BRAMSHILL BLOG: From the Desk of Bramshill Investments
The Bramshill Income Performance Strategy performed well in November, with a total net return of +2.28% and YTD net performance of -7.70%. We achieved this return while maintaining a moderate 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 continued to be a major focus for the markets. In November, however, based on softer inflation data, 10-year yields fell by approximately 44bps on the month (4.05% to 3.61%). While we are respectful of the recent rally in yields, we are not markedly increasing our duration risk in the Strategy, currently at 2.3 years. We do not believe investors need to take significant rate risk with an inverted yield curve to capture the best values in the US credit markets. We also do not believe, in general, investors are being adequately compensated to take significant long-term interest rate risk to capture yield. Thus, our duration will likely remain low for the near term. Last month we provided the yield ranges upon which we would deploy capital. Most of the asset classes in which we invest are at the tighter end of those ranges, thus we maintain our conviction to have a significant liquidity allocation. 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. Over the past 14 years, at times, an asset class allocation (such as municipals in 2011 or high yield corporates in 2016) was the most compelling opportunity. Today, however, we are not finding a particular asset class allocation which is compelling. Most of the liquid credit indices are screening at fair or only slightly cheap levels in our models. Nevertheless, we are finding significant compelling value in individual security selection which is the result of illiquidity in the credit markets. We believe credit differentiation will be paramount if the economy heads into recession in 2023. In October, we mentioned we took positions in BA 3.65 ’47, and ORCL 4 ’46 which were both trading below $65 as well as new issues in 2y and 3y GM and GS, respectively, paper which were yielding close to 6%. In November, we allocated 3% to a new issue for Lincoln National Corp. LNC 9% and 9.25% PFD’s were new issues that came to market and our team is very familiar with this capital structure. Our ability to deploy our liquidity decisively on this deal led to a meaningful allocation which has performed very well as of this writing. We increased our largest asset class allocation in the Strategy in fixed-to-reset preferred’s to 29%.In November, 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 4% allocation to this asset class. We reduced our cash/ST treasury position from 48% to 44% of the Strategy. While the YTW on the Strategy is 5.44% (YTM 5.66%) as of the end of November, the yield to maturity on the invested capital in the Strategy outside of short-term treasuries is 7.12%. The average credit rating across the portfolio is A at this time. We are considering certain positions in other IG and crossover high yield corporates which are starting to look attractive, but we are patiently awaiting more opportune investment entry points as we believe credit selection is paramount at this time.
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.