BRAMSHILL BLOG: From the Desk of Art DeGaetano.
The Strategy returned +0.42% net in August contributing to a +7.16% YTD total return. In August, volatility was constrained in both the credit and rates markets. Most fixed income asset classes were slightly positive on the month, however there are numerous cross currents which concern us as a result of recent mixed economic data and market expectations of potential changes in Federal Reserve monetary policy. Our concern is that rates could move higher for the rest of 2016 due to: an earnings recovery, labor markets tightening, and economic data improving. Our portfolio continues to be positioned defensively because we anticipate volatility in the coming weeks around a September Fed meeting, the presidential election and an Italian referendum. Additionally, nominal long interest rates are very unattractive with little risk-reward opportunity. For these reasons, our portfolio has the shortest duration since the strategy’s inception in 2009 at 1.9 years. We also have minimal municipal exposure due to the significant rate sensitivity and unattractive yields in that market. We made few adjustments to the portfolio in August. We increased allocations from 4% to 7% in two senior floating rate loan funds trading at attractive discounts to NAV. Including these funds, our entire high yield exposure now stands at 18% of the portfolio. We also added modestly to Legg Mason 5.625% 1/44 which is trading above 5% yield with attractive credit metrics. We favor high quality credits which are not interest rate sensitive. Our other current positions are primarily in BBB and BB rated corporates and preferreds with high coupons trading to short dated calls. In 2016, most mangers in the credit markets have performed well because they have had significant exposure to duration or high yield. We believe investors should consider interest income relative to the risk of the sector or asset class. We are mindful of both duration risk and credit risk in this environment and believe a conservative portfolio is warranted at this time.
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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.