Financial markets are rarely short of headlines, but the past quarter has been particularly noisy. From President Donald Trump’s “Liberation Day” tariff barrage to fresh tensions in the Middle East and a rate pause surprise from the Reserve Bank of Australia (RBA), financial markets saw volatility spike to levels not seen since April 2020, at the depths of the COVID-19 panic, before rallying back to all-time highs.
It’s little wonder then that the word “uncertainty” surged across second-quarter earnings calls, cited 80 per cent more than the previous quarter, according to IoT Analytics, making it second only to the word “tariff” in its significance on those calls.
Market commentators from globally renowned institutions have been quick to respond – flooding inboxes with fresh forecasts and updated outlooks, each promising to help you navigate the unknowable.
Yet, what the last quarter really showed is that in the real world, certainty is the exception, not the rule. The real problem is not how to master the prediction game to achieve good investing outcomes. It’s how to build a portfolio that can perform when the crystal ball fails.
Crystal ball gazing gone wrong
The 8 July RBA monetary policy decision highlighted the limitations of prediction. A 25 basis point cut was considered certain with interest rate markets implying a 96 per cent probability that the benchmark cash rate would be cut to 3.60 per cent, according to Bloomberg.
But the RBA shocked markets and pundits alike by holding the cash rate steady, saying it needed further confidence inflation was under control before committing to a cut. The minority of economists who predicted “hold” quickly declared their prescience and the wrong-footed cohort penned eloquent rationalisations for why the central bank didn’t move.
Fortunately, investors don’t need a perfect forecast of an unknowable future – but they do need a portfolio built to endure many possible ones.
Credit is different
A competent private credit manager understands that uncertainty is a given, not a cause for concern.
In equities, concentrating on your best ideas rather than meaningful diversification might deliver extraordinary compound returns. Indeed, a few investment disasters, bad portfolio management or inadequate risk control processes might be masked or offset by one standout performer – the 10-bagger bet that props up the whole portfolio.
Credit, whether traditional fixed income like bonds or private credit, plays a different role and sits in the defensive part of an investor’s portfolio. The objective in credit is to deliver consistent monthly income in a well-constructed portfolio that meets the target risk and return parameters, while maximising the chance that the capital invested is secure.
Private credit should provide a premium return to traditional fixed income, capturing the value of proprietary and direct origination, as well as lower volatility through being fundamentals-focused (rather than adopt a trading mentality) – though that is a trade-off for less frequent liquidity.
Most importantly, these goals have to be achieved under constant conditions of uncertainty.
Keys to investing in uncertainty
The bottom line is that private credit portfolios must be built in a way that ensures delivery of fund objectives in a wide array of possible market conditions, combining good investments with disciplined portfolio and risk management. In practice, this means:
1. Thinking beyond superficial diversification
This means building a balanced portfolio with things that are correlated differently to each other and have different causal factors – positive or negative. Resilient portfolios must be built with broad exposure to different lending segments, borrower types, industry sectors, end markets, geographies and key performance drivers.
2. Regular stress testing
Risk management starts with a culture that allows people to challenge each other’s investment theses in a mutually respectful way. It thrives through process discipline. At MA Financial, that means running weekly credit meetings, monthly portfolio reviews, and a semi-annual war games exercise where we simulate recessionary scenarios and left-field shocks across every loan in the portfolio. These are not theoretical workshops – they’re granular, bottom-up reviews designed to surface vulnerabilities early, before they become major problems.
Maintaining this process discipline is hard – especially when markets are calm and portfolios are performing. But that’s exactly when the work matters most. You don’t build your risk controls in volatile markets – you rely on them then.
3. Using strategies built for uncertainty
Private credit managers can leverage strategies that are optimised for investing in uncertainty, such as asset-backed lending. Its ability to span a wide range of subsectors of lending helps mitigate correlation risk. This eliminates the need to predict the precise outcome of an inherently unknowable future to earn acceptable returns on credit investments in this sector.
Uncertainty is here to stay
The future is always uncertain. While some periods might feel more comfortable than others, the feeling of certainty is an illusion.
By recognising this, a private credit manager can focus on planning for a wide range of market conditions rather than relying on predictions in an attempt to out bet the market.
Before gazing into a crystal ball, remember that resilient private credit portfolios are not built around forecasts. The goal isn’t to eliminate uncertainty – it’s to prepare so your portfolio can absorb it.
Frank Danieli, head of global credit solutions, MA Financial
