BRAMSHILL BLOG: From the Desk of Bramshill Investments
The month of January witnessed a significant dislocation in most liquid assets. The Bramshill Income Performance Strategy returned -2.48%. Both US fixed income and equities suffered due to sharp inflation data and increased rhetoric from the Fed which indicates significant tapering and tightening of monetary policy is imminent.
As we stated in our most recent quarterly letter, “recently they (the Fed) pivoted and explicitly told us they will be quickly tapering…ending Quantitative Easing and…soon begin Quantitative Tightening…while curtailing their $9 trillion balance sheet.” The S&P Index, the most visible risk barometer, witnessed a large monthly drawdown (-5.17%). For the month, the US high yield and preferred markets were down -2.7% and -3.9%, respectively.
Although we had been positioned for a rising interest rate environment, our positions in preferreds and closed-end funds contributed to the negative performance. In recent commentaries, we referenced an approximate 33% position in cash and short-term US Treasuries as we waited for better entry points on risk assets. Recently, we have seen significant corrections in prices and yields in all of the underlying asset classes in which we invest. However, most yields and spreads in investment grade corporates, high yield corporates and preferreds have only moved from extremely overvalued levels to fair levels in terms of pricing. In our assessment, these asset classes still have room to correct before they look cheap and indicate a low probability of loss. Therefore, we remain cautious and maintain our large liquidity position.
Nevertheless, our bullpen of potential investments is growing daily. The biggest drag on the month was related to our allocation to municipal CEFs. If you recall, we had reduced this allocation from 15% to 12% in late 2021. In early January, we further reduced this position to 11% of the Strategy. However, prices moved very rapidly intramonth and we therefore held our remaining position as we believe these CEFs represent good value at current prices. We reduced our high yield exposure from approximately 11% to 9% as we sold our position in COIN bonds and modestly reduced our high yield CEF exposure. We increased our investment grade corporate exposure from 10% to 12% as we put some cash to work in short duration bonds to pick up incremental yield. Certain short duration corporates look much more enticing than they did even 2 months ago. We will likely continue to allocate to this asset class especially in the new issue market. We reduced our preferred allocation from approximately 34% to 32% of the portfolio as we sold one of our more rate sensitive positions in TFC 5.10% PFDs. The vast majority of our PFD positions remain in fixed 5yr reset structures with high back-end spreads (+350 to 450). Although these positions sold off in sympathy with other spread markets in January, they remain much more attractive than perpetual preferred’s which have extended in duration in the recent rate market selloff. In early January, we initiated a small treasury hedge which contributed slightly to performance.
At Bramshill we try not to get emotionally tied to investment positions and purely look to manage risk across various environments as we have done in this Strategy over the past 13+ years. We are currently excited about this environment as many securities are beginning to represent better value with a much lower loss probability. This will give us an opportunity to significantly increase the yield in the Strategy and to reposition our capital. We like to say that the quarter ahead “is our type of environment” as we anticipate volatility across many 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.