A new wave of opportunity seems set to flow into private credit markets, which could enhance risk-adjusted returns and diversify portfolios. What's driving this potential?

Bond yields are up—that’s good news for income investors, but secular forces still pose headwinds for inflation-adjusted returns. We think an efficient way to generate income is by carefully assembling mixes of interest-rate and credit building blocks—and incorporating private-market exposure for additional diversification and return potential.

Tight lending standards and rising yields, along with concern about an approaching turn in the business cycle, have put opportunistic credit in the spotlight. But what, exactly, does opportunistic credit mean? Here’s how we look at it—and what we think it may offer investors.

While 2022 has been a challenging year for nearly every segment of the capital markets, it comes with a silver lining for income investors: higher yields.

Investors naturally gravitate toward higher-income segments as a way to boost traditional core bond yields.

Interest rates are rising, and bond investors are worried about the potential impact on their portfolios. But they’re not entirely at the mercy of the markets. 

The US high-yield market has staged a strong comeback since its downturn at the onset of the COVID-19 pandemic and—despite historically tight spreads—fundamentals for credit continue to improve. Along with a strong global economic recovery, credit spreads are getting positive tailwinds from declining default expectations, falling levels of distressed debt, and improving access to capital.

Many investors are somewhat skittish about illiquid alternatives because they’re worried about tying up their money for a long time in an investment that they can’t trade or exchange easily. However, illiquidity may actually work to investors’ advantage.

Alternative investments have the potential to enhance portfolio returns and reduce risk, but it isn’t easy to determine which alternative works best—and how much of it to own. To get accurate answers, it’s necessary to look beyond traditional asset-allocation approaches.

With the global economy moving into its late-cycle stages, we think it’s a good time to bolster portfolio inflation protection by embracing several recently unloved investments—including natural resources and commodities.

Emerging markets offer investors plenty of opportunity, but managing downside risk effectively is critical. A flexible framework that integrates multiple asset classes can help.