It’s that time of year again, when equities typically enjoy their most profitable period. It’s a statistical anomaly that’s proved itself over more than two decades, and one which Interactive Investor decided to exploit three years ago by building a pair of winter portfolios with different risk profiles.
Known as the six-month strategy, it requires investors buy a basket of shares on 1 November, or late-on in the previous trading session, and sell on 30 April. Buying and holding these portfolios over the winter months only, has, historically, generated far better returns than if you had stayed invested all year round.
Data from The UK stockmarket Almanac, published by Harriman House, shows that starting with £100 in 1994, an investor who had been invested in the market continuously for the past 23 years would have seen their money grow to £251 (excluding dividends).
However, if they had only invested in the market between 1 November and 30 April every year then that £100 would be worth £326. Conversely, if they had chosen to only invest over the summer months they would have lost money; their original £100 would be worth just £70.
Despite its simplicity, the trading strategy has beaten the benchmark FTSE 350 index (NMX) every time we’ve run it. Despite our caution last year, with the period bookended by the US presidential election and Article 50 kicking off Britain’s withdrawal from the European Union, our portfolios delivered a stunning performance.
In fact, 2016/17 was the best yet. The so-called Consistent Winter Portfolio did twice as well as the benchmark index, returning 9.5% over the six months. But it was the Aggressive Winter Portfolio’s return of almost 30%, excluding dividend income, that grabbed the headlines.
Why does it happen?
Stephen Eckett, mathematician and author of The UK stockmarket Almanac, believes the winter portfolios leverage off two phenomena.
“The first is the odd feature of shares generally performing better over the winter (November-April) than over the summer (May-October),” says Stephen. “The second is the identification of certain shares that consistently out-perform the market in the winter period. These two features together can be used to create quite a turbo-charged portfolio.”
It was data supplied by Mr Eckett that inspired us to build two portfolios based on his findings. The Consistent portfolio is a basket of five FTSE 350 stocks with the most stable track record of returns over the past decade. Each has risen in at least nine of the past 10 years. Returns would have averaged 18% per annum over the past decade compared to just 3.5% for the FTSE 350.
For the Aggressive Winter Portfolio, the FTSE 350 constituents must have delivered the highest average annual returns over the winter. While average returns are our primary criterion, stocks must also have risen over the winter months in at least seven of the past 10 years. In return for the obvious increase in risk, the average annual profit over the past decade soars to 32%.
Performance of both portfolios over the past three years has proved the theory. If you’d invested £10,000 in the inaugural Interactive Investor Aggressive Winter Portfolio in 2014, reinvested the proceeds in the 2015 portfolio and repeated the process in 2016, you’d now have £14,794! That’s a return of almost 48%, which excludes dividends and includes commission.
Doing the same with the Interactive Investor Consistent Winter Portfolio would leave you with £12,418, an overall return of more than 24%. The FTSE 350 would have returned 10.6%, even without any commissions.
This year’s portfolios
Our 2017/18 portfolios have predictably impressive track records. The Consistent portfolio has outperformed the FTSE 350 every year for over a decade, and has posted gains every year since at least 2008.
Two of the constituents have generated positive returns in every one of the past 10 years, and the other three are up on nine occasions.
The new Aggressive portfolio has outperformed the benchmark in eight out of the previous 10 years versus just seven times for the FTSE 350. The average annual gain is 32%, a mighty 28.5 percentage points more than the benchmark.
Interactive Investor Winter Portfolio 2017/18 historic performance
Big question, as always, is will these baskets of outperformers do it for a fourth year?
Last year, we feared the US presidential election, but that turned out to be hugely positive for stocks, and Article 50 passed without incident. Only Theresa May’s decision to call a snap general election troubled markets.
But there are reasons to be cautious again as we launch the latest incarnations.
Central banks in the west are beginning to unwind quantitative easing and raise interest rates, there are concerns about profit expectations in some sectors, and the valuation question refuses to go away. Here, Brexit talks will keep markets guessing while, in the US, much hinges on the success of Donald Trump’s proposed tax reforms. North Korea is a worry, too.
However, the theory behind the two winter portfolios is impressive and it is quite compelling to have both a buy and sell date. Yes, the portfolios are higher-risk options and won’t be suitable for all, but they may be of interest to investors who follow market trends and like the concept of trying to time the market rather than simply staying invested.
On Monday 30 October, we will reveal which companies made the final cut and make both the Interactive Investor Consistent and Aggressive Winter Portfolios available for investors to buy.
Get 25% off The Harriman stockmarket Almanac 2018! That’s £18.75 (+P&P) for the print book or £15 for the ebook. Order at Harriman House, entering promotional code ii_ALMANAC2018 (for the print book) or ii_ALMANAC2018e (for the ebook), when you reach the checkout.
Stephen Eckett started his career with Baring Securities and then later worked for Bankers Trust and SG Warburg, during which time he worked in London, Hong Kong and Tokyo. After settling in France, he co-founded Harriman House which has become a leading independent publisher of financial books in the UK. He also writes books on finance including, most recently, the Harriman stockmarket Almanac.
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