Inside Challenger IM’s credit fund that refuses to be boxed in

When you hear private and public credit mentioned in the same sentence, they are almost always presented in opposition. Far less common, however, is a fund utilising both.

The Challenger IM Credit Income Fund fits that bill, with a floating rate credit strategy that invests across a mixture of public and private credit assets, with the private credit sleeve focused on three key areas: asset-backed finance, corporate loans and commercial real estate debt.

Stephen Martin, Head of Multi-Sector Credit at Challenger Investment Management, says:

“That breadth of the investment universe allows us to allocate capital wherever we see the best relative value at that point in the cycle. We think that's a really important feature of this fund.”

In this edition of Fund in Focus, I spoke with Martin about the Challenger IM Credit Income Fund and why this blend of investments is key to maintaining a flexible approach, how it manages market risk, and the importance of employing a liquidity gate.

The public and private credit advantage

The ability to move across both public and private credit markets is central to how the fund generates returns. Martin describes Challenger as "first and foremost a relative value investor", and the dual mandate allows the team to shift allocations as market conditions evolve.

"Private credit provides stable, short duration and higher yield into the portfolio, but it's not always the best place to be. And so having that public credit capability as well allows us to shift allocations with the objective of maximising return for investors," he says.

This flexibility has been a key driver of the fund's consistency. Since 2017, more than 85% of returns have come from income earned on the underlying credit portfolio rather than from interest rate or currency bets.

‘It takes a village’

Credit investing, Martin is quick to point out, is not a passive exercise. Behind the fund sits a team of 40 investment professionals spanning each of those asset class verticals, supported by the broader Challenger infrastructure for legal, compliance and, critically, an independent credit risk function that rates every private transaction that enters the portfolio.

“In credit, giving someone the money is only the first step. It's getting it back that really matters. So you've got to have a lot of humans helping you do each stage of that process. It really does take a village.”

Managing market risk

One of the fund's core objectives is to reduce market risk, and it approaches this from several directions simultaneously. The Fund seeks to minimise currency risk by swapping non-Australian dollar exposures back to AUD. Interest rate duration is capped at no more than one year, and credit spread duration is also kept short.

“We can do this because we also have private credit inside the asset allocation, which is really important. And we think that's an important way to mitigate market risk for investors,” Martin explains.

Key structural features

Two structural features of the fund stand out. The first is the liquidity gate. While monthly liquidity is available, the 10% fund-level gate is deliberately designed to support orderly redemptions from the Fund and prevent it from being used as a cash substitute, which protects the portfolio's ability to invest in less liquid private credit and capture the illiquidity premium that comes with it.

"While it allows investors to take their money out if they need it for personal reasons, it also protects the fund against being considered by investors a cash-like alternative and the first place to go to get liquidity," Martin says.

The second is credit quality discipline. The fund maintains firm caps on sub-investment grade exposure and applies a minimum rating threshold to any asset entering the portfolio, which Martin says reinforces the fund's investment-grade risk profile.

Managed Fund

Challenger IM Credit Income Fund

Australian Fixed Income

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Investments in the Fund are subject to investment risk, including possible delays in repayment and loss of income or principal invested. Accordingly, the performance, the repayment of capital or any particular rate of return on your investments are not guaranteed by any member of the Challenger Group.