Market Insights from the Bramshill Investments Team.

2023 September Portfolio Commentary

Posted by Bramshill Investments Team on October 20, 2023

BRAMSHILL BLOG:  From the Desk of Bramshill Investments

Logo BlueSeptember was a challenging month in both the fixed income and equity markets. The Bramshill Income Performance Strategy produced a total return of -0.74% in September, putting our YTD returns at +2.02%. The 10-year US Treasury yield moved +47bps higher on the month. 

The Bloomberg US Aggregate Index fell -2.54% in September and has returned -1.21% YTD.  All liquid markets experienced significant volatility in September as economic headlines, characterized by a robust labor market and inflationary forces still at play, caused many investors to believe the Fed will keep rates higher for longer.  Furthermore, a significant supply/demand imbalance continues to put upward pressure on treasury yields. Since the Fed began its tightening campaign, we have believed interest rate risk, due to Fed rate hikes and quantitative tightening, as being the biggest threat to principal loss.  For this reason, we have maintained significant amount of short duration liquidity over this time to protect principle. However, this liquidity is proving very valuable as we are beginning to identify opportunities in certain segments of US fixed income.  We have begun to methodically deploy this liquidity into three distinct areas of the market. First, within investment grade corporates, we increased our allocation from approximately 11% to 17% of the portfolio. We like the risk/reward of certain low dollar priced corporate bonds with large market caps and high credit quality. We added names such as Duke Energy, Oracle, 3M and Verizon. The bonds which we added had an average dollar price below <$65, an average yield in excess of 6.5%, and an average spread of approximately +165 over treasuries. We believe the low dollar prices on these securities insulates the potential downside credit risk, and the more limited duration (approximately 9 years) of these credits is a better risk/reward than par securities. Furthermore, the positive convexity attributes to these positions provide a strong risk/reward profile. Second, we are targeting certain 2-3 year investment grade corporates with yield in excess of 6.25%.  We believe the Fed is nearing the end of its tightening campaign, as their last rate hike took place in July and the rhetoric among the FOMC is more even-handed.  Thus, we are poised to lock in short duration IG corporate bonds with higher yields than short term bills.  Third, we added very moderately to municipal CEFs which now stand at 8% of the portfolio. These funds have been experiencing selling pressure due to their leverage (higher borrowing costs) and tax loss harvesting from investors. However, they are trading at -15% to -18% discounts to NAV.  This oversold condition proved to be good entry points for such CEFs in 2013, 2018, and 2020.  While we will be judicious in this allocation, we are poised to increase our exposure if selling pressure mounts in 4Q23. Our preferred allocation was stable at approximately 28% of the Strategy, as we sold C 7.375% PFD which had tightened on spread considerably, and we added positions in ENBCN 8.5% PFD new issue and ALL 7.375% PFD. Our high yield corporate allocation is approximately 3.0% of the portfolio. The US high yield default rate has already risen from approximately 1% to 3% YTD. We will maintain our caution on this asset class.  Our short-term treasury (now yielding 5.42%) and cash allocation was reduced to approximately 44% of the portfolio. We expect to deploy more capital in the asset classes and opportunities described above in the coming weeks.  For a much more thorough discussion of our views and our positioning, please see the Webinar hosted by our CIO/Founder Art DeGaetano which took place on October 10, 2023.  

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.

Topics: Commentary