BRAMSHILL BLOG: From the Desk of Art DeGaetano
The fixed income markets experienced significant volatility in February. Meanwhile, our portfolio produced a total return of -0.27% net on the month, putting our YTD returns at +0.22% net.
Using the Bloomberg Barclays Indexes, during the month of February, the Long U.S. Treasury Index was down -3.12%, the U.S. Aggregate Index was down -0.95%, the U.S. Corporate Index was down -1.62% and the U.S. High Yield Index was down -0.85%.
For many months, we have highlighted interest rate risk as the biggest threat to principal loss. During the month, we maintained our defensive position of the past few months as we maintained a very short duration. Our largest allocation remains in fixed-to-float and FRNs in the preferred sector. These securities have been performing in line with our thesis of attractive yields with little price volatility. Additionally, we have had the added benefit of certain preferreds in our portfolio not being called at their call date and remain outstanding as FRN securities. One example, WFC 7.98% perp, is a preferred which is callable quarterly and is now beyond its first call date. These securities now pay a coupon of L+377 (a very attractive yield for WFC preferred risk with Libor currently at 2.12%).
We made very few asset allocation changes to the rest of portfolio. First, we reduced our high yield exposure from 14% to 11% by taking down exposure in two closed-end funds and exiting SWN 7.75% 10/27. Second, we reduced our U.S. Treasury hedge from 10% to 9% of the book. Third, we increased our exposure to energy preferred securities from 10% to 14% of our portfolio.
We have been waiting for more favorable entry points for risk. We maintain a very low allocation to municipals at 1.5% of the portfolio, as investors are not being paid for the duration risk in that market. Investment grade corporates also represent a very low allocation at 4% of our portfolio. There is little value in that market at this time. Overall, our portfolio duration decreased to 0.1 years, our shortest duration since inception. We are closely monitoring inflation measures as the economy remains resilient and unemployment reaches full status. We are very conscious of interest rates tailing, as happened during the summer of 2013, which could weigh upon all asset classes. We will likely stagger our entry points for risk in all fixed income over the next couple months.
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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.