Summer Portfolios outperform as benchmark crashes

Summer is typically more pedestrian in terms of share price performance. However, after extensive research, Interactive Investor has uncovered two seasonal portfolios which have significantly outperformed the wider market over the summer months for the past decade.

Like our hugely successful Winter Portfolios, the summer version is incredibly simple. All it requires is that investors buy a portfolio of stocks on Friday 1 May and sell it on Friday 30 October. The beauty of this portfolio is that investors are guided by both a defined entry and an exit point, which takes the stress out of trying to time the market.

As before, we teamed up again with Harriman House, publisher of The UK Stock Market Almanac, to create two model portfolios. First, we screened the FTSE 350 for those stocks which had delivered the most positive annual returns over the entire previous 10 years. The result is Interactive Investor’s Consistent Summer Portfolio – our Summer Smoothie – which has averaged annual growth of 8.9% since 2005. The FTSE 350 benchmark index is up an average of just 0.3%.

Fine-tuning the data to include companies with a minimum of eight years as a FTSE 350 company, and which still generated positive annual returns 70% of the time, generated even bigger potential profits. With greater potential reward comes extra risk, hence the naming of our Aggressive Summer Portfolio – the Summer Sizzler. It has outperformed the benchmark index every year for the past decade, this time by an average of 17%

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

Having begun life just a week before the UK general election, both our model portfolios triumphed to thrash the benchmark FTSE 350 index. The second month of the strategy was no less difficult, only this time it was Greece’s turn to stick a spanner in the works. In fact, June proved to be the FTSE 100’s worst monthly performance in more than three years.

Deadlines for a deal between Greece and its lenders came and went before prime minister Alexis Tsipras shocked EU negotiators by calling a referendum for Sunday 5 July. It’s essentially a decision on Greek membership of the Eurozone – a “no” vote will likely force a major sell-off, while a “yes” vote will still leave the thorny issue of just how does Greece repay its debts. Fears of possible contagion should the worst happen – could Portugal, Spain or Italy follow Greece out of the euro? – had the FTSE 350 down 6% in June, and down 7% from the April highs to a five-month low. This story – unfortunately – has much further to run.

However, for a second consecutive month, both our model summer portfolios beat the benchmark index.
Aggressive Summer Portfolio

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Despite the sell-off, our Aggressive Summer Portfolio suffered no major damage last month, with three of the five constituents actually posting gains. It’s why the portfolio ended the period just 1% lower.

Best of the bunch was film and TV distribution firm Entertainment One (ETO). After jumping 4% in May, the company behind the Peppa Pig franchise rose a further 9% to 356p. Clearly, reaction to the previous month’s full-year results spilled over into June. Investec Securities reckon the shares still look decent value compared with North American peers like DHX Media and Lions Gate. It’s why they upgraded their target price to 376p. Then, just days ago, Numis Securities initiated coverage with an ‘add’ recommendation and target price of 401p.

An absence of news didn’t prevent another good month for software supplier Micro Focus International (MCRO) – up nearly 3%. Instead, an analyst and investor meeting to showcase the company’s product portfolio following last year’s merger with the Attachmate Group created excitement. Imperial Leather soap giant PZ Cussons (PZC) eked out gains after reassuring that trading for the year to May was in line with expectations, and despite warning that the weak Nigerian naira remained a threat.

Dragging the portfolio lower, however, was AVEVA (AVV) and BTG (BTG). Takeover talk should give the former a lift when markets stabilise, but the latter is a real “marmite stock” and is already the black sheep of the group – BTG shares fell 11.5% last month following a 2% drop in May. “Overvalued,” says finnCap with a ‘sell’ rating and price target of 562p. “Build a position given the attractive discount,” screams Investec. “The negative share price reaction?has been overdone.” It’s trimmed its target, but still thinks the shares are worth 961p.
Consistent Summer Portfolio

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Given June was one of the stockmarket’s worst monthly performances since 2012, a decline of 5% did not embarrass the Consistent Summer Portfolio.

Bid speculation gave Diageo (DGE) a shot in the arm. The Guinness and Smirnoff vodka firm is said to be on the shopping list of Jorge Paulo Lemann, Brazil’s richest man, although a £50.6 billion takeover seems unlikely. Even so, broker Berenberg still believes the shares are worth 2,350p (currently 1,867p).

National Grid (NG.), however, had a stinker. News was thin on the ground, yet its share price still slumped by over 12% to a 14-month low. There is talk that highly-regarded chief executive Steve Holliday will leave next year, although it’s more likely that valuation is sending investors for the exit – National Grid trades on more than a 50% premium to its UK regulatory asset base (RAB).

The tables were turned on Shire Pharmaceuticals (SHP) when the drug giant – historically a bid target – was said to have offered $18 billion for Swiss peer Actelion. “Unlikely,” say experts, but the shares moved further from recent record highs in line with the wider market. It was a similar story at high-flying Dechra Pharmaceuticals (DPH) – down 4.5% – where investors took the opportunity to bank profits.

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.