Cliff Smith's Low Volatility Bond Strategy

Cliff is at it again! He recently presented another interesting strategy utilizing municipal bonds, high yield bonds, mortgage securities and intermediate term U.S. treasuries. The strategy ranks the assets by their 10-day return (which is a lot shorter of a timespan than the often used period of several months). At the beginning of every month, as long as an asset is equal to or above its 10-SMA, the strategy invests in the top1 ranked asset. If no assets are equal to or above their 10-SMA, the strategy goes to / stays in cash (or very short term U.S. treasuries).

One can easily replicate Cliff's backtest on Portfolio Visualizer with the basket of OPTAX, FHYTX, FMSFX, DRGIX and CASHX, resulting in a CAGR of +11.62% and Max DD of -6.64% (1988-2015) or +11.34% / -5.60% (2000-2015).

One can find similar no load, no transaction fee funds at Fidelity and Schwab, yielding a similar (or actually better) performance with the basket of NHMAX, CPHYX, PTMDX, NEFLX and CASHX, resulting in a CAGR: +12.18% and Max DD of -2.92% (2000-2015). Instead of CASHX, one can use proxies SHY or SCHO. It is to be noted that the mutual funds have a 30-day minimum holding period.

The upside of this strategy is that it provides an amazing risk-to-reward ratio with a smooth equity curve and a very low maximum drawdown, assuming that it will continue to perform as it has for the last few decades.

The downside of this strategy is that for both Schwab and Fidelity, though there are no-load and no transaction fees on these funds, a redemption fee of $49.95 (when a fund is sold before 90 days) applies, so the strategy averaging about 7 trades a year, translates to it costing about $350 / year to run. On a $10,000 portfolio this translates to an annual cost of 3.5% and on a $100,000 portfolio 0.35%, so it's definitely not cheap on smaller accounts.

As usual, I've created a dynamic spreadsheet to follow this strategy, or one can use Portfolio Visualizer as well.


QH Low Volatility Bond