2024 August Portfolio Commentary

BRAMSHILL BLOG:  From the Desk of Bramshill Investments

The Bramshill Income Performance Strategy performed extremely well in the month of August returning +1.13% and is now up +4.58% YTD. Due to a number of economic readings which have indicated reduced inflation and slowing economic growth, the markets have been focused, once again, on the timing of cuts to the Fed Funds rate.

Many forecasters are predicting cuts beginning in September this year. As stated in our 2Q24 Webinar, it is our belief the Fed will reduce rates by 100bps this year. However, as we have stated in the past, we do not invest based on precision forecasting of Fed behavior. Our process tends to identify and allocate to unique structures and differentiated asset class mixes. We have always employed a philosophy which measures the probability of loss of our investments as a permanent loss of capital, and thus our strategies have tended to produce lower drawdowns and higher up-capture results. In August, we became more cautious in deploying capital due to valuations. During the month, we made small asset allocation changes to the portfolio because we are comfortable with our current positioning and the approximate 6% yield (6.07% YTM and 5.43% YTW) on our portfolio. We believe spreads in most of our investable markets are at tight valuations and thus, we prefer to be more discerning with allocations to these markets. We slightly reduced our largest allocation to investment grade corporate bonds from approximately 33% to 32% of the portfolio as we took profits in Cornell Univ taxable bonds and added slightly to D 6.875% which we have highlighted in past commentaries. We also reduced our allocation to preferred securities from approximately 27% to 26% of the portfolio, as we took profits in CFG 5.65% PFD and added small size to our position in LNC 9% PFD. In high yield corporates, we reduced our allocation from approximately 12% to 9% as we sold a portion of our position in SHYG ETF. We are slightly cautious on the risk markets and thus wanted to reduce our high yield exposure. There was no change to our municipal CEF exposure which remained at approximately 2% of the portfolio. However, we are looking more closely at this asset class for opportunities because if the Fed cuts rates in the fall, CEFs may be an opportunistic segment in which to add risk due to the anticipated lower borrowing cost on the leverage of such funds. Our treasury allocation increased to approximately 32% of the Strategy, with 13% allocated to long duration treasuries and the balance in short-term treasuries. We maintained our long treasury exposure because we believe rates will rally in the months ahead on softer employment and consumer data. At this time, we have very little credit beta in our positioning (BBB+ average credit rating). In addition, our 19% cash plus ST treasuries serve as dry powder for our bullpen if and when we see better entry points for spread product. If treasuries rally to 3.5% on the 10yr treasury, we would most likely monetize some of our long bond position and move out of higher quality credit, in favor of spread product on a significant spread widening into either high yield corporates or preferred securities. If the market stays in a rangebound environment, the Fed is your “friend” (telegraphed by a likely cut in September) in which case collecting yield and carry will be favorable.