Did these wealth managers sell in May and go away?
Sell in May and go away is a well worn phrase, warning investors to sell their stock holdings in May to avoid the traditionally volatile May to October period.
The idea being that when the investor goes back to the equity markets in November, they will have avoided the historical underperformance in the six months of summer.
It's one of the oldest investment clichés, but in this digital age, can wealth managers afford to ignore this once sage advice?
We spoke to six of them to find out.
David Battersby, investment manager, Progeny Asset Management
‘Things have moved on from when this maxim was penned. We now have electronic trading, significant volumes of passive investing and a vastly more international investment outlook. Over the last 15 years, investors who sold out through the summer months would have avoided significant drawdowns four times, and would have missed notable market increases also on four occasions.
‘The other years markets moved sideways over that period. The problem comes when you factor in the costs of buying and selling (1-3% or more), the missed dividends paid during the summer months and the likelihood of missing out on strong market gains that often follow market falls. Some investors will be crystallising gains above the £11,300 capital gains allowance and so will be liable to pay tax out of the money they are planning to reinvest in September.
‘There are some ways to mitigate these drawbacks, such as buying put options that can protect on the downside without selling shareholdings. But these can be expensive for the protection they are providing, and markets have to move significantly before they offer value. Given all this it is better to stay invested through the period and ride out any softness in markets while banking the dividends.'
Caroline Shaw, head of fund and asset management, Courtiers
‘No! Market timing is impossible to constantly get right so it shouldn’t be attempted. Investors should instead ensure they are taking the right level of risk, are positioned for their time horizon, have sufficient liquidity and are investing in a tax efficient manner. An adviser should be helping with all these and warning against trying to time the markets.
‘Equities are not as attractive as they were in 2011 but in the long run our analysis shows they carry a lower risk than government bonds and have a significantly higher return potential. The risk-reward payoff indicates that staying invested for the long term is the sensible course of action, but this requires a healthy disregard for fads.'
Georgina Ogilvie-Jones, chief investment officer, Dewhurst Torevell
‘The advice to “sell in May” can appear seductively simple but it doesn’t always work. In 2016 the FTSE All Share rose by 11.6% from May to September, while the FTSE All World rose by over 18%. In our experience it is difficult to time the market, and our approach is based on long term, patient investing rather than short term trading.
‘We are aware that statistics indicate capital returns for equities can be relatively weak between May and October. A different picture emerges if total returns and reinvested dividends are considered, particularly for the UK market with its higher than average payout ratio. This underscores the importance of income for portfolios.
‘Equity market valuations remain comparatively rich and political uncertainty and currency effects will be influential in the coming months. We prefer to base our investment decisions on our client’s objectives and needs, and have been taking advantage of current market strength to take some profits and top up cash reserves where necessary.
'Opportunities may arise to reinvest if there is a sell-off. We predominantly invest with active managers who are able to take advantage of turbulent markets to buy quality stocks cheaply.’
Arnaud Gandon, chief investment officer, Heptagon Capital
‘Since most asset prices have gone up meaningfully with little volatility in the past few months, it would be indeed tempting to take some profits in portfolios before the summer. However, by engaging in such behaviour, investors inherently assume that short term market timing is an easy and effective tool for risk management. Sadly, it is not.
‘Investors should seek to take a long-term view on the value of their assets and hence manage allocation decisions strategically, not just for the next four months.
‘Seasonality is a very seducing concept in finance and has been around for a long time. There is certainly some academic evidence supportive to the idea of persistent seasonality in stock performance.
However, it is difficult incorporate this and justify its conclusions coherently in an investment process, since this would require reducing the investment horizon under consideration dramatically. We would rather outsource such trades to momentum/CTA managers who have ample resources to implement shorter-term strategies.
‘We believe that investors should take a view on the valuation of their assets for the next 10 years and leave tactical trading to a small group of expert managers.’
Neil Whelan, Investment Director, R.C Brown Investment Management – Bristol
While the summer months have historically tended to be less productive for UK equity market investors, more recent periods have been less conclusive as to the merits of standing on the side-lines during this time.
One concern we would have with following such an approach is the dividend income foregone during an extended period out of the market, given this is such a significant component of an investor’s total return over the longer term.
Another factor would be the difficulty in timing reinvestment into the market, as this can easily be influenced by investor sentiment at the time. Furthermore, research has shown that missing even a very small number of positive trading days can have a material impact on the eventual outcome.
For these reasons we would suggest the adage ‘time in the market, rather than timing the market’ is likely to be a more fruitful one for investors.
Piers Cushing, Managing Director, Plurimi Wealth – London
Long-term analysis of the seasonal return pattern in the markets has highlighted a weaker performance from the equity markets – and other risky asset classes – during the summer months. A seasonal effect. However, for a long-term investor, prepared to ignore not just the seasonal return pattern but also the broader cycle in equity market valuations, empirical studies suggest that a ‘buy-and-hold’ strategy beats a ‘market timing’ strategy.
Compounding a full year of investment in the equity market tends to beat targeting the autumn to spring months alone, all other things being equal, even on a risk-adjusted basis. What is not so well documented, however, is the seasonal pattern for safer assets, such as Treasuries, which may move inversely to risky assets and have demonstrated a tendency to deliver their attractive relative performance in the summer and autumn.
In other words, ‘buy-and-hold’ may beat ‘sell-in-May-and-go-away’ but a more flexible, dynamic asset allocation policy may trump them both!