The new reviewed Bond Rotation Strategy

From the next strategy email on, the Bond Rotation Strategy will also use adaptive ETF allocation, to make is more suitable as IRA or 401k Investment Strategy. This new technique allows a 30% higher Sharpe (return to risk) ratio.

Together with this change we have also changed the ETF selection from the old:
AGG – iShares Core Total US Bond (4-5yr)
BOND – PIMCO Total Return ETF
CWB – SPDR Barclays Convertible Bond
HYLD – AdvisorShs Peritus High-Yield Bond (3-4yr)
SHY – Barclays Low Duration Treasury (2-yr)
TLH – iShares Barclays 401k 10-Year Treasury (9-11yr)

Ro the new ETF selection:
CWB – SPDR Barclays Convertible Bond
JNK: SPDR Barcap High-Yield Junk Bond (4-7yr)
PCY: PowerShares Emerging Mkts Bond (7-9yr)
TLT: iShares Barclays 401k Long-Term Trsry (15-18yr)

The new BRS strategy does not need the total US market bonds AGG and BOND anymore. In fact for the old strategy, these bonds have been used to simulate an intermediate mix between treasuries and corporate bonds. The new BRS strategy can now invest in any mix of these bonds due to the adaptive allocation. Also the SHY (cash) ETF is not necessary anymore, because the allocations will be automatically reduced to zero if this would be necessary.

Excellent features as an IRA or 401k Investment Strategy

We also go back to the passively managed JNK high yield junk bond after the actively managed HYLD junk bond was showing an extremely bad performance these last months. So better don’t have any fund manager interfering with the strategies in the future.

New is the emerging market sovereign debt bond PCY which gives the strategy some international diversification. TLH has been replaced by the more liquid TLT treasury ETF.

All together, the strategy becomes simpler, with less ETFs, but with a significantly better performance. We recently were approached by a subscriber who’s Barlays 401k plan included a Target Date Fund he was subscribed to, he found out that he could replace his holdings with this new strategy.

5 year performance comparison between old and new BRS strategy, now better suited as 401k Investment Strategy.

Max. draw down9.7%6.6%

As you can see, the new bond rotation is performing significantly better than the old strategy, and the composition better suited for a 401k Investment Strategy. This is by a good part due to the new adaptive allocation, which until now has shown superior results for all strategies I have back tested so far.

As you can see in the allocation table below (middle chart), the new PCY Emerging Mkts Bond is also having a positive contribution to the BRS performance. PCY is like TLT having a negative correlation to the corporate bonds JNK and CWB.


401k Investment Strategy

If you compare the Sharpe (return to risk) ratio of such an actively re-balanced bond strategy with the big total bond market ETFs (AGG, BOND), then you see that you can achieve twice the Sharpe ratio with this active BRS approach. The disadvantage of ETFs like AGG and BOND compared to our BRS strategy is, that they are so big, that they can only change allocations very slowly. Too slow to react in time to a changed market environment.

See also how the Bond Rotation blends with other strategies in our Custom Portfolio Builder.

Frank Grossmann
December 28, 2014

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5 thoughts on “The new reviewed Bond Rotation Strategy”

  1. Ed,
    Good question.
    All bonds have risks of at least 3 different forms: Interest rates, risk on/risk off environment, and relative currency. Each bond sector/geography responds differently with various elasticity to those risks. Emerging market bonds will often outperform US bonds in the right regime, have have lower correlation.

    The model will let through the gate emerging markets bonds when they are doing relatively well and and when US bonds may be in less favor (think Fed moves).

  2. Frank you revised the bond portfolio with a new mix, deleting old and adding new ETFs.

    Can we see what the results going back at least through 2 bear markets. The current reported results of the old strategy are now completely different and meaningless? Why do you even post them as it confuses the membership?

    I find when such significant changes occur to a portfolio any real time credibility of current “Algo” design becomes worthless. This has to have a psychological impact on the investor sticking to the plan. When you see strategies such as the ‘permanent portfolio’ its allegiance and following is the fact that it does not change regardless of return.

  3. Wes,
    I know, that I am a little behind schedule with publishing a full paper with backtests on the new BRS strategy. The new web site was more work than we originally expected. However I will publish in January the paper on the new GMRS and in February for BRS.
    The old BRS paper is not totally meaningless, because the main idea of a bond rotation with a mix of bonds with positive and negative correlation to the stock market is still the same. The only difference is in fact the adaptive allocation.

  4. Hi Frank
    Did you manage to publish the Backtests for the New BRS and GMRS strategies that include the Asset Allocations?
    What about the Backtests for the other strategies with the Asset Allocations?

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