Market Insights from the Bramshill Investments Team.

2017 August Portfolio Commentary

Posted by Arthur DeGaetano on September 20, 2017

BRAMSHILL BLOG:  From the Desk of Art DeGaetano

The Bramshill Income Performance Strategy returned -1.32% on the month, putting our YTD return at +0.87%.

If you recall, we have repeatedly expressed our concern about interest rate risk for much of 2017 because we believe the economy is showing sustainable growth, the labor markets are tight, and inflation is likely to increase in the coming months. Additionally, we believe there is significant uncertainty about how orderly the unwind of the Federal Reserve's balance sheet will be. For these reasons, we have selected securities for our portfolio with attractive yield characteristics, but also reflect our conservative view of interest rates.

We have an interest rate hedge to shorten our duration. At the end of August, our portfolio had an approximate duration of 1 year, with a current yield of 5.69% and a yield to worst of 4.47%. Unfortunately, two factors weighed on our performance in August. First, interest rates declined significantly as the 10-year U.S. Treasury moved 17 bps lower on the month. Second, energy prices sold off significantly (oil -5.8%) which impacted our 10% position in energy convertible preferred securities, attributing for an approximate drag of 69 bps on the portfolio.

We remain constructive in the months ahead regarding the economy, inflation, and energy prices. Therefore, we have not markedly changed our view of the current environment. We believe many of the factors which may have contributed to muted prices in the past months are temporary in nature and we continue to favor taking credit risk over interest rate risk at this time.

Over 42% of the Bramshill portfolio is currently positioned in fixed to float preferreds, with limited durations and attractive yields. Approximately 14% of the portfolio is positioned in four closed-end funds in senior secured floating rate loans and high yield bonds.

The recent rally in rates has allowed our team to focus on many new opportunities in the preferred market, where we have allocated over 50% of our portfolio (an increase from 35% at the end of 2Q17). Recent additions include:

  • C 7.68% floating rate PFD
  • VLY 5.5% fixed-floating rate PFD
  • JPM 5% fixed-floating rate PFD.

We believe recent fixed income volatility has created more opportunities, and therefore greater return potential, for our Bramshill Income Performance Strategy.

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This commentary is provided by Bramshill Investments, LLC for information purposes only and may contain information that is not suitable for all investors. Certain views and opinions expressed herein are forward-looking and may not come to pass. Investing involves risk, including the potential loss of principal. Past performance may not be indicative of future results, which are subject to various market and economic factors. No statement is to be construed as an offer to sell or a solicitation of an offer to buy securities or the rendering of personalized investment advice. Stated performance is reflective of realized/unrealized capital gains/losses and investment income achieve in composite accounts, net of investment management fees and expenses for trading, custody and fund maintenance (where applicable). Returns reflect the reinvestment of dividends and other such distributions and performance for January 2009 through April 2012 depicts actual returns generated by the strategy while managed by the Firm’s Chief Investment Officer at an unaffiliated investment firm. All information is accurate as of the date of publication and is subject to change without notice.

Topics: From the Desk of Art DeGaetano, Commentary