BRAMSHILL BLOG: From the Desk of Bramshill Investments
June was an extremely volatile month in both the interest rate and credit markets. Higher than expected inflation numbers increased the outlook for interest rates as the 10-year US Treasury moved +27bps higher on the month. The YTD returns through June for benchmark fixed income asset classes were as follows: Bloomberg US Aggregate Index (-10.35% YTD); Bloomberg US IG Corporate Index (-14.39% YTD); Bloomberg US High Yield Corporate Index (-14.19% YTD); BAML Fixed US Preferred Index (-14.96% YTD); S+P US Preferred Index (-15.51% YTD) and the Bloomberg US Municipal Index (-8.98% YTD). The Bramshill Income Performance Strategy returned -1.83% in June and has now returned -8.43% YTD.
The first half of 2022 has required us to maintain discipline and employ our consistent investment process which we have implemented over the past 13 years. A large part of such discipline is preservation of capital and risk management. Due to the challenging investment environment, during the first half of 2022 we de-risked the portfolio with a cash plus short-term treasury allocation which increased from approximately 32.1% of the portfolio to 48.7% of the portfolio at this time. This allocation now yields close to 1.5%, as the recent move in Fed funds has made our defensive investment even more attractive. In the first half of 2022, the moves in yields and spreads were historic. We manage strategies which are not benchmark or index focused. One of our competitive advantages which has led to our outperformance, is our ability to assess absolute value in the asset classes in which we invest (US IG corporates, US HY corporates, US Preferred Securities, Municipals). At the end of 2021, these asset classes offered little value as the “all-in” yields were between 2% and 4.5%. At this time, these same asset classes offer yields ranging from 4% to 9%. We plan to deploy capital in the coming months judiciously when the probability of loss is low and the likelihood of positive returns is high. Another key component of our investment process is quantitative analysis which provides historical context (we employ over 25 years of data) to determine whether an asset class is rich or cheap. During 2022, most of these asset classes have moved from spread levels which were two standard deviations rich for most of 2021. At this time, we see a number of variables which now screen 1.5 to 2 standard deviations cheap in our models. These valuations have historically been compelling entry points (which has led to substantial returns) in the past. The process described above has not only allowed us to maintain a conservative profile when investors are not being compensated, but also allowed us to deploy capital opportunistically when the probability of loss on such investments is low. We would gladly share more of this information with more granularity on a call. We believe there are many specific opportunities in our bullpen which are compelling at this time. While the yields on our overall portfolio are 3.91% YTM and 3.75% YTW, respectively, the yields on invested capital within the portfolio are 6.46% YTM and 6.15% YTW, respectively, at this time. We are beginning to see many attractive securities in the credit markets and expect to reach price targets for 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.