On our last Bramshill Investments quarterly conference call, an investor asked:
Q: Can you talk a little bit about the liquidity in preferreds? Is that of concern?
A: Art DeGaetano: Liquidity in preferreds is not a major concern to us. I think there’s a slight misconception when it comes to liquidity in preferreds because they’re an exchange-traded product. Therefore, the typical equity crowd looks at volume on the exchange to gauge how liquid a stock is. The way preferreds work is that because they’re really a subordinated fixed income product that does trade on an exchange, they often trade by appointment with the dealer community.
At Bramshill, we are set up with all the preferred exchange-traded desks where we have the ability to send orders through algorithms or electronically and work them on the screen to get the liquidity we want. We can also go to the OTC fixed income desk that trades preferreds and trade them in block institutional sizes. In the liquid names in which we are invested, we often have no problem moving decent-sized positions around in either of these two manners. We’ll usually arbitrage the two types of execution in order to get the best price and best liquidity at the time.
We also pegged capacity on this strategy at $2 billion, and we did not do that in a cavalier way. (By the way, if we get to $2 billion and clients want to true up, could we run $2.1 billion, yes). But at $4 billion or $5 billion, we could not tactically move in and out of positions the way we do opportunistically now.
Bramshill’s approach is unlike some of the bigger bond strategies out there, like at JP Morgan Strategic Income where I believe their stated target was $5 billion capacity, and then they grew AUM to over $20 billion and had trouble moving positions.
We always go through our portfolio once a week and mark it the way a street sell-side dealer would in order to judge our liquidity in relation to the size of our positions. We want to know if we have $20 million versus $50 million, what the difference in bid-ask spread is, and factors such as these. Liquidity is a big part of our investment process: beginning with the selection of investments, to how we analyze risk and to how we scenario analyze our portfolio. As Bramshill grows assets under management, our size will unlikely be an issue until we get toward capacity.
Please feel free to contact the team with any questions or comments.
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