Page 9 - Wealth-Adviser-Issue-118 (FWP)

ISSUE 118
AUGUST 2025

available from term deposits . Inflation-linked securities, available through government
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Investment experts observe that “alternative credit can Treasury Indexed Bonds and various managed investment
be quite a defensive part of the portfolio” due to its secured structures, provide direct mathematical linkage to consumer
nature and floating-rate characteristics, which help portfo- price movements. These instruments adjust both principal
lios adapt to changing interest rate environments . The float- and income payments to reflect CPI changes, offering inves-
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ing-rate feature means that as official rates rise, the income tors guaranteed real returns above inflation .
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from these investments typically increases, providing some The mechanics of inflation protection work through cap-
protection against rate volatility. ital indexed structures where both the principal value and
Key characteristics of alternative credit include: periodic income payments increase in line with measured
• Secured lending structures that rank ahead of equity in inflation rates. Even modest allocations (5–10%) to infla-
repayment priority tion-linked investments can provide significant portfolio
• Floating interest rates that adjust with market conditions protection when inflation exceeds expectations .
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• Diversified borrower exposure across industries and By combining infrastructure exposure with infla-
credit qualities tion-indexed securities, investors achieve a dual layer of
• Professional credit analysis managed by experienced protection: contractual real-rate stability and exposure
investment teams to real-asset appreciation, enabling portfolios to weather
inflation shocks more effectively.
For Australian investors, particularly SMSF trustees,
allocations of 5–15% to alternative credit strategies can The Role of Diversified
boost overall portfolio yields whilst maintaining reasonable 4Property Strategies
diversification. However, investors must consider liquidity Commercial property investment, accessed through
constraints, as many of these investments have lock-up various fund structures and listed vehicles, offers another
periods or limited redemption windows . dimension for income generation—often providing higher
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The rise of institutional demand for alternative credit re- and more stable yields than residential property invest-
flects its low correlation to traditional equities and capacity ments while benefiting from professional management and
for contracted interest adjustments, making it an increasing- diversification.
ly important component of institutional portfolios . Commercial property income streams offer several
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advantages over direct residential investment:
Inflation Protection • Professional asset management handling tenant relations
3Through Real Assets and maintenance
Inflation remains a significant long-term risk for income • Lease structures where tenants bear responsibility for
investors, particularly those in retirement phases where property outgoings
purchasing power erosion can dramatically impact living • Longer lease terms providing income certainty over ex-
standards. Two broad categories of real assets provide direct tended periods
inflation linkage: infrastructure investments and infla- • Built-in rent reviews often linked to inflation indices
tion-indexed securities.
Infrastructure investments—encompassing utilities, Market analysis indicates that quality commercial prop-
transport networks, and energy assets—often operate under erty assets can deliver yields in the 5–7% range, supported
regulated frameworks or long-term contracts with built- by stable occupancy rates and defensive tenant profiles .
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in inflation adjustments. Investment research suggests Neighbourhood retail centres, for example, benefit from
infrastructure is “positioned for attractive returns… with essential service tenants like supermarkets, pharmacies,
utilities particularly benefiting from the energy transition and cafes that maintain occupancy even during economic
and current valuations at compelling levels” after recent downturns.
underperformance . Diversification within property becomes crucial—spread-
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Infrastructure investments typically offer several infla- ing exposure across:
tion-protection mechanisms: • Geographic regions to reduce localised economic impacts
• Regulated price reviews that incorporate CPI adjustments • Property sectors including industrial, office, retail, and
• Long-term contracts with inflation escalation clauses specialised uses
• Essential service provision that maintains demand across • Tenant industries to avoid concentration in cyclical busi-
economic cycles nesses
• Asset replacement value that rises with inflation over • Lease maturity profiles to manage re-leasing risk over
time time

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