BRAMSHILL BLOG: From the Desk of Bramshill Investments
The Bramshill Income Performance Strategy performed well in July, with a total net return of +2.32% and YTD net performance of -6.30%. We achieved this return while maintaining a defensive posture, both in terms of credit risk and rate risk. With the Federal Reserve focused on aggressively raising rates to fight inflation, interest rate risk has been a major focus for the markets. In July, however, 10-year yields fell by approximately 36bps on the month (3.01% to 2.65%).
If you recall, in mid June we allocated 7% of the Strategy to the 20-year US Treasury benchmark which was the highest yielding part of the curve (at the time trading 25bps cheap to the 30yr US Treasury benchmark). This was an opportunistic allocation based on oversold conditions in that market. In early July, we exited this treasury position into the rally. We do not believe the July rally in yields is long-lived. Therefore, we reduced our duration to 2.41years on the Strategy. We also do not believe, in general, investors are being adequately compensated to take significant long-term interest rate risk, thus our duration will likely remain low for the near term. One of the benefits of our investment process is to allocate to sectors and securities with overwhelming relative value attributes for the risk associated with those positions. One such asset class is short-dated investment grade bonds. In July, we increased our allocation to IG corporate bonds from 13% to 16% of the Strategy (and as of this writing this allocation is now over 19% of the Strategy). With yields on 2 to 3year corporates, between 4% and 5% and spreads meaningfully wider this year, we believe there are many credits which offer significant carry with low credit and duration risk. We will likely continue to allocate to this asset class in the coming weeks. Our largest asset class allocation in the Strategy in fixed-to-reset preferred’s was stable at 29%. In July, preferred’s were a significant contributor to performance. In municipals, we maintained an approximate 5% allocation to municipal CEF’s. In high yield corporates, we maintained a 5% allocation to this asset class. With the monetization of the treasury position mentioned above, we increased our cash/short-term treasury allocation to 46% (however, as of this writing this liquidity position has been reduced to 40% as we have been allocating to IG corporates in recent days). While the YTW on the Strategy is 3.83% as of the end of July, the yield to maturity on the invested capital in the Strategy outside of short-term treasuries is 6.08%. The average credit rating across the portfolio is A at this time. We are considering certain positions in fixed coupon perpetual preferreds and crossover high yield corporates which are starting to look attractive, but we are patiently awaiting more opportune investment entry points.
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.