Staying opportunistic without chasing risk: Challenger IM's approach to credit investing

Pete Robinson, Head of Investment Strategy at Challenger IM, has seen his fair share of market dislocations. And while April’s volatility caught many investors off guard, he says it barely left a dent in their portfolio positioning.

“It was really a fleeting moment of volatility,” Robinson explains. 

“Markets have rebounded, and equity markets are now above where they were before it all started.”

The fund’s positioning remains consistent. Not because of inaction, but because the team expects these “bumps in the road” to continue and prepares for them accordingly. Their allocation across both public and private credit gives them the flexibility to act when spreads move.

Trading through volatility

Unlike many credit managers bound by tighter liquidity constraints, Challenger’s structure allows for greater agility. When markets become volatile, Robinson and the team can trade around the dislocation.

“We tend to extend our credit duration during those periods. We sell short-dated bonds and buy longer-dated bonds.”

Because the fund doesn’t offer daily liquidity, they aren’t forced into reactive selling or constrained by redemption flows. That makes them better equipped to respond when credit markets seize up.

“We're better able to trade during periods of volatility and illiquidity compared to those funds that offer daily redemptions.”

Navigating the big picture risks

With Donald Trump’s “Big Beautiful Bill” passed and concerns around US fiscal sustainability mounting, Robinson sees risks, but also opportunities.

He suggests that rising questions about the US dollar’s global dominance may prompt capital to rotate back into local markets.

“That could actually drive Aussie credit spreads tighter,” he says. “All it takes is a marginal move.”

The outlook for the long end of the US yield curve, in particular, is causing concern. If the 30-year Treasury heads towards 6%, Robinson believes the market could face real pressure.

Private credit: Still attractive (for now)

Challenger IM is currently seeing better relative value in private credit, where spreads haven’t compressed to the same degree as public markets. While US high-yield bonds are trading at spreads around 300 basis points, Challenger IM is still seeing 500 basis points on similarly rated private credit.

“That 2% illiquidity premium is still a healthy return,” Robinson says.

But he acknowledges that this gap can narrow. If markets stay calm and capital continues to flow into private credit, that premium could shrink to 100-150 basis points. Any tighter, and the value proposition may no longer stack up.

“If spreads get too tight, the value proposition for being in private credit just isn’t there.”

Fair value matters in times of dislocation

When markets are volatile, price discovery becomes difficult, even in public markets. But it’s in private credit where the challenge is most acute. Robinson warns that stale or unrealistic valuations can paralyse liquidity.

“If I’ve got something marked at par that should really be at 90 cents, I’m not going to sell it and realise that loss.”

This reluctance to revalue assets properly can hinder both trading and fund inflows. For Challenger IM, this fair value principle is a strategic advantage.

“We’re big advocates for that. It’s about holding something where you think you can sell it. That applies to public and private markets.”

Stability through portfolio construction

The fund targets a BBB-average credit rating and aims for a 2.5-3% credit spread. But that doesn’t mean it’s chasing yield. Instead, Robinson says their approach is grounded in disciplined portfolio construction.

“We’ll maintain a consistent level of credit risk, but we build in diversification and think hard about relative value.”

That includes granular position sizing and careful selection across industries and sectors, with an emphasis on buying the cheapest assets relative to their risk.

Opportunistic, not reckless

When dislocations occur, the Challenger IM team doesn’t waver from its core objective: to deliver steady income and capital stability. But that doesn’t mean they sit on their hands.

“It’s about being opportunistic but disciplined,” Robinson says. 

“We want to buy the right assets, at the right price, and maintain that stability.”

He notes that while capital preservation is a goal, it doesn’t guarantee zero volatility. Markets will move, but the focus is on smoothing the ride.

Lessons from a GFC war story

Robinson closes the conversation with a vivid story from the global financial crisis. While working at a credit opportunities fund, he bought US subprime mortgage bonds in late 2008 at just over 20 cents on the dollar, only to realise he’d overpaid by around 40% compared to the next best bid.

“I remember that sinking feeling,” he admits.

But the trade turned out to be one of the best of his career. The bonds eventually recovered to par, delivering a massive return. The lesson?

The biggest discounts occur during the periods of the of the biggest dislocations and having dry powder to put to work when markets are dislocated can be more important than getting the price exactly right.

Access to income and capital stability

The Challenger IM Credit Income Fund aims to provide clients with capital stability and income on a regular basis accompanied by lower levels of volatility than traditional fixed income strategies. To learn more, visit their website or fund profile below. 

Managed Fund

Challenger IM Credit Income Fund

Australian Fixed Income

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