BRAMSHILL BLOG: From the Desk of Bramshill Investments
December was an extremely volatile month in both the interest rate and credit markets. Despite softer than expected inflation readings, the Fed continued its strong rhetoric to maintain steady interest rate hikes in the coming months. The 10-year US Treasury moved +27bps higher on the month.
This capped a consistent march higher for rates all year. The full-year 2022 returns for benchmark fixed income asset classes were as follows: Bloomberg US Aggregate Index (-13.01% YTD); Bloomberg US IG Corporate Index (-15.76% YTD); Bloomberg US High Yield Corporate Index (-11.19% YTD); BAML Fixed US Preferred Index (-19.22% YTD); and the Bloomberg US Municipal Index (-8.53% YTD). The Bramshill Income Performance Strategy returned -0.20% in December and returned -7.88% for the full year 2022. This year we have been required to maintain discipline and employ our consistent investment process which we have now implemented for over 14 years in this Strategy. A large part of such discipline is focused on preservation of capital and risk management. If you recall, due to the challenging investment environment, in the first quarter of 2022 we de-risked the portfolio increasing our cash plus short-term treasury allocation to 48.7% of the portfolio. That proved to be a fortuitous allocation, as treasury bills were the least impacted by the dramatic moves in credit and rates last year. Our short-term treasury allocation now yields close to 4.25%, as the recent move in Fed funds has made our defensive investment even more attractive. While we have reduced this liquidity allocation to approximately 41% of the portfolio, it remains a ballast, and will be the allotment from which we fund new investments this year. We are fortunate that we do not need to sell poor performers to buy new positions. In recent months, we have mentioned new positions we added in: BA 3.65 ’47, and ORCL 4 ’46 which were both trading below $65; new issues in 2y and 3y GM and GS, respectively, paper which were yielding close to 6%; Macys 4.3% ’43 which was trading below $60; and a new issue for Lincoln National Corp. LNC 9% and 9.25% PFD which came to market at extremely attractive levels. In December, we added to a position in Energy Transfer FRNs (junior subordinate paper) trading at approximately $75 with a L+300 coupon and a current yield of 10.3%. (This was a compelling entry point at over +400bps cheap to senior corporate bonds in the same capital structure). Our high yield allocation now stands at approximately 4% of the Strategy, which we believe is appropriate with credit spreads remaining historically tight. Our investment grade corporate allocation remained stable on the month at approximately17%. We increased our allocation to municipals to approximately 8% of the Strategy, as municipal CEFs such as VMO, EIM and MVF sold off aggressively with year-end tax selling pressure. Discounts widened to greater than 12%, and we used this opportunity to add exposure. Our preferred allocation increased slightly to approximately 29% of the Strategy as we purchased a small position in a new issue in ATH 7.75%, and took a new position in a short call PFD, C 5.95% which was trading >7% yield to a 2 month call. If this preferred is not called it will reset to a coupon >8%. In 2022, the moves in yields and spreads were historic. At the end of 2021, these asset classes offered little value as the “all-in” yields were between 2% and 4%. At this time, these same asset classes offer yields ranging from 6% to 10%. Our gameplan this year is to invest capital according to the targeted ranges we have identified within each asset class of our Strategy. For example, we believe the US high yield corporate market will trade within an 8-10% yield range. At the wider end of this range we will choose names from our bullpen (primarily BB-rated corporates with high quality credit metrics) and allocate to them accordingly. We would gladly share more of this information in each asset class with more granularity on a call. However, our allocations will be security specific, not focused on generic index allocations most of which are at fair value. Current opportunities are single-name credit opportunities which are the result of the illiquidity of the credit markets last year. We see many more of these opportunities presenting themselves in 2023. While the yields on our overall portfolio are 5.66% YTM and 5.44% YTW, respectively, the yields on invested capital within the portfolio (outside of short-term treasuries) are 7.39% YTM and 6.97% YTW, respectively. We are beginning to see many attractive securities in the credit markets and expect to reach price targets for many items in our bullpen in the coming months.
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.