The Bramshill Income Performance Strategy returned 0.28% in January.
As we mentioned in our Webinar from a few weeks ago (Replay here), we believe long-term Treasury yields are attractive around 200 basis points above long-run inflation expectations, implying fair value near the mid-3% to low-4% range on the 10-year Treasury. Technical factors, issuance trends, and positioning among large bond managers could support lower long-end yields over time. As a result, the firm continues to favor maintaining duration exposure while being selective in taking any spread risk with corporates spreads at multi-year tights. While the Fed could cut two or three times later this year, we align more closely with the outlook indicated by the futures market which has them on hold in the near term. In January, we made very few changes to our portfolio. Currently, our duration is moderately long, reflecting the firm’s view that longer-dated bonds offer more yield, better convexity, and total return potential if yields decline. As we have mentioned in previous commentary, this is not a typical view for us. For this reason, we maintain a 20% position in long duration treasuries. Our largest allocation is within high quality investment grade corporate bonds which we increased moderately during the month to 43%. While spreads are generically tight at the index level, there are two subsectors within IG where we feel spreads provide great value and tightening potential. First, we have an approximate 17% allocated to low $, long duration bonds that provided above average carry and positive optionality towards any rate rallies. The 2nd subsector is junior subordinated utility bonds with fixed-to -reset structures and coupon floors. These are IG rated (typically 1-notch below Holdco debt) yet trade at yields north of the BB HY index. The reset feature provides great protection against rising rates, while the coupon floor gives us security against rates falling aggressively. We increased our IG allocation by adding to CG and KKR, low $, junior subordinated baby bonds and PSX, a utility junior subordinated issue. In preferreds, we maintained a 14% allocation on the month. We paired a position in AGNC FRN PFD. In high yield, we increased our position from approximately 10% to 12% as we added to a CEF we felt was oversold. We also added to a short duration high yield ETF which was trading >7% yield. Our municipal allocation remained stable at approximately 2% as we executed a relative value swap by selling a municipal CEF that was trading flat to NAV and reallocating capital into a municipal CEF which screened attractive in our model. Our cash plus short term treasury allocation decreased from approximately 10% to 9% of the portfolio. We see value in long duration fixed income as we anticipate a reduction of the deficit/GDP ratio, and inflation migrates towards 2% this year.
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.