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.