The big idea and why it matters: Credit is a broad landscape with many dials to turn for targeting specific risks/rewards and exposures across yields, durations, and structures. As strategies move from daily liquid to more restricted liquidity, different risk and yield possibilities are introduced that can be helpful for building income-focused portfolios.
“Old age isn’t so bad when you consider the alternative.” – Maurice Chevalier (French singer, actor, and entertainer)
If you guessed that we’ve saved Alts for last in this series, then you guessed right (it also required no guessing because I overtly stated it)! In Part 2, we covered some common investment approaches in the context of retirement/endowment income generation and why they present us with opportunities for improvement. Today, we’ll root ourselves in fixed income concepts that will then allow us to explore Alts and where they fit in as a piece of the portfolio puzzle. Riffing on Mr. Chevalier’s quote, we’ll begin making the case that alternatives aren’t so bad when you consider the alternative
There’s No Alternative!
Alts are important investment options because they can offer different sources of risk, return, and income vs. public/traditional markets. Specifically regarding private markets, there are nearly 25x more Private Equity and Venture Capital-backed companies than public companies, so why would investors want to ignore them as an opportunity set for ownership (private equity) or lending (private credit)? Yes, public markets are about eight times larger in terms of capitalization (e.g., total value), but that still leaves a vast world of private investments to consider.
If we take the time to understand what we’re investing in – and can afford to sacrifice some liquidity that often comes with Alts and, particularly, private investments – then the related attributes can help add diversification, reduce volatility, and increase income and/or growth vs. public markets. As portfolio tools, those attributes can go a long way toward future success and certainty of planning outcomes – even if the underlying fees are multiples of your plain vanilla bond ETF (focus on value and net results, instead of fees).
You simply cannot obtain alternative characteristics without alternative investments.
Extra Credit
Let’s start with the credit side of the picture and a quick refresher or “Bonds 101” so we’re all on the same page regarding some basic fixed income (aka “bonds,” aka “credit”) definitions:
- Quality: In general, higher quality will translate to a lower yield. Conversely, higher bond yields often come with lower quality (aka “junk bonds”), and a greater chance of default risk – i.e., a company with a higher chance of bankruptcy and/or bonds with less chance of recovery in a bankruptcy scenario. They are paying higher yields because they have to compensate investors for the embedded risk, not because they want to. It’s a simple yet beautiful example of markets and price (or yield) discovery at work.
- Duration: Longer-dated bonds and/or lower-yielding bonds are more interest-rate sensitive. That sensitivity is known as duration, which helps to measure how much the price of a bond moves vs. a given move in interest rates. Bond prices and interest rates move inversely to one another. [Bond logic example: if rates move higher, and new bonds are therefore paying higher yields, then someone will want to give me less money for my old bond that now has a below-market yield. The opposite also holds true.]
- Securitization: Per Investopedia, securitization is “the process of taking illiquid assets or a group of assets and, through financial engineering, transforming them into an investable security.” David Bahnsen recently posted on September 5th, 2025, this incredible statistic in his Dividend Cafe: In the US, “we have a $30 trillion GDP and $15 trillion in securitization issuance.” (Source: Apollo Chief Economist, 9/5/2025) Mortgage-backed securities (MBS) are forever the infamous example tied to the 2008 Financial Crisis, but there are many securitized assets to choose from these days.
- Fixed or Floating Rate: Fixed-rate bonds have, well, fixed yields that don’t change with the interest rate environment. Floating-rate bonds, on the other hand, move along with changes in a reference rate. For example, if a bond pays a yield of “SOFR + 3%,” then a SOFR (Secured Overnight Financing Rate) of 4% means that the bond pays a 7% total yield until the SOFR rate changes (up or down). The ability for a yield to float reduces sensitivity to interest-rate changes.
- Summary:
- Lower yield, higher duration, and/or fixed rate => more rate sensitivity
- Higher yield, lower duration, and/or floating rate => less rate sensitivity
Credit where credit is due
For this discussion, I’m slicing the world of “credit” into three main segments: corporate bonds, structured credit, and private credit. The purpose is to be able to delineate between characteristics, tradeoffs, and portfolio implications of each in general terms.
- Corporate Bonds: These range from high-grade to high-yield across a variety of durations, so particular characteristics can be targeted by investors. While bonds still need to trade between bond desks/traders, for all intents and purposes, these are very liquid. Many bond ETFs can be sold nearly instantly (whether or not that’s a good thing is a whole other discussion), and bond mutual funds offer daily liquidity. Based on a group of corporate bond funds and ETFs on my computer screen, expect current yields between 4 and 6% across the quality spectrum (Source: FactSet, as of 9/11/25).
- Structured Credit: This category encompasses the vast world of securitized offerings. The opportunity set is large, as the limits of what can be securitized get continuously tested. Mortgage-Backed Securities (MBS) are still a big area (both residential and commercial, aka RMBS and CMBS), but Asset-Backed Securities (ABS) cover areas including auto loans, student loans, credit card receivables, and aircraft leases and offer a wide range of quality, duration, and yield possibilities.
Using an MBS as an example: the underlying pool of borrowers (remember, these are real people with real mortgages) can vary across credit ratings, geographies, and other factors; thus, structured credit managers can target these particulars. But also specific to securitized structures is the ability to buy particular tranches (slices) within each MBS. The tranches themselves vary in terms of income, risk, and reward because senior tranches get repaid before junior tranches in a waterfall format. Tranching is a topic for another day (but here’s an Investopedia overview, if you can’t wait).
All we need to know for now is that the nuances of securitization allow for A LOT of variation in approaches within structured credit strategies. Some can be used in a daily liquid format, while others should be less liquid. A representative group of these strategies in liquid ETFs and mutual funds shows a range of about 4-8% yields on my FactSet screen (as of 9/11/25), while interval funds (not daily liquid) reflect yields closer to 9%.
- Private Credit: We’ve covered private credit at a fairly in-depth level over the years, but the main differentiator vs. public bonds or securitized credit is that these loans are being made directly. On the public side, there is a wide range of applications, but direct corporate lending is a common use case – meaning loans made directly to private companies, sometimes in conjunction with a private equity sponsor buying a business.
Unlike public bonds or securitized structures, which are issued with pre-baked terms, private credit allows for control over the terms of the loan. If a lender (like a private credit manager) cannot negotiate acceptable terms, then they can simply walk away. Knowledgeable managers have the luxury of reviewing many deals and being selective about those they pursue; that allows for structuring favorable loan terms – including fees, yields, payment structures, optionality, and downside mitigation – managing risk, and targeting good outcomes for investors. These are not and should not be in a daily liquid format. An example of a private credit interval mutual fund focused on direct corporate lending on my FactSet screen (as of 9/11/25) currently yields over 10%.
Driving income has many paths
Back in Part 2, we discussed how the fixed income and Alts portions of a retirement or endowment portfolio may need to do some heavy lifting to help balance out (potentially) the lower yield contribution from equity. As above, there are many options across public and private markets to do so. But it is pretty clear that sacrificing some liquidity can allow investors to drive greater yields, and Alts are an important part of that solution set.
As this edition is far too long already, we’ll just keep moving through this topic next time, getting into some risk considerations, recent credit price trends, why you could chase very high yields in public markets but shouldn’t, and then we’ll get to move into the private equity side of the discussion. Much fun to come.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
