Our last post discussed the advantages to using systematic investing processes along side discretionary trading. Here is a great example of this in practice.
In our Junk Bond Model we track several Junk Bond Funds and indexes. We do this so that we aren’t burdened with mutual fund trading restrictions and so that we have a fuller view of the High Yield Bond market. In this example we are using PRHYX the T Rowe Price High Yield Bond Fund. It is actually one of our favorite Junk Bond Funds because among other reasons it tracks the index very well and has a long history.
Looking at the results of the PRHYX its year to date (YTD) performance has been OK. On a total return basis it is up +3.9% this year with a maximum drawdown of -5.69% and a current drawdown of -1.56%. Looking at the results of our Junk Bond Model we have a YTD return of +5.6% with a max drawdown of -.71% and a current drawdown of -.71%.
If you look at the chart below you can see the results of investing $100 in the Junk Model versus $100 in he PRHYX Bond Fund.
Obviously the Junk Bond Model was able to sidestep the huge drop this summer and has avoided most of the current downturn. If you had invested in the Fund you would have taken on almost six times the risk for less return than trading the Junk Model. By the way the main inputs for this model are price action and interest rates.
This is an example of a model we use in our trading. As stated before we do this so that we can have uncorrelated, consistent, outperforming returns over time. We look at several asset classes, across as many countries as we can, using varied trading strategies. We do this because we are looking for the best risk to reward trades on the planet.
The Macro Trader
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UPDATE-So far for the year 2007 our Junk Bond Model is ahead of the SP500 in both absolute and risk adjusted returns. The SP500 is up 2.87% and the Junk Bond Model has returned 5.86%. And what about drawdowns? Well the SP500 has had two drawdowns slightly larger than -8% and few in the -5% range. The Junk Bond Model’s worst drawdown is still only -.71%. So yes, long term (and short term as well) adding different asset classes and trading strategies to your overall portfolio does help returns, diversification, and your risk profile.
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