BRAMSHILL BLOG:  From the Desk of Bramshill Investments

Bramshill displayed the importance of an active approach to fixed income last month. In the month of January, our portfolio performed extremely well returning +2.93%, bringing YTD returns to +2.93%. Volatility has been pervasive throughout the last year due to aggressive Fed tightening and uncertain economic conditions.  

Many of our peers struggled to limit drawdowns in 2022.   We maintained a conservative approach through this challenging environment and our portfolio held up relatively well. Conversely in 2023, as the market has begun to recover, our portfolio was able to capture significant positive performance due to the structures and credit quality of our investments.  In November we stated, “Most of the liquid credit indices are screen¬ing 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.”  We have been building a portfolio to withstand interest rate volatility, but to capture upside in months where credit performs.  In January, we moderately increased our preferred allocation to approximately 32%.  Preferred’s rallied in January and this accounted for a large portion of our performance.  We added to our position in FITB 4.5% PFD, which trades at 7%+ YTC (coupon resets in ’25 at UST 5Y +422), an attractive structure which had lagged the rally.  Our high yield allocation now stands at approximately 6% of the portfolio as we added two new positions in high yield corporates, NCLH 8.375% secured notes which are secured by the cruise ships of Norwegian Cruise Lines and SEE 6.125% which is a BB-rated credit which has been in our bullpen for many months.  Our municipal allocation moved up slightly to 8% of the portfolio. While we kept this allocation stable, we saw it tick up moderately on market value as our purchases of municipal CEFs in late December performed well in January.   Our investment grade allocation was stable at approximately 17% of the portfolio.    Our cash plus short-term treasury allocation has been reduced to approximately 39% of the portfolio.  This has been paired from a peak of 48% last summer.  The optionality which this allocation allows in the portfolio will continue to enable our team to build new positions line by line as they reach our price targets.  While the YTW on the Strategy is 5.60% (YTM 6.00%) as of the end of January, the yield to maturity on the invested capital in the Strategy outside of short-term treasuries is 6.89%.  One final note, our portfolio duration at this time is 2.59 years and the portfolio's average credit quality continues to be single A.  We highly favor the yield and duration dynamics of our portfolio over the yield and duration indices like the Bloomberg US Aggregate Index (4.30% yield; 6.3yr duration) and we think there is risk in such passive allocations.