Monday 8th September 2025
The credit sweet spot: Building resilient income portfolios
Private credit is often positioned as a high-yielding alternative to traditional fixed income, but for Teiki Benveniste, head of Australia and New Zealand at Ares Wealth Management Solutions, the key is to find the “sweet spot” on the risk -return spectrum, where most of the return comes from contractual income and volatility is kept firmly in check.
Speaking at The Inside Network’s Income & Defensive Symposium, Ares’ Teiki Benveniste explained that the manager focuses on asset classes that sit to the left of the risk axis, but high on the income axis. “We want to focus on asset classes that have a good combination of income generation and lower volatility,” he said, noting that in credit the investor’s first job is to reduce default risk, before even thinking about portfolio construction.
Benveniste drew a simple distinction. Whether lending to a company or against a pool of assets, credit investing is about contractual cashflows. “You have a contract that says you have to be paid a certain level of interest, and at maturity you get your money back,” he said. Defaults are the primary risk to manage. In liquid US high-yield and loan markets, historical defaults average 2.5 to 4.5 per cent a year, translating to losses of 1 to 2 per cent after recoveries. By contrast, Ares’ own portfolios have averaged just 13 basis points of defaults, with one basis point (one-hundredth of a percentage point) of losses.
Once credit selection reduces the chance of loss, diversification takes over as the next layer of defence. Benveniste stressed the importance of spreading exposures not just across borrowers and geographies, but across asset types, structures and cashflow profiles. Ares’ modelling shows that expanding a private credit portfolio from a handful of loans to thousands significantly narrows the range of potential returns and reduces tail risk.
One way to achieve this, he said, is to combine liquid credit instruments, such as leveraged loans and high-yield bonds, with illiquid direct lending. Liquid credit offers daily pricing, tradeability and exposure to larger issuers. Private credit typically lends to smaller borrowers, offers tighter covenants, higher origination fees and less day-to-day volatility. “You give up liquidity, but you get lower volatility and higher upfront fees, which enhance yield,” he said.
Adding asset-backed lending introduces another complementary dimension. Unlike corporate loans, which return principal in a lump sum at maturity, asset-backed loans amortise steadily through contractual cashflows from loans, leases or receivables. “Overlay those two in a portfolio and you have very different cashflow profiles,” Benveniste noted, which can improve risk efficiency and resilience.
Dynamic allocation is critical to maximising this blend. Private credit can serve as a portfolio anchor, delivering steady yield, but dislocations in liquid markets present opportunities to step in and capture outsized returns. Benveniste pointed to spikes in high-yield spreads during past market stress when bonds could be bought at deep discounts, adding “hundreds of basis points” to portfolio returns. The key is to be ready with a credit wish-list and the ability to move quickly.
He illustrated this with Ares’ own portfolio shifts. In early 2020, as COVID-19 roiled markets, Ares lifted its high-yield allocation from 5 per cent to 20 per cent to capture repriced opportunities. Later, as inflation and volatility risks rose, the firm rotated back into less-volatile private assets to protect returns. “That is how you shield your portfolio in more uncertain environments,” he said.
Flexibility also exists within private credit itself. Benveniste described moving between the lower, core and upper-middle market-segments, defined by borrower EBITDA levels, to find the best relative value. Smaller borrowers may offer higher spreads but require greater origination capability and underwriting discipline. Larger issuers may provide scale and speed but at tighter spreads. “It is not just between asset classes, it is within them,” he said.
Today, Ares’ flagship diversified credit portfolio spans over 900 issuers, with exposures across US and European direct lending, loans, high-yield bonds, asset-backed finance and opportunistic credit. The goal is to produce a gross yield of about 9.5 per cent before leverage, with diversification at every level including issuer, geography and asset type.
Benveniste’s message to investors was that credit portfolios can be engineered for resilience by starting with high-quality lending, then layering diversification, structural variety and tactical agility. “You are not getting paid for concentration,” he said. “In credit, if you lose money on a position, that is it, so you build portfolios to minimise the probability of that outcome”. For advisers seeking defensive income in a higher-for-longer rate environment, he argued, the combination of private and public credit, corporate and asset-backed exposures, and a readiness to pivot as opportunities shift, offers the best chance of delivering strong income while protecting capital.
James is an experienced senior journalist and editor of The Inside Network's publications.
