For the past year, we have targeted interest rate risk as the biggest threat to principal loss. A hallmark of the past few months was that higher yields were a catalyst for negative returns in most risk markets. However, in our 2Q18 commentary, we highlighted that we would likely alter our views regarding interest rates if two conditions changed: first, if financial equities corrected; and second, if US credit spreads widened. These two conditions began to change in October and continued into November with financial equities correcting, on average, close to 20%, and US high yield spreads widening over 80bps. Because of these conditions, we decided to remove the interest rate hedge we had in position for the majority of 2018.

Recently, other negative market conditions for risk assets has led us to maintain caution and position the portfolio defensively. Therefore, we made very few asset allocation changes to the portfolio in November. We have increased our weighting to short-term US Treasuries and cash (now more than 31% of the portfolio). Our largest allocation remains in fixed to float preferred securities at 43% of the portfolio. These securities experienced some recent volatility in the wake of financial equities correcting. However, the credit quality of these issuers remains extremely strong. We are not overly concerned as the impact to our portfolio from this allocation which was -40bps for the month. In other sectors, we have increased our allocation to municipal closed end funds which represent approximately 6% of the portfolio at this time. These funds are trading at the biggest discounts to NAV in the past 5 years and are offering attractive yields relative to corporate bonds. Our high yield corporate and investment grade corporate exposure remained stable at a 11% and 4%, respectively.

Our portfolio yield to worst remains attractive at 4.47%. Increased volatility in the credit markets will likely lead to better entry points for risk in the coming weeks. We are paying close attention to the changing language of the Fed as well as trade negotiations. 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.