BRAMSHILL BLOG: From the Desk of Art DeGaetano
Bramshill showed the importance of an active approach to fixed income last month. The Income Performance Strategy performed extremely well, returning +1.33% in the month of April, bringing year to date returns to +1.33%. As volatility has made a notable return in 2018, our peers continue to struggle through a challenging environment across fixed income.
Using the Bloomberg Barclays Indexes, the year to date returns through April were as follows: US Aggregate was down -2.19%, US Treasury Index was down -1.98%, US Corporate Index was down -3.22%, US Municipal Index was down -1.46%, and US High Yield Index was down -0.21%. Because our strategy has an absolute return focus, we tend to avoid drawdowns based on our risk/reward assessments.
In our 4Q17 Investor letter we stated: “If we are correct on our interest rate view and 10 year U.S. Treasury yield moves up into the 3% – 3.25% range, there is a high probability that most of these other asset classes (equities, emerging markets, real estate, private equity) will start to experience much more volatility and valuation pressures. In this scenario, Bramshill has a very good chance of having strong performance…”. By maintaining a defensive posture, both in terms of credit risk and interest rate risk, we were able to avoid the drawdowns experienced in US fixed income.
Currently, our portfolio has a duration of less than one year, a 4.31% current yield, a 3.67% yield to worst, and a BBB average credit rating. We have maintained caution due to extended fixed income valuations, inflationary pressures and complacency in the markets which likely warrants a repricing of risk assets. We expect to see such a repricing in the coming months. High yield was relatively flat on the month and offers little cushion for price volatility. Recent equity volatility coupled with rising rates, has impeded performance for US high yield. We do not see good value in high yield until BB’s move closer to 6% (currently at 5.09%). Recently, long duration corporates and preferreds have begun to sell off. As a result, we are creating a bullpen of targeted securities in such markets but most of this list is 30-50 basis points from our target yield entry points. We have had virtually no exposure to municipals for many months and need to see a significant repricing to become interested in this sector due to relative value considerations. We maintained our interest rate hedge in April. Toward the end of the month, approximately 20% of our portfolio was allocated to short-term US Treasuries and cash. We will likely reallocate these short-term securities as we see opportunities in the markets.
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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.