How our Winter Portfolio strategy made a 56% profit
Our fourth year of winter portfolios was not an easy one. Market volatility spiked as the bells rung in 2018, and a spectacular Santa rally unravelled in equally spectacular fashion when Donald Trump's tariff idea threatened a trade war with China.
Despite one of the stockmarket's best April performances in living memory when the FTSE 350 (NMX) rose 6%, the benchmark index ended our six-month seasonal strategy up just 10 points, or 0.25%, from where it began on 1 November.
Our higher risk Aggressive Winter Portfolio did much better, adding 7.4% in April and 1.79% for the six-month period. It wasn't without its trials, however, having been down as much as 6% and up more than 8% at the beginning of 2018. Include dividends, and gains for the entire strategy extended to 2.9%.
The Consistent Winter Portfolio ended this year's strategy down 0.38%, but generated returns of 1.2% when you factor in dividends. It generated a profit in excess of 4% at its best and traded down as much as 5% in March. In contrast, the benchmark index was down almost 8% at its nadir.
However, our pair of winter portfolios now have a four-year track record, and the performance has been impressive.
In the four years since inception, our Consistent Winter Portfolio has returned an average of 6.0% each winter and our Aggressive Winter Portfolio an average of 11.8%. In comparison, the FTSE 350 benchmark index averaged a gain of just 3% for the past four winters.
ii Winter Portfolios vs benchmark: How profits grew
Source: interactive investor
The compounding effect of consistently investing in these portfolios every year since launch has been powerful.
Investors who invested £10,000 in the inaugural interactive investor Aggressive Winter Portfolio in 2014, reinvested the proceeds in the 2015 portfolio and repeated the process in 2016 and 2017, would now have £14,999. That's a return of 50% even with commission included, illustrating the benefit of interactive investor's fixed-fee pricing model.
Doing the same with the interactive investor Consistent Winter Portfolio would have turned £10,000 into £12,307, an overall return of 23%. The FTSE 350 over the four years generated a winter return of only 9.7%.
Once dividend income is included, four-year returns swell to 56.1% for the Aggressive Portfolio and to 29.6% for the Consistent Portfolio.
Staying fully invested in the FTSE 350 in all months between 31 October 2014 and 30 April 2018, would have generated a more modest return of 17%.
Why does the Winter Portfolio strategy work?
There are many explanations for why investing over just the winter months is such a profitable strategy. It's typically when extra money flows into financial markets, the period includes five of the year's six best months including regular winners December and April, and more of the big political and economic decisions tend to get made when leaders are in town.
That our Winter Portfolio strategy has consistently outperformed the wider market over four years goes a long way to proving the validity of both seasonal pattern and our winter trading strategy.
Putting the theory into practice
The Winter Portfolios were designed by interactive investor in 2014 to exploit a seasonal anomaly that suggests investing only in the six winter months from November to April can be more profitable than staying in the market all year round.
With help from Stock Market Almanac author and mathematician Stephen Eckett we identified the stocks with the best track record of returns over the past 10 winters.
Our so-called Consistent Winter Portfolio contains the five most reliable FTSE 350 companies of the past decade - each has risen at least 90% of the time. To make our Aggressive Winter Portfolio, stocks must have a 70% success rate over the winter months.
Prior to the current year, our reliable basket of shares had netted an average annual profit of 18% over the past 10 years versus just 3.5% for the FTSE 350. There's more risk in the aggressive portfolio, but average annual profit has been 32%, almost 10 times the benchmark index.
Aggressive Winter Portfolio
Source: interactive investor Past performance is not a guide to future performance
A mixed bag would best describe both portfolios in 2017/18. Workspace provider IWG (IWG) - formerly Regus - made us a 15% profit (up 8.4% in April). It would have been more if a bid approach had been accepted, but management clearly feels the business is worth more than was on the table.
High street fashion chain JD Sports (JD.) (up 16.6% in April) has been a great performer in previous winter portfolios, and this year a 9% gain justified its inclusion. UK expansion and growing overseas is being rewarded by investors here, but the shares still look undervalued.
Equipment rental giant Ashtead (AHT) (up 4.8% in April) is no stranger to our seasonal portfolios, and a near-5% profit this time round compared well with the wider market. There is a sense, however, that the shares could have achieved more given US tax cuts and a weaker pound will be a huge help to significant earnings generated there.
Of the two losers in this year's higher risk portfolio, high-yielding Taylor Wimpey (TW.) (up 3.9% in April) gave up less than 4% as momentum drained from the sector following a strong run in the months leading up to the strategy start date. Investors have done well out of the housebuilders post the EU referendum, and it's been hard to make a 'buy' case as house prices stabilise.
Big disappointment this year was builders' merchant Travis Perkins (TPK) (up 2.8% in April). Down 16.5% over the six months, it was the worst performer in either portfolio. It could have been so different as it only just beat rival Howden Joinery (HWDN) into this basket of shares. For the record, Howden rose 16% over the same period!
Consistent Winter Portfolio
Source: interactive investor Past performance is not a guide to future performance
InterContinental Hotels Group (IHG) (up 7.5% in April) stood out in this year's consistent basket of shares, generating a 10% gain. Speciality chemicals company Croda International (CRDA) (down 2.3% in April) has been by far the best and most consistent performer and, while it ended the period below its best, the shares still added over 6% - respectable given wider market returns.
Heat treatment specialist Bodycote (BOY) (up 0.6% in April) promised much and is widely fancied in the City, but it lost 4% over the six months. It remains one for the future. There was sad news at caterer Compass (CPG) (up 7.2% in April) following the death of chief executive Richard Cousins in a plane accident in Australia. The shares ended 5.6% lower.
Biggest disappointment this time round was Irish building materials firm CRH (CRH) (up 7.1% in April). Like Ashtead, it does much of its work in the US, so will feel a big tax benefit as Donald Trump's reforms feed through. The President's promised infrastructure spending plan is not quite as successful, however, and CRH shares underperformed expectations. A 15% rally from mid-April - still ongoing - came too late for this portfolio.
Stephen Eckett started his career with Baring Securities and then later worked for Bankers Trust and SG Warburg, during which time he worked in London, Hong Kong and Tokyo. After settling in France, he co-founded Harriman House which has become a leading independent publisher of financial books in the UK. He also writes books on finance including, most recently, the Harriman Stock Market Almanac. https://www.harriman-house.com/almanac2018
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|HOWDEN JOINERY GROUP||513.09p||-0.56%|
|INTERCONTINENTAL HOTELS GROUP||4,876.00p||0.45%|
|JD SPORTS FASHION||380.10p||0.03%|
|FTSE 350 INDEX||£4,354.36||-0.61%|
|All data 15min delayed as of: 14:02:58 23/05/18|