What Is BestBond™?

By the year 2000, T Theory® concluded that the era of great growth during the 1980s and 1990s had reached a dangerous over extended condition with great risk to equities for some years to come. In response, we spent the following years devising a new, more conservative bond investment strategy called BestBond™ which has become unique to our company.  Its annual back performance since 2000 is summarized in the table below.

The logic of BestBond™ is derived from the Confidence Index, devised and maintained by Barrons that has been published for many decades as a basic indicator of investor confidence in the future economic outlook.   The Barrons Confidence Index is derived from the bond investors basic need to choose between a higher yield, but riskier, low quality bond that promises a greater income return, or alternatively, choosing a safer, higher quality bond that promises default protection in hard times but which necessarily provides a lower yield. The Confidence Index monitors ongoing investor preference between these two options. Thus the trend of this indicator provides an insight as to investor confidence as the bond market judges the relative future prospects for these alternatives. This process is constantly being re-evaluated by bond investors in light of ongoing economic developments, thus a dynamic and insightful indicator can result.

In our program we simplify these two basic choices to either the Fidelity Capital and Income fund (FAGIX), a high yield, well-managed fund of lower quality bonds which the fund manager thinks can ultimately survive economic setbacks, or alternatively to a very high quality Vanguard US Government intermediate or long term bond fund that places safety above current yield (VUSTX or VFITX).

BestBond™ basic theory is to own the safer, lower yielding Vanguard US Government Bonds when confidence in the economic outlook is declining, then switching to the higher yielding Fidelity Capital and Income once the Federal Reserve makes it clear they are committed to pulling the economy out of a crisis situation.

*Data compiled from Morningstar,Inc. a leading provider of independent investment research. 

As noted in the Table above the Total Return for the S&P 500 benchmark, which includes gains/losses plus dividends has over the last decade, returned a disappointing compound annual growth rate (CAGR) of 0.4%.  This has resulted from the recent gross overvaluation of equities, the failure for regulator to limit past speculative practices, the general inability of the US economy to compete with Asia, and the US preoccupation with running up ever increasing debts which it can ill afford.

In contrast, we see the average returns over this same period for the either of the two bond alternatives to be far more attractive. If one had implicit faith in the management of Fidelity's Capital and Income (whose symbol is FAGIX) to prosper long term no matter what the negative economic consequences going forward, then the CAGR of FAGIX since 2000 looks to be quite attractive (7.8%)  relative to equities (0.4%). On the other hand if one were ultra conservative, the Vanguard Long Term US government Bond fund would have provided an alternative superior CAGR (7.5%) although not as high over this period as FAGIX.

This divergence is not unexpected. As a general rule it is always true, when viewed over sufficient time, that if one seeks safety and security above all other considerations, one must accept a lower return as the price for "sleeping at night".  Our first principle is that not that one kind of bond is superior to the other going forward, as there is room for both considerations because both look to be superior. Rather, the overriding consideration is that there is an alternative approach to the common equity investment for growth that we used in our early decades. Our program makes use of these two types of bonds.  It is not a simple income approach as can be seen by the BestBond™ total return (20.2%) when the better of the two alternatives is selected retrospectively for any one year. 

There are important points to note for the 11 year total return for the BestBond™.  First, it is a retrospective view. Second its results are not guaranteed.  Third, it does not require trading within a one year holding pattern.  Because it is retrospective it should be noted that the selection of which fund we use in our program is dictated by T Theory™ analysis of the funds involved as well as other securities.

Finally, while we are committed to using our BestBond™ strategy as our core investment holding, we may from time to time invest a portion of the available funds in special situations where we believe we may achieve superior returns for the client.  We call this strategy BestBond Plus™.