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Flexible Income Insights: April Update from Bramshill Investments

By Richard "Crit" Thomas, CFA, CAIA
Income Investing
Flexible Income Insights: April Update - Crit Thomas Interview

Crit Thomas:
So I'm Crit Thomas, I'm with Touchstone Investments and I'm here with Art DeGaetano, who is the founder and CIO of Bramshill Investments and portfolio manager on the Touchstone Flexible Income Fund. So from a broad brush standpoint, if I look at the fixed income marketplace, I would suggest that interest rates are relatively low and credit spreads are a bit tight. But you know you're involved in the middle of all of this Art. So give me some perspective on what you're seeing and what are the risks and opportunities that you're finding within the fixed income marketplace.

Art DeGaetano:
Sure. Currently, everyone's concerned about interest rates rising as well as inflation. And I think if any investor, we could all figure out what that exact answer would be, you know we'd be having the crystal ball. But I think for for the marketplace, it looks to be interest rates. The bias is to marginally go higher from here for the remainder, I think, of the year, given the supply issuance that you're going to see from the Treasury. So if we end up having tax increases some time towards the back end of the year, that might put a little pressure on risk assets such as equities and then maybe might have a more balanced migration of rates where they will go up as fast.

But I think we're targeting at Bramshill about a two percent, 10 year note. Currently, we're positioned with a fairly low duration and floating rate securities. So we've weathered the recent rise in interest rates throughout the fixed income market. But as you mentioned, spreads are very tight and interest rates moving up generically isn't a comforting thing. But the good news is vaccines are getting rolled out and the economy's reopening and there's plenty of liquidity and no recession on the horizon. So in general, the bias is higher and I think that's what you have to pay attention to.

Crit Thomas:
OK, so you run a flexible income strategy, and as the name suggests, you have flexibility to to move across different fixed income sectors. So maybe talk about how you're positioning the portfolio specifically given the outlook that you just gave us.

Art DeGaetano:
Yes. So we're focused on fairly low duration, but also more on floating rate securities. So about 40 percent of the portfolio is in investment grade rated preferreds investment grade credits that float off of Treasuries in 2024 or 25. And these spreads tend to be plus 350 to 550 basis points as a reset. So when interest rates move up, you can think about it.

So that's a concentration for us. Diversified across different names, but all very high quality credits. And then we also see some value where we have some smaller allocations, but in select closed end funds. And some of these haven't really recouped from last year. And there across some high yield, they're also across municipals where they're yielding anywhere from two and a half percent to four percent over the relative index. So a high yield Closed-End Fund that we can buy at eight percent once we've looked through the portfolio and get comfortable with the credit risk, the high yield index is yielding about 4.05%.

So you're really getting compensated for those. So we have a small position there because we're not a fund of funds, we’re individual credit manager, but there's an opportunity in closed end funds. And then lastly, I'd say some of the investment grade securities that are also exchange traded. So these are twenty five dollar par securities. They're fairly attractive as well. So they're pari passu to an investment grade bond as far as rating and where they are in the cap structure. But they tend to trade at a higher yield because they're more exchange traded versus over-the-counter. So we found some value there. But aside from that, it's really about, you know, missing any drawdowns and preventing losses from duration.

So we're trying to be mindful of duration and getting a good return on the portfolio and really waiting for some opportunities that I think we'll see over the next few months. And one of the last things I'd mention, we've been targeting some longer duration fixed coupon preferreds that we have been invested in in the past. Currently, we've been avoiding those and they're down anywhere from four to seven percent this year. So if they were to go down another five percent, you could see us rotate into those.

Crit Thomas:
Well, it's great to hear that you're finding some opportunities within this marketplace while managing risk of the portfolio. I really appreciate your time, Art, and we'll look forward to speaking with you again in another month or two.

Art DeGaetano:
Absolutely. Thank you.

The Touchstone Flexible Income Fund invests in fixed-income securities which can lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. The Fund invests in preferred stocks which are relegated below bonds for payment should the issuer be liquidated. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing their price to decline. The Fund invests in non-investment grade debt securities which are considered speculative with respect to the issuers’ ability to make timely payments of interest and principal, may lack liquidity and has had more frequent and larger price changes than other debt securities. The Fund invests in asset-backed securities which are subject to the risks of prepayment, defaults, changing interest rates and at times, the financial condition of the issuer. The Fund invests in corporate loans which are considered speculative with respect to the issuers’ ability to make timely payments of interest and principal, may lack liquidity and have more frequent and larger price changes than other debt securities. There is a high risk that the Fund could suffer losses from investments in non-investment grade debt securities caused by the default of an issuer.

The information and statements provided here are believed to be true and accurate. There can be no assurance however that the beliefs expressed herein will be consistent with future market conditions and investor behaviors.

This commentary is for informational purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation to buy, sell or hold any security. Investing in an index is not possible. Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results.

Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.

Touchstone Funds are distributed by Touchstone Securities, Inc.*
*A registered broker-dealer and member FINRA/SIPC.

Not FDIC Insured | No Bank Guarantee | May Lose Value

crit thomas global market strategist

Richard "Crit" Thomas, CFA, CAIA

Global Market Strategist
Crit is responsible for examining and evaluating economic conditions, generating insights and providing a sharpened perspective on investment strategies for enriched portfolio construction.

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