BRAMSHILL BLOG: From the Desk of Bramshill Investments
The Bramshill Income Performance Strategy returned +0.66% net in May, contributing to a +1.87% YTD net total return. The portfolio has benefitted from positioning this year in closed-end funds and preferreds. There were very few adjustments made to the portfolio in the past month as it has been positioned for spread tightening in these asset classes. The US economy has been gathering momentum in the past few months as a result of the substantial monetary and fiscal stimulus programs in place at this time. This backdrop has brought about much debate of late about higher GDP readings, inflation and rates.
Our view on inflation is aligned with Fed. We believe the recent elevated readings on inflation are transitory. Recent tight market conditions in certain commodities, semiconductors and autos have occurred because of the rapid reopening of the economy. However, we do not believe such conditions will be systemic. There are still over 9 million people unemployed in the US which creates slack in that market and hourly earnings and wage growth have not moved markedly in recent months. That being said, we are not taking significant duration exposure in our portfolios. Bramshill employs a philosophy of “probability of loss” and when that probability is on the higher end of the spectrum based on valuations, our investment team maintains caution. The Income Performance Strategy has a portfolio duration of 3.2 years at this time. We do not see that duration moving very much in the coming months simply because the interest rate market and long duration securities in our five core asset classes are not compensating investors to take duration exposure at this time. Our investment team constantly employs scenario analysis. If rates move higher from here, approximately 40% of the portfolio is defensive and/or floating rate in nature, and will perform well in a rising rate environment with coupons resetting higher (in most cases off US Treasuries not LIBOR) and principal likely to be stable under such conditions. While we are not overly concerned with inflation, the credit and rate markets are not compensating investors at this time to extend interest rate exposure. As always, we will continue to monitor these conditions and constantly reassess our analysis. Our largest asset class allocation remains in preferred securities which represent approximately 37% of the portfolio, which is down slightly on the month. In preferred’s, we are still positioned primarily in fixed to reset structures with limited durations. We had positions in Citi floating rate note PFD and PRE 7.25% PFD which were called during the month. We also took more profits in ET PFDs which had run significantly this year with the energy/MLP rally. We added a new 1.5% position in ALLY 4.7 PFD, fixed to nc7 reset at UST+350, and added to a position in JPM 4.63% fixed for life PFD. Our positions in high yield, investment grade corporates and municipals all remained stable at 15%, 11% and 13% of the portfolio, respectively. Our liquidity position of cash/ST US Treasuries increased slightly to 24% of the portfolio. The current yield in our composite is 4.26%, with a yield-to-worst of 3.02 %, and an average credit rating of BBB+. Overall, we are constructive on risk and looking for further opportunities to deploy capital into stable credits with attractive yield characteristics.
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.