Could these stocks warm your portfolio this winter? By Daneil Grote
Research shows shares often do better in the winter. Online stockbroker Interactive Investor has picked the hottest performers in the coldest months.
The coldest months of the year typically produce the hottest stock market returns, and certain types of stocks enjoy an even greater winter boost, according to online stock broker Interactive Investor.
Using data from the UK Stock Market Almanac, it has calculated that over the last 20 years, investors who had bought into the FTSE All-Share index on 1 November then sold on 30 April every year would have enjoyed more than twice the returns than if they had been invested throughout.
A saver investing £100 in 1995 would have seen that money grow to £316, excluding dividends, if they had invested in just the winter months, but just £200 if they had been invested the whole time. Had they invested only in the summer months, they would have lost money, with their initial £100 now worth £69.
The figures add flesh to the bones of that old investment adage, 'sell in May and go away', which advises investors to avoid the stock market in the summer, and only to return in the winter.
It's not a trend that always holds true: we've sifted through the performance of the FTSE All-Share since the turn of the millennium, and there are some years when the summer months, from 1 May to 31 October, deliver a better return than the winter, from 1 November to 30 April.
But the overarching trend is for the winter to produce stronger returns, and we've highlighted in bold in the table below the instances when that has been the case. It's worth noting though, that the trend is reinforced by the two major market crises of this period: the bursting of the tech bubble in the early 2000s and the 2008 financial meltdown having the biggest impact in the summer months.
FTSE All-Share Summer Winter
2000 1.45% -6.16%
2001 -13.16% 1.12%
2002 -22.60% -4.07%
2003 14.08% 5.27%
2004 2.45% 4.33%
2005 8.90% 17.78%
2006 2.56% 5.98%
2007 2.39% -9.47%
2008 -37.04% 2.58%
2009 21.49% 10.79%
2010 2.54% 7.45%
2011 -6.77% 2.13%
2012 1.02% 11.66%
2013 5.68% -0.02%
2014 -2.15% 7.32%
Average -1.28% 3.78%
Investment flows are likely to explain part of this trend. In the summer months there is less money in the markets, which can lead to more volatility, while flows tend to pick up in the winter months.
'Year after year, the data suggests that investing over the winter months is far more favourable than investing over the summer, or, indeed, remaining fully-invested all year round,' said Rebecca O'Keeffe, head of investment at Interactive Investor.
'Between November and April, stocks are less volatile, sentiment is more positive, the weight of liquidity is strong and hence the performance versus the rest of the year is unmatched, either in risk-adjusted or absolute terms.
'There are no conclusive studies on this subject, but one explanation is that far more money flows into the market over the winter months as investors take advantage of tax-efficient products in the run up to global tax year ends. This liquidity provides a strong foundation for global equity markets.'
There are also certain types of stocks that typically enjoy an even greater boost in the winter months. High 'beta' stocks are those which tend to be more affected by market movements. They will tend to perform worse than the market when it is falling, and beat the market when it is rising.
Interactive Investor has compiled two 'winter portfolios' composed of these sorts of stocks. For its 'consistent' winter portfolio, it filtered the FTSE All-Share for the stocks with the most consistent positive returns during the winter months over the past 10 years. From that selection, the best five performers were picked for the portfolio:
[Consistent portfolio chart removed - see full article online]
For its 'aggressive' portfolio, it selected FTSE All-Share stocks which had delivered the highest returns during the winter months, restricting the selection to those which had delivered positive returns at least 75% of the time.
The portfolio contains one name, Playtech (PTEC +), which has only a nine-year track record. 'We use more judgement with this portfolio,' said Interactive Investor's Lee Wild.
'While we have a preference for stocks with at least 10 years of performance data, stocks with exceptional performance over a shorter time frame were also considered.'
[Aggressive portfolio Chart removed - please see full article online]
Not all investors will want to follow the 'sell in May and go away' saw. As our table shows, the trend doesn't hold true every year and, besides, there are trading costs involved in moving in and out of stocks every year. Plus, the higher-risk shares relied upon to exploit the trend might sit uneasily with some.
But O'Keeffe argued the strategy could be adapted for those who don't follow the motto wholeheartedly. 'Even if you don't buy into the entire strategy of being out of the market for six months, you may be better off increasing your exposure to higher risk stocks over the winter months and invest in more defensive stocks over the summer,' she said.
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