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All the signs suggest your equity fund is about to rally hard, says Greetham

13 August 2015

Trevor Greetham, head of multi-assets at Royal London Asset Management, explains why equities are likely to pick up near the end of the year despite current volatility in the markets.

By Lauren Mason,

Reporter, FE Trustnet

Equities are likely to pick up again in the coming months despite volatility and slow market growth, according to Royal London Asset Management’s Trevor Greetham (pictured).

The head of multi asset partially attributes the recent volatility in markets to the impending Federal Reserve interest rate rise, which he predicts will happen next month as unemployment is continuing to fall in the US.

However, he says that an increase in returns towards the end of the year is almost inevitable because the ‘St Leger’s day’ investing superstition often rings true, according to research from Royal London Asset Management.

Performance of indices from May 2015
  

Source: FE Analytics

A lot of financial experts are sceptical of basing investment decisions around the age-old investing parable. Patrick Connolly, head of communications at Chase de Vere, told FE Trustnet earlier this year that nobody can predict with any degree of confidence what is going to happen in the future and that timing the markets is impossible.

“Sell in May and go away, come back on St Leger Day”, suggests that investors would be better out of stock markets for four months of each year,” Connolly said.

“While it is true that markets can be more volatile in the summer months as they are moved by lower trading volumes, this doesn’t mean that investors should get out - the most sensible way to maximise returns in the long term is to stay invested and focus any decisions on your own circumstances, requirements and attitude to risk,” he said.

“If we think back to the 2010 football World Cup, it is worth remembering that Paul the Octopus predicted eight out of eight winners in Germany’s games and 12 out of 14 winners in total.

“While Paul unfortunately died later that year, it probably wouldn’t be a wise strategy to base predictions of future football matches on an octopus, just as it wouldn’t be wise to base investment decisions on what is essentially an old wives’ tale.”

Through Greetham’s research, however, he argues that almost every stock market in the world has increased in volatility and has been more prone to shocks over the last few decades between the months of May and September.

To quantify this, the manager has calculated the average returns across equity markets worldwide as well as in the UK for each month of the year over 42 and 45 years respectively.

In both instances, September has proven to be the worst month for returns, with world equity markets losing an average of 0.6 per cent and the UK equity market making a loss of 1 per cent.

The most lucrative month on average has been December, with world equity markets returning 2.3 per cent and the UK equity market returning an average of 2.5 per cent.

 Seasonality of stock returns over 42/45 years

 

Source: Royal London Asset Management


 “You see much bigger returns in December, so the Q4 rally that people talk about really does exist,” Greetham argued.

“What’s even more interesting is if you do it over a total period. The total return for the global equity market aside from the months between May and September is 9.9 per cent per annum nominal total return. What is the return between May and September over that same 42 year period? The average is 0.3 per cent, which is a stunning result.”

“You get a 10 per cent return from stocks on average over 42 years, but if you only owned in the summer you would get 0.3 [per cent]. If you bought them in September and sold in May, you would get almost the full 10 per cent and endure much less risk.”

Past performance is by no means an indicator of future performance, though, and the manager admits that there have been times when the theory has proven to be incorrect.

“It’s always a bit of a puzzle and people like to try and take this into account somehow in their strategy, but the one year you bet the ranch on it is the year the pattern doesn’t hold – there are some famous examples of very strong rallies in the summer like 2003 and 2009,” he explained.

The stock market downturn of 2002 reached its lowest ebb in March 2003, at which point the markets began climbing compared to their previous low performances.

Performance of indices in 2003

 

Source: FE Analytics

 Similarly, the stock markets in 2009 began to grow stronger throughout the year as they recovered from the financial crash of 2008.

“Years where the summer is really strong are when something happens in spring time that triggers a big recovery. So 2003 it was the invasion of Iraq which removed a lot of uncertainty from the market, which was rather bizarre, then 2009 was the recovery after the Lehman failure,” Greetham said.

“We think you have to hold fire a little bit, be aware of that fact that volatility can’t accurately be predicted and, importantly, we think the macro backdrop is positive, so we have not been shaken off of equities over the summer.”

While August is perhaps a tricky time to be investing, Greetham says that depressed market sentiment will create pockets of stellar opportunities for investors as soon as it subsides.

Again, he has devised a way of measuring sentiment through a composite indicator shown in the below graph, which takes into account how much the market has dropped in the last month, the increase in volatility and a weekly survey monitoring US investor sentiment.

Investor sentiment vs global stock prices from 2005

 

Source: Royal London Asset Management


 “These surveys, as well as the other data we have gathered, shows that retail investors are really quite bearish at the moment,” the manager said.

“Company directors have been buying and selling stocks quite aggressively at the moment though, so you’ve got a combination of retail investors panicking and company directors saying, ‘thank you very much, I’m going to buy some of my stock’, which usually makes investors feel constructive again.”

Since Trevor Greetham began running funds in 2006, he has outperformed his peer group composite by 17.78 percentage points to provide a return of 59.75 per cent.

Performance of fund manager vs peer group composite

 

Source: FE Analytics

He had previously headed-up the multi-asset team at Fidelity and managed the likes Fidelity Multi Asset Strategic, Fidelity Multi Asset GrowthFidelity Multi Asset Defensive and Fidelity Allocator World.

He now heads up the newly created Royal London Cautious Managed fund which he launched in June.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.