather than simply a target. The highest available (potential) yield is also not always the most attractive outcome if it means accepting capital erosion from time to time.

Higher yields are usually compensating for something – greater credit risk, lower liquidity, longer duration, leverage, or concentration in cyclical sectors. With the 10 year Australian Government bond yield having risen by more than 400 basis points since 2020, the headline number on offer across credit products is materially higher than five years ago.

The relevant question is not how much income an investment generates today, but how reliably it can sustain that income as the cycle turns.

Diversification remains important but it may need to evolve

The principle of diversification remains as important as ever.

However, diversification is not simply about holding a larger number of investments. It is about combining assets that respond differently to economic events and market cycles.

As a result, some investors are broadening their definition of defensive assets and considering a wider range of income-producing investments alongside traditional fixed income allocations.

The objective is not to replace established portfolio construction principles, but to strengthen them by introducing additional sources of income and return that may behave differently through the cycle.

Why Alternative income solutions are attracting attention

One consequence has been the rapid growth of Alternative Income in the form of private credit. In November 2025, ASIC’s REP 820 estimated retail and wholesale private AUM at $200 billion.

This growth has been a function of the continued development and sophistication of lending markets both in Australia and across the globe. It has also been driven by reduced bank appetite to operate in certain lending markets.

Products supporting increased investor demand have given advisers and clients a wide range of options to consider.

The attraction of floating rate structures is their ability to reset with the cash rate. This gives advisers confidence to offer clients stability during periods of rising interest rates. Returns are typically driven by contractual borrower repayments, security over real assets, and underlying cash flows rather than daily market pricing.

However, private credit is not immune from risk – borrower default, liquidity constraints, valuation discipline and manager execution all matter.

Ultimately this is credit risk and should be treated as such. ASIC’s REP 820 made the same point in regulatory terms: not all private credit funds are created equal. The regulator found material variance across the sector in disclosure, valuation, liquidity and credit risk management.

Notwithstanding this, the return profile and the low cycle of defaults has led many advisers to treat quality private credit as a complementary source of income within a broader defensive allocation. This may sit alongside fixed income and cash.

For advisers, that reinforces a familiar message. The quality of the underlying loan book, lending standards, security position and governance framework are what determine outcomes through a full credit cycle.

The role of defensive assets has not disappeared. But the environment in which they operate has changed.

For investors seeking stability, income and capital risk management, the challenge is no longer simply identifying defensive assets. It is understanding how those assets are likely to behave when market conditions become less predictable.

For advisers assessing income-producing investments, governance, underwriting discipline, portfolio construction and capital management matter far more than headline yield.