In our Winter 2021 newsletter (published in FEB 2021) we noted that inflation was likely to be a surprise as we exited the COVID-19 pandemic. Over the next several months we researched various ways we might help protect our bond portfolios against inflation. By October 2021 we initiated an investment in a private credit fund, one which is comprised 100% of floating rate, senior secured debt. Floating rate debt as the name implies adjusts to interest rate changes, in the case of the fund we ultimately selected LIBOR or SOFR. In concert with members of a study group of advisors to which I belong, we vetted four leading private credit fund offerings before selecting the one we believed to be the best.
Our primary goal of fixed income is safety thus we typically keep bond fund allocations short in terms of maturity and duration and a focus on solid investment grade (AA average) credit quality. Despite these conservative leanings our bond mutual funds are down ~5% year-to-date through September 30, 2022. However, the widely followed bond benchmark, the Barclays Aggregate Bond Index, is down about 14% over the same period. Our conservative approach has served our clients exceedingly well during a time when both stocks and bonds have declined.
In addition, our allocation to private credit has performed as we’d hoped, delivering a positive total return of slightly over 2% through September. Private credit isn’t an arena easily navigated by do-it-yourself investors (for a wide variety of reasons) nor should it be a total replacement for bond mutual funds. While our focus is on capturing market returns, investment strategies like private credit offer yet another example of how working with us helps enrich the lives of our clients.