Winter Portfolio: Big profit for aggressive investors by Lee Wild
There's a seasonal trading strategy that typically generates far better returns than if you had stayed invested all year round. Over the past decade, it has outperformed the FTSE 350 index by at least five-fold. And it's incredibly simple, too, giving investors both a specific entry and exit date. But just one month into this six-month trade, there's plenty of reason to be optimistic.
Buy on the first trading day of November and sell on 30 April, suggests the strategy. It's based on the theory that far more money flows into equity markets during the winter months than in the quieter summer period when thoughts turn away from investing and onto holidays.
We teamed up with Harriman House, publisher of The UK Stock Market Almanac, and fine-tuned the data to generate even bigger potential profits. First, we took the companies which had delivered the most positive annual returns over the past 10 years to form our Consistent Winter Portfolio. It has generated an average annual return of 26% over the past decade. Our Aggressive Winter Portfolio is more flexible on track record, but the extra risk is rewarded with potentially higher returns ? an average of 37%.
Here's a round-up of the highlights and lowlights from the first month of this six-month strategy.
[Consistent Winter Portfolio chart removed]
Our Consistent Winter Portfolio's underperformance against the FTSE 350, its benchmark index, is largely down to one company, and comes despite the best efforts of speciality chemicals company Croda International (CRDA). It is already living up to its reputation as the best performing FTSE 350 company over the six-month period, having risen in each of the past 10 winters, averaging an annual return of almost 18%. True, that's not the biggest profit, but you do get reliability, and the share price jumped by 7% in November.
A solid set of third-quarter results certainly generated plenty of buying interest in the company, a major exporter of ingredients for make-up, anti-wrinkle creams and industrial lubricants. The pound is weaker against the dollar and underlying growth is picking up, too.
There were also gains for fund manager Henderson (HGG) ? up 6% in the month. A positive third-quarter update on 30 October clearly helped, although our portfolio's performance would have been better had the announcement come a few days later! Henderson shares jumped 7% in the days before our period began. Still, net inflows of £1.4 billion and strong investment performance are reasons to be optimistic.
Elsewhere, equipment rental company Ashtead (ASH) and workspace provider Regus (RGU) are still warming up. Both are little changed, but have averaged returns of 37% and 30% respectively over the past 10 years, so hopes remain high.
But as the accompanying chart reveals (see above), the Consistent portfolio underperformed the FTSE 350. For that, blame Hunting. A brief update early November appeared confident enough, but Hunting is a major supplier to the oil and gas industry, so an 18% slump in oil prices during the month hammered its shares. It has already plunged from 900p a month earlier.
There are clearly concerns that low oil prices will affect investment in oil assets, and while that means cheap fuel for consumers, fewer oil rigs means less demand for Hunting's drilling tools, casing, tube connections and other equipment.
[Aggressive Winter Portfolio chart removed]
Yes, it is early days, but our Aggressive Winter Portfolio is off to a winning start. Flat-lining Ashtead and Regus feature here, too, so it's the other three constituents that make the aggressive portfolio exciting. And there's been plenty to talk about.
Everything went Taylor Wimpey's (TW.) way, it seems. A third-quarter update repeating confidence in growth prospects was well-received. Margins are improving, interest rates are unlikely to rise any time soon, and, importantly, the housebuilder says the feared Mortgage Market Review has not damaged business.
Of course, it's also the time of year when, historically, the sector outperforms the market. It's a seasonal trade that Investors Chronicle columnist Simon Thompson wrote about recently, and refers to the first quarter of the calendar year during which the FTSE 350 housebuilders have delivered an average quarterly return of 11% since 2004, rising 10 times and only falling once. The average return on the FTSE All-Share index in those years is just 0.5%. Simon suggested buying in early this year, and those who did have been rewarded.
Bwin.Party Digital Entertainment (BPTY) had cause to celebrate, too. The online gaming company admitted talking with "a number of interested parties" about a possible bid for the company. The shares surged by a third before settling back for a gain of 18% at month-end.
But this meant bad news for our final Aggressive portfolio member, Playtech (PTEC). It was already looking fragile just a week into November amid concerns that Malaysia may begin to regulate the online gambling industry there. Management said the company would hit consensus forecasts whatever happened in the Far East. But then traders took news of a ?297 million (£233.8 million) convertible bond issue for "acquisitive and organic opportunities" as a heavy hint that Playtech was prepping a bid for Bwin. We'll see on both counts.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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