The 60/40 portfolio was once the cornerstone of disciplined investing—balancing equities for growth, fixed income for stability, and gold as a hedge against uncertainty. But in today’s structurally altered landscape, the traditional defensive playbook warrants a fundamental reassessment.
In recent cycles, the limitations of legacy asset allocations have become increasingly apparent. Elevated volatility, persistent inflation pressures, and rising correlations across public markets have challenged the efficacy of conventional diversification. Sophisticated investors are now reconsidering what a truly defensive allocation looks like—and many are finding the answer in private credit.
The defensive playbook has shifted
Historically, defensive allocations have skewed toward bonds and cash—assets presumed to offset equity drawdowns. Some investors have also held allocations to gold as a hedge. But in a world where monetary policy, inflation dynamics, and geopolitical uncertainty move markets in new and often correlated ways, these assumptions no longer hold.
This is not a call to abandon fundamentals, but rather to evolve them. Capital preservation, income generation, and downside protection remain core priorities—but the methods to achieve them must be more adaptive. The traditional 60/40 portfolio, while once fit for purpose, increasingly resembles a relic of a bygone era.
Private credit: a contemporary defensive allocation
Against this backdrop, private credit—particularly real estate-backed lending—is emerging as a compelling alternative. Australia's private credit market has now surpassed $205 billion, with commercial real estate credit accounting for $85 billion of that and growing rapidly. This trend reflects not just cyclical demand, but a structural shift driven by tightening bank lending standards, increasing regulatory constraints, and the capital-light priorities of major banks.
Private credit offers investors a differentiated risk-return profile. In real estate private credit, floating-rate structures allow returns to track official cash rate movements—providing a natural hedge against interest rate volatility. Unlike fixed-rate bonds, which typically lose value as rates rise, private credit can help preserve value while delivering attractive income.
For investors seeking capital stability, consistent yield, and lower correlation to public markets, private credit represents a modern defensive allocation—particularly when secured against high-quality, income-generating real assets.
Undersupplied housing and constrained lending create tailwinds
The resilience of any credit investment lies in both borrower quality and the underlying asset. In the Australian market, housing fundamentals offer powerful support. The National Housing Finance and Investment Corporation (NHFIC) projects a cumulative housing shortfall exceeding 100,000 dwellings by 2027, exacerbated by rising migration and structural undersupply. At the same time, development funding has become increasingly constrained due to construction cost inflation and the retrenchment of traditional lenders.
This convergence presents a unique opportunity for well-capitalised, disciplined private lenders to support high-quality residential and mixed-use projects—while delivering investors premium risk-adjusted returns.
Zagga, for example, has remained focused on Australia’s Eastern Seaboard, particularly New South Wales and Victoria, where the intersection of population growth, infrastructure investment and sustained demand creates a resilient backdrop for credit exposure.
Toward a more resilient allocation framework
As global markets adjust to an uncertain policy outlook, and geopolitical tension remain an ongoing source of risk, investors are recognising that resilience—not just growth—is the new imperative in portfolio construction. The goal is no longer simply to outperform benchmarks, but to build robust portfolios that can withstand shocks and generate consistent, reliable income across market cycles.
Institutional investors and asset consultants are already evolving. Australian superannuation funds and global multi-asset managers have begun increasing allocations to private credit—recognising its ability to complement traditional exposures while reducing volatility.
In the years ahead, we expect portfolio allocations to reflect a more diversified model—potentially closer to a 25/25/25/25 split across equities, fixed income, alternatives, and private markets. Within this framework, private credit plays a critical role: offering floating-rate income, strong collateral backing, and structural protection through senior secured lending.
Time to rethink ‘old gold’
Private credit is not a panacea—and should be approached with the same rigour and due diligence as any institutional allocation. But for investors seeking to modernise their approach to risk, it presents an opportunity to move beyond the inertia of the past and toward a more forward-looking defensive strategy.
In a structurally changed market environment, clinging to outdated models may do more harm than good. It’s time to move beyond ‘old gold’ and embrace strategies grounded in the realities of today—and the opportunities of tomorrow.
About Zagga
Zagga is a leading Australian alternative real estate investment manager founded in 2016. Headquartered in Sydney, and with offices in Melbourne and Singapore, Zagga is committed to delivering attractive, risk-adjusted investor returns, and tailored private credit solutions, across the capital stack.
A leader in their chosen niche of mid-market loan sizes ranging from $5 million to $75 million, the firm serves a growing base of wholesale investors, including HNW individuals, family offices, and quasi-institutional funders from Australia, China, Hong Kong, Israel, Japan, Mauritius, Singapore, South Africa, Switzerland, the UK, and the USA.
Since inception in 2017, they have repaid over $1 billion in principal and interest, across more than 150 successful exits.
Why zig when you can Zagga?
