Market Insights from the Bramshill Investments Team.

2018 January Portfolio Commentary

Posted by Arthur DeGaetano on February 21, 2018

BRAMSHILL BLOG:  From the Desk of Art DeGaetano

January was an extremely challenging month for most fixed income markets. Looking at the Bloomberg Barclays Indexes, the U.S. Treasury Index was down -1.36%, the U.S. Aggregate Index was down -1.15%, the U.S. Corporate Index was down -0.96% and the U.S. Municipal Index was down -1.84%. For the Bramshill Income Performance Strategy, the portfolio performed relatively well, returning +0.49% net on the month.

Our absolute return focus has guided us to guard the portfolio from large moves in interest rates. For many months, we have discussed our view that the strong economy would drive rates higher. However, there is an even larger catalyst in the market post the latest tax reform and budget resolutions. That catalyst is in the form of a marked increase in U.S. Treasury supply (2018 issuance will be more than double the supply of 2017). In addition, there will be a marked decrease in demand from central banks (the Federal Reserve and the ECB are scheduled to withdraw over $1 trillion of buying power from the markets in 2018). This combination will likely create a recipe for a major correction in that market.

In our 9 years managing the Income Performance Strategy, we have never had such a short duration on our portfolio. At the end of January, our portfolio duration was 0.2 years. We have maintained caution due to complacency and the extended fixed income valuations both in yield and spread in the credit markets which likely warrants a repricing of all risk assets. High yield offers little cushion for price volatility which will likely increase in the coming months. Long duration corporates and municipals are also not attractive. Fixed-to-float preferred securities continue to represent a large allocation at approximately 40% of our portfolio. These securities have proven to exhibit strong yield characteristics, limited durations and very little price volatility. We also have approximately 10% of our portfolio allocated to convertible preferred securities in the energy sector. These convertibles contributed to portfolio performance in January of approximately +25 bps as many of the names rallied given how levered they are to the underlying commodity (crude). There are four high yield and loan closed-end fund positions in the portfolio which contributed -11 bps to performance in January. Our rate hedge contributed +63 bps for the month. As of the end of January, the current yield is approximately 5.08% and the yield to worst is 3.78%.

There will likely be a large opportunity in the coming weeks and months as there are likely redemptions and reallocations which will take place in the U.S. credit markets. As in the past, we are well positioned to take advantage of these opportunities. Our bullpen now consists of over 75 securities. We are excited by these opportunities as we are likely to be able to increase the yield on our portfolio judiciously in the months ahead.

Did you miss our live Q4 2017 webinar? Click here to watch the replay. 

Q4 2017 Webinar Replay


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