Source: Stockhead and The Australian
Author: Tom Cranfield, Executive Director – Risk & Execution, Zagga
Date: 12 June 2025
For decades, the 60/40 portfolio was sacrosanct: equities for growth, bonds for ballast, and gold as a hedge. But in a structurally different world, the assumptions underpinning traditional defensive strategies demand rethinking.
Recent market cycles have exposed the fragility of conventional defences. In an era of persistent volatility and rising correlation across traditional asset classes, we believe it’s time to re-examine—and reframe—what constitutes a truly defensive allocation.
One asset class rising to meet this moment is private credit. At Zagga, we see firsthand how this market is maturing, how demand is growing, and how investors are shifting their thinking.
The defensive playbook is broken
Traditionally, defensive investing meant a tilt toward fixed income – bonds and cash. For more cautious allocators, it also included real assets like gold. These assets were expected to provide protection when equities fell. But that assumption has been increasingly challenged in an environment where market correlations behave differently than they once did.
So why do some still cling to “old gold” strategies? Perhaps out of habit. Or inertia. But markets don’t reward nostalgia.
Let’s be clear: this isn’t about abandoning fundamentals but adapting them. Today’s sophisticated investors aren’t just diversifying for returns—they’re building portfolios that can withstand, and prevail across, market shocks.
In this contemporary context, the old 60/40 portfolio no longer provides a compass for uncertain times but rather, is quickly becoming a relic of the past.
Rethinking defensive strategies. Pic via Getty Images
Private credit: a modern defensive asset
Consider this: Australia’s private credit market is now worth over $205 billion1, with commercial real estate credit accounting for $85 billion2, and growing rapidly. The shift is structural, not cyclical. Banks are retreating from mid-market lending due to increasing capital and regulatory constraints. Private lenders—disciplined, agile, and secured by real property assets—are stepping in.
Private credit offers a distinct risk-return profile. In real estate private credit, loans are commonly structured with floating interest rates, aligning returns with the cash rate. This alignment provides a natural hedge, unlike traditional fixed income securities like government bonds, which typically decline in value when interest rates increase. It also helps smooth returns over time, providing downside protection that equities can’t offer.
If defensive investing is about protecting capital, generating income, and reducing volatility, then the approach to achieving these goals must evolve to reflect today’s market realities.
Housing fundamentals provide strong tailwinds
The strength of any credit investment lies in both the borrower and the underlying asset. That’s why Australia’s persistent housing undersupply and constrained development finance are creating a favourable environment for well-structured real estate private credit.
The National Housing Finance and Investment Corporation (NHFIC) projects a shortfall of over 100,000 homes by 20273. Meanwhile, construction costs remain elevated, and banks are pulling back from development lending. This convergence of demand and funding shortfall creates a unique opportunity for investors to support high-quality projects while earning attractive returns.
Zagga has long focused on the Eastern Seaboard – especially NSW and Victoria -where underlying demand for housing remains robust, driven by immigration, infrastructure investment, and strong economic fundamentals.
The result? A compelling investment case. Private credit, especially in Australia’s resilient property market, now offers investors an alternative to both fixed income and share markets – one that yields returns multiple percentage points above the official cash rate, with less volatility and lower correlation.
The future of portfolio construction
As global uncertainty endures and central banks walk a tightrope between tightening and easing interest rates, public markets remain volatile. The traditional 60/40 portfolio is no longer sufficient; the focus must shift from chasing growth to building resilience. Alternative, uncorrelated asset classes can enhance diversification, support capital preservation, and provide income across market cycles. Investors must not just prioritise growth, but incorporate alternative, uncorrelated asset classes, that provide consistency in returns, and income, across cycles.
We have already seen a shift in institutional behaviour, with Australian super funds and global wealth managers now increasing allocations to private credit for precisely this reason. The goal isn’t just to beat benchmarks – it’s to preserve capital, generate consistent income, and build resilience against shocks.
We expect to see sophisticated investors embrace more diversified portfolio. One that may be more 25 / 25 / 25 / 25 than 60/40. That is, 25 per cent spread equally across equities, fixed income, alternatives and private markets – to balance risk, enhance returns and build resilience in a structurally different market environment.
In this formula, private credit delivers income that floats with inflation; diversification from public markets; and when well-executed, it sits atop high-quality real assets with clear exit strategies.
Private credit isn’t the answer to every question. But for investors looking to modernise their defensive allocations, it may be time to rethink some of those ‘Old Gold’ ideas and embrace strategies fit for today’s market realities.
1. Australian Private Debt Market Review 2024
2. Australian Private Debt Market Review 2024
3. NHFIC State of the Nation’s Housing 2022-23
The article was additionally published in Adelaide Advertiser, The Daily Telegraph, The Herald Sun, The Courier Mail, NT News, The Mercury, The Cairns Post, Townsville Bulletin, Gold Coast Bulletin, Geelong Advertiser, and Toowoomba Chronicle.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
