Finding Consistency & Low Correlation in Private Credit

Investor interest in private credit is growing, prompting many to explore how it fits within their broader asset allocation. Here, we examine two important features: correlation and consistency, and how to pick a manager with a track record that can deliver both.

For sophisticated investors, private credit can play a meaningful role in meeting income objectives. In this article, we’ll look at two important features of private credit: low correlation to the equity market and a low to moderate correlation with listed Australian and global bonds. Then, we’ll examine how to find a manager that can deliver on both these benefits.

Low correlation makes for a powerful diversifier

One of the reasons that investors are turning to different segments of private credit is to access a variety of ways to generate stable income returns. This is particularly appealing when you consider private credit’s low correlation with other markets.

In other words, returns aren’t necessarily impacted by the same drivers that move share prices, such as investor sentiment or earnings cycles. Instead, returns are linked to factors such as borrower repayments on loans made to companies and individuals, and the value of underlying security.

Unlike listed markets, which can experience volatility due to a number of factors, private credit tends to exhibit relative capital stability and consistency of income, provided the credit assessment of borrowers is robust and the associated security assets remain sound. This can make private credit a useful diversifier in a portfolio, particularly when equity or bond markets are volatile.

Consistency of income

For a great many investors, consistency of income is just as important as the return itself – particularly those in retirement or seeking a stable additional cash flow. That’s one reason why private credit investments have gained in popularity over recent years. A proven ability to deliver month-on-month income is a key advantage of certain private credit funds.

This is especially true when considering the re-emergence of global inflation in 2022 onwards, which showed the vulnerability of defensive assets like government bonds and cash in investment portfolios. As inflation surged and the RBA responded with aggressive rate hikes, bond yields spiked and prices fell sharply, breaking the usual negative correlation with equities. This unusual environment meant that both bonds and equities delivered disappointing returns, challenging the effectiveness of the classic 60/40 portfolio and prompting investors to look beyond traditional defensives for protection.

However, investors must choose their private credit investments carefully, including evaluating the manager and the fund’s ability to meet returns and redemptions reliably.

A key component of this is looking at whether the underlying investments are actually income-producing – an important feature when looking for reliability of income. For example, assets still in development may not have a steady source of income just yet, especially compared to investments linked to a steady income stream such as mortgage repayments secured by a tenanted residential or commercial property.

As with any investment, risks apply. Investors should refer to the relevant Information Memorandum for a full outline of the risks associated with Thinktank’s investment products.

Picking a manager

Depending on an individual’s specific circumstances and risk appetite, some private credit funds will be more appropriate than others, while many may not be appropriate at all. Determining the most suitable option requires careful research and an informed understanding of the fund’s product disclosures along with its historical context and performance.

Private credit often looks attractive on paper, but the real challenge lies in assessing manager credibility and structural safeguards.

For example, Thinktank has a record of consistency across multiple market cycles from 2006 onwards, which is a reflection of disciplined lending practices and deep risk management capabilities.

This approach has earned Thinktank’s Income Trust a ‘favourable’ rating from SQM Research, which noted its consistent returns and absence of capital loss or defaults. Importantly, the fund has consistently met its target returns, with monthly income paid reliably to investors throughout its history.

Private credit investment can offer consistent income and capital preservation, with a low to moderate correlation with both Australian and global bond markets as well. Low correlation of investments can help provide investors with greater consistency across their portfolio. However, it is important for investors to pick a manager which can deliver on both the consistency of income and security of capital.

Disclaimer: This article is for general information only and does not constitute financial advice. It has been prepared without taking into account your objectives, financial situation or needs. Past performance is not a reliable indicator of future performance. Thinktank’s investment products are available to wholesale investors only (as defined under the Corporations Act 2001 (Cth)).