BRAMSHILL BLOG: From the Desk of Art DeGaetano
The Bramshill Income Performance Strategy produced a strong month of performance in June, with a total return of 0.82%. The Strategy has returned 7.20% YTD. We achieved this return while maintaining a very defensive posture, both in terms of credit risk and rate risk. The duration of our Strategy now sits at 1.17 years.
Interest rates rallied significantly in the month due to a perceived change in US Federal Reserve policy. In the coming weeks, the Fed will likely deliver further clarity on whether they will cut the Fed Funds target rate. Some have speculated as much as a 50bp rate cut at the July meeting. The perceived inflation outlook of the market has decreased along with economic activity. We have not taken much interest rate risk this year because the yield curve is still extremely flat on a historical basis and the market has not offered sufficient compensation for taking such duration risk.
As distinguished from most fixed income strategies, the Income Performance Strategy’s total return this year has not benefited significantly from the rally in US Treasury rates. The Strategy has mostly benefitted from positioning in undervalued securities. In recent weeks, as the prices of certain names in our portfolio have reached target levels, we have reduced exposure judiciously and moved into short-term US Treasuries and cash (which accounts for approximately 28% of the Strategy at this time). In June, we took profits on some of our allocation to municipal closed-end funds, reducing this allocation from approximately 12% to 9.5%. Certain of these funds had rallied close to 20% in total return from our original purchases in November and December 2018. We have a modest 9% exposure to high yield at this time and only 9.5% allocation to investment grade corporates. Our portfolio benefitted from a few long duration investment grade corporate names, which we still favor but will be very selective in adding at this time. Our largest sector allocation is in preferred securities, which accounts for approximately 39% of the portfolio (most of which are short duration). We increased this allocation in June with some selective additions in the new issue market. As we have taken profits in recent weeks, we have maintained yield on the portfolio (4.97% yield to maturity, 4.22% yield to worst).
With the market priced for a Fed “insurance cut“ late next month, we feel there is a growing risk in rate sensitive sectors such as municipal bonds and investment grade corporate bonds. Because of our conservative risk profile at this time, we are poised for a correction and opportunity in the credit or rate markets.
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.