At Cadre Capital Partners, effective portfolio construction begins with understanding risk.

This is especially important within fixed income and defensive assets, where investments are often grouped together as the “safer” component of a portfolio despite having very different levels of credit risk, liquidity, security and capital protection.

To strengthen our capability in this area, Scott Bannon has joined Cadre in a consulting capacity and will work closely with our Investment Committee on the development and oversight of our fixed income and defensive asset allocations.

Scott brings more than 25 years of experience across institutional banking, corporate lending, structured finance and credit markets. His appointment adds further depth to Cadre’s investment governance and enhances our ability to assess increasingly complex income-producing investments on behalf of clients.

Institutional experience applied to client portfolios

Scott joins Cadre following an extensive career with HSBC in Australia and Hong Kong.

Most recently, he served as Managing Director and Head of Client Coverage, Corporate and Institutional Banking Australia. In that role, he was responsible for corporate client coverage, lending origination, portfolio management and specialised finance across many of Australia’s largest listed and privately owned businesses.

He previously led HSBC’s Structured Banking division in Australia, overseeing complex financing transactions including acquisition finance, sponsor-backed lending, event-driven funding and specialised corporate debt solutions.

Scott also held the position of Head of Structured Banking, Asia Pacific, where he oversaw the bank’s mid-market financial sponsor strategy across 18 countries.

This experience provides Cadre with valuable insight across:

• corporate and institutional lending;
• private credit;
• leveraged and acquisition finance;
• securitisation and structured credit;
• property and infrastructure finance;
• credit risk management; and
• institutional governance.

For clients, the practical benefit is a more rigorous approach to assessing fixed income managers, private credit funds and defensive investment opportunities.

Fixed income is more complex than it appears

Many investors consider fixed income to be the low-risk portion of a portfolio.

However, the term can include a broad range of investments, such as government bonds, corporate debt, private credit, asset-backed securities, property loans, infrastructure finance and specialty lending.

Each can behave very differently during periods of economic or market stress.

A government bond may be highly liquid and backed by a sovereign issuer, while a private property development loan may depend heavily on the borrower’s ability to complete and sell a project. Both may be described as fixed income, but they do not provide the same level of capital security.

The level of return offered is therefore only one part of the assessment.

The more important question is whether the investor is being adequately compensated for the risks being assumed.

Understanding risk before focusing on yield

A central theme of Scott’s recent workshop with Cadre’s Investment Committee was that risk should be assessed before return.

Higher-yielding investments frequently involve some combination of:

• greater borrower leverage;
• weaker covenant protections;
• reduced liquidity;
• higher refinancing risk;
• increased concentration; or
• a greater probability of default.

A higher distribution rate may appear attractive, particularly for retirees and income-focused investors. However, the yield may not adequately compensate for the possibility of capital loss, delayed withdrawals or reduced recovery if a borrower experiences financial difficulty.

Cadre’s approach is therefore not simply to identify the investment offering the highest income.

We seek to understand where the return is coming from, what protections are available and how the investment is likely to behave under adverse conditions.

Looking beyond investment labels

Terms such as “investment grade”, “diversified credit”, “private debt” and “income fund” can create an impression of stability.

However, these descriptions do not always provide enough information to assess the true level of risk.

Two funds using the same label may invest in very different borrowers, industries, loan structures and levels of security.

A proper assessment requires analysis of the underlying portfolio, including:

• borrower quality;
• security and collateral;
• seniority within the capital structure;
• loan-to-value ratios;
• interest coverage;
• covenant protections;
• sector and borrower concentration;
• liquidity arrangements;
• manager experience; and
• governance and valuation processes.

This is particularly important as Australia’s private credit market continues to expand and more income-focused products become available to retail and wholesale investors.

The importance of security and recovery

When assessing credit investments, the possibility of default is only one consideration.

The likely recovery outcome is equally important.

An investment secured by high-quality assets with conservative lending margins may provide a stronger recovery position than an unsecured loan to a highly leveraged company.

The Committee therefore considers both:

1. the probability that the borrower may fail to meet its obligations; and
2. the amount of capital that may be recovered if that occurs.

This distinction is critical when comparing investments that offer similar yields but materially different structural protections.

Liquidity should not be overlooked

Liquidity is another important area of analysis.

Some fixed income investments can be bought and sold daily, while others may lock investors in for several years or permit withdrawals only when sufficient cash is available.

In normal conditions, limited liquidity may not appear problematic. However, during periods of market stress, borrowers can take longer to refinance, assets may be harder to sell and withdrawal queues may develop.

For financial planning purposes, the liquidity of an investment must align with the client’s expected cash flow needs.

A strategy may be inappropriate where funds could be required for pension payments, debt reduction, property purchases, tax liabilities or other foreseeable expenses.

This is why defensive portfolio construction cannot be separated from broader financial planning.

Building a disciplined due diligence framework

Scott’s work with Cadre’s Investment Committee includes the development of a repeatable framework for reviewing fixed income and credit investments.

The framework considers:

• capital preservation;
• default probability;
• recovery expectations;
• portfolio liquidity;
• structural protections;
• diversification;
• manager capability;
• valuation methods; and
• governance and oversight.

A consistent framework helps the Committee compare opportunities on a like-for-like basis and reduces the risk of investment decisions being driven by marketing material or headline income rates.

It also supports better ongoing monitoring after an investment has been approved.

Fixed income within a financial plan

Fixed income can serve several roles within a financial strategy.

Depending on the client’s circumstances, it may provide:

• regular portfolio income;
• lower volatility than growth assets;
• diversification from equities;
• capital for short- to medium-term spending;
• support for pension payments;
• a source of liquidity during market downturns; or
• greater certainty around future cash flows.

However, no single fixed income allocation is suitable for every client.

A retiree drawing regular pension payments may require greater liquidity and capital stability than a younger investor with a longer investment horizon.

Similarly, a client with substantial property, business or private market exposure may already hold significant illiquid credit risk outside their investment portfolio.

The appropriate allocation must therefore consider the client’s complete financial position rather than treating fixed income as a standalone investment decision.

Strengthening the Investment Committee process

Cadre’s Investment Committee brings together experience across wealth management, portfolio construction, institutional banking, corporate finance, alternative investments, private credit, macroeconomic analysis and risk management.

Scott’s appointment strengthens the Committee’s ability to evaluate defensive assets through an institutional credit lens.

This means greater scrutiny of:

• how managers assess borrowers;
• whether loan covenants are sufficiently protective;
• how funds value illiquid assets;
• whether liquidity terms are realistic;
• how diversified the underlying portfolio is; and
• how the strategy may perform during an economic downturn.

The objective is not to eliminate investment risk, which is not possible.

It is to identify the risks clearly, assess whether they are appropriate and ensure clients are adequately compensated for accepting them.

Protecting capital remains the priority

Cadre’s investment philosophy remains centred on disciplined risk management.

Returns are important, but the highest advertised yield is not necessarily the best investment outcome.

For defensive assets, capital preservation, reliable income and liquidity can be more important than maximising short-term returns.

The most effective portfolios balance risk and reward across different market environments, rather than relying on one asset class, investment manager or source of income.

By adding institutional credit expertise to our Investment Committee, Cadre is further strengthening the research, governance and due diligence applied to client portfolios.

Scott Bannon’s appointment represents another step in our ongoing commitment to providing clients with disciplined portfolio construction, independent thinking and access to high-quality investment expertise.

This article contains general information only and does not take into account any person’s objectives, financial situation or needs. Before acting on any information, investors should consider whether it is appropriate for their circumstances and seek personal financial advice where required.