BRAMSHILL BLOG: From the Desk of Bramshill Investments
The Bramshill Income Performance Strategy returned -7.38% on the month, putting our YTD return at -8.47%. March was a month in which the global markets experienced unprecedented stress in terms of volatility and illiquidity.
Not only were the markets assessing the economic effects of a deadly virus which required social distancing, but markets had to contend with a “1 - 2” knockout punch. On March 9th, an oil price war was announced which triggered a liquidity vacuum in almost all financial markets across fixed income, equities, currencies and commodities. The speed and violence of such price moves was unprecedented. The S+P 500 Index sold off -12.35% on the month. Specific to the asset classes in which we invest, that is, corporate credit, preferreds, municipal bonds, and US Treasuries, there were few places, if any, to hide. If you recall, in recent months, the Strategy has been positioned conservatively due to valuations in the credit markets. However, our allocation to preferred securities (approximately 38%), largely impacted the portfolio's performance as the S+P Preferred Stock Index was down -14.91% on the month. Our exposure to this sector was reduced during the month due to risk management and two calls/redemptions which took place. Our preferred exposure was approximately 30% of the portfolio by the end of March. High yield corporate bonds also suffered in March, where according to the Bank America US Corporate HY Index, that market sold off -12.7% for the month. We began March with approximately 11% exposure to high yield corporates, mostly in closed-end funds. This exposure was reduced to approximately 8% of the strategy by the end of March. With these reductions in exposure to the preferred and high yield sectors, we increased our liquidity and allocations to the investment grade corporate and municipal sectors. The portfolio’s investment grade corporate exposure increased from approximately 9% to 11% of the portfolio. This sector will be the beneficiary of recent Fed language which included such corporate bonds, for the first time, in their quantitative easing program. Municipal closed end funds also traded in March at the most attractively priced discounts to NAV we have seen since 2008. Thus we increased exposure in such funds from approximately 3% to 5% of the portfolio. Cash/Short-Term US Treasuries represented approximately 46% of the portfolio at the end of March.
We expect to deploy some of this liquidity in the coming weeks in certain higher quality assets such as IG corporates to increase the yield on the portfolio. However, we also see a particular opportunity in lower tier debt (often crossover rated) within the capital structures of IG credits. Our view is the “post-corona” and post the current quarantines, there will be a longer “U” shaped type of recovery, while we must also be conscious of a potentially leaky “L” shape recovery. We envision this portion of our portfolio to have a very low drawdown probability, given our low dollar price targets and being in stable businesses which will partici-pate near-term in a recovery. These subordinated investments are trading in the $60-$80, yielding 5.5%-7.5% and are generally the preferred, or junior subordinated tranches of credits which have demonstrated solid liquidity. Post the Fed IG corporate bond buying program, these firms also have access to capital at the senior parts of their capital structures and solid balance sheets. We view these names as higher quality securities (relative to generic HY corporate bonds) that are under duress due to the current risk-off environment, and therefore an opportunity. We will provide more details on these investments in the weeks and months ahead. Please note, as of the date of this writing (4/9/20), the Strategy has recovered significantly (more than +300bps) from the drawdown experienced in March.
At this point we are all aware of the global events that are unfolding, predominately due to the Coronavirus. Click here for a note from our CIO regarding Bramshill's latest market outlook.
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.