BRAMSHILL BLOG: From the Desk of Bramshill Investments
In August, 10-year US treasury yields moved +15bps and the Bloomberg US Aggregate Index returned -0.64% on the month and has returned 1.37% YTD. The Bramshill Income Performance Strategy returned -0.33% on the month, putting our YTD return at +2.78%.
While we have been consistent with our message that we believe the Fed will be “higher for longer”, it does seem as though the Fed may be nearing the end of its tightening cycle. Inflation readings remain somewhat elevated; however, the Fed at this time seems to be patient to allow its rate hikes of the past 18 months to work through the economy and have a further quelling effect on prices. At these levels, all-in yields are attractive and our investment team has populated its “bullpen” with a long list of securities which have a low probability of loss and high potential return. While our allocation to short-term Treasuries approaches 45% and continues to buffer the portfolio, this allocation will also allow our investment team to deploy capital in a meaningful way. We are focused on building a portfolio which will not only collect a high current yield, but also withstand potential volatility. Currently, we are in a position to allocate to some very attractive sectors of the market. In particular, here are the three sectors which we favor for investment within the Strategy in the coming months: short duration investment grade corporates which offer significant carry with limited credit risk; long duration, low dollar price high quality investment grade corporates trading in the $65-70 dollar price with good convexity attributes; and municipal closed-end funds trading at more than 15% discounts to NAV. While all three of these sectors look attractive, our immediate focus remains on implementing and incorporating these investments from our bullpen during opportunistic entry points in the market. During August, we were not as active as we expect to be in the coming months. We slightly reduced out preferred allocation to 28% of the portfolio. We added small to some existing positions such as SCHW 5.375% PFD, which we have highlighted in recent commentary. We also added to WFC 5.9% PFD which yields 7.75% to 1y call and, if not called, steps up to a FIXED 9% coupon. We sold some GS 7.5% PFD and C 7.375% PFD at levels where spreads had tightened to unattractive levels. In investment grade corporates, we have an approximate 11% allocation but, as mentioned above, this is likely to increase. Our high yield corporate allocation was stable at approximately 7% of the portfolio as we reduced one name and remain cautious on this asset class. High yield corporate defaults are likely to elevate in the months ahead as these levered issuers face higher borrowing costs. The Strategy’s YTM is 6.67% (YTW 6.44%) with a duration of 2.3 years and an average credit quality of single A. Year to date, we have been defensive with regard to duration and credit exposure and that has translated into outperformance YTD. However, we believe the recent increase in treasury yields has created more opportunities than we have seen over the past year. With this backdrop, we expect to deploy capital in the coming 4th quarter to build a portfolio which should perform well over the next few years and capture more upside than our short-term treasury allocation. This shift is likely to alter the complexion of the portfolio and thereby the potential for greater returns.
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.