Credit remains on relatively firm macro foundations, with growth that, while moderating, has remained broadly positive. While pockets of stress remain, default risk appears contained. However, with much of the good news already reflected in market pricing, the challenge for investors is shifting from whether to hold credit to how to implement it effectively.
Against this backdrop, broad market exposure is becoming less reliable as a standalone strategy. As public credit spreads remain relatively tight and passive benchmarks are already pricing in much of the recent good news, starting yields and disciplined implementation are becoming more important.
Investment-grade credit will still matter, particularly where contractual cash flows are required, but charities will need to be more selective and deliberate in how they implement and diversify their credit allocations.
Many investors are reassessing their credit allocations and considering portfolio construction through three lenses: cash flow, risk and return. This is because credit can provide contractual cash flows to meet liabilities and spending needs, while supporting more predictable outcomes and reducing governance complexity.
Investors often make large allocations to high-quality investment-grade credit, typically adopting a buy-and-maintain approach while focusing on areas where cash flow visibility is highest.
Although spreads have moved somewhat higher again year-to-date, with the continuation of the Middle East conflict, they remain well below the highs of last year, prompting charities to look beyond public credit for more attractive sources of value. This has renewed interest in selective private credit allocations within diversified portfolios.
Furthermore, as private market funds have grown, their need for financing beyond what banks alone can provide has increased, which has created new opportunities for institutional lenders.
One key example is subscription-line finance, which is typically short-dated lending secured against commitments from high-quality institutional investors. This can offer investment-grade characteristics with an attractive yield pickup, without giving up much liquidity.
As the market evolves, manager selection and underwriting discipline will become more important. This is why charities will need to target the right risk profile, align structures to objectives and maintain flexibility across public and private markets.
Credit can continue to play a central role in portfolios in 2026, but delivering positive outcomes will require an increasingly active, diversified and cash-flow-aware approach.
Simon Rhodes is an investment consultant and head of credit content
