A high-yield diversifier ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ Hi there, In case this is your first time reading one of these, I’m Ben Reeves, the Chief Investment Officer at Wealthsimple, and I send regular updates to our clients with my perspective on topics that impact investors. In this one, I’m going to share my thoughts on private credit – we recently introduced the option to invest in this asset class – and how I think about it in the context of a diversified portfolio. First a quick definition: private credit is lending directly to companies outside of the public markets. These are usually direct loans between one borrower and one lender, with payments that re-set based on short-term interest rates. As private loans, they’re illiquid and can’t be traded easily the way publicly-traded assets can. This investment isn’t appropriate for everyone, but I do like it for a lot of our clients – especially investors mainly holding stocks and bonds, who have a significant proportion of their investments in registered accounts (like an RRSP or TFSA). There are two main reasons for that: Private credit has the potential for high risk-adjusted returns Private credit is a good diversifier for a stock and bond portfolio Ok, let’s get into what these all mean, and how they can interact to result in a higher-returning, lower-volatility portfolio. Higher risk-adjusted returns This means the expected return is good relative to the riskiness of the investment. Over the past 15 years, private credit returns have been similar to U.S. stocks, and far above those of high-yield bonds or developed market stocks outside of the U.S. (you can see the numbers in the graph on this page). In recent years, banks have pulled back from direct lending due to consolidation in the industry and regulatory changes, and private credit has stepped in to address this gap. This has created favourable conditions for private credit, and the asset class is still small relative to the opportunity. The investment manages risk by having rigorous underwriting standards. We partnered with a credit manager that does its own due diligence and lends directly to companies. As a result, we can select loans that are in attractive industries, and have lower leverage and more protections for the lender. Good diversifier for a portfolio of stocks and bonds When thinking about a portfolio, we always look for assets that (1) are high returning, and (2) perform well when other assets in the portfolio may not. Private credit’s floating rate feature – meaning the yield adjusts with interest rates – can provide positive returns when interest rates rise sharply and other assets underperform. Here’s how we expect private credit to act as a diversifier under different market conditions: Outperformance in periods of rising interest or bond rates, when treasuries and stocks both tend to suffer Positive returns in times of economic growth alongside stocks when treasuries underperform. Underperformance (due to credit risk and credit dislocation) during severe recessions when treasury bonds outperform. Although we do expect private credit to outperform stocks during these periods. For these reasons we think private credit is a valuable addition to many portfolios as part of a managed investing relationship with Wealthsimple — but as I mentioned above, it’s not for everyone. It’s exclusively available to Wealthsimple clients with $100,000 or more in deposits, and it’s only appropriate for investors who have a long enough time horizon to ride out any volatility, and have some flexibility around when they’ll need the money. If that sounds like you, you can apply to add it to your investment portfolio, or read more. Apply now Private credit is a staple of institutional portfolios – like our big pension plans – but is almost never available to individual investors. We’re really excited to be able to offer an opportunity of this calibre to our clients. All the best, Ben Reeves Chief Investment Officer Wealthsimple, 80 Spadina Ave Suite 400 Toronto, ON, M5V 2J4 Privacy Policy Unsubscribe Replies to this email address are not monitored. Have questions? Visit our Help Centre or submit a request to our Client Support team. Targeted yields are not guaranteed. The planned frequency of interest payouts and withdrawals is variable at the discretion of fund managers. Private credit involves risks including, but not limited to, credit risk, liquidity risk, leverage risk and value fluctuation. See here for more information. All information and commentary provided is for illustration purposes only and is not investment advice or recommendations. All investments involve risk. To get more info on our products, investment decisions, fee schedules, user testimonials, promos & more visit wsim.co/disclaimers. Indicated performance data are historical for the period indicated. Rates of return do not take into account any fees or tax payable. Past performance may not be repeated. Managed accounts are offered by Wealthsimple Inc., a registered portfolio manager in each province and territory of Canada. Self-directed investing is offered by Wealthsimple Investments Inc. (WSII). WSII is a member of the Canadian Investment Regulatory Organization (CIRO). Customer accounts held at WSII are protected by Canadian Investor Protection Fund (CIPF) within specified limits in the event WSII becomes insolvent. 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