We have seen strong growth in the demand for alternative credit to sit alongside traditional fixed income to boost returns and diversify risk. Asset owners need to be discerning when building portfolios to ensure they are not overloaded on corporate exposure or undue concentration risks. Most credit portfolios typically hold substantial corporate exposure – often with overlapping issuers – across developed-market investment grade and high-yield bonds, leveraged loans and emerging-market corporate bonds. Furthermore, the sprawling securitized credit and private debt asset classes also carry ample corporate exposure, with a few clear examples highlighted below:
Why is this an issue? A high concentration of underlying corporate risk leaves asset owners at risk of higher correlations with equities. While debt backed by sovereigns, consumers and real assets will inevitably track economic cycles to a degree, these assets can provide attractive long-term results and can offer a much-needed ballast when corporates are under pressure.
While the aforementioned asset classes are important components within a return-seeking credit strategy, asset owners should also prioritize these non-corporate-linked risk profiles:
We believe a robust credit portfolio is diversified across corporates, consumer and commercial-linked debt, and government bonds. Against this backdrop, there are many paths to achieve a successful outcome. Asset owners can choose from a wide variety of mandates within each universe to achieve their goals while also meeting their credit risk tolerance. For example, some consumer-linked ABS mandates focus more on residential mortgages, whereas others focus on less-liquid, lower-rated esoteric assets – both come with different risk and return profiles.
There are other factors to consider when assessing how to improve diversification. Geography, public versus private debt, and vintage diversification in private markets are additional avenues. Manager diversification is also an important factor to consider when it comes to investment style and risk and reward preferences.
We believe asset owners can build more robust and resilient portfolios through careful construction of their credit allocations. They should take special consideration when thinking about the underlying risk exposures and take advantage of the various non-corporate-linked securities that only credit can provide. While spreads have come in across most credit markets as of late 2025, many pockets of value do still exist. Asset owners need to be dynamic when constructing their portfolios to take advantage of these opportunities and use the full spectrum of the universe available to them.
Whether you are looking to invest in alternative credit for the first time or looking to review your allocations in this new environment, we believe WTW has the experience necessary to partner with you. At WTW, we have a team of dedicated liquid alternative credit and private debt specialists who have helped our clients with selecting highly skilled managers, building highly diversified portfolios over time, and investing at scale. We have a proven track record of innovating with credit managers to design new and creative solutions to address our client’s ever-changing needs.
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