Credit and debt important diversifiers: Perpetual

With the typical balanced portfolio in need of more risk diversification and the traditional safe haven of bonds offering little yield, investment grade credit and private debt are a good way to gain that diversified risk management, according to Perpetual Investments head of balanced funds Michael Blayney.

The typical industry super fund balanced portfolio or financial planning balanced portfolio will have around 90 per cent of its investment risk in the equities component, but with 10-year yields at 2 per cent or lower in most markets, there is currently no compelling reason to invest in developed market sovereign bonds - an area where Perpetual currently has no exposure, Blayney said.

But investment grade credit, despite historically low yields, saw an enormous spike over the global financial crisis, and with another recent spike there is currently compelling value in investment grade credit, Blayney said.

"The good thing about credit is that you get paid back; particularly with investment grade, the certainty of getting paid back is high. Investment grade credit deserves a larger part of investors' portfolios," Blayney said.

Perpetual is still neutral towards equities, although they seem quite cheap because there are still plenty of risks and headwinds, he said. 

"What we've done is what I think a lot of institutional investors have done - we've pursued more alternatives," he said.

Although alternatives can be a double-edged sword and many alternatives tend to be repackaged equities or credit in a different form, there are some compelling opportunities - particularly in private debt in areas such as infrastructure debt and commercial mortgages, he said.

It is also important to have a large exposure to floating rate credit, which is something Perpetual has done over the past few years because over meaningful time horizons it enhances the chances of meeting an investment objective, of getting paid back, and meeting risk premia, he said.