Market-beating winter portfolios are back
There's a statistical anomaly that has consistently generated big profits for investors over more than two decades. So successful is it that Interactive Investor has twice built model winter portfolios based on this simple seasonal trading strategy. After beating the benchmark index every time, we're running them again, but this year we're more cautious than before.
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.
And the outperformance has been significant.
Data from The UK Stock Market Almanac shows that starting with £100 in 1995, an investor who had been invested in the market continuously for the past 21 years would have seen their money grow to £217 (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 £310. Over 10 years, investors would have made over three times as much profit by using this seasonal strategy.
Two key phenomena
According to Stephen Eckett, mathematician and author of The UK Stock Market Almanac, published by Harriman House, 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."
We were so impressed that in 2014/15, we constructed two portfolios based on these findings. The first included the FTSE 350's most reliable winter performers of the past 10 years - the Interactive Investor Consistent Winter Portfolio. The second took on a little more risk in return for greater potential profit - our Aggressive Winter Portfolio.
Even with last winter's China crash, our consistent portfolio made money and the aggressive beat the marketOur maiden portfolios were a runaway success. The consistent portfolio made a 14% profit versus 8.7% for the benchmark FTSE 350 index.
The aggressive portfolio, which still requires that constituents must have risen in at least seven of the ten years, returned 16.9%.
Last winter, which included a Chinese stockmarket crash and plunge in global commodity prices, was inevitably tougher. Yet even here, both portfolios outdid the benchmark, which fell 1.9% over the six months. Our consistent portfolio actually rose by 1%.
The high-risk aggressive portfolio was at breakeven one day before the strategy expired, and, even in a savage final session of April, six-month declines were capped at only 1.2%. Add on dividends earned during the period, and the "aggressive" basket of five shares was within a fraction of ending flat.
This year's portfolios
Our portfolios for 2016/17 have predictably stunning track records. Like last year, three of the five constituents of the Consistent portfolio have generated a positive return over the winter every year for a decade. The other two have risen in nine of the last 10 years. The average annual gain of these shares is over 18%, five times that of the FTSE 350, up 3.7%.
Over the last decade, the constituents of this year's Aggressive portfolio have averaged a 32% profit each year, although this year we have changed the criteria for selection slightly.
We are still looking for shares that have a stunning track record over the winter, but we have also looked at their relative summer performance too.
Our portfolio is based on those stocks which have the best overall net winter minus summer performance, to maximise the seasonality effect.
Interactive Investor Winter Portfolio 2016/17 historic performance
[graph 1 removed]
However, these are strange times, and we would urge an extra level of caution this year. Typically, the constituents outperform over the winter, but average either much smaller gains or, more likely, lose money over the lazy summer months.
A Trump win, unlikely as it seems, is tipped to cause chaos on global financial exchangesThis year the EU referendum turned things on their head. In the five months from April 2016 to September, the FTSE 350 index surged by 10%.
Past members of our seasonal portfolios soared by up to 40%. Of course, this does not mean further gains are not possible during the seasonally stronger half of the year, but there are some major obstacles, too.
One of the dirtiest US presidential election campaigns in living memory will end with either Hilary Clinton or Donald Trump in the White House. A Trump win, unlikely as it seems right now, is tipped to cause chaos on global financial exchanges.
And, on the domestic front, there's the small matter of Article 50, which the prime minister Theresa May has promised to invoke by the end of March. What Brexit actually means will, we hope, be clearer by then, but it remains for now a significant unknown.
Our portfolios are higher-risk options but they'll suit active investors interested in timing the marketRebecca O'Keeffe, head of investment at Interactive Investor says: "The theory behind our winter portfolios is impressive and the market analysis suggests seasonal investing is an effective trading strategy. It is also quite compelling to have both a buy and sell date, as we are surrounded by ideas of what to buy, but having a strategy of when to sell is a real advantage.
"There is no doubt that recent market performance has been turned on its head and it is more difficult to have a firm view of what lies ahead - however, seasonality has been a strong indictor in the past and the hope is that it will remain convincing.
"Although these portfolios are higher-risk options and won't be suitable for all, they may appeal to investors who follow market trends and like the concept of trying to time the market rather than simply staying invested."
On Monday 31 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.