All when risk reasserts itself: Inflation responsive portfolios

Content Partnership

6 May 2026

Risk has taken centre stage, dominating markets, headlines and conversations with clients as investors try to understand how events will play out so they can make changes to their portfolios.

However, Chris Paton, Chief Investment Officer of Australian alternative asset manager La Trobe Financial, said this instinct to forecast risked forgetting that well-constructed portfolios already had defences built in, and that reacting to short term changes could increase risk.

“The challenge for investors isn’t forecasting the markets next move,” Mr Paton said. “It’s making sure their risk settings still make sense.”

As part of a three‑part series on the role of private credit when risk reasserts itself, Mr Paton sat down with Financial Newswire to talk about inflation, volatility and capital structure, and why he sees discipline as the common thread between all three.

“I think it’s important when there are periods of elevated uncertainty in the market that you don’t blow it all up and start again,” he said.

“You don’t want to be trying to sell out against the headlines and reconstruct your portfolio, but you do need to be really clear in the role [of] each of the asset class allocations you’re making across your portfolio and how they’ll perform during different periods.”

Inflation outlook and the risk for portfolios

Even before oil prices spiked as a result supply disruptions due to the Iran/US conflict, the Reserve Bank of Australia was tightening policy. Mr Paton said this suggested the persistent inflation was a cyclical feature of the Australian economy rather than the result of a one‑off shock.

“I think you’ve just got to position in a way to say that inflation is going to be higher and it’s going to be higher for longer than many forecasted,” Mr Paton said.

Persistent high inflation has implications for investors when the return generated by their portfolios fails to keep pace with rising costs. Retirees and other investors who rely on their investments for income typically feel it the most.

“If you’ve got a well-constructed portfolio, it should be responsive to inflationary environments, but it’s a question that investors do need to ask themselves for the moment – is my income going to keep up with and produce a positive “real return” relative to inflation?”

Risk settings for high inflation

Mr Paton said assets responsive to interest rate changes could help offset the impact of inflation, shifting the focus during periods of high inflation from maximising returns to preserving capital.

“You’re trying to build robust portfolios for an investor to continue to perform during all seasons,” Mr Paton said.

Examples of inflation‑responsive assets may include inflation‑linked bonds, real assets such as infrastructure and property, shares in companies that can pass higher costs through to customers, and some private credit strategies where income increases as interest rates rise.

“Inflation-responsive asset classes, like private credit and our 12 Month Investment Account, which has inflation responsive income, matters more than…your growth assets at the moment,” Mr Paton said.

The role of private credit during inflation

Unlike fixed-rate investment bonds, most private credit loans are floating rate. When central banks raise rates, those increases are typically passed onto borrowers, which can mean additional income for investors.

But Mr Paton cautioned that not all private credit funds are the same. La Trobe Financial’s12 Month Investment Account provides floating rate, short duration credit via a diversified portfolio of Australian first registered mortgages. Other funds offer higher returns but potentially more downside risk during periods of volatility.

“It’s really going back to those fundamentals, those defensive, conservative characteristics,” Mr Paton said, such as how the underlying borrowers are expected to perform during a higher inflationary environment.

“[The inflation responsiveness] can’t be to the detriment of the quality of the assets and the conservatism that’s delivered through that period.”

Choosing the right private credit manager

Mr Paton stressed the importance of selecting the right manager and style of fund for the individual investor’s objectives.

“We’ve got this massive bucket called private credit, which includes so many different things,” he said.

“So, it’s getting back to first principles. What is your investment objective? What is this particular part of your allocation looking to perform during this particular cycle? And which are the best managers designing portfolios to do that?”

He gave the example of a manager focused on distressed credit promoting outsized returns by helping a company turn its cash flows around. However, higher inflation and interest rates can place additional pressure on those cash flows, complicating recovery efforts.

“While you might have received an additional few basis points a year from a manager, you can give all of that away in a six-month period of stress because of the credit disciplines they do or don’t have,” Mr Paton said.

“You’ll have other managers, like ourselves and our strategies, which are really conservative and focus on the highest quality borrowers.”

He described quality borrowers as having a strong equity cushion, along with adequate free cash flows to absorb higher interest rates.

Questions he recommends advisers ask when assessing a private credit manager include the level of transparency around portfolio holdings, the depth of the team’s capability, the manager’s longevity in the asset class and their performance track record.

La Trobe Financial’s 12 Month Investment Account’s current distribution rate is 6.50 per cent* net of fees, compared to 5.72% for its benchmark, the Bloomberg Ausbond Bank Bill Index +1.50%. More importantly, it builds on a track record dating back to 2002 of returning 100% of investor capital, paying income at the advertised rates, and meeting all redemptions in full and on time.

Content Partnership sponsored by La Trobe Financial 

*The variable rate of return is current at 1 April 2026. The rate of return is reviewed and determined monthly, is not guaranteed, and may be lower than expected. The rate of return is determined by the future revenue of the Credit Fund, and distributions for any given month are paid within 14 days after month end.

An investment in the Credit Fund is not a bank deposit, and investors risk losing some or all of their principal investment. Past performance is not a reliable indicator of future performance. Withdrawal rights are subject to liquidity and may be delayed or suspended.

Any advice is general and does not consider your personal circumstances.

La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence 222213 Australian Credit Licence 222213 is the responsible entity of the La Trobe Australian Credit Fund ARSN 088 178 321. It is important for you to consider the Product Disclosure Statement (PDS) when deciding whether to invest, or continue investing, in the Credit Fund. You can read the PDS and the Target Market Determinations on our website.