Following the money with private credit

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Asset allocation plays a critical role in growing personal wealth.

We all dream of picking 'the next big investment' that fast-tracks our wealth. In reality though, these investments rarely come along.

Fortunately, building personal wealth doesn't have to rely on finding the 'needle in the haystack' or next red hot investment.

sponsored following the private credit money

Research shows that asset allocation - how your wealth is spread across a range of investments - goes a long way to shaping the income and lifestyle you achieve.

That being the case, it's important to get asset allocation right.

And it all boils down to the blend of risk and return - as well as diversification - that lets you achieve long term goals.

Trends in asset allocation over time

Once upon a time, investing was a lot simpler than it is today.

Investors basically had a choice of cash, bonds, shares and property. And investment decisions were often made with one eye on the economy.

During an economic slowdown, for example, shares might underperform bonds and cash. Conversely, shares became more attractive during periods of economic growth.

Fast forward to today, and the investment landscape has shifted.

Asset allocations are evolving

A key change is that the number of companies listed on the Aussie sharemarket  (ASX) is falling year by year.

In September 2024, the ASX offered 1998 listed stocks, down from over 2300 in 2022.

This is part of a global trend​​.

The World Economic Forum reports a drop of nearly 75% of companies listed on the main market of the London Stock Exchange between the 1960s and the end of 2022.

Similar data for public companies in Germany shows a drop of more than 40% since 2007.

In the US, there's been around a 40% drop since 1996.

One factor behind the decline in listed entities is the availability of private credit, which allows high quality companies to raise funds more efficiently, and often at a lower cost, through non-bank lenders than through public sharemarkets.

Far from reducing options for investors, the shift to private credit is offering a whole new world of investable assets.

But it doesn't end there. Evolving technology, the growth in residential and commercial property, and the sheer volume of funds being funnelled into infrastructure projects all present new investment opportunities. La Trobe Financial has seven decades of experience managing the asset class.

And this is where things get really exciting for retail investors.

Australians are embracing the opportunities

Whether it is secured property loans or lending to corporations, private credit is giving retail investors a chance to earn higher risk-adjusted returns than are available in the public markets (such as sharemarkets).

In fact, the global private credit market is expected to grow from $US1.5 trillion ($2.2 trillion) in late 2023 to $US2.6 trillion ($3.9 trillion) by 2029.

Already, La Trobe Financial has seen considerable investor appetite for its real estate private credit opportunities here in Australia.

As a guide, over the financial year ended 30 June 2024, total funds invested in La Trobe's 12-month Term Account rose from $7.2 billion to $8.3 billion, with many investors likely attracted by our long history of low volatility income.  The 12 Month Term Account has performed across all economic cycles since its inception in 2002, and currently offers a monthly, variable return of 6.75%pa.

Recognised as the 'Best Credit Fund - Mortgages' by Money magazine for 15 consecutive years, our 12-month Term Account works differently from a bank savings account.

Account holders' funds are put to work across more than 9,000 high quality loans diversified by sector, location and borrower type, providing diversification and inflation-responsive returns without the volatility seen in sharemarkets.

SMSFs could be missing out

While retail investors are reaping the rewards of private credit, many self-managed super funds (SMSFs) could be missing out.

The latest data from the Australian Taxation Office (ATO) shows SMSFs have a near-record high of $293 billion invested in Australian and overseas shares, accounting for around one-third of total SMSF assets.

This asset concentration is leaving SMSFs vulnerable to an equity market correction.  And with the sector holding a record $162 billion just sitting in cash accounts, investors need to ensure they have a wide mix of defensive assets in their portfolio.

Private credit, which is a type of fixed income investment, provides yield while acting as ballast for a portfolio.  It has shown to add diversity to help stabilise returns through various cycles, while providing a defensive buffer against market fluctuations.

These are valuable qualities for any SMSF portfolio, meaning private credit has a vital role to play within SMSFs - particularly as interest rates are expected to fall, and the economic and geopolitical outlooks are uncertain.

How investors are favouring an 'ark' to get rich slowly

A growing number of Australians are exploring the advantages of private credit.

Sure, it's a 'get-rich-slow' pathway.

But the growth story of private credit is ongoing as structural change reshapes investment opportunities.

It could be time to rethink the composition of your portfolio.

As leading investor Warren Buffet has noted, "Predicting rain doesn't count: building the ark does".

Every decade will throw up one or more crises. There is always another one around the corner. So, build an ark, with a portfolio that is diversified across a variety of asset classes including those that perform at all points along the economic cycle.

Any advice is general and does not consider your personal circumstances. Past Performance is not a reliable indicator of future performance. La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence No. 222213 is the responsible entity of the La Trobe Australian Credit Fund ARSN 088 178 321. It is important that you consider the Product Disclosure Statement (PDS) before deciding whether to invest or continue to invest in the fund. The PDS and Target Market Determination are available on the La Trobe Financial website.

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Chris Paton is chief investment officer at La Trobe Financial. He has more than 14 years' experience in banking, asset management and financial services and has held a number of senior roles since joining the business in 2017. Prior to joining La Trobe Financial, Chris worked in law specialising in the banking and finance sector. He holds Bachelors in Commerce (Distinction) and Law (Hons).