Seasonal investing strategies

Your Share of the Pie

The old adage, “Sell in May and go away”, is well known. It certainly seems that during the winter months equities perform much better than during the summer. This is best explained by the fact that these markets are mostly dominated by players and investors in the Northern Hemisphere – after all, this is the home of the American and European exchanges.

It certainly seems that the money managers do prepare for the Northern Hemisphere summer by selling shares and reducing their exposure and risk before the vacation period in July and August.

Dynamic Trading strategy

The utilisation of this Halloween effect can dramatically increase the returns of a dynamic trading strategy.

The return on government bonds also displays seasonal characteristics, but it seems, very interestingly, that this is precisely the inverse of the stock pattern.

A research piece by Jeroen Blokland shows exactly how this has worked over the past few years.

Jeroen Blokland.

According to Blokland, you can significantly enhance your return by just switching between equities and bonds twice a year. How easy is that!

Interesting returns

The seasonality in stock prices is pretty well documented, but the seasonality of bond returns is a pretty new argument and yet it is the combination of these two patterns that could provide interesting returns.

Blokland gives examples: During the period November to April, the average return on the S & P 500 has equalled 8.5%, against a much lower return of 2.4% in the period May to October. The difference of 6.1%, looks pretty amazing.

Now the best period to invest in bonds is the opposite, but not exactly. The best period is between June and November (not May and October), a “move” of one month. During this period the return has averaged 5.0% against just 1.9% between December and May. The seasonal return difference is more than 3%.

By the same writer: “The party is getting tired”.

So the seasonal effect is pretty impressive, with the switching strategy increasing returns by a massive 8.8%.

And the strategy is easily implemented using general indices and pretty cost efficient as it only requires two transactions per year.

● William Meyer is a qualified Chartered Accountant (SA) and Chartered Financial Analyst (USA). He has been CEO of Fenestra Asset Management since 1990. He lives in Mooi River with his wife Claire and their four children. He commutes to his head office in Cape Town. His company has outstripped the All Share Index with a compound growth rate of 18.87% per year since 2004.

If you are not happy with your portfolio performance or would like a second opinion, contact Fenestra for a free, independent, objective and confidential review of your portfolio.
Tel: 021 689 7855; info@fenestra.com