Interactive Investor

Winter Portfolio: Setback looks temporary

6th February 2015 16:32

Lee Wild from interactive investor

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. Now two months 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 to holidays and the sporting calendar.

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 second month of this six-month strategy.

Round-up

Unlike their US counterparts, UK stocks did well during January. Yes, falling oil prices, economic turmoil in Europe and ongoing geopolitical concerns continued to cause volatility, but a rally mid-month made up for losses elsewhere.

Most of the stockmarket's  gains came in the third week of the month during which the FTSE 350 surged by around 6%. Tesco led a resurgent supermarket sector and a raft of bombed-out blue chip miners and oil companies engineered an impressive recovery. Otherwise, the month was book-ended by a weak start and disappointing end, leaving the benchmark index up 2.6% overall.

Unfortunately, our Winter Portfolio celebrated the half-way point of this six-month strategy with more of a whimper than a bang. Of course, it was always going to be difficult following such a strong finish to December. Our star performer, the aggressive portfolio, underperformed both the benchmark and the historically more reliable consistent portfolio.

Aggressive Winter Portfolio

Having rallied more than 12% in the first two months of the strategy, the aggressive portfolio fell 4.5% in January. Online gaming firm Bwin.Party Digital Entertainment watched some of its substantial gains unwind as new VAT rules were introduced on 1 January. Despite lots of uncertainty, management now expects to file for and pay VAT in certain EU member states. That will cut total net revenue and cashflow in 2015 by about €15 million before any mitigating actions. Also, there’s still no sign of a rumoured bid for the business.

Equipment rental firm Ashtead slipped up, too. After a superb start to the strategy, its shares dropped by 6% despite decent fourth-quarter numbers from US peer United Rentals and a two-day investor trip to the firm's American unit in Miami.

Losses elsewhere were more modest - workspace provider Regus fell 3%, housebuilder Taylor Wimpey 2%, and Bwin.party Digital Entertainment 1%.

Consistent Winter Portfolio

Surprisingly, the typically more reliable consistent portfolio limited declines to just 3%. It's surprising because oil services supplier Hunting plunged a further 25%. The troubled firm has now lost almost half its value since the end of October, and there was little to excite in January. Hunting sold EA Gibson Shipbrokers, but a plunge in oil prices remains the big danger.

David Buxton at finnCap slashed his target price for Hunting from 655p to 420p, putting the shares on just 6.7 times forward earnings. Currently yielding 4.8%, the shares are likely to remain a barometer of the oil price without a takeover.

Both Ashtead and Regus feature in this portfolio, too, but, elsewhere, Croda was flat despite a downgrade by Berenberg Bank to Hold. It still thinks the shares are worth 2,800p (currently 2,700p).

And despite a lack of fresh news, the star performer for the consistent portfolio in January was fund manager Henderson Group. It's been on the up since mid-December and last month rose by 11%. Shore Capital thinks there's more to come. "Following an extended period of acquisition integration, Henderson feels to us ready to push aggressively for new business, particularly on the institutional front where clients are naturally more cautious during periods of internal reorganisation," said the broker, which initiates coverage with a Buy rating and 260p target price.

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.

Related Categories

    UK shares
    Commodities
    Consumer goods and services
    Industrials
    Gaming