Private Credit Demystified

"I am the king of debt. I understand debt probably better than anybody."
Donald J. Trump

A grim-looking future for traditional investing

Let’s begin with the bad news. For reasons that are quite clear if you read the Absolute Return Letter on a regular basis, neither equities nor bonds are likely to deliver particularly attractive returns in the years to come.

My central forecast is an annual average inflation-adjusted return of 0-2% between now and 2050 on a global portfolio consisting of 40%bonds and 60% equities. In other words, an arch-typical traditional portfolio following the 60/40 allocation ‘rule’, which so many investors do these days,will deliver next to no returns, if I get things about right.

The two main ‘risks’ to my rather lacklustre forecast are (i) that the next stage of the digital revolution (automation, AI, etc.) will cause productivity growth to re-accelerate much faster than can be reasonably expected, and (ii) that commercialisation of fusion energy will allow us to produce all the energy we need at virtually no cost, which will obviously have an extraordinary impact on productivity.

I have spent most of the summer researching both (i) and (ii), and I am sure my findings will find their way into future Absolute Return Letters, but that is not my point here. Rather, I am going to urge you to think outside-the-box when constructing your portfolio because, if you don’t, the next many years could be rather painful. Today, I will look at the “40” in the 60/40 allocation rule. Are there ways to enhance the returns of the 40% that is allocated to bonds without adding substantially to risk?

The good news next. Fortunately, there are many things you can do to improve on those lacklustre numbers. Those returns are reserved for the lazy investor - someone who invests passively. Today, I will review one of the ‘escape routes’, should you desire higher returns - an investment strategy I call private credit.