On our last Bramshill Investments quarterly webinar, an investor asked:
Q: Given Bramshill's exposure to preferred securities, how might the portfolio perform during an equity market drawdown?
A: It has been roughly ten years since the credit crisis. In response to the regulatory changes, banks have significantly improved their balance sheets in the form of greater tier-one capital. They go through rigorous stress tests and they have shored up their balance sheets as a whole. Many of the broker dealers, especially the majors, which we are invested in, are now chartered banks with significantly more liquidity.
From a correlation standpoint, the markets have experienced a few equity market drawdowns over the past 9 years while we have been running the strategy. The most significant one was late 2015 to early 2016. In January 2016, the S&P was down over -7% and high yield was down over 3% that month. Preferreds really didn't move much in that period. They acted quite well. At the time, Bramshill was invested in some preferreds, and we were basically flat during that month. So I think preferreds have shown that they are just a different type of asset class than they were 12 years ago when the credit crisis came around. That was a financially driven crisis.
Finally, it is important to note that not all preferreds are created equal. There are different types and different structures which allow good active managers to find the most attractive risk-reward opportunities. As an example, many of our current names are not very interest rate sensitive or credit sensitive. To stress test the portfolio, we blew out yields a hundred basis points, and the result was that our securities did not move that much. This is partly due to the banks being better capitalized. Part of it is also due to security selection. The structures and the securities we target should hold up fairly well in any type of credit or equity correction.
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Stephen Selver is the CEO at Bramshill Investments, an asset management firm specializing in absolute return solutions within fixed income and income producing assets. Click here to view his bio and other team members of Bramshill Investments.
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 solicitation to buy securities or the rendering of personalized investment advice. Bramshill does not provide investment advice with respect to individual holdings or portfolios outside of the assets and accounts for which the Firm has been engaged to manage.