BRAMSHILL BLOG: From the Desk of Bramshill Investments
The Bramshill Income Performance Strategy produced a total return of -0.62% in October, putting our YTD returns at -9.76%. All liquid markets experienced significant volatility in October due to many economic headlines, and guidance from the Federal Reserve which is poised to maintain vigilance with regard to inflation.
For the past year, we have targeted interest rate risk, as a result of Fed rate hikes and quantitative tightening, as being the biggest threat to principal loss. The full impact of tighter credit conditions is still difficult to assess as the economy slows. Clearly, such increased borrowing costs will impact the most levered borrowers. However, we are also cognizant of a confluence of market-impacting factors. These influences have ranged from the impact of UK fiscal policy on UK pensions, to challenging US/China relations, to a deteriorating Russian/Ukraine war. Such factors have affected markets and increased volatility in recent weeks, and thus need to be incorporated into our process when we allocate to risk sectors in our Strategy. Our primary focus at this time is our gameplan with regard to the 48% allocation to cash/ST treasuries in the Strategy. This gameplan is as follows. First, we are operating with an assumption that inflation will settle in a 3-5% range. Although the Fed is making progress in slowing the economy and inflation’s trajectory, it will take much longer this time to reach the Fed’s longer-term target of 2%. Therefore, the Fed will keep rates elevated for an extended period. Second, we have targeted ranges to invest capital within each asset class of our Strategy. For example, we believe the US high yield corporate market will trade within an 8-10% yield range. At the wider end of this range we will choose names from our bullpen (primarily BB-rated corporates with high quality credit metrics) and allocate to them accordingly. We recently added Macy’s (Ba2/BB) to the portfolio in this asset class. At the tighter end of this range we will be patient and await better entry points. We have targeted ranges for 10-year treasuries, investment grade corporates, preferred’s and municipals, and we are happy to share these ranges on a call with our investment team. In October, we made very few asset allocation changes to the portfolio. In investment grade corporates, we sold PCG 3.25 ’24 which had held in well. We took small positions (<1%) in BA 3.65 ’47, and ORCL 4 ’46 which were both trading below $65. As we mentioned in previous commentaries, we like the risk/reward of certain low dollar price corporate bonds with large market caps and high credit quality. We also purchased new issues in 2y and 3y GM and GS, respectively, paper which were yielding close to 6%. Our investment grade corporate allocation now stands at 18% of the portfolio. While our high yield corporate allocation remained stable at 4% of the portfolio, we shifted this allocation by reducing our exposure to loan CEFs (a sector which we believe will be challenged) and offset this by reallocating this capital to a HY bond ETF, a more liquid position. Our preferred allocation remained stable at approximately 26% of the portfolio, although we did sell MS 6.5% PFD which was a new issue on which we took profits as market conditions changed. Our municipal allocation remained stable at approximately 5% of the portfolio. Our portfolio yield to maturity is 5.12%, and the yield to worst is attractive at 4.91%; however, the yield to worst on invested capital (outside ST treasuries) is much higher at 7.45% at this time. We expect to employ the targeted ranges mentioned above and deploy capital according to this gameplan.
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.