Setback looks temporary - Winter Portfolio Feb 15 update

Snowman holding pound sign

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 fivefold.

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.

Our sister website Interactive Investor has teamed up with Harriman House, publisher of The UK Stock Market Almanac, and fine-tuned the data to generate even bigger potential profits.

Round-up

First, they took the companies that 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 per cent 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 per cent.

Here's a round-up of the highlights and lowlights from the second month of this six-month strategy.

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 mid-month rally made up for losses elsewhere.

Most of the stock market's gains came in the third week of the month, during which the FTSE 350 surged by around 6 per cent. 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 per cent overall.

Unfortunately, our Winter Portfolio celebrated the halfway 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 per cent in the first two months of the strategy, the aggressive portfolio fell 4.5 per cent 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 (£11.2 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 per cent 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 per cent, housebuilder Taylor Wimpey 2 per cent, and Bwin 1 per cent.

Consistent Winter Portfolio

Surprisingly, the typically more reliable consistent portfolio limited declines to just 3 per cent. It's surprising because oil services supplier Hunting plunged a further 25 per cent.

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 per cent, 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 per cent. 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 was written for our sister website Interactive Investor.


Subscribe to Money Observer magazine

 

Comments

Post new comment

The content of this field is kept private and will not be shown publicly.
By submitting this form, you accept the Mollom privacy policy.