Market Insights from the Bramshill Investments Team.

2018 September Portfolio Commentary

Posted by Bramshill Investments Team on October 17, 2018

BRAMSHILL BLOG:  From the Desk of Art DeGaetano

September was a challenging month for many fixed income markets. Meanwhile, our portfolio performed relatively well. The Bramshill Income Performance Strategy returned +0.30% on the month, bringing YTD returns to +3.36%. 

During the month, the yield on the 10-year US Treasury increased 20bps from 2.86% to 3.06%. Using the Bloomberg Barclays Indexes, the US Aggregate Index was down  -0.64%, US Treasury Index was down -0.93%, the US Corporate Index was down -0.36%, and the US Municipal Index was down -1.39%. Our out-performance was due to our portfolio positioning which has become more defensive in the past few months. In addition to our often discussed concerns about interest rates, we have maintained caution due to extended historically tight spread levels and complacency in the markets which likely warrants a repricing of risk assets.

Our fixed to float preferred position now stands at 45% of the portfolio. These securities have performed as expected, with minimal price volatility and attractive income generation. High yield still offers little cushion for price volatility. Spreads remain close to historic tights. We have only 11% allocated to this asset class, mostly in loan closed end funds. We need to see a significant repricing to become interested in high yield due to relative value considerations. Municipals suffered significant price declines in September due to their high correlation to US Treasuries. We have had virtually no exposure to municipals for many months. However, we have begun to see value in certain municipal closed-end funds (5% allocation) which are trading at approximately 15% discounts to NAV and yields between 5.25-6%. In September, our interest rate hedge helped us mitigate the significant repricing in rates. We maintained this hedge heading into October.

As of the end of September, approximately 22% of our portfolio was allocated to short term US Treasuries and cash. An additional 7% of our portfolio is positioned in liquid securities with maturities inside 2 years. This cushion will allow us to reallocate to sectors which we believe will suffer more volatility in 4Q18. Because short-term US Treasuries now offer a return on cash (a condition which was not the case even 18 months ago), many allocators are likely to reassess their allocations to passive and longer duration fixed income assets. Such reassessment is likely to lead to transition. We expect such transition to lead to opportunities to invest within the next few 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.

Topics: Commentary