As we reported in last month’s Bond Upgrading new-fund write-up: “We’ve devoted a significant amount of time recently to re-opening our bond research to see if there’s a way to reduce the potential for…short-term trades. The good news is we believe we have come up with a slight modification that maintains the appeal of the original research, but which will hopefully diminish the frequency of these short holding periods in the future.”

We thought those of you using our Bond Upgrading portfolio recommendations might like more specificity as to how our methodology tweak in the selection of the “rotating” bond changed our historical back-testing results. The improvements for the 1996-2015 period included:

  • The number of trades where the holding period was three months or less dropped from 17 to 13. That’s one about every year and a half.
  • The average holding period of the rotating-bond recommendation increased from 7.7 months to 10.9 months.
  • Volatility in the month-to-month results, as measured by standard-deviation, dropped 15%.
  • The results for the worst 3-, 6-, and 12-month rolling periods improved dramatically across the board. One example: the worst 6-month results from owning a rotating fund improved from a loss of -11.0% to one of only -4.7%.

There was one stat, however, that didn’t improve—the average annual rate of return from owning the rotating fund dropped from +9.0% using the original methodology to +8.8% using the new. We trust you agree that’s a small price to pay in return for the many significant improvements listed above.