Interactive Investor

How our aggressive winter portfolio thrashed the market

2nd December 2016 16:47

Lee Wild from interactive investor

Building the winter portfolios is a very straightforward process. The consistent portfolio is simply the most successful stocks of the past ten winters based on share price performance, while the aggressive portfolio requires a little tinkering.

You can read a more detailed explanation here. That success and simplicity is what makes this seasonal investing strategy so attractive.

Despite limitations on our involvement in the picking process, we were nervous about this year's portfolios. We said so in October when we announced the 10 constituents.

While our winter portfolios beat the benchmark index both in 2014, their maiden year, and last year, a series of headwinds would make the six months between 31 October 2016 and 30 April 2017 the hardest yet.

Brexit showed that an event expected to be hugely negative for equities can be the oppositeStocks had already enjoyed a spectacular rally as our portfolio period began, making valuations less attractive.

The strategy is book-ended by a US presidential election and the likely triggering of Article 50, promised by PM Theresa May before April.

In between, there's an Italian referendum, Austrian election, a key European Central Bank monetary stimulus decision, a predicted Federal Reserve rate hike and anticipation of further elections across Europe in 2017. Now we know Donald Trump has won the presidency, there's the added risk of serious policy mistakes.

However, as Brexit showed, an event which one thinks must be hugely negative for equity markets, in fact turns out to be quite the opposite, initially at least.

Following Trump's victory, a 700-point loss on futures markets quickly turned to big gains and, eventually, record highs.

While that optimism has not translated wholesale to the UK - the benchmark FTSE 350 index fell over 2% during November - there have been some stunning individual performers over here.

Luckily, two of the best feature in our Aggressive Winter Portfolio, and it's why this basket of riskier shares is up an impressive 4.5% at the end of the first four weeks.

Aggressive Winter Portfolio

Ashtead has appeared in every winter portfolio since inception. It rose by 7.9% during year one and fell by 9.5% in 2015/16, but in the first month of the current period it's already up an incredible 23%.

That's because Ashtead has a huge American division - Sunbelt - which serves the US construction and industrial equipment rental sector.

And that's important because Donald Trump has promised to spend as much as $1 trillion (£789 billion) on improving infrastructure, and Ashtead is tipped to be a major beneficiary.

Performance at Ashtead and JD offsets losses elsewhere in the portfolio We have a huge soft spot for JD Sports Fashion, too. A 29% rally at the tracksuits-to-trainers chain was responsible for last year's aggressive portfolio outperformance, and profits are still growing fast.

Expecting confirmation at the next scheduled update alongside full-year results on 28 January, investors chased JD up 9% in November.

Taylor Wimpey took a pasting following the Brexit vote in June. A partial recovery since looks unconvincing, yet the UK housing market is holding up well in the aftermath, according to chief executive Pete Redfern in a trading update mid-November. Traders agree, and there's a 4.5% gain in month one.

That these three have done so well offsets losses at the two laggards - gaming software firm Playtech and workspace provider Regus.

Regus will change its name to IWG (International Workplace Group) later this monthGaming software firm Playtech suffered a blip when it warned that sterling weakness versus the euro had hurt reported second-half revenue growth at the gaming division. Low market volatility had also impacted the financials business.

It had recovered as month-end approached, but then we heard that Brickington Trading, owned by Playtech's co-founder Teddy Sagi, had sold 38.7 million shares at 850p. He's promised not to sell any more of his remaining 69.6 million shares for six months, but the price remains near 850p.

Workspace provider Regus continued an early autumn decline, accelerated by uninspiring third-quarter results. It will change its name to IWG plc (International Workplace Group) later this month.

Consistent Winter Portfolio

Life was tougher for our normally reliable "consistent" portfolio, down in the first month by 5%. Only CRH managed gains, driven by excitement over Trump's infrastructure plans. Shares in the Irish building materials firm, which makes over half its money in the US, rose as much as 13% at one stage, but enthusiasm quickly waned.

A mid-month third-quarter update revealed further growth in the Americas, although at a more modest pace than in the first half. However, acquisitions will still drive a 35% increase in full-year cash profit.

Interestingly, analysts at Barclays think CRH could be worth over £30 if the Trump administration delivers a new multi-billion dollar federal infrastructure plan. That could boost CRH's mid-term earnings by 17-27%, while a 40% discount to US peers makes the valuation attractive.

Compass is an 'expensive defensive', trading on a big premium to the sectorCRH was up 1% over the month. The other four constituents fell. Heat treatment specialist Bodycote dropped least, down 3%. It told investors that the business remained on course to hit full-year 2016 headline operating profit, although demand was unlikely to pick up any time soon.

Both catering giant Compass and speciality chemicals favourite Croda lost 7%. Full-year results from the former met expectations, but so-called "expensive defensives" - Compass trades on over 21 times forward earnings, a big premium to the sector - have fallen out of favour.

Croda found itself in a similar predicament. There were no shocks in third-quarter results early in the month and the company should hit full-year targets. It did, however, caution that demand remains subdued in a number of end markets.

Finally, Johnson Matthey, these days trading on more modest valuation multiples at around 15 times earnings, reported first half sales up 5% and underlying pre-tax profit up 5%. It'll get a big boost from the weak pound, too, but the shares still fell 8%.

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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